## Facts

- The New York Stock Exchange (NYSE) had a long-standing listing rule associated with one-share/one-vote: listed companies generally provided voting power to common shareholders on a one vote per share basis.
- In the mid-1980s, issuers began proposing dual-class and similar recapitalizations that would reduce voting power per share for some holders (for example, issuances of a second class of common stock with fewer votes per share).
- The NYSE encountered difficulty enforcing its one-share/one-vote approach and petitioned the Securities and Exchange Commission (SEC) to amend or relax the exchange’s own rule.
- The SEC did not approve the NYSE’s requested change. Instead, the SEC adopted its own rule, Exchange Act Rule 19c-4.
- Rule 19c-4 barred national securities exchanges and national securities associations (self-regulatory organizations, or SROs) from listing the securities of a corporation that took corporate action having the effect of “nullifying, restricting, or disparately reducing” the per share voting rights of existing common shareholders.
- The SEC treated covered actions as “disenfranchisement” even if the change had been approved by a shareholder vote conducted on a one-share/one-vote basis.
- The Business Roundtable petitioned the United States Court of Appeals for the District of Columbia Circuit for review, arguing that Rule 19c-4 exceeded the SEC’s authority under the Securities Exchange Act of 1934 (Exchange Act) because it regulated substantive shareholder voting rights—an area traditionally governed by state corporate law.

## Issues

1. Whether § 19 of the Securities Exchange Act authorized the SEC to adopt Rule 19c-4, which restricted exchanges and associations from listing companies that adopted certain voting-rights structures.
2. Whether Rule 19c-4 impermissibly regulated substantive corporate governance—specifically, the allocation of voting power among shareholders—rather than the procedures and market practices the Exchange Act empowers the SEC to regulate.
3. Whether, under principles of administrative law and statutory interpretation (including Chevron deference), the SEC could justify Rule 19c-4 as within its delegated authority over SRO rules and listing standards.

## Decision

- The D.C. Circuit granted the petition for review and vacated Rule 19c-4.
- The court held that Rule 19c-4 exceeded the SEC’s authority under § 19 of the Exchange Act because it directly controlled the substantive allocation of power among shareholder classes.
- The court reasoned that the Exchange Act’s framework, history, and structure did not show a congressional grant of authority to the SEC to set substantive corporate voting-rights rules through SRO listing restrictions.
- Even assuming the SEC would ordinarily receive deference on ambiguous statutory terms, the court concluded the Commission’s interpretation went beyond what Congress authorized, given the federal-state allocation of authority over internal corporate affairs.

## Legal Principles

- An agency must identify a statutory grant of authority for the rule it adopts; broad references to market integrity or investor interests cannot supply power that Congress did not confer.
- Section 19 of the Exchange Act gives the SEC significant authority over SRO rules and oversight of exchange practices, but that authority does not extend to imposing substantive corporate-governance requirements on issuers through listing bans absent clear authorization.
- Federal securities law generally targets disclosure, trading, and market mechanisms; the substantive allocation of shareholder voting rights is ordinarily a matter of state corporate law, and a shift of that subject to federal control requires a clear congressional signal.
- Chevron deference does not permit an agency to claim jurisdiction or regulatory power over a subject that the statute, read in context and light of its history, does not delegate to the agency.

## Conclusion

The D.C. Circuit vacated SEC Rule 19c-4, holding that the Exchange Act did not authorize the SEC to use its SRO oversight and listing-related powers to regulate the substantive distribution of shareholder voting rights within corporations, a domain generally left to state corporate law absent a clear congressional directive.


Business Roundtable v. Securities and Exchange Commission, 905 F.2d 406 (1990)