## Facts

- Federal Water Service Corp., a registered public utility holding company, was controlled by its officers, directors, and controlling stockholders through a parent company holding the voting Class B common stock.
- After registration under the Public Utility Holding Company Act of 1935 (PUHCA), management submitted multiple reorganization plans to the Securities and Exchange Commission (SEC) under PUHCA §§ 7 and 11; earlier plans were withdrawn after SEC objections.
- A later plan eliminated Class B participation and proposed converting preferred and Class A common stock into common stock of a new corporation.
- While the reorganization plans were pending before the SEC, the controlling insiders purchased a substantial number of the company’s preferred shares to protect their interests.
- The SEC approved a reorganization plan but ordered that preferred shares acquired by the insiders during the pending proceedings could not participate on an equal basis; instead, they had to be surrendered at cost plus 4% interest.
- The SEC did not find fraud, nondisclosure, misuse of position, unfairness, or injury arising from the specific purchases, and it disavowed relying on such grounds.
- The SEC justified the restriction by citing broad, judicially established equity principles barring fiduciaries from trading in the corporation’s securities during a reorganization.
- The D.C. Circuit set aside the SEC’s order, and the Supreme Court granted certiorari.

## Issues

1. Whether an administrative order may be sustained on a rationale supplied by a reviewing court rather than on the agency’s stated grounds.
2. Whether the SEC’s stated reliance on general equitable fiduciary principles, without findings of misuse or unfairness in the transactions, justified forcing surrender of the insiders’ newly acquired preferred shares at cost plus interest.
3. Whether the absence of statutory findings under PUHCA required vacatur and remand even if other potential grounds might have supported the order.

## Decision

- The Supreme Court held that the validity of the SEC’s order had to be judged solely on the grounds the SEC actually invoked in the record.
- Because the SEC relied on general equity principles, the Court evaluated the order under those principles and concluded they did not support the imposed restriction absent findings of misuse, unfairness, or injury.
- The Court declined to uphold the order on alternative statutory grounds not relied on by the SEC and not supported by essential agency findings.
- The Court remanded to the SEC for reconsideration, allowing the agency to make any necessary findings and to rest any renewed action on an appropriate legal basis.
- Justice Black dissented (joined by Justices Reed and Murphy); Justice Douglas did not participate.

## Legal Principles

- A reviewing court may uphold agency action only on the rationale the agency itself articulated; agency action “must stand or fall” on the stated grounds.
- Courts may not affirm administrative action by searching the record for substitute reasons or by supplying post hoc rationales the agency did not adopt.
- When an agency’s stated legal theory does not support its order, and required findings are missing, the usual remedy is remand to allow the agency to reconsider and, if appropriate, supply adequate findings and reasoning.

## Conclusion

The Court remanded because the SEC’s order rested on a stated equity rationale that did not justify the sanction without findings of misconduct, and the judiciary could not affirm by substituting unarticulated statutory grounds; agency decisions are reviewed based on the reasons the agency gave.


SEC v. Chenery Corp., 318 U.S. 80 (1943)