|
Forum Report
Court Requires SEC Rulemaking for
Investment Company Registration Requirements
In a May 15, 2007 opinion, the U.S. Court of Appeals for the Seventh Circuit
reversed a district court judgment in
SEC v. National Presto Industries which had required National
Presto’s registration under the
Investment
Company Act of 1940 (“1940 Act”). The opinion can be downloaded
from the following link:
The appellate court’s opinion was based primarily on its view that the SEC
and the lower court had reacted too harshly to the antics of National
Presto’s management, and that their subsequent reduction of investment
securities to less than 40% of assets should eliminate the need for
registration. Commenting on the costs of the apparent intent to punish the
company’s managers, the court observed (page 5) that “it is the investors
who must pay to recreate the financial statements, though they did not
contribute to this imbroglio.”
More importantly, though, the opinion rejected the SEC staff’s
interpretation of rules for defining “investment company” status, finding
that it was no longer consistent with the original intent of a 1947 formal
ruling of the Commission that has been the foundation of evolving policy.
Taking a position similar to that of the Second Circuit in its September
2006 AFSCME v. AIG decision rejecting the SEC interpretation of proxy
access rules, the Seventh Circuit concluded as follows (page 16):
|
“The Commission has never
issued an opinion or rule taking a different view, and its lawyers
cannot adopt a new approach by filing briefs. Only the Commission’s
members may change established norms, and they must do so by
rulemaking or administrative adjudication.” |
While the Seventh Circuit’s analysis of the SEC rules may be questioned –
for example, the opinion confuses income with revenue and receipts – the
decision effectively requires the SEC’s action to establish rules for the
enforcement of registration requirements under the first of two definitions
of an “investment company” in Section 80a-3(a)(1)(A) of the 1940 Act (any
issuer which “is or holds itself out as being engaged primarily, or proposes
to engage primarily, in the business of investing, reinvesting, or trading
in securities”). The opinion also suggests possible confusion about
interpretations of the second definition, the “40% of assets” test under
Section 80a-3(a)(1)(C), but does not directly challenge it.
For shareholders of Farmer Bros. and other companies for which investment
company disclosure requirements or governance protections might be
desirable, the Seventh Circuit decision in National Presto does not
encourage reliance on SEC enforcement action prior to their completion of
the required rulemaking process.
Your comments will be welcomed.
GL – May 17, 2007
Gary Lutin
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
Tel: 212-605-0335
Email: gl@shareholderforum.com
|