[00:00:00] Speaker 00: Case number 25-1047, Trident Financial Forgiveness and Private Investment Management Inc. [00:00:07] Speaker 00: Petitioners vs. Securities and Exchange Commission. [00:00:11] Speaker 00: Mr. Kaye for the petitioners, Ms. [00:00:13] Speaker 00: Parisi for the respondent. [00:00:15] Speaker 01: Good afternoon, Council. [00:00:17] Speaker 01: Mr. Kaye, please proceed when you're ready. [00:00:20] Speaker 02: Your Honours, good afternoon and may it please the Court. [00:00:22] Speaker 02: I would like to reserve three minutes for rebuttal. [00:00:25] Speaker 02: The rulemaking petition that Thrivent and Timmy filed with the SEC presented a facial challenge to FINRA rules. [00:00:32] Speaker 02: Those rules clearly are not consistent with federal law. [00:00:36] Speaker 02: That is because they prohibit FINRA members from agreeing with their customers to resolve disputes in arbitration on an individual basis, in the arbitration form of their choice, and using the arbitration rules that they choose. [00:00:50] Speaker 02: The Supreme Court has been clear that restrictions like these can only be imposed where Congress has expressly given the agency that power. [00:00:58] Speaker 02: But the federal securities laws provide no such congressional command, and the FINRA rules are therefore invalid on their face. [00:01:06] Speaker 02: The rulemaking petition explained all of this in great detail, but the SEC denied the petition without addressing any of it. [00:01:14] Speaker 02: Instead, the SEC ignored the petition's merits, a point that the SEC acknowledged in its response brief. [00:01:21] Speaker 02: In so doing, the SEC abused its discretion in two distinct ways. [00:01:25] Speaker 02: First, settled precedent applying the APA requires an agency to provide some reasoned response that addresses a petition's merits, even if only briefly. [00:01:36] Speaker 02: Here, the SEC clearly abused its discretion by denying the petition without addressing the merits to any extent at all. [00:01:43] Speaker 04: Is that true that they have to address the merits? [00:01:45] Speaker 04: Because it seems to me that there are some cases that say it's not an agency priority, it's a resource allocation issue. [00:01:52] Speaker 04: Maybe you need to say more about that, but you can do that and not address the merits, can't you? [00:01:58] Speaker 02: Your Honor, I don't believe that that's correct, especially in the context here where the petition presented a challenge of validity of the rules, whether they were legal. [00:02:09] Speaker 02: The SEC did not cite a single case that held that the agency cannot address the merits to any extent whatsoever. [00:02:19] Speaker 02: And we didn't identify any cases in our research [00:02:22] Speaker 02: that hold that. [00:02:24] Speaker 02: The court's precedents require a reasoned explanation, a reasoned response. [00:02:29] Speaker 02: And here, the SEC's response was conclusory. [00:02:32] Speaker 02: And to use the court's terms from the first flier's rights decision, it was vacuous. [00:02:37] Speaker 04: I'm just looking at cases like Exhaust List and Wild Earth Guardians. [00:02:42] Speaker 04: And the EPA would say things like, [00:02:47] Speaker 04: We have other rulemakings in progress. [00:02:49] Speaker 04: We concluded that in light of these constraints, we're going to prioritize other sectors and emit more air pollutants. [00:02:56] Speaker 04: That seems like they declined to address the merits of the petition. [00:03:00] Speaker 02: Well, and two points, Your Honor. [00:03:02] Speaker 02: First off, that's not what the SEC did here. [00:03:05] Speaker 02: Here, the language was entirely conclusory. [00:03:08] Speaker 04: Yeah, I agree that perhaps that language was not enough. [00:03:10] Speaker 04: But it just seems, I guess I'm trying to home in on your assertion that they have to, in some form, address merits. [00:03:17] Speaker 04: I was my understanding that they did not necessarily have to, they could rely on these other types of issues, but they would have to say more about those issues. [00:03:27] Speaker 02: And so I understand your honor's question. [00:03:30] Speaker 02: And with regard to the Wild Earth Guardians case, the agency did invoke its resource allocation, but it did so in addressing the merits. [00:03:39] Speaker 02: So the merits of the petition related to the regulation of greenhouse gas emissions. [00:03:44] Speaker 02: And so there, the APA explained [00:03:47] Speaker 02: here is what we're doing to address and curb greenhouse gas emissions. [00:03:52] Speaker 02: And so we're using our resources to address other sources, electricity generation, motor vehicles. [00:04:01] Speaker 02: That accounts for 60% of greenhouse gas emissions, whereas coal-fired power plants [00:04:07] Speaker 02: represent one percent and so in that way we are prioritizing our resources but we are addressing the merits and saying the merits of your request which are address I'm sorry address coal you know coal plants. [00:04:24] Speaker 02: is less pressing to us than these other factors of greenhouse gas emissions. [00:04:32] Speaker 02: So even there, the agency did take on the merits of the request in saying our resources are being prioritized for other areas where greenhouse gas emissions need to be regulated. [00:04:48] Speaker 02: I would like to address the second way in which the SEC abused its discretion is that here, this rulemaking petition identified rules that are unlawful on their face and the SEC failed to correct them. [00:05:03] Speaker 02: The commission has long known that the federal securities laws provide no authority for the arbitration restrictions that FINRA's rules impose. [00:05:12] Speaker 02: And instead of addressing this issue, the SEC here, in the context of our rulemaking petition, has conducted a campaign of avoidance that has gone on now for nearly four years. [00:05:23] Speaker 05: Why do you say the SEC knows that it has to allow your arbitration agreement to displace the thinner one? [00:05:39] Speaker 02: Well, Your Honor, I first. [00:05:41] Speaker 02: Maybe I misheard you. [00:05:42] Speaker 02: I understand. [00:05:42] Speaker 02: Put it in your mouth, tell me. [00:05:44] Speaker 02: Well, this rulemaking protection presents a facial challenge to FINRA's rules. [00:05:49] Speaker 02: So the question is not whether the commission is required to allow our arbitration rules to be imposed, but whether the FINRA rules are consistent with federal law. [00:06:01] Speaker 02: And this presents a facial challenge. [00:06:03] Speaker 02: On that point, [00:06:04] Speaker 02: Absolutely. [00:06:07] Speaker 05: You want us to view this as a facial challenge, so you have to run the board that there's no situation where a private arbitration agreement could displace. [00:06:18] Speaker 02: And again, Your Honor, there's no issue presented here. [00:06:26] Speaker 02: This is the way the SEC tried to frame it in their brief. [00:06:28] Speaker 02: Absolutely. [00:06:29] Speaker 05: I'm asking you what you mean by your facial challenge here. [00:06:31] Speaker 02: Understood. [00:06:32] Speaker 02: So just as in the Supreme Court's epic systems case where the Supreme Court held that the National Labor Relations Board's rules [00:06:44] Speaker 02: prohibiting employers from agreeing to resolve disputes individually in arbitration, the Supreme Court held that that restriction exceeded the NLRB's authority. [00:06:58] Speaker 02: Here, our argument is that FINRA's rules [00:07:02] Speaker 02: exceed the authority of the SEC, exceed the authority of FINRA, which derives its authority from the SEC because they provide the limitations that I alluded to, addressed before. [00:07:15] Speaker 02: They preclude parties from agreeing to resolve disputes individually in arbitration. [00:07:23] Speaker 04: Is that distinguishable from Epic Systems because they're not saying [00:07:27] Speaker 04: You don't have to arbitrate there. [00:07:28] Speaker 04: This is just about form selection, right? [00:07:30] Speaker 04: No, it's not. [00:07:31] Speaker 04: That seems like a different kind of limitation. [00:07:33] Speaker 04: And I wonder if it's as absolute as you say about that. [00:07:36] Speaker 02: The issue here is the enforceability of FINRA's rules. [00:07:39] Speaker 02: And FINRA's rules are crystal clear, as we addressed in our papers, that they prohibit [00:07:46] Speaker 02: fin remembers from entering into agreements that that require individual resolution of disputes. [00:07:54] Speaker 02: They prohibit fin remembers from agreeing to resolve disputes in the form of their choice. [00:08:01] Speaker 02: And so in that [00:08:02] Speaker 04: Right, I'm just saying those types of restrictions are not addressed by epic systems and other cases are they? [00:08:07] Speaker 02: These are different in kind is kind of what I'm trying to... I don't agree with that, Your Honor. [00:08:14] Speaker 02: The Supreme Court's FAA precedent, including epic systems, is clear that unless there's an express congressional command, [00:08:21] Speaker 02: empowering the agency to limit the right to agree to arbitrate in any way that such limitations can't be imposed. [00:08:30] Speaker 02: And so that's what the Supreme Court has held, not just in Epic Systems, but similarly in Italian Colors and with regard to the securities laws in McMahon, Rodriguez. [00:08:41] Speaker 04: Is there a case law that says any kind of limitation, that we treat all limitations the same? [00:08:45] Speaker 04: Because to me, [00:08:47] Speaker 04: it seems a little different to say you can arbitrate all you want, you just have to do it in this forum. [00:08:51] Speaker 02: I mean, I guess I would say all of the cases, that's what every case, I mean, the court and Epic Systems use the language that the FAA protects arbitration rights pretty absolutely. [00:09:03] Speaker 02: And I think it essentially, it says where you want under the rules that you want. [00:09:09] Speaker 02: And so that's what is at issue here. [00:09:12] Speaker 02: And it's especially at issue with regard to individual arbitration. [00:09:16] Speaker 05: So did Epic Systems involve [00:09:20] Speaker 05: One form of arbitration versus another. [00:09:22] Speaker 02: Epic systems prohibited. [00:09:27] Speaker 02: Epic systems involved a prohibition on arbitration. [00:09:32] Speaker 05: The alternative there was court litigation, class action, but court litigation. [00:09:37] Speaker 02: With regard to class actions, that's right. [00:09:39] Speaker 02: And so here we have the same restriction. [00:09:42] Speaker 05: But it's arbitration versus arbitration. [00:09:45] Speaker 02: not with regard to class actions, Your Honor. [00:09:47] Speaker 05: Well, it's a little confusing to me that what the Finner One means, whether there's already class action going on, you pull people out. [00:09:53] Speaker 05: But put that aside for a minute, because you said you have a facial challenge here and that all the precedent supports you. [00:10:02] Speaker 05: But the two cases actually involving the SEC, McMahan and Rodriguez, Professor McMahan went out of its way to say that it was litigation versus [00:10:15] Speaker 05: SEC regulated arbitration procedures, right? [00:10:20] Speaker 05: It doesn't hold true for arbitration procedures subject to the SEC's oversight. [00:10:26] Speaker 05: Commission has expansive power to ensure the adequacy of that arbitration procedures employed by the SROs. [00:10:33] Speaker 05: And they can regulate the rules adopted by the SROs. [00:10:38] Speaker 05: SEC regulates it relating to consumer disputes, including the power to mandate the adoption of any rules it deems necessary to ensure that arbitration procedures adequately protect statutory rights. [00:10:46] Speaker 05: I'm reading from McMahon on 233 and 234. [00:10:53] Speaker 05: And you had the same SEC-approved arbitration procedure going on in Rodriguez. [00:11:02] Speaker 05: And so both times when you're talking about heavily regulated entities in an industry where the market depends upon relying on enforcement of rules for fairness, transparency, integrity in the market, the whole market depends upon it, then when your argument is that precedent requires [00:11:31] Speaker 05: the SEC to stand down and allow brokers and dealers to create their own form for adjudicating their own compliance with the law in suits brought by their customers. [00:11:49] Speaker 05: There's no precedent for that, at least as to these SEC cases. [00:11:53] Speaker 05: None whatsoever. [00:11:53] Speaker 05: And it seems maybe at the end of the day, you'd win, but your whole breach and your facial challenge is that this is controlled. [00:12:02] Speaker 05: It's already answered by the Supreme Court. [00:12:04] Speaker 05: And I just see two Supreme Court cases saying, will enforce arbitration in a context where the SEC is providing a supervision to ensure that the law is still complied with. [00:12:20] Speaker 05: So it seems to me I just I don't understand I guess the argument that this is already settled. [00:12:26] Speaker 02: I understand your Honor's question and I might make two principal points. [00:12:30] Speaker 02: I think the first point is that part of the issue here relates to the way that the SEC chose to address the rulemaking petition and avoid this substantive question completely. [00:12:46] Speaker 02: So we don't have the SEC's position in the context of the rulemaking petition addressing this at all. [00:12:52] Speaker 02: And that, going back to what I was saying previously, appears clear to be consistent with the SEC's consistent, persistent determination to avoid addressing that question. [00:13:09] Speaker 02: The second point I would make, Your Honor, is that the SEC's policy statement... Persistent, consistent, to avoid. [00:13:16] Speaker 05: Have there been other petitions for rulemaking by other parties other than private? [00:13:20] Speaker 02: um raising the same issue not with regard to broker dealers in our in our opening brief we addressed the SEC's efforts to avoid any final agency action with regard to the extent of authority to limit arbitration under the 33 act and that was that was um an issue that we explained at some detail [00:13:43] Speaker 02: in our opening brief because it is consistent with the position that the SEC had been taking. [00:13:48] Speaker 02: But that gets me to my second point, Your Honor, which is I believe crucially important with regard to Your Honor's specific question on this issue of oversight, because the SEC did, as we explained in our policy, I'm sorry, in our reply brief, [00:14:05] Speaker 02: issue a policy statement which is binding on the SEC as a regulation two days after we filed our response brief, I'm sorry, after the SEC filed their brief in this court where the SEC concluded in the policy statement unequivocally that the Exchange Act in the context of issuer investor arbitration [00:14:28] Speaker 02: does not include any congressional command that would empower the agency, I'm sorry, the commission in any way to limit arbitration rights. [00:14:37] Speaker 02: And in footnote 39 of that policy statement, the SEC expressly addressed the point that your honor is asking about as far as agency oversight. [00:14:47] Speaker 02: The SEC in that footnote said it would be inconsistent [00:14:52] Speaker 02: with subsequent Supreme Court decisions to look at this question of oversight. [00:14:58] Speaker 02: The SEC acknowledged that Supreme Court precedent in the three decades since McMahon and Rodriguez looked simply to whether there is a clear manifest indication to limit arbitration rights. [00:15:10] Speaker 05: Are you saying we shouldn't follow McMahon and Rodriguez anymore? [00:15:13] Speaker 02: I'm saying that McManon Rodriguez told that the securities laws do not contain an express congressional command that's necessary to limit arbitration rates. [00:15:26] Speaker 02: The SEC acknowledges that. [00:15:28] Speaker 05: There's an awful lot of explanation there as to the careful context in which they made that decision. [00:15:33] Speaker 05: That is SEC supervision of the arbitral process. [00:15:37] Speaker 05: for obvious reasons. [00:15:39] Speaker 05: Again, this is not directed at Thriven in particular at all, but you can imagine great concern about Fox, Guardian, and Hen House. [00:15:47] Speaker 05: I'm not suggesting Thriven is a Fox, but if it works for you, it works for everybody with your facial challenge. [00:15:55] Speaker 02: I understand, Your Honor. [00:15:57] Speaker 02: And I think the important point there is that the SEC, in their policy statement, expressly disclaimed the importance of that analysis. [00:16:07] Speaker 02: They said that no subsequent decision has referred to oversight as a factor. [00:16:12] Speaker 02: And so the SEC has now said that 33-hour claims. [00:16:15] Speaker 02: They just haven't been subsequent ones. [00:16:18] Speaker 02: But the commission expressed its legal view that [00:16:25] Speaker 02: that issuer investor claims can be arbitrated without any oversight. [00:16:29] Speaker 02: They said there is no oversight. [00:16:31] Speaker 05: Per to the SEC is reading the Supreme Court precedent. [00:16:36] Speaker 02: I understand that, Your Honor, and that again gets back to the posture that we find ourselves in where the SEC avoided addressing this substantive question entirely. [00:16:50] Speaker 05: I get that point. [00:16:52] Speaker 05: This is not affected by my question, but I'm trying to understand the nature of your challenge here as a facial challenge to [00:17:03] Speaker 05: Finra's rules. [00:17:04] Speaker 02: Finra's rules. [00:17:05] Speaker 05: And what year did the SEC approve those rules? [00:17:12] Speaker 02: I don't have those. [00:17:13] Speaker 05: 2007. [00:17:14] Speaker 02: I think that, yes, that's right. [00:17:16] Speaker 05: You did a challenge within 60 days of that decision. [00:17:19] Speaker 02: And so at that point in time, there was... Arbitration Act had been around an awfully long time. [00:17:24] Speaker 02: Right. [00:17:24] Speaker 02: And so at that point in time, my clients weren't directly harmed by those rules. [00:17:30] Speaker 02: And so that's why we're bringing the rulemaking petition that we're bringing now. [00:17:34] Speaker 05: Again, you have your argument about the content of their response, but I'm not sure how you can bring a facial challenge to similar rules of arbitration if they weren't brought within 60 days of the SEC's approval of those rules. [00:17:47] Speaker 02: Well, I mean, a rulemaking petition has long been recognized as a vehicle under the APA to challenge the validity of existing rules. [00:17:56] Speaker 02: The Supreme Court, even as recently as Corner Post, recognized that that option always remains available, even when a party might be time limited on a rulemaking challenge. [00:18:09] Speaker 05: Well, the rules is applied to that party. [00:18:12] Speaker 05: That's what was going right. [00:18:13] Speaker 05: And so and so that's an as applied challenges. [00:18:15] Speaker 05: I'm just confused by your facial versus as applied. [00:18:17] Speaker 05: If you just say I want to challenge fin rules as applied to our agreement. [00:18:22] Speaker 05: Well, so then a facial challenge to the rules across the board, which is I'm just I'm kind of confused as to your position. [00:18:29] Speaker 02: Well, I mean, so so. [00:18:31] Speaker 02: Your Honor, I want to make one more point that I also recall to your question about SRO oversight on arbitration. [00:18:40] Speaker 02: I think that also the Supreme Court's decision in Italian colors speaks clearly to this, and epic systems do. [00:18:50] Speaker 02: It's not just a question of whether or not there is, I mean, they say there is no congressional command. [00:18:56] Speaker 02: those cases also address. [00:18:58] Speaker 02: So in Italian colors, as I'm no doubt your honor is aware, the court address at length could rights be vindicated for class members if there was no class action. [00:19:13] Speaker 02: And the Supreme Court looked at that and it determined that that was not a factor that it could consider [00:19:22] Speaker 02: in the context of determining whether or not antitrust claims could be required to be arbitrated individually and not subject to class treatment. [00:19:31] Speaker 02: The court held that the question is, and the only question is, has Congress spoken in a way that arbitration rights are limited, period. [00:19:41] Speaker 02: And so the court said there's no congressional command empowering [00:19:45] Speaker 02: you know, limitation of arbitration rates. [00:19:48] Speaker 02: And that is the test. [00:19:49] Speaker 02: Similarly in Epic Systems, the NORB argued about its authority to protect workers' rights and to oversee that. [00:19:56] Speaker 02: And the court, again, held clearly that the question is, does the statute, by its terms, [00:20:05] Speaker 02: include an express command empowering the limitation of arbitration rights. [00:20:10] Speaker 02: So that is consistent with what the SEC recognizes. [00:20:13] Speaker 02: I understand that the court is not bound by the SEC's interpretation of Supreme Court precedent, but they're acknowledging the point that [00:20:22] Speaker 05: that that i'm making here that we made in all those cases involved didn't involve the scc where we have two two cases from the supreme court um that in approved arbitration only when it was regulatorily supervised arbitration that is that the the the party that the [00:20:44] Speaker 05: that the regulated party could not have a contract with its customer to decide who would decide whether we have complied with the law. [00:20:55] Speaker 05: I'm not saying let's remember what we did today or tomorrow, what they would do with those cases. [00:21:04] Speaker 05: But we, as Woolly Court of Appeals, have that sort of precedent. [00:21:10] Speaker 05: staring us in the face that makes this at least a much more complicated question for purposes of your facial attack here that's separate from your argument just about the content of their response to your rulemaking. [00:21:28] Speaker 05: I had one other sort of procedural confusion question. [00:21:32] Speaker 05: So my understanding from your brief is that you've presented to the SEC your agreement in your registration statement and attaching your customer agreements that contain these arbitration terms, said not FINRA arbitration. [00:21:49] Speaker 05: And then the SEC did not act on those, which meant [00:21:56] Speaker 05: In that context, they were approved by the SEC, and action equals approval by the SEC. [00:22:02] Speaker 02: They weren't effective. [00:22:02] Speaker 02: That's right, Your Honor. [00:22:03] Speaker 02: They weren't effective. [00:22:04] Speaker 05: Yes. [00:22:04] Speaker 05: Right. [00:22:06] Speaker 05: And so are you using those? [00:22:08] Speaker 05: Have you been using those customer agreements since they became effective? [00:22:12] Speaker 02: No, we have not. [00:22:13] Speaker 02: And we addressed that because FINRA, and this was expected. [00:22:17] Speaker 05: You went to FINRA after. [00:22:18] Speaker 05: Correct. [00:22:18] Speaker 05: You went to SEC first and then FINRA. [00:22:20] Speaker ?: Correct. [00:22:21] Speaker 05: Did you tell FINRA that the SEC had already approved these? [00:22:25] Speaker 02: Yes, Your Honor, we did. [00:22:26] Speaker 02: And so this is in the rulemaking. [00:22:28] Speaker 05: This was really confusing. [00:22:29] Speaker 02: Yeah, this is in the rulemaking petition. [00:22:32] Speaker 02: But that's absolutely and exactly what happened is that these registration statements went effective. [00:22:39] Speaker 02: And then my clients engaged with FINRA and said, we now have these registration statements. [00:22:44] Speaker 02: We would like to be able to sell them and market them and engaged in a dialogue with FINRA. [00:22:51] Speaker 02: And FINRA said, well, that would be a violation of our rules. [00:22:55] Speaker 05: So you're using registration statements that were not approved by the SEC? [00:23:00] Speaker 02: No, those registrations, there were other, there are other registration schemes. [00:23:05] Speaker 05: I mean, my client has a wide range of... Well, as to these, the very sort of life insurance securities... Variable products, yes. [00:23:17] Speaker 05: I assume that as to the ones that issue here, those are the ones that were approved by the SEC, by silence. [00:23:24] Speaker 05: I'm just going to call it approved by the SEC. [00:23:27] Speaker 05: And then later rejected by FINRA. [00:23:33] Speaker 02: You're using... Other variable products that have also gone effective that do not have the mandatory aspect of... And you're able to use the same registration statements for different products, even if the SEC hasn't approved them for that specific product. [00:23:48] Speaker 02: Okay. [00:23:48] Speaker 02: All the registration statements that are being marketed and sold have gone effective, have gone through SEC registration. [00:23:55] Speaker 05: Okay, so we have this one the SEC has signed off on, but the FINRA then said we beg to differ. [00:24:00] Speaker 05: Correct. [00:24:01] Speaker 05: OK, all righty. [00:24:03] Speaker 02: And again, Your Honor, I do want to emphasize, though, that, I mean, that is a necessary aspect of our being here today as far as having standing and being harmed by these thinner rules. [00:24:18] Speaker 02: But again, this is a rulemaking petition challenge to the validity of those FINRA rules that don't depend on the contents of particular. [00:24:31] Speaker 05: Why didn't you seek SEC review of FINRA's decision? [00:24:36] Speaker 05: When it said you can't use these registration statements that the SEC had already said you can. [00:24:41] Speaker 02: Well, so I guess it's two separate questions, right? [00:24:44] Speaker 02: One is registration of product under the 33 Act, and then the other is whether or not they can be marketed and sold. [00:24:52] Speaker 02: And so the challenge... Could you have gone to the SEC? [00:24:59] Speaker 05: Finra said no. [00:25:01] Speaker 05: Well, I think that goes... At the SEC, you just said, yes, please resolve this problem, Horace. [00:25:06] Speaker 02: Judge Mallette, I understand your question. [00:25:07] Speaker 02: I think that goes to... [00:25:09] Speaker 02: the fact that we're now on four years since we filed a rulemaking petition with the SEC. [00:25:15] Speaker 05: I'm asking a procedural question. [00:25:17] Speaker 02: Well, no, but what I'm saying is we had informal conversations with Finner about this. [00:25:26] Speaker 05: You don't have a final decision from FINRA? [00:25:30] Speaker 02: FINRA provided us with a letter that it would be a violation of their rules to market and sell these products. [00:25:40] Speaker 05: So that doesn't sound like an informal discussion. [00:25:42] Speaker 05: That sounds like a final decision by FINRA? [00:25:44] Speaker 02: No, there was no formal adjudication process that we went through with FINRA. [00:25:48] Speaker 02: We engaged in extended dialogue. [00:25:51] Speaker 02: We took the route that would present this question [00:25:56] Speaker 02: to the SEC because the SEC has the responsibility to approve and oversee FINRA and make sure that its rules are consistent with federal law. [00:26:06] Speaker 02: So to the extent that the question is whether or not the rules are consistent with federal law, we filed the rulemaking petition with the SEC. [00:26:17] Speaker 02: And my point on the four years is that even doing that took us four years. [00:26:21] Speaker 02: And so to the extent you're asking about a preliminary process with FINRA, where FINRA may have a different view on the enforceability on federal law, we filed a rulemaking petition with the SEC, which is absolutely an appropriate vehicle to raise the invalidity of federal rules. [00:26:44] Speaker 02: And so even that has taken us four years to get to where we are right now. [00:26:50] Speaker 05: If it turned out that the Hobbs Act limitation period bars your facial challenge to the FINRA rules, or ICC's approval of the general rules, then how would you, could you take the letter from FINRA? [00:27:11] Speaker 05: to the SEC and either just directly ask the SEC for action review of that or not? [00:27:18] Speaker 05: Is the only way to get to the SEC through an adjudicatory process at FINRA? [00:27:23] Speaker 05: That's my first question. [00:27:26] Speaker 05: And then the second one is why couldn't you do a petition for rule making that focus solely on the FINRA decision in your case? [00:27:33] Speaker 05: If you can't go directly to the SEC from the FINRA letter, why wouldn't your petition for rulemaking be confined, have to be confined to FINRA's action on your particular reason? [00:27:46] Speaker 02: I'm sorry. [00:27:46] Speaker 02: I'm not sure I heard the last part of your honor's question. [00:27:49] Speaker 05: I'll try it one at a time. [00:27:50] Speaker 05: I'm not being fair when I ask any questions at once. [00:27:53] Speaker 05: You got this letter, you had discussions with FINRA and FINRA says, [00:27:58] Speaker 05: or somebody in FINRA says, we don't think you can have that. [00:28:02] Speaker 05: No, you can't. [00:28:03] Speaker 05: If you have those provisions in your customer agreements, they will violate FINRA rules. [00:28:09] Speaker 05: What recourse do you have from that? [00:28:13] Speaker 05: Is there any recourse from that? [00:28:14] Speaker 05: Can you appeal to FINRA board or can you go to the SEC at that point? [00:28:22] Speaker 02: I don't believe that there was final FINRA action in the sense that we hadn't taken steps that would be required. [00:28:29] Speaker 02: It hadn't gone to the FINRA board. [00:28:31] Speaker 02: And so I don't believe that without going to the FINRA board, it could be something that we took to the SEC. [00:28:38] Speaker 05: But if you went to the FINRA board, then you could go to the SEC. [00:28:41] Speaker 02: That's my understanding, Your Honor. [00:28:42] Speaker 05: So we don't even have a final decision from FINRA in this case. [00:28:45] Speaker 02: No, but Your Honor, this is a rule-making petition challenge. [00:28:51] Speaker 02: First off, the SEC hasn't made any of these arguments. [00:28:54] Speaker 02: And I do think that that's an important point of emphasis here, that there's no argument that— Upset time limitation. [00:29:05] Speaker 05: Is it jurisdictional or no? [00:29:08] Speaker 02: I don't believe so. [00:29:11] Speaker 02: Actually, I think, let me correct that. [00:29:14] Speaker 02: I believe that the Hobbs Act is. [00:29:16] Speaker 02: But here, this is a rulemaking petition challenge. [00:29:19] Speaker 02: And again, I would direct Your Honor's attention to corner posts where the court addressed. [00:29:25] Speaker 05: Corner posts involve the APA, not the Hobbs Act. [00:29:28] Speaker 02: And we have an APA challenge here. [00:29:32] Speaker 05: It involved the APA's statute of limitations, not the Hobbs Act's. [00:29:36] Speaker 02: But there's no... But there, the court... It's a statute of repose. [00:29:40] Speaker 05: Right. [00:29:41] Speaker 05: The APA statute of limitations are held not to be in corner post. [00:29:45] Speaker 02: I understand that, Your Honor. [00:29:46] Speaker 02: And that's... It's a statute of repose. [00:29:48] Speaker 02: Right. [00:29:48] Speaker 02: But that's where the court said, even if the dissent was correct, a rulemaking petition challenge to the validity of regulations is always there. [00:30:03] Speaker 05: And so... It's applied. [00:30:05] Speaker 05: I'm sorry as applied. [00:30:07] Speaker 02: I don't I don't understand that to be a distinction. [00:30:10] Speaker 02: We haven't seen that in any in any rulemaking petition challenges where where it's as applied challenge as opposed to a challenge to the validity corner post not challenging the application to itself. [00:30:24] Speaker 05: The corner post absolutely was, but my point is that the court in addressing the dissent... I guess the point is that if you can just bring facial challenges whenever, then there's never any either limitations period under the APA or repose under the Hobbs Act. [00:30:42] Speaker 02: But that is consistent with the APA's rulemaking petitions case law. [00:30:49] Speaker 02: We haven't seen a single case that holds that a rulemaking petition is [00:30:57] Speaker 02: is prohibited because it wasn't brought within 60 days. [00:31:02] Speaker 02: That's the purpose is that Congress provided a vehicle for parties to challenge the validity of existing rules through a rulemaking petition challenge. [00:31:13] Speaker 02: And absolutely the court addresses there that the standard of review may be deferential, but it's there. [00:31:22] Speaker 05: The rulemaking petition is not [00:31:24] Speaker 05: is different from a challenge of validity. [00:31:27] Speaker 05: It's an argument that you should change your rules because of your validity. [00:31:33] Speaker 02: Of which validity? [00:31:34] Speaker 02: And so Geller, going back to the court's decision in Geller, that was absolutely... I understand that. [00:31:39] Speaker 02: Right. [00:31:39] Speaker 02: But that was absolutely... But that was a challenge to the validity of the rules. [00:31:43] Speaker 05: Right. [00:31:43] Speaker 05: No, I completely understand that. [00:31:44] Speaker 05: But then, I mean, it's asking you, agency, [00:31:50] Speaker 05: super broad discretion to change it because of this, right? [00:31:55] Speaker 02: And so that gets to the plain error of law that the court has found to constitute compelling circumstances to vacate a rule when rules are premised on plain errors of law. [00:32:08] Speaker 02: And so even the standard, Your Honor, that this court has articulated in the first Flyers Rights decision in America on a Horse. [00:32:16] Speaker 05: The problem with plain errors of law [00:32:19] Speaker 05: So you've got two Supreme Court decisions involving arbitration in the very SEC context we have here that focused on the fact that it was, that involved and focused on in McMahon, the fact that it was SEC superintended arbitration. [00:32:40] Speaker 02: That's right. [00:32:40] Speaker 02: And then we have the subsequent cases. [00:32:42] Speaker 05: We've already done this. [00:32:45] Speaker 05: I don't mean to rehash it. [00:32:46] Speaker 05: I'm having a little trouble with your plain error of argument here. [00:32:50] Speaker 02: Your Honor, to that point, I do believe that when the court's standards talk about the agency being blind to the source of its delegated authority, [00:33:04] Speaker 02: The court absolutely doesn't, you know, doesn't owe deference to the agency's legal interpretation in the sense that Loper-Bright makes that clear. [00:33:15] Speaker 02: But where the agency says, as they did in their policy statement, that this, you know, [00:33:22] Speaker 02: this factor that the court looked at in McMahon is not a factor. [00:33:28] Speaker 02: And they've now actually adopted a regulation with regard to issuer investor claims that you can put an arbitration provision in a registration statement as a result of their policy statement. [00:33:42] Speaker 02: And so their view here [00:33:45] Speaker 02: is relevant. [00:33:47] Speaker 02: That is their view that essentially that was dicta in McMahon and Rodriguez, that it's been superseded by the court's own standards in Italian colors, in epic systems, where agencies made the same arguments. [00:34:04] Speaker 02: The NLRB [00:34:06] Speaker 02: made effectively that argument, that they had a charge to protect workers under the Labor Relations Act. [00:34:18] Speaker 02: And the court rejected that. [00:34:19] Speaker 02: That said, the only question is, is there an express congressional command? [00:34:24] Speaker 02: And in the National Labor Relations Act, there's not, which is what the court in McMahan and Rodriguez also addressed with regard to the 34 Act. [00:34:35] Speaker 02: So in that sense, I do believe that the commission's policy statement on this point is crucially important. [00:34:44] Speaker 01: Why don't we, we've talked a lot about the commission. [00:34:47] Speaker 01: Unless there's further questions from my colleagues, maybe we'll hear from commission counsel. [00:34:52] Speaker 04: Can I just ask, does your position then depend or turn upon this plain error aspect? [00:35:00] Speaker 04: Because I guess I'm thinking about the rule we would be creating here because [00:35:05] Speaker 04: It is a very deferential standard of review. [00:35:08] Speaker 04: When somebody petitions for an agency to change their rules, we want to give a lot of deference to the agency in picking and choosing what rules they take up. [00:35:20] Speaker 04: I just want to understand, are you asking us to hold that because this is a plain error and it's clearly and obviously something that's wrong, therefore [00:35:31] Speaker 04: there's an obligation to address the merits of that. [00:35:33] Speaker 04: I'm just trying to understand how this fits within our case law that says you're deferential, they can rely on resource concerns and discretion, et cetera. [00:35:42] Speaker 04: And is the distinguishing factor that it's a plain error of law? [00:35:47] Speaker 02: Judge Penn, I understand your question. [00:35:49] Speaker 02: I want to try to break that down between the two ways in which we contend that the SEC abused its discretion. [00:35:56] Speaker 02: Because the first is the response that the commission gave here, it just plainly doesn't satisfy its obligations. [00:36:08] Speaker 02: Let's put that aside for a minute. [00:36:10] Speaker 02: Yes, no, no, but I understand that. [00:36:11] Speaker 02: I'm asking for what's the legal principle that we would be announcing. [00:36:15] Speaker 02: Right, so the legal principle there is that absolutely as part of a reasoned response, the agency needs to address the merits to some extent. [00:36:24] Speaker 02: And so here are our contention in the rulemaking petition. [00:36:28] Speaker 04: Would it be enough to say they claim this is a plain error, we don't see it that way, we think it's unclear, and we don't have the resources to work that out right now? [00:36:37] Speaker 02: Well, at that, I suppose that to the extent they say they claim it's a plain error and we don't see it that way, that would, I mean, so here they argue, right? [00:36:48] Speaker 02: And they argue, well, we haven't addressed, they identify what the legal question is. [00:36:54] Speaker 02: Like their statement of the case, their counter statement of the case, they understood that the ruling petition was presenting a facial challenge. [00:37:01] Speaker 02: And then they try to reframe the argument as a battle between [00:37:06] Speaker 04: But I guess the reason I'm asking it this way is because any person petitioning for rulemaking can say, this is a plain error of law. [00:37:13] Speaker 04: It's got to be fixed. [00:37:15] Speaker 04: And I don't think that that can be the governing standard for requiring the rulemaking to happen. [00:37:20] Speaker 04: So if it's sufficient to say, they allege it's a plain error, we don't see it that way, and it's going to take a lot of resources for us to figure this out, and we don't have the resources, would that be sufficient? [00:37:31] Speaker 02: Well, I suppose they would need to explain the extent of the resources much more than they did here, consistent with Wild Earth Guardians. [00:37:39] Speaker 02: But in terms of a legal standard, then that would be a different question before the court. [00:37:48] Speaker 04: But it would be sufficient for an agency to say that. [00:37:50] Speaker 02: Well, so I don't think first off, I don't think we're asking the court to create any any new standard here. [00:37:55] Speaker 04: The court in Geller made clear that where it feels different to me because you're trying to say that this agency has to consider your petition for rulemaking. [00:38:05] Speaker 04: because you say it's a plain error of law. [00:38:08] Speaker 02: No, we're saying that the agency has to consider any rulemaking petition. [00:38:14] Speaker 02: There are due process implications here, absolutely, where a legal challenge is being made. [00:38:20] Speaker 02: So the procedural posture that we're in is that either we bring this rulemaking petition challenge or we bet the farm by risking sanctions. [00:38:31] Speaker 05: Well, you appeal to FINRA's board and then you take that decision to the NCC. [00:38:36] Speaker 05: You got process here, other processes here. [00:38:38] Speaker 02: Well, but either way, you end up back at the SEC. [00:38:43] Speaker 05: But then you end up in the SEC before the SEC in a very different posture than a rulemaking petition. [00:38:48] Speaker 05: And you could win before the SEC. [00:38:50] Speaker 05: SEC has already answered that question. [00:38:52] Speaker 02: It's easy. [00:38:54] Speaker 02: But again, this goes to where it took us four years to get here. [00:38:59] Speaker 02: And it's not apparent. [00:39:02] Speaker 02: We're talking hypotheticals. [00:39:04] Speaker 05: We could have gone on both tracks. [00:39:06] Speaker 02: They aren't exclusive. [00:39:07] Speaker 02: I understand, Your Honor. [00:39:08] Speaker 02: I don't believe that that changes the legal standards that are before the court. [00:39:11] Speaker 05: I'm just responding to your due process concerns. [00:39:15] Speaker 05: You only had one or the other, and that doesn't seem to me procedurally accurate. [00:39:20] Speaker 02: I guess I would say that what due process addresses, now we're talking about general standards for rulemaking petitions. [00:39:29] Speaker 02: And so to Judge Pan's question, to the extent there is a challenge to the validity of any rule in a rulemaking petition, it does present [00:39:40] Speaker 02: that due process question. [00:39:42] Speaker 02: And so here, if the agency denies it without addressing the merits at all, it does present a due process question as well. [00:39:54] Speaker 02: And it was interesting that that was another point that we raised in our brief. [00:39:58] Speaker 02: The SEC [00:40:00] Speaker 02: chose not to respond to that. [00:40:02] Speaker 02: And so on your question, Judge Pan, the second aspect with regard to the second way in which the agency abuses discretion is that here it was presented with this compelling circumstance where the rules are inconsistent with them. [00:40:22] Speaker 02: Of course, according to us. [00:40:23] Speaker 02: Right. [00:40:24] Speaker 02: But also consistent with now the SEC's own policy statement. [00:40:30] Speaker 04: I just read our cases to suggest that they have a lot of discretion in saying, we don't have time to do this right now. [00:40:36] Speaker 04: We have other priorities, et cetera. [00:40:37] Speaker 04: And I'm trying to understand like where the merits come into this in a way that's not so burdensome. [00:40:44] Speaker 04: So I suppose it removes the discretion. [00:40:46] Speaker 02: Right. [00:40:47] Speaker 02: And your honor, I suppose that, for example, the environmental health trust case speaks to that, where it talks about where the predicate of the agency's decision has eroded. [00:40:59] Speaker 02: So here we have a policy statement. [00:41:01] Speaker 04: I feel like those cases are a bit different because [00:41:04] Speaker 04: seems like in those cases there was an actual fact that the commission said this could change and we're going to revisit this later and then it did change and then they didn't revisit it later. [00:41:13] Speaker 04: I just feel like that's a little different here because like you're saying this was the same fact all along. [00:41:17] Speaker 02: Well and so that gets to the development of the loft and so which the SEC also acknowledged in the policy statement that yes we had McMahon and Rodriguez [00:41:25] Speaker 02: Since then, we've had Italian callers, we've had epic systems. [00:41:28] Speaker 02: This is a point that the policy statement makes, that the law has gone even further to make clear that these rules are not consistent with federal law. [00:41:41] Speaker 02: And so, in that sense... That goes to whether or not it was plein air. [00:41:45] Speaker 04: I'm trying to understand. [00:41:46] Speaker 02: Right. [00:41:46] Speaker 02: But it also goes, I mean, so a predicate, I mean, certainly a factual predicate of rules could be their legal validity. [00:41:54] Speaker 02: And so here, to the extent that subsequent Supreme Court precedent has made clear, as the SEC recognized in their policy statement, that there is no such predicate anymore, that there is no basis, that that's where we are at this point in time. [00:42:12] Speaker 01: My colleagues don't have additional questions for you at this point. [00:42:14] Speaker 01: We'll give you a little time for rebuttal. [00:42:15] Speaker 01: Thank you. [00:42:24] Speaker 01: Ms. [00:42:24] Speaker 01: Parise. [00:42:34] Speaker 03: May it please the court, Emily True Parise for the Securities and Exchange Commission. [00:42:38] Speaker 03: The commission reasonably explained its denial of Thriven's rulemaking petition, and the denial should be upheld. [00:42:45] Speaker 03: The commission provided Thriven with a brief statement setting forth the rationale for its decision, and no more was required under the APA or applicable precedent. [00:42:54] Speaker 03: Drive-In's suggestion in this argument, in this appeal, that the commission was required to address a specific question raised by its rulemaking petition, here whether certain federal rules are inconsistent with the Federal Arbitration Act, simply because Drive-In asserted that the relevant rules were unlawful under cases applying the FAA, finds no support in the law and for good reason. [00:43:18] Speaker 03: It would allow the filer of a rulemaking petition to commandeer an agency's resources and priorities merely by making an assertion that a challenged rule is unlawful. [00:43:28] Speaker 03: That position is remarkably broad. [00:43:30] Speaker 03: It could open up agencies to campaigns that involve filing rulemaking petitions regarding every regulation an agency promulgated or approved, asserting the petition thinks the rules are unlawful. [00:43:42] Speaker 03: And under Thriven's view, the agency would be required to address each and every petition [00:43:46] Speaker 03: by saying whether or not the agency agreed and why. [00:43:49] Speaker 04: But do you think the SEC can respond to any petition for rulemaking by saying, this is just not our priority right now? [00:43:57] Speaker 03: I mean, certainly the cases such as Wild Earth and others say that is a valid reason for denying rulemaking petitions. [00:44:04] Speaker 03: Here, of course, the agency said more than that. [00:44:07] Speaker 04: They didn't say a lot more than that. [00:44:09] Speaker 03: I mean, certainly it's not the longest document that agencies ever produce, but that's befitting the fact that denials of rulemaking petitions are decisions of agencies not to act. [00:44:19] Speaker 03: And all the APA requires is a brief statement of the reasons seems very bare bones. [00:44:22] Speaker 04: There must be some level at which becomes too bare bones. [00:44:25] Speaker 04: And this just seems so general. [00:44:28] Speaker 04: And, you know, basically we're prioritizing our resource for resources for other matters. [00:44:35] Speaker 04: We don't consider that our petition was a priority. [00:44:39] Speaker 04: These rules have been in effect for a long time. [00:44:41] Speaker 04: I mean, it just seems so general. [00:44:43] Speaker 04: I mean, hypothetically, what if it really was a very clear violation or a rule? [00:44:49] Speaker 04: You don't have to mention that in saying why you're not going to address it. [00:44:55] Speaker 03: I think if you're in a situation where it's as clear as like Geller or something, then maybe it might have been an abuse of discretion, not to mention it. [00:45:02] Speaker 03: But as we explained in our briefs, briefs were far from Geller land. [00:45:05] Speaker 03: And so it was not. [00:45:06] Speaker 04: Don't you have to say something when they are alleging that it's a plain error, a giant mistake? [00:45:12] Speaker 04: You have to say we don't see it that way. [00:45:14] Speaker 04: Don't you have to say something about the merits? [00:45:16] Speaker 03: I don't think that there's anything in this court's cases and the other side hasn't pointed to anything that suggests that just because they claim that it's plainly unlawful, the commission is required to entertain that specific legal question. [00:45:31] Speaker 03: All that's required is for the commission to say why it's denying the rulemaking petition so this court can discern its path. [00:45:37] Speaker 04: But if you agree that it would be arbitrary and capricious if it were a plain error, [00:45:43] Speaker 04: It seems like maybe you should just say, it doesn't cost you much to say we don't agree or just something about the claim that they're actually making. [00:45:50] Speaker 03: I mean, certainly the commission could have, but I still don't think this court's precedents require it. [00:45:55] Speaker 03: It may be running the risk. [00:45:57] Speaker 04: Is it arbitrary and capricious to completely ignore what the merits were if the merits are allegedly extremely serious or important or clear? [00:46:09] Speaker 03: I don't think it ignored the merits of the petition. [00:46:11] Speaker 03: It ignored the specific check. [00:46:13] Speaker 04: How did it address the merits of the petition? [00:46:15] Speaker 04: Maybe I missed that. [00:46:16] Speaker 03: Well, I mean, I guess it depends on what you mean by merits. [00:46:18] Speaker 03: I mean, it addressed the claim that they were making. [00:46:21] Speaker 03: It did not address the claim of unlawfulness that they were making. [00:46:24] Speaker 03: Yes, you're right. [00:46:25] Speaker 03: But there is nothing in any of these court's precedents that suggests that the agency is required to address a petition in a certain way, even when there is a claim of unlawfulness. [00:46:35] Speaker 03: The cases like Geller and those say that if it is in fact so clear, like in Geller, the regulation had been superseded and the agency just still denies rulemaking, that denial may be an abuse of discretion. [00:46:48] Speaker 03: But those cases don't say that it was a denial just because the agency didn't. [00:46:53] Speaker 03: address the question. [00:46:54] Speaker 03: There's no cases requiring the agency to address the rulemaking petition in a particular way. [00:47:00] Speaker 03: What is required and what the crux of what this court's cases have held is that the agency needs to explain why it did what it did so this court can review it. [00:47:10] Speaker 03: And here the agency gave several rationales how long these arbitration forms had been in existing, predating the securities laws. [00:47:18] Speaker 03: It made two points about resources constraints. [00:47:21] Speaker 03: It said that these [00:47:23] Speaker 03: the reexamination of FINRA's arbitration form has not been placed on the regulatory agenda, and also that resources and priorities are being used for other capital formation and protecting investors. [00:47:36] Speaker 03: And then it noted, in particular, the context here of the Section 19C process, whereas this is the commission sitting in review of FINRA's private rules, and the Section 19C process gives the commission discretion as to when to invoke 19C, which is what the rulemaking petition was asking. [00:47:53] Speaker 03: which is a very resource intensive process. [00:47:56] Speaker 03: In addition to requiring written submissions, it requires the oral submission of data. [00:48:00] Speaker 04: Give this letter to almost any or some form of this letter to any petition for rulemaking. [00:48:05] Speaker 04: It's just really not tailored. [00:48:06] Speaker 04: It's you know, we have other priorities. [00:48:09] Speaker 04: We have discretion. [00:48:10] Speaker 03: I mean, I certainly don't think the part about, I mean, it situates, it's in context of the FINRA arbitration forum and that is specific to this. [00:48:19] Speaker 04: Maybe I misread this. [00:48:20] Speaker 04: I thought that all it said about this specific petition was it's challenging rules have been in effect for a long time. [00:48:26] Speaker 04: And then otherwise it's really boilerplate in it. [00:48:29] Speaker 04: I don't know. [00:48:30] Speaker 04: Arbitrary and capricious to do sort of a form rejection that just says we have discretion here and we have other priorities and we're not putting it on the agenda. [00:48:39] Speaker 04: All of that is really something you could say to any petitioner for rulemaking. [00:48:43] Speaker 03: I mean, I don't think you can. [00:48:44] Speaker 03: I think there's the piece your honor mentioned. [00:48:46] Speaker 03: I think the 19 C process wouldn't apply for all petitions for rulemaking. [00:48:51] Speaker 03: It would obviously apply to petitions for rulemaking in the 19 C context. [00:48:54] Speaker 03: But that is a distinguishing factor. [00:48:56] Speaker 03: Certainly the resources point could be invoked in a wider swath of cases. [00:49:02] Speaker 03: But I think you need to look at all the rationales together. [00:49:05] Speaker 03: And I think with all of those rationales, this fits comfortably within the sports cases. [00:49:09] Speaker 03: Comfortably. [00:49:10] Speaker 04: Can you name some other cases where such a bare-bones rationale was upheld? [00:49:14] Speaker 03: I think in Wild Earth, it was as bare-bones as here. [00:49:17] Speaker 03: And I think Flyer's rights, it was as bare-bones. [00:49:20] Speaker 03: I mean, there, it was just the decision not to deny rulemaking. [00:49:26] Speaker 04: Wild Earth is more specific. [00:49:27] Speaker 04: It submitted evidence that's budgetary and staff constraints, explained it had mandatory rulemaking some progress. [00:49:33] Speaker 04: In light of the constraints, it puts prioritizing sectors that emit more air pollutants than coal mines. [00:49:38] Speaker 04: That's more specific than here. [00:49:40] Speaker 03: I mean, here, the commission also pointed to its current regulatory agenda. [00:49:44] Speaker 03: I mean, I think it's more specific there. [00:49:45] Speaker 03: But I think that has to do with the context of the rulemaking at issue. [00:49:51] Speaker 03: I don't know what more specificity would be required for this kind of challenge. [00:49:56] Speaker 04: But I think you could say, we're looking at other different FINRA things, such as this, this, and this. [00:50:01] Speaker 04: And we don't have the resources to look at other ones in this area. [00:50:05] Speaker 04: You could just say more than, we got other things to do. [00:50:10] Speaker 03: I think what was here is enough, but I just think to the point, that case involved data and studies and other pollutants that are susceptible to that sort of comparison. [00:50:21] Speaker 03: I'm not sure there's a great comparison here. [00:50:24] Speaker 03: Just saying, I'm not sure. [00:50:24] Speaker 04: I mean, you could easily have said, you're claiming that this is a clear error. [00:50:29] Speaker 04: We don't see it that way. [00:50:30] Speaker 04: And it will take us a lot of resources to work this out. [00:50:33] Speaker 04: And we don't have those resources right now. [00:50:35] Speaker 04: I mean, all you're doing is writing a letter. [00:50:38] Speaker 04: So it's not that resource intensive to say something more. [00:50:42] Speaker 03: I simply don't think that these courts require that something more. [00:50:47] Speaker 04: You keep saying that, but I don't see any case that has upheld something as bare bones as this. [00:50:53] Speaker 04: Even if we're not going to have rules that say you must address merits or whatever, it seems like you have to say something that indicates you've thought about this. [00:51:01] Speaker 04: And I don't see that here necessarily. [00:51:04] Speaker 03: Respectfully, your honor, I think that if you look at the rules the commission gave at JA 91 to 92 in context and together, it shows that the commission considered the petition. [00:51:12] Speaker 03: It didn't address the question in the way Thrive and Wanted, but certainly that's not required. [00:51:16] Speaker 04: Can you tell me what is your best argument for evidence that they considered this petition? [00:51:22] Speaker 03: Well, I mean, they considered the petition. [00:51:25] Speaker 03: They didn't consider the legal question the petition raises. [00:51:27] Speaker 03: But to me, that's two different things. [00:51:29] Speaker 03: They're not required to address the legal question raised in the petition just because it's put before it. [00:51:35] Speaker 04: I guess I'm kind of focusing on the letter that they wrote. [00:51:39] Speaker 04: And so I guess what's your best argument for why that's adequate? [00:51:44] Speaker 03: I think that the letter at J91 to 92 lays out several rationales that the commission gave for why it denied the petition. [00:51:52] Speaker 03: It said that the arbitration forum has been in existence for 100 years, creating the securities laws. [00:51:58] Speaker 03: It said that it made two points about resources. [00:52:02] Speaker 03: It said that revision of [00:52:04] Speaker 03: in reexamination of FINRA's rules is not on the current docket and it said it was currently using a current regulatory agenda and it was using its resources for other priorities and then it noted the 19c context and it went through how 19c is an additional layer of discretion because it says the commission may abrogate FINRA rules and it's a particularly resource intensive process so I think when you put those together [00:52:29] Speaker 05: Sorry, does it say the resource intent? [00:52:32] Speaker 05: I didn't recall them saying, adding that additional line about, and it's a super resource intensive process. [00:52:38] Speaker 03: It did not say that, but it invoked 19C on J92. [00:52:43] Speaker 03: It invoked 19C. [00:52:44] Speaker 05: Double discretion was sort of discretion squared or something was the only point made. [00:52:47] Speaker 05: Yes, Your Honor. [00:52:48] Speaker 05: It wasn't about the resources. [00:52:49] Speaker 03: be implicit in invoking nineteen C which the statute provides that in addition to uh written comments, it it requires the oral presentation of data. [00:52:59] Speaker 05: The agency didn't say it's concerned about the nineteen C resources as opposed to nineteen C gives us another layer of discretion. [00:53:07] Speaker 03: I mean, I think you can fairly read it. [00:53:08] Speaker 03: It's it's talking about resources and and cites nineteen C but uh again, that's just wanna make sure I'm [00:53:15] Speaker 03: You are correct, it didn't draw that explicit reference. [00:53:20] Speaker 01: Because you're relying on the line that says resources and personnel are being used for other matters. [00:53:24] Speaker 03: Well, that in combination with 19C, yes. [00:53:27] Speaker 05: Additionally, 19C gives us discretion. [00:53:30] Speaker 05: Right. [00:53:32] Speaker 03: It didn't make the explicit point I'm making here that that 19c discretion also involves additional resources because it involves the oral presentation of data and submissions as well as written submissions. [00:53:45] Speaker 03: But I think that's fairly encompassed by what the commission did say there. [00:53:49] Speaker 03: And I think that, again, that fits comfortably within this court's cases. [00:53:54] Speaker 03: I would like to address a few points. [00:53:56] Speaker 05: If an agency [00:53:59] Speaker 05: gets a rulemaking petition like this and simply responds with, we choose not to use our resources to address this issue. [00:54:09] Speaker 05: One sentence. [00:54:11] Speaker 05: Would that be sufficient? [00:54:14] Speaker 03: I think that would be a harder case, which is not what we have here. [00:54:19] Speaker 03: I don't think it is precluded by this court's case law. [00:54:24] Speaker 05: So my question, so let me try again. [00:54:26] Speaker 05: We choose not to use our resources to address this issue. [00:54:28] Speaker 05: Is that arbitrary and capricious for insufficient reason explanation, or is it sufficient under existing precedent? [00:54:36] Speaker 03: I think it is a much closer case under existing precedent. [00:54:39] Speaker 05: I'd like to know whether it is or is not under your view of what existing precedent requires. [00:54:44] Speaker 03: Under my view, I don't think it is necessarily arbitrary and capricious, but I could see how it could be harder in that situation. [00:54:52] Speaker 03: Was it harder? [00:54:53] Speaker 03: To discern the agency's path. [00:54:56] Speaker 03: But again, I think we have- Harder. [00:54:58] Speaker 05: It's just saying what your client said here. [00:55:01] Speaker 05: We really do not count the number of words in deciding whether something is arbitrary and capricious. [00:55:07] Speaker 05: And so if what the agency said here is we choose not to devote our resources to this issue, and here we are saying that same point three or four different ways, I don't know why repeating it matters. [00:55:21] Speaker 03: Yes, I don't think it is arbitrary and capricious for an agency to say, we are not going to take up this rulemaking petition because we are using our resources elsewhere. [00:55:30] Speaker 03: I think that is consistent with Wild Earth and Flyers Rides and other cases. [00:55:39] Speaker 01: And you think that would be so no matter how clearly correct the claim is that the existing regime is contrary to law? [00:55:49] Speaker 03: Well, again, your honor, I think certainly there's the cases like Geller and some of the other cases which suggest that an agency can abuse its discretion if it ignores sort of a clear violation of law in Geller. [00:56:06] Speaker 03: premise of the agency's regulation was the FCC regulated in order to have Congress enact a law, Congress enacted that law, and so the whole premise for the regulation was gone and the commission, the FCC still didn't, in response to a petition for rulemaking, reevaluate its regulation. [00:56:27] Speaker 01: But I don't know that it came up in the context where there was, correct me if I'm wrong, but where there was an affirmative [00:56:34] Speaker 01: statement made that resources are being devoted elsewhere. [00:56:39] Speaker 03: I think that was part of it, but I don't think that it was, I mean, there were several rationales given in Geller, but certainly I think that it could be arbitrary and capricious if there was clear invalidity, clear legal invalidity, but we don't think they have come close to establishing that under the Geller American horse in other cases. [00:57:00] Speaker 03: And so it is not, because we're not in the realm of clear, plainly, [00:57:06] Speaker 03: plainly unlawful or clear and validity, however you want to phrase the legal test because we're not in that Gellar world. [00:57:12] Speaker 01: It was not clear and validity, then resources have to be devoted to it. [00:57:19] Speaker 01: Or could you still say no matter how invalid it may be, our focus is elsewhere. [00:57:25] Speaker 03: I think, as the cases say, if the factual predicate for the rule has changed, the commission at least has to consider it. [00:57:32] Speaker 03: Even in Geller and American Horse, they don't have to necessarily do the rulemaking. [00:57:36] Speaker 03: The courts did not actually impose rulemaking. [00:57:39] Speaker 03: But they said the agency at least has to consider it. [00:57:43] Speaker 03: So I think if we were in the clearly unlawful world, they wouldn't necessarily have to devote resources to actually [00:57:49] Speaker 03: do the rulemaking or take up the particular rulemaking petition at issue, but it was an abusive discretion there to not even consider the question in some fashion, whatever fashion the agency determined best. [00:58:02] Speaker 05: Why isn't the fact that the SEC approved these registration statements, including the attached customer agreements with the arbitration provisions, had previously approved them by inaction, but had previously approved them [00:58:19] Speaker 05: Why doesn't that necessitate the agency sort of reconciling the conflict between its prior approval and at least some subcommittee of FINRA's disagreement? [00:58:33] Speaker 05: So your honor, that's just a different. [00:58:34] Speaker 05: You can decide all the arguments about Supreme Court cases. [00:58:36] Speaker 05: Right. [00:58:37] Speaker 03: That's just a different context. [00:58:38] Speaker 03: That's this context. [00:58:40] Speaker 03: No, no. [00:58:43] Speaker 03: Sorry. [00:58:43] Speaker 03: The context of allowing registration statements to go effective is a different context. [00:58:48] Speaker 03: What the commission is looking at there, that's under the 1933 Act, and it's looking at the disclosures in the registration statement. [00:58:55] Speaker 03: And the fact that it let the registration statement go effective [00:58:59] Speaker 03: doesn't, the commission is not evaluating or looking at FINRA rules or anything like that. [00:59:05] Speaker 03: It's just simply a different context. [00:59:06] Speaker 03: It's a different process. [00:59:08] Speaker 05: You just need to educate me because I'm not an SEC specialist. [00:59:14] Speaker 05: They attach to their registration statements, the customer agreements that said you will not have FINRA arbitration. [00:59:25] Speaker 05: or that's not going to be the mandatory form of arbitration here. [00:59:29] Speaker 05: That's what they attach. [00:59:33] Speaker 05: When SEC approves that registration statement, approves something that specifically says we're going outside gender regulation world, it doesn't approve that? [00:59:45] Speaker 03: It's not looking for [00:59:49] Speaker 03: It's not, it couldn't possibly be checking for consistency with FINRA rules, all of FINRA rules. [00:59:54] Speaker 03: That's not what the agency is looking at when it's looking at a registration statement. [00:59:57] Speaker 03: There are specific things the agency is looking at when it looks at whether registration goes effective. [01:00:02] Speaker 03: It's a disclosure regime. [01:00:03] Speaker 05: Transparency, fairness, disclosure to customer. [01:00:06] Speaker 05: Sorry, do you look at transparency, fairness, disclosure to customers? [01:00:09] Speaker 05: What is disclosed to customers? [01:00:12] Speaker 05: Right, but it's disclosed that we're going to have our own arbitration process to customers, but the commission wouldn't look at that. [01:00:20] Speaker 03: That's just not part of the analysis of allowing the registration statement to go effective. [01:00:25] Speaker 03: It's simply a different context, Your Honor. [01:00:27] Speaker 03: And again, the time the commission was reviewing the FINRA rules was back when it went through the Section 19B process, which was, as Your Honor mentioned, for two of them in 2007, for one of them, it was 1989 for the three challenged rules. [01:00:40] Speaker 03: And that's when the commission is evaluating the specific FINRA rules and their consistency with the Exchange Act. [01:00:46] Speaker 03: That's through the 19B process. [01:00:48] Speaker 03: The registration statement is just an entirely different thing. [01:00:50] Speaker 05: OCC has not yet approved then this customer agreement, even though it technically was allowed to go into effect? [01:00:59] Speaker 03: No, it has not approved the agreement. [01:01:01] Speaker 03: It has let the registration statement go effective, but that is a different [01:01:06] Speaker 03: That is simply an entirely different event under the securities laws. [01:01:13] Speaker 03: It does not weigh in on the arbitration agreement in the bylaws attached to the registration statement. [01:01:22] Speaker 01: Make sure my colleagues don't have additional questions for you. [01:01:24] Speaker 01: Thank you, counsel. [01:01:32] Speaker 01: Okay, we'll give you two minutes for rebuttal. [01:01:36] Speaker 02: Thank you, Your Honor. [01:01:37] Speaker 02: I want to address both abuses of discretion that we serve here. [01:01:41] Speaker 02: First off, on the first abuse of discretion, Judge Pan, I think your questions to my friend were exactly right. [01:01:48] Speaker 02: If this denial letter here passes muster, it's a playbook that [01:01:53] Speaker 02: any agency could use in denying any rulemaking petition without saying anything at all. [01:01:57] Speaker 02: They just say resources and personnel are being used elsewhere and then they cite their statutory regulatory priorities like protecting investors, market integrity, capital formation. [01:02:08] Speaker 02: That's not saying anything. [01:02:11] Speaker 02: Also, I would look at the court's decisions in, for example, WWHT and Geller, where the court held that a rulemaking petition requires, if it's going to be denied, that the agency show them it gave a hard look at the relevant issues. [01:02:28] Speaker 02: Geller says that an agency can't sidestep re-examination of rules where there are abnormal circumstances suggesting that the rules may no longer be valid. [01:02:38] Speaker 02: Here, after the policy statement, there's no question that that's true. [01:02:41] Speaker 05: On the second abuse of... Can we consider the policy statement? [01:02:46] Speaker 05: I mean, I take the practical point you're making, but can we consider that since that is [01:02:51] Speaker 05: long after it post-states the agency decision in this case? [01:02:56] Speaker 02: Well, I understand, Your Honor. [01:02:57] Speaker 02: And I think the point is that the policy statement recognized the force of the legal authority that we had asserted in the enrollment petitions. [01:03:05] Speaker 02: So from that standpoint... Do you consider it or not, since it's post-states? [01:03:11] Speaker 05: the decision we're reviewing. [01:03:12] Speaker 02: Well, I don't think right. [01:03:13] Speaker 02: I don't think in the terms of determining that the agency abuses discretion. [01:03:17] Speaker 02: I think that's clear in the first abuse of discretion already. [01:03:21] Speaker 02: Um, but the point is now what does the agency have to do? [01:03:24] Speaker 02: There's no question based on the policy statement now that on remand it, you know, the gellers clearly met here that there are circumstances that offer re examination, um, based on what the agency is recognized. [01:03:37] Speaker 02: And I think the other point there is that, you know, Italian [01:03:39] Speaker 05: But if we can't consider it, then we can't consider it. [01:03:43] Speaker 02: Well, I mean, to the extent this court is going to give direction on remand, I think it's absolutely, I mean, it's an agency rule. [01:03:50] Speaker 02: And so to that extent, it's something that the court can absolutely consider as far as what the agency should and might address on remand. [01:04:01] Speaker 02: The second abuse of discretion, though, Judge Penn, your questions with regard to the plain legal error, that's the standard, of course, that this court looks at in determining that the agency abuses discretion. [01:04:16] Speaker 02: But when we're talking about [01:04:17] Speaker 02: whether when the agency reexamines its rules, what standards should it be applying? [01:04:24] Speaker 02: Here, that standard is met and implicated by the Exchange Act, which is, are these rules consistent with federal law? [01:04:33] Speaker 02: That's what section 19B requires. [01:04:37] Speaker 02: That's what this court in Susquehanna has made clear that the Exchange Act hardly envisions that SROs have rules that are not consistent with [01:04:47] Speaker 02: authority under the exchange act. [01:04:49] Speaker 02: And so the question is, should the agency re-examine rules to determine whether they're consistent with federal law? [01:04:56] Speaker 02: If we get back here on appeal, then the issue is, if they still fail to correct them, was that premise on cleaner? [01:05:05] Speaker 02: If I could make one final point, to the extent the court is considering remand, [01:05:10] Speaker 02: The SEC's denial, which was clearly insufficient, was issued by the commission the day that this court ordered them to respond to our second mandamus petition. [01:05:22] Speaker 02: And so to the extent that we're now here on four years, to the extent there is a remand here, I would encourage the court to consider some sort of process where [01:05:32] Speaker 02: The commission has already essentially escaped mandamus proceedings for a year by issuing their denial. [01:05:40] Speaker 02: And my clients are being harmed every day that these rules remain in place. [01:05:45] Speaker 02: Thank you, Your Arms. [01:05:45] Speaker 01: Thank you, counsel. [01:05:46] Speaker 01: Thank you to both counsel. [01:05:47] Speaker 01: We'll take this case under submission.