The Public Utility Holding Company Act of 1935 (PUHCA) required the simplification and reorganization of complex public utility holding company structures. Federal Water Service Corporation, a registered holding company, submitted a reorganization plan to the Securities and Exchange Commission (SEC) under PUHCA § 11(e). During the pendency of the reorganization, several officers, directors, and controlling persons of the company—collectively associated with Chenery Corporation—purchased preferred stock of the company on the open market. The SEC concluded that, although these purchases were not illegal per se under then-existing judicial fiduciary-duty doctrine, the insiders' acquisitions during the reorganization created conflicts of interest and undermined the fairness and integrity of the process. The Commission therefore approved a reorganization plan that prevented these insider-purchased preferred shares from receiving the same speculative or reorganizational benefits as other holders; instead, the plan limited the insiders' participation to terms the SEC deemed fair and equitable in light of their fiduciary status and the statutory objectives. In Chenery I (1943), the Supreme Court held that the SEC's order could not be sustained on the purely equitable grounds the agency had originally invoked and remanded for further proceedings. On remand, the SEC reissued its order, this time resting on its statutory authority and expert administrative judgment concerning what was necessary to ensure a fair and equitable reorganization. The Court of Appeals again set the order aside, reasoning that the Commission had engaged in impermissible retroactive policymaking. The Supreme Court granted review in Chenery II.
May an administrative agency announce and apply new principles through adjudication—rather than rulemaking—and apply those principles to the parties before it in a pending matter, consistent with its statutory mandate and without violating prohibitions on retroactivity?
An administrative agency has broad discretion to choose between rulemaking and adjudication as the means of making policy, so long as its choice is reasonable and consistent with its statutory authority. Principles announced in adjudication may be applied to the parties before the agency, even if they represent new applications or refinements of policy, provided the agency's action is not arbitrary or capricious, does not contravene statutory or constitutional constraints, and does not impose retroactivity that is so unreasonable or unfair as to constitute manifest injustice. Courts review the agency's order on the grounds the agency itself invoked (Chenery I) and uphold the order if supported by the statute, the record, and reasoned explanation.
Yes. The SEC permissibly proceeded by adjudication, articulated an adequate statutory rationale, and reasonably applied its policy to the insider-purchased shares in the reorganization. The Supreme Court reversed the Court of Appeals and sustained the SEC's order.
The Court emphasized that the SEC's statutory mandate under PUHCA § 11 required it to ensure that any reorganization plan was fair and equitable and protective of investors and the public interest. In discharging this mandate, the agency must have latitude to address unanticipated or novel problems that arise in specific cases. Not every standard can be formulated ex ante as a general rule; agencies may justifiably develop principles through case-by-case adjudication where flexibility and expertise are needed, the factual contexts are variable, or a general rule would be premature. Here, the SEC, on remand from Chenery I, did not rely on free-floating notions of equity but instead grounded its decision in its statutory charge and expert assessment of fairness in the reorganization. The insider purchases during the pendency of the plan created conflicts of interest that could distort outcomes and erode confidence in the process. Limiting the insiders' ability to reap reorganization-based gains from those purchases was a reasonable, remedial measure tailored to vindicate the statute's goals, not a punitive afterthought. The Court rejected the retroactivity objection. While the Commission's rationale had not previously been codified as a rule, applying it in this adjudication did not amount to impermissible retroactive lawmaking. Agencies may apply newly articulated principles to the parties before them when doing so is reasonable and consistent with the statute. The SEC's action did not impose penalties for past lawful conduct; rather, it structured the distribution of reorganization benefits prospectively in a way that protected investors and the public. Finally, the Court underscored that reviewing courts may not displace the agency's informed policy choice with their own views; the proper inquiry is whether the agency's decision falls within statutory bounds and reflects reasoned judgment on the record.
Chenery II is the canonical authority for agency discretion to choose policymaking by adjudication or rulemaking. It affirms that agencies can announce and apply new principles in individual cases—subject to reasonableness, statutory consistency, and fairness—without first engaging in formal rulemaking. The decision also clarifies the limits and permissibility of retroactivity in administrative adjudication and complements Chenery I's insistence that agency action must be judged on the agency's stated grounds. For students, Chenery II frames modern doctrine on policymaking modes, sets benchmarks for judicial review of agency choices, and informs how agencies manage fairness issues in complex, ongoing regulatory processes.
Chenery II cements the principle that agencies may legitimately make and apply policy through adjudication, provided their actions are reasoned, fair, and faithful to statutory purposes. By sustaining the SEC's reorganization order, the Supreme Court validated an agency's capacity to address novel problems case-by-case without first engaging in formal rulemaking.