## Facts

- Federal Water Service Corp., a registered public-utility holding company, underwent reorganization supervised by the SEC under the Public Utility Holding Company Act of 1935.
- While the reorganization plan was pending before the SEC, corporate officers and directors associated with Chenery purchased preferred shares of the company.
- The reorganization plan involved exchanging preferred shares for common shares in the reorganized entity.
- The SEC approved the plan only if the insiders’ newly acquired preferred shares were surrendered at cost plus interest, rather than receiving the same conversion benefits as other preferred shareholders.
- In prior proceedings, the Supreme Court set aside an earlier SEC order because it rested on an inadequate rationale; the matter returned to the SEC for further proceedings.
- On remand, the SEC reaffirmed the same substantive condition, this time grounding it in the statutory standards of the Act (including provisions requiring plans to be fair and equitable and consistent with the public interest).
- The court of appeals again vacated the SEC’s order, and the SEC sought Supreme Court review.

## Issues

1. Whether an agency, after a reviewing court rejects its original rationale, may reach the same result on remand by providing a new justification grounded in the governing statute.
2. Whether the SEC could announce and apply a new standard of conduct through adjudication rather than first adopting a generally applicable rule.
3. Whether applying that standard to insiders’ completed stock purchases was impermissibly retroactive.
4. What limits govern judicial review of an agency order that applies a newly stated principle.

## Decision

- The Supreme Court reversed the court of appeals and sustained the SEC’s order.
- The Court held that the earlier reversal did not bar the SEC from reaching the same outcome on remand when supported by a proper statutory rationale.
- The Court held that the SEC was not required to proceed by rulemaking and could develop policy through case-by-case adjudication.
- The Court held that retroactive effect from adjudication does not, by itself, invalidate the agency’s action.
- The Court stated that once the agency’s action is supported by substantial evidence and falls within congressional authority, courts may not set aside the order based on disagreement with the policy choice.

## Legal Principles

- A reviewing court evaluates agency action only on the grounds the agency invoked; it may not affirm by supplying a different justification.
- After remand, an agency may reexamine the matter and reissue an order reaching the same result if it supplies a lawful rationale consistent with the statute.
- Agencies generally have discretion to choose between policymaking by rulemaking and policymaking by adjudication.
- An agency may announce a new principle in adjudication and apply it to the parties before it; the presence of some retroactive effect is not automatically unlawful.
- Judicial review is deferential where the agency’s order is within statutory authority and supported by substantial evidence.

## Conclusion

The Court upheld the SEC’s restriction on insiders’ reorganization-era stock gains and confirmed that agencies may develop and apply statutory policy through adjudication, even when the decision incidentally operates retroactively, so long as the agency’s stated reasons fit the statute and the record supports the order.


Securities & Exchange Commission v. Chenery Corp. (Chenery II), 332 U.S. 194 (1947)