Risk Management and Crisis Response Blog

U.S. Supreme Court to rule on deference owed to SEC interpretation of securities legislation

Sep 29, 2017 3 MIN READ

We have previously discussed the pending appeal in Digital Realty Trust v. Somers, in which the U.S. Supreme Court will determine the scope of the anti-retaliation protections for whistleblowers in the Dodd-Frank Act. In its recently filed brief [PDF], the petitioner Digital Reality raised a related issue: should courts defer to the Securities and Exchange Commission’s interpretation of the Dodd-Frank Act, or should they reach their own interpretation that might result in an approach that differs from the SEC’s?

Decision under appeal

In the decision under appeal, the Ninth Circuit held that a whistleblower could obtain the protections of the anti-retaliation provisions of the Dodd-Frank Act even though he never reported his concerns directly to the SEC. Although the Dodd-Frank Act defines whistleblowers as employees who make a report to the SEC, the Ninth Circuit held that a strict interpretation of this provision – which would have denied the whistleblower the anti-retaliation protections in this case given that he did not report to the SEC – would result in an “absurdity” and would be “illogical.”

In coming to this decision, the Ninth Circuit relied on the SEC’s published interpretation of the anti-retaliation provisions, which states that whistleblowers can sue under the Dodd-Frank Act even if they did not report directly to the SEC. The Ninth Circuit relied on the so-called “Chevron Doctrine”, which provides that, when a law is ambiguous, court should defer to the interpretation adopted by the executive-branch agencies empowered to enforce the law.

Petitioner’s arguments against deference

Digital Realty, which was recently granted certiorari by the Supreme Court, filed a brief arguing that the Ninth Circuit was wrong to defer to the SEC’s interpretation for two reasons.

First, Digital Realty argued that no deference is owed to the SEC’s interpretation because the anti-retaliation provisions in the Dodd-Frank Act are unambiguous. According to Digital Realty, the Dodd Frank Act is clear on its face that an employee is required to have made a complaint to the SEC before being entitled to the legislation’s anti-retaliation protections, and both the Ninth Circuit and the SEC erred by inventing a different definition.

Second, Digital Realty argued that no deference is owed because the SEC failed to follow administrative rules when developing its interpretation. In particular, Digital Realty criticized the SEC because the expansive interpretation of the anti-retaliation provisions had not been included in the draft rules initially published by the SEC. Instead, according to Digital Realty’s arguments, the expansive interpretation appeared in the final rule without any comment or explanation.

Deference to securities commissions in Canada

Although the question of deference in Digital Realty arises in the context of U.S. law, there are parallels in Canada. For instance, similar to the Chevron Doctrine, the Supreme Court of Canada has held that an interpretation adopted by an administrative agency is “entitled to weight and can be an ‘important factor’ in case of doubt about the meaning of legislation.”

Further, Canadian courts have consistently deferred to decisions rendered by the Ontario Securities Commission and its counterparts in other jurisdictions. For instance, in Sears Holdings Corporation v Ontario Securities Commission, the Ontario Divisional Court held that the OSC decision under appeal had to be reviewed on a reasonableness standard which, it noted, “encompassed ‘the right to be wrong.’” This deferential standard of review has been reinforced in recent cases such as Fiorillo v Ontario Securities Commission and Finkelstein v Ontario (Securities Commission).

As a result, a decision by the U.S. Supreme Court on the deference owed to the SEC’s interpretation may be of interest in Canada, especially if the U.S. Supreme Court pursues a less deferential approach.