Chapter 23, Problem 1RE

Assume that the Securities and Exchange Commission (SEC) has a rule that it will enforce statutory provisions prohibiting insider trading only when the insiders make monetary profits for themselves. Then the SEC makes a new rule, declaring that it will now bring enforcement actions against individuals for insider trading even if the individuals did not personally profit from the transactions. In making the new rule, the SEC does not conduct a rulemaking procedure but simply announces its decision. A stockbrokerage firm objects that the new rule was unlawfully developed without opportunity for public comment. The brokerage firm challenges the rule in an action that ultimately is reviewed by a federal appellate court. Using the information presented in the chapter, answer the following questions.

Is the SEC an executive agency or an independent regulatory agency? Does it matter to the outcome of this dispute? Explain.

Summary Introduction

Case s ummary: The SEC prohibits insider trading through the statutory provisions only when the monetary benefit is earned by the insider for himself. The SEC decided to amend the law, and the action can be brought even when there is no monetary benefit to insiders. The commission did not follow the procedure of rulemaking and simply announced the law. An objection against the law was brought by a stock brokerage firm on the ground that the rule was made without giving any opportunity for public comments. The rule was ultimately challenged before the federal appellate court.

To find: The nature of the agency SEC.

Explanation of Solution

The SEC is an independent regulatory agency by nature. The appointment of various federal position is entrusted with the agency itself. President does not have the power to appoint any federal officer in the commission. The president cannot remove a federal officer from his office. The officers serve the commission for a fixed term. The officers cannot be removed without a just cause of removal from their positions. SEC is an independent body having its own regulatory body which regulates the function of the commission.

Summary Introduction

Case s ummary: The SEC prohibits insider trading through the statutory provisions only when the monetary benefit is earned by the insider for himself. The SEC decided to amend the law, and the action can be brought even when there is no monetary benefit to insiders. The commission did not follow the procedure of rulemaking and simply announced the law. An objection against the law was brought by a stock brokerage firm on the ground that the rule was made without giving any opportunity for public comments. The rule was ultimately challenged before the federal appellate court.

To find: The impact of the nature of the agency, SEC on the judgment.

Explanation of Solution

SEC is an independent regulatory agency by nature. The nature of the agency will impact the judgment as the appointment in the executive agency is made by the president himself, and the agency has certain autonomy to regulate the securities exchange. Therefore, the judgment will depend on the nature of the agency.