[482] Merril Hirsh argued the cause for petitioner. With him on the briefs was Jonathan A. Cohen.

Rachel M. Weintraub and Mercer E. Bullard were on the brief for amici curiae Consumer Federal of America and Fund Democracy, Inc. in support of petitioner.

Debra G. Speyer was on the brief for amicus curiae Public Investors Arbitration Bar Association in support of petitioner.

Rex A. Staples was on the brief for amicus curiae North American Securities Administrators Association, Inc. in support of petitioner.

Rada L. Potts, Senior Litigation Counsel, Securities & Exchange Commission, argued the cause for respondent. With her on the brief were Brian G. Cartwright, General Counsel, Jacob H. Stillman, Solicitor, Michael A. Conley, Special Counsel, and Jeffrey T. Tao, Senior Counsel.

Before: ROGERS, GARLAND and KAVANAUGH, Circuit Judges.

[483] Opinion for the Court filed by Circuit Judge ROGERS.

Dissenting opinion filed by Circuit Judge GARLAND.

ROGERS, Circuit Judge.

Brokers and dealers are not subject to the requirements of the Investment Advisers Act ("IAA") where their investment advice is (1) "solely incidental to the conduct of [their] business as a broker or dealer," and (2) the broker or dealer "receives no special compensation therefor." 15 U.S.C. § 80b-2(a)(11)(C) (2000). The Securities and Exchange Commission, acting pursuant to § 202(a)(11)(F) and § 211(a) of the IAA, 15 U.S.C. §§ 80b-2(a)(11)(F)^[1], 80b-11(a), promulgated a final rule exempting broker-dealers^[2] from the IAA when they receive "special compensation therefor." See "Certain Broker-Dealers Deemed Not to be Investment Advisers," 70 Fed.Reg. 20,424 (Apr. 19, 2005). The Financial Planning Association ("FPA") petitions for review of the final rule on the ground that the SEC has exceeded its authority. We agree, and we therefore grant the petition and vacate the final rule.

I.

The IAA was enacted by Congress as one title of a bill "to provide for the registration and regulation of investment companies and investment advisers." Pub.L. No. 76-768, tit. II, 54 Stat. 847 (1940). The other title was the Investment Company Act ("ICA"). Pub.L. No. 76-768, tit. I, 54 Stat. 789 (1940). These were the last in a series of congressional enactments designed to eliminate certain abuses in the securities industry that contributed to the stock market crash of 1929 and the depression of the 1930s. Congress had previously enacted the Securities Act of 1933, the Securities Exchange Act of 1934 (hereinafter "the Exchange Act"), the Public Utility Holding Company Act of 1935, and the Trust Indenture Act of 1939.

"A fundamental purpose, common to these statutes, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963). The IAA arose from a consensus between industry and the SEC "that investment advisers could not `completely perform their basic function—furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments—unless all conflicts of interest between the investment counsel and the client were removed.'" Id. at 187, 84 S.Ct. 275 (citation omitted). According to the Committee Reports, "[t]he essential purpose of [the IAA] . . . [was] to protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts and to safeguard the honest investment adviser against the stigma of the activities of these individuals by making fraudulent practices by investment [484] advisers unlawful." H.R.Rep. No. 76-2639, at 28 (1940).

"Virtually no limitations or restrictions exist with respect to the honesty and integrity of individuals who may solicit funds to be controlled, managed, and supervised. . . . Individuals assuming to act as investment advisers at present can enter profit-sharing contracts which are nothing more than `heads I win, tails you lose' arrangements. Contracts with investment advisers which are of a personal nature may be assigned and the control of funds of investors may be transferred to others without the knowledge or consent of the client."

S.Rep. No. 76-1775, at 21-22 (1940).

Under the IAA, investment advisers are required, among other things, to register and to maintain records, 15 U.S.C. § 80b-3(c) & (e); to limit the type of contracts they enter, id. § 80b-5; and not to engage in certain types of deceptive and fraudulent transactions, id. § 80b-6. Congress has amended the IAA on several occasions,^[3]see VII Louis Loss & Joel Seligman, Securities Regulation 3314-15 (3d ed.2003), but the provisions at issue in this appeal have remained, in relevant part, unchanged.

In § 202(a)(11) of the IAA, Congress broadly defined "investment adviser" as

"any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. . . . "

15 U.S.C. § 80b-2(a)(11). Carving out six exemptions from this broad definition, Congress determined that an "investment adviser" did not include:

(A) a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956 which is not an investment company, except that the term "investment adviser" includes any bank or bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser;

(B) any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession;

(C) any broker or dealer [1] whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and [2] who receives no special compensation therefor;

(D) the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation;

(E) any person whose advice, analyses, or reports relate to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which shall have been designated by the Secretary of the Treasury, pursuant to [485] section 3(a)(12) of the Securities Exchange Act of 1934, as exempted securities for the purposes of that Act; or

(F) such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.

15 U.S.C. § 80b-2(a)(11) (emphasis added). Subsections (C) and (F) are at issue in this appeal.

Before enactment of the IAA, broker-dealers and others who offered investment advice received two general forms of compensation. Some charged only traditional commissions (earning a certain amount for each securities transaction completed). Others charged a separate advice fee (often a certain percentage of the customer's assets under advisement or supervision). See 11 Fed.Reg. 10,996 (Sept. 27, 1946). The Committee Reports recognized that the statutory exemption for broker-dealers reflected this distinction; the Reports explained that the term "investment adviser" was "so defined as specifically to exclude . . . brokers (insofar as their advice is merely incidental to brokerage transactions for which they receive only brokerage commissions)." S.Rep. No. 76-1775, at 22 [HA 164]; H.R.Rep. No. 76-2639, at 28 [HA 168].

The final rule took a different approach. After determining in 1999 that certain new forms of fee-contracting adopted by broker-dealers were "not . . . fundamentally different from traditional brokerage programs," the SEC proposed a rule very similar to the final rule, see Notice of Proposed Rulemaking, 64 Fed.Reg. 61,228 (Nov. 10, 1999) ("1999 NOPR"), stating it would act as if it had already issued the rule, id. at 61,227. In adopting the temporary rule, pursuant to subsection (F) and its general rulemaking authority under IAA § 211(a), the SEC exempted a new group of broker-dealers from the IAA. 64 Fed.Reg. 61,226 (Nov. 10, 1999). After reproposing the rule in January 2005, again pursuant to its authority under subsection (F) and § 211(a), the SEC adopted a slightly modified final rule on April 12, 2005, codified at 17 C.F.R. § 275.202(a)(11)-1. 70 Fed.Reg. 20,424, 453-54.

The final rule provides, generally, in Paragraph (a)(1), on "fee-based programs," that a broker-dealer who (1) receives special compensation will not be deemed an investment adviser if (2) any advice provided is solely incidental to brokerage services provided on a customer's account and (3) specific disclosure is made to the customer.^[4] In Paragraph (a)(2), on discount brokerage programs, a broker-dealer will not be deemed to have received special compensation merely because it charges one customer more or less for brokerage services than it charges another customer. Paragraph (b) lists three non-exclusive circumstances in which advisory services, for which special compensation is received under paragraph (a)(1), would not be performed "solely incidental to" brokerage: when (1) a separate fee or contract exists for advice; (2) a customer receives certain financial planning services; and, (3) generally, a broker-dealer has investment discretion over a client's account. Paragraph [486] (c) states a "special rule" that broker-dealers registered under the Exchange Act are investment advisers only for those accounts for which they receive compensation that subjects them to the IAA. Paragraph (d) defines the term "investment discretion," which appears in paragraphs (a)(1) and (b)(3), to have the same meaning as § 3(a)(35) of the Exchange Act, 15 U.S.C. § 78c(a)(35), except for "discretion granted by a customer on a temporary or limited basis."

The FPA petitions for review, challenging the SEC's authority to promulgate the final rule.^[5] We first address the threshold issue presented by the SEC's challenge to FPA's standing.

II.

Article III standing is a fundamental prerequisite to any exercise of the court's jurisdiction, see Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992), and requires, at the "irreducible constitutional minimum," id., a showing that the litigant has suffered a concrete and particularized injury that is actual or imminent, traceable to the challenged act, and redressable by the court. See Allen v. Wright, 468 U.S. 737, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984); Simon v. E. Ky. Welfare Rights Org., 426 U.S. 26, 37-38, 41-42, 96 S.Ct. 1917, 48 L.Ed.2d 450 (1976). A petitioner must support each element of its claim to standing "by affidavit or other evidence." Defenders of Wildlife, 504 U.S. at 561, 112 S.Ct. 2130; see Sierra Club v. EPA, 292 F.3d 895, 899 (D.C.Cir.2002). The SEC maintains that the FPA fails to show injury-in-fact because FPA's assertions of injury from the final rule's dual standard are conclusory.

The standard for representational standing is well-established:

[A]n association has standing to bring suit on behalf of its members when: (a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization's purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.

United Food & Commercial Workers Union Local 751 v. Brown Group, Inc., 517 U.S. 544, 553, 116 S.Ct. 1529, 134 L.Ed.2d 758 (1996) (quoting Hunt v. Wash. State Apple Adver. Comm'n, 432 U.S. 333, 343, 97 S.Ct. 2434, 53 L.Ed.2d 383 (1977)). The FPA meets this test.

The court has "repeatedly recognized that parties `suffer constitutional injury in fact when agencies . . . allow increased competition' against them." U.S. Telecom Ass'n v. FCC, 295 F.3d 1326, 1331 (D.C.Cir.2002) (citation omitted). The FPA is a non-profit organization with over 27,000 members that exists to advance the financial planning profession. See Decl. of Daniel Moisand, President of the FPA, ¶¶ 1, 2, Petitioner's Br.App. 1. The final rule creates a dual standard for the provision of investment advice. First, there are investment advisers who are covered by the IAA; many FPA members are investment advisers, and must comply with the IAA. See FPA Comment Letter of Feb. 7, 2005 n. 1. Second, there is a new group of broker-dealers who are exempted from the IAA even though their activities do not conform to the two-pronged requirements of subsection (C). The two groups compete for customers, and under the final [487] rule one of them (including FPA members) must continue to comply with the IAA, while the other one (the broker-dealers in the new, exempt category) need not.

Additionally, contrary to the SEC's view, the FPA also has prudential standing. Its members are within the IAA's zone of interest, see Clarke v. Sec. Indus. Ass'n, 479 U.S. 388, 399, 107 S.Ct. 750, 93 L.Ed.2d 757 (1987), because one of Congress's purposes in enacting the IAA was to protect the ability of "bona fide" investment advisers to compete on a level regulatory playing field with those advisers who did not fully disclose their conflicts of interest, see Capital Gains, 375 U.S. at 191, 84 S.Ct. 275 (1963).

Accordingly, we hold that the FPA has standing to bring its petition.

III.

The FPA contends that when Congress enacted the IAA, Congress identified in subsection (C) the group of broker-dealers it intended to exempt, and that subsection (F) was only intended to allow the SEC to exempt new groups from the IAA, not to expand the groups that Congress specifically addressed. The resolution of the FPA's challenge thus turns on whether the SEC is authorized under § 202(a)(11)(F) or § 211(a) to except from IAA coverage an additional group of broker-dealers beyond the broker-dealers exempted by Congress in subsection (C), 15 U.S.C. § 80b-2(a)(11)(C). Subsection (F) of § 202(a)(11) authorizes the SEC to except from the IAA "such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order." 15 U.S.C. § 80b-2(a)(11)(F). As such, we review the SEC's exercise of its authority pursuant to subsection (F) under the familiar two-step analysis of Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Under step one, the court must determine whether Congress has directly spoken to the precise question at issue. "If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id. Under step two, "if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." Id. at 843, 104 S.Ct. 2778. In reviewing an agency's interpretation of its authority under a statute it administers, the court will uphold that interpretation as long as it is a reasonable interpretation of the statute. See Village of Bergen v. FERC, 33 F.3d 1385, 1389 (D.C.Cir.1994).

Applying the "traditional tools of statutory construction," see Chevron, 467 U.S. at 843 n. 9, 104 S.Ct. 2778, the court looks to the text, structure, and the overall statutory scheme, as well as the problem Congress sought to solve. See PDK Labs. Inc. v. DEA, 362 F.3d 786, 796 (D.C.Cir. 2004); Sierra Club v. EPA, 294 F.3d 155, 161 (D.C.Cir.2002). All four elements demonstrate that the SEC has exceeded its authority in promulgating the rule under § 202(a)(11)(F) because Congress has addressed the precise issue at hand.

Section 202(a)(11) lists exemptions (A)-(E) from the broad definition of "investment adviser" for several classes of persons—including, for example, lawyers, accountants, and others whose advice is "solely incidental" to their regular business; and publishers of newsletters that circulate widely and do not give individually-tailored financial advice. Among the IAA exemptions is subsection (C)'s exemption for "any broker or dealer whose performance of such [investment advisory] services is solely incidental to the conduct of his business as a broker or dealer and [488] who receives no special compensation therefor." (Emphasis added). Beyond the listed exemptions, subsection (F) authorizes the SEC to exempt from the IAA "such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order." (Emphasis added).

In the final rule, the SEC purports to use its authority under subsection (F) to broaden the exemption for broker-dealers provided under subsection (C). The rule is inconsistent with the IAA, however, because it fails to meet either of the two requirements for an exemption under subsection (F). First, the legislative "intent" does not support an exemption for broker-dealers broader than the exemption set forth in the text of subsection (C); therefore, the final rule does not meet the statutory requirement that exemptions under subsection (F) be consistent with the "intent" of paragraph 11 of section 202(a). Second, because broker-dealers are already expressly addressed in subsection (C), they are not "other persons" under subsection (F); therefore the SEC cannot use its authority under subsection (F) to establish new, broader exemptions for broker-dealers.

The final rule's exemption for broker-dealers is broader than the statutory exemption for broker-dealers under subsection (C). Although the SEC maintains that the intent of paragraph 11 is to exempt broker-dealers who receive special compensation for investment advice [Red Br. 28; Oral Arg. Tape at 31:50], the plain text of subsection (C) exempts only broker-dealers who do not receive special compensation for investment advice. The word "any" is usually understood to be all inclusive. See New York v. EPA, 443 F.3d 880, 885 (D.C.Cir.2006). As "[t]he plain meaning of legislation should be conclusive, except in the `rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters,'" United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)), the terms of the IAA establish the precise conditions under which broker-dealers are exempt from the IAA. "To read out of a statutory provision a clause setting forth a specific condition or trigger to the provision's applicability is . . . an entirely unacceptable method of construing statutes." Natural Res. Def. Council v. EPA, 822 F.2d 104, 113 (D.C.Cir.1987).

No other indicators of congressional intent support the SEC's interpretation of its authority under subsection (F). The relevant language in the committee reports suggests that Congress deliberately drafted the exemption in subsection (C) to apply as written. Those reports stated that the "term `investment adviser' is so defined as specifically to exclude . . . brokers (insofar as their advice is merely incidental to brokerage transactions for which they receive only brokerage commissions)." S.Rep. No. 76-1775, at 22 (emphasis added) [HA 164]; see also H.R.Rep. No. 76-2639, at 28 [HA 168]. By seeking to exempt broker-dealers beyond those who receive only brokerage commissions for investment advice, the SEC has promulgated a final rule that is in direct conflict with both the statutory text and the Committee Reports.

The text of subsection (F) confirms this conclusion by the limiting the SEC's exemption authorization to "other persons." We agree with the FPA that when Congress enacted the IAA, Congress identified the specific classes of persons it intended to exempt. As to broker-dealers, subsection (C) applied to "any broker or dealer." Congress, through the use of contrasting [489] text in subsection (F), signaled that it only authorized the SEC to exempt "other persons" when consistent with the intent of the paragraph, and thus only when doing so would not override Congress's determination of the appropriate persons to be exempted from the IAA's requirements.

As the FPA points out, the word "other" connotes "existing besides, or distinct from, that already mentioned or implied." II The Shorter Oxford English Dictionary 1391 (2d ed.1936, republished 1939). See Key v. Allstate Ins. Co., 90 F.3d 1546, 1550 (11th Cir.1996) (citing The American Heritage Dictionary 931 (1981)). There is nothing to suggest that Congress did not intend the words "any" or "other" to have their "ordinary or natural meaning." Smith v. United States, 508 U.S. 223, 228, 113 S.Ct. 2050, 124 L.Ed.2d 138 (1993). So understood, courts have hesitated to allow parties to use language structurally similar to the "other persons" clause in subsection (F) to redefine or otherwise avoid specific requirements in existing statutory exceptions. In Liljeberg v. Health Servs. Acquisition Corp., 486 U.S. 847, 864 n. 11, 108 S.Ct. 2194, 100 L.Ed.2d 855 (1988), for example, the Supreme Court noted that where Federal Rule of Civil Procedure 60(b) contained five explicit grounds for relief, and one non-specific "any other reason" clause, (emphasis added) the structure of the clauses suggested that the final clause could not be used to elude or enlarge the first five—that "clause (6) and clauses (1) through (5) are mutually exclusive." (emphasis added). Accord Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 393, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993); Hesling v. CSX Transp. Inc., 396 F.3d 632, 643 (5th Cir. 2005); United States v. Erdoss, 440 F.2d 1221, 1223 (2d Cir.1971). Similarly, in Am. Bankers Ass'n v. SEC, this court explained that:

A universal clause preceding every definition in the statute, which states only "unless the context otherwise requires," cannot provide the authority for one of the agencies whose jurisdictional boundaries are defined in the statute to alter by administrative regulation those very jurisdictional boundaries. To suggest otherwise is to sanction administrative autonomy beyond the control of either Congress or the courts.

804 F.2d 739, 754 (D.C.Cir.1986). Our dissenting colleague attempts to distinguish these two cases as limited to situations in which one agency seeks to redraw the jurisdictional boundaries of another agency. See Dissenting Op. at [7-9]. That interpretation, however, ignores the underlying principle in each case: where the statutory text is clear, an agency may not use general clauses to redefine the jurisdictional boundaries set by the statute.

Just as the text and structure of paragraph of 202(a)(11) make it evident that Congress intended to define "investment adviser" broadly and create only a precise exemption for broker-dealers, so does a consideration of the problems Congress sought to address in enacting the IAA. A comprehensive study conducted by the SEC pursuant to the Public Utility Holding Company Act of 1935 indicated that "many investment counsel have `strayed a great distance from that professed function' of furnishing disinterested, personalized, continuous supervision of investments." Securities and Exchange Commission, Investment Counsel, Investment Management, Investment Supervisory and Investment Advisory Services, at 25 (1939) (quoting testimony of brokerage executive James N. White, of Scudder, Stevens & Clark). Floor debate on the IAA called attention to the fact that while this study was being conducted investment trusts and investment companies had perpetrated "some of the most flagrant abuses and grossest violations of fiduciary duty to investors." 86 Cong. Rec. 2844 (daily ed. Mar. 14, 1940) [490] (statement of Sen. Wagner). Congress reiterated throughout its proceedings an intention to protect investors and bona fide investment advisers.^[6]

The overall statutory scheme of the IAA addresses the problems identified to Congress in two principal ways: First, by establishing a federal fiduciary standard to govern the conduct of investment advisers, broadly defined, see Transamerica Mortgage Advisors v. Lewis, 444 U.S. 11, 17, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979), and second, by requiring full disclosure of all conflicts of interest. As the Supreme Court noted, Congress's "broad proscription against `any . . . practice . . . which operates . . . as a fraud or deceit upon any client or prospective client' remained in the bill from beginning to end." Capital Gains, 375 U.S. at 191, 84 S.Ct. 275.

[T]he Committee Reports indicate a desire to . . . eliminate conflicts of interest between the investment adviser and the clients as safeguards both to `unsophisticated investors' and to `bona fide investment counsel.' The [IAA] thus reflects a . . . congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not disinterested.

Id. at 191-92, 84 S.Ct. 275. This statutory scheme is inconsistent with a construction of the SEC's authority under subsection (F) that would enable persons Congress determined should be subject to the IAA to escape its restrictions.

In an attempt to overcome the plain language of the statute, the SEC asserts that Congress was also concerned about the regulation of broker-dealers under both the IAA and Exchange Act, and that such concern was reflected in the "intent" of the paragraph. See 70 Fed.Reg. 20,430; see also 64 Fed.Reg. 61,228. The SEC points to no convincing evidence that supports these assertions. At the time Congress enacted the IAA in 1940, broker-dealers were already regulated under the Exchange Act. In the IAA, Congress expressly acknowledged that the broker-dealers it covered could also be subject to other regulation. IAA § 208(b), 15 U.S.C. § 80b-8(b). The IAA's essential purpose was to "protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts and to safeguard the honest investment adviser against the stigma of the activities of these individuals by making fraudulent practices by investment advisers unlawful." H.R.Rep. No. 76-2639 at 28; see also id. at 21. As the FPA emphasizes, there is nothing in the committee reports to suggest that Congress was particularly concerned about the regulatory burdens on broker-dealers.

While the SEC's failure to respect the unambiguous textual limitations marked by the phrase "intent of this paragraph" and "other persons" is fatal to the final rule, an additional weakness exists in the SEC's interpretation: It flouts six decades of consistent SEC understanding of its authority under subsection (F). Cf. Commodity Futures Trading Comm'n v. Schor, 478 U.S. 833, 844, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986); Red Lion Broad. Co. v. FCC, 395 U.S. 367, 380-82, 89 S.Ct. 1794, 23 L.Ed.2d 371 (1969).^[7] Subsection [491] (F) is not a catch-all that authorizes the SEC to rewrite the statute. Rather, as subsection (F)'s terms provide, the authority conferred must be exercised consistent with the "intent of this paragraph" and apply to "other persons." The SEC cannot point to any instance between the 1940 enactment of the IAA and the commencement of the rulemaking proceedings that resulted in the final rule in 2005, when it attempted to invoke subsection (F) to alter or rewrite the exemptions for persons qualifying for exemptions under subsections (A)-(E). Rather, the SEC has historically invoked subsection (F) to exempt persons not otherwise addressed in the five exemptions established by Congress: For example, the adviser to a family trust who was otherwise subject to fiduciary duties, Oral Arg. Tape at 39:20-43:24; or new groups, such as thrift institutions acting in a fiduciary capacity, 69 Fed.Reg. 25,777-90 (May 7, 2004), and World Bank instrumentalities that provide advice only to sovereigns, In re Int'l Bank for Reconstr. & Dev., 2001 SEC LEXIS 1782 (Sept. 4, 2001). As the SEC's own actions for the last 65 years suggest, subsection (F) serves the clear purpose of authorizing the SEC to address persons or classes involving situations that Congress had not foreseen in the statutory text—not to broaden the exemptions of the classes of persons (such as broker-dealers) Congress had expressly addressed.

The SEC unconvincingly attempts to defend its expansive interpretation of subsection (F) by likening it to section 6(c) of the ICA, 15 U.S.C. § 80a-6(c). Section 6(c) of the ICA empowers the SEC to grant exemptions from the ICA, or any rule or regulation adopted under it, "if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions" of the ICA. This court has noted that the SEC "has exercised this authority to exempt persons not within the intent of the [ICA] and generally to adjust its provisions to take account of special situations not foreseen when the [ICA] was drafted." NASD v. SEC, 420 [492] F.2d 83, 92 (D.C.Cir.1969), vacated on other grounds, Investment Co. Inst. v. Camp, 401 U.S. 617, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971). Reliance on NASD does not advance the SEC's position as the plain text of the ICA is far broader than that of IAA subsection (F). The ICA expressly refers to the SEC's view of "the public interest" as a basis for new exemptions. "[W]e assume that in drafting . . . legislation, Congress said what it meant." United States v. LaBonte, 520 U.S. 751, 757, 117 S.Ct. 1673, 137 L.Ed.2d 1001 (1997). Although Congress amended the IAA in 1970, see supra n. 3, and repeated the same ICA language highlighted in NASD in § 206A of the IAA, 15 U.S.C. § 80b-6a, the SEC disavows any reliance on § 206A in promulgating the final rule, see 70 Fed. Reg. 20,453; Respondent's Br. at 27 n. 10, and thus the court has no occasion to express an opinion on the SEC's authority under it, see SEC v. Chenery Corp., 318 U.S. 80, 95, 63 S.Ct. 454, 87 L.Ed. 626 (1943). But the broader language found in § 206A supports the conclusion that subsection (F) must be read more narrowly. Cf. Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001); City of Chicago v. Envtl. Def. Fund, 511 U.S. 328, 338, 114 S.Ct. 1588, 128 L.Ed.2d 302 (1994).

In light of the context in which Congress drafted subsections (C) and (F), we conclude that, as indicated by the structure of § 202(a)(11) and the problems that Congress addressed in the IAA, as well as the other indicators of Congress's intent, under Chevron step one the text of subsections (C) and (F) is unambiguous, and that, therefore, the SEC has exceeded its authority in promulgating the final rule. Our dissenting colleague's analysis fails to confront two realities of statutory construction. First, "[a]mbiguity is a creature not of definitional possibilities but of statutory context." Brown v. Gardner, 513 U.S. 115, 118, 115 S.Ct. 552, 130 L.Ed.2d 462 (1994). Congress has used words having ordinary meaning—"any broker or dealer" in subsection (C) and "other persons" in subsection (F)—and a familiar structure to express its "intent" in addressing problems identified by the industry and the SEC. Second, the absence of a statutory definition of "intent of this paragraph" and "other persons" does not necessarily render their meaning ambiguous. See Goldstein v. SEC, 451 F.3d 873, 878 (D.C.Cir.2006). Again, the meaning of the text is defined by its context as set forth in the normal meaning of the words, the structure of paragraph 11, and the problems Congress sought to address in the IAA. Because the court's duty is to give meaning to each word of a statute, the court cannot properly treat one authorization, under subsection (F), as duplicative of another authorization, under Section 206A. See supra at [491-92]; Dissenting Op. at [498]. Consequently, section 202(a)(11)(F) does not lend itself to alternative meanings; to conclude otherwise would undermine Congress's purpose in enacting the IAA—to protect consumers and honest investment advisers and to establish fiduciary standards and require full disclosure of all conflicts of interests of "investment advisers," broadly defined. The SEC's suggestion that "new" broker-dealer marketing developments fall within the scope of its authority under subsection (F) ignores its own contemporaneous understanding of Congressional intent to capture such developments. See supra at [490-91] and note 7. Although an agency may change its interpretation of an ambiguous statute, all elements of the traditional tools of statutory interpretation confound the SEC's effort to walk away from its long-settled view of the limits of its authority under subsection (F) and our dissenting colleague's attempt to find an alternative meaning at this late date.

[493] The SEC's invocation of its general rulemaking authority under IAA section 211(a),^[8] is likewise to no avail because it suggests no intention by Congress that the SEC could ignore either of the two requirements in subsection (C) for broker-dealers to be exempt from the IAA. See Am. Bankers, 804 F.2d at 755. Paraphrasing an apt observation, while, in the SEC's view, "[t]he statute may be imperfect, . . . the [SEC] has no power to correct flaws that it perceives in the statute it is empowered to administer. Its [subsection (F) authority and its] rulemaking power[s][are] limited to adopting regulations to carry into effect the will of Congress as expressed in the statute." Bd. of Governors v. Dimension Fin. Corp., 474 U.S. 361, 374, 106 S.Ct. 681, 88 L.Ed.2d 691 (1986).

Accordingly, we grant the petition and vacate the final rule. See North Carolina v. Fed. Energy Regulatory Comm'n, 730 F.2d 790, 795-96 (D.C.Cir.1984); cf. K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 294, 108 S.Ct. 1811, 100 L.Ed.2d 313 (1988). The final rule does not contain a severability clause; nor does the SEC suggest it is severable. Paragraph (b) is expressly tied to paragraph (a). Although, absent (a) or (b), paragraph (c) merely states the current law, the SEC identifies paragraph (c) as one of "three separate, yet related, parts" of the final rule. Respondent's Br. at 11, 13. Paragraph (d) defines a term used in paragraphs (a) and (b). The SEC release to the final rule states that paragraph (d) institutes a policy change based on its interpretation of subsection (F), see 70 Fed.Reg.20,439-440, but otherwise identifies paragraph (d) in the release as part and parcel of the final rule, see, e.g., id. at 20,424.

GARLAND, Circuit Judge, dissenting.

The Investment Advisers Act contains five specific exceptions, and further authorizes the SEC to exempt "such other persons not within the intent of this paragraph, as the Commission may designate by rules." 15 U.S.C. § 80b-2(a)(11). Unlike my colleagues, I cannot derive an unambiguous meaning from the terms "such other persons" and "within the intent of this paragraph." As required by Chevron, I would therefore defer to the SEC's reasonable interpretation of the statute it administers and uphold the Commission's fee-based brokerage rule.

I

The Investment Advisers Act (IAA) imposes a series of requirements on "investment advisers." See 15 U.S.C. §§ 80b-3 to -6. Paragraph 11 of section 202(a) of the Act defines an "investment adviser" as "any person who, for compensation, engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities," unless that person comes within one of six exceptions. Id. § 80b-2(a)(11).^[9] The first five exceptions include, inter alia, certain banks and bank holding companies, certain lawyers and accountants, and—most relevant here—certain brokers and dealers. The exception [494] relating to broker-dealers—subsection (C)—exempts:

any broker or dealer whose performance of [advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.

Id. § 80b-2(a)(11)(C). The SEC has construed "special compensation" to mean any compensation other than brokerage commissions (or dealers' "mark-ups" or "mark-downs"). See Certain Broker-Dealers Deemed Not To Be Investment Advisers, 70 Fed.Reg. 20,424, 20,425 & n. 10 (Apr. 19, 2005) [hereinafter Certain Broker-Dealers]. Hence, a broker-dealer who receives any kind of compensation other than commissions does not come within the subsection (C) exception, even if he, too, provides advice solely as an incident to his business as a broker-dealer. See id. at 20,425.

In addition to the five specific exceptions, the IAA's definition of covered investment advisers includes a sixth exception—subsection (F)—which reads as follows:

such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.

15 U.S.C. § 80b-2(a)(11)(F). That exception is the crux of this case. In the final rule currently under attack, the SEC exercised its authority under subsection (F) to create an exception for broker-dealers whose provision of advice is also solely incidental to their brokerage services, but who receive a particular kind of non-commission compensation. These broker-dealers—a group that did not exist when the IAA was passed in 1940—charge either a fixed fee or a fee based on the amount of assets in the customer's account. In return, they provide the customer with a traditional package of brokerage services that includes investment advice, execution, arranging for delivery and payment, and custodial and recordkeeping services. Certain Broker-Dealers, 70 Fed.Reg. at 20,425. Because these broker-dealers receive fee-based compensation rather than commissions, they receive "special compensation" within the meaning of subsection (C) and hence are not covered by that exception. See id.

As the court states, the question before us is whether subsection (F) gives the SEC the authority to "except from IAA coverage an additional group of broker-dealers beyond the broker-dealers exempted by Congress in subsection (C)." Court Op. at 487. The SEC believes that it does. In the Commission's view, although these broker-dealers receive "special compensation" in a technical sense, they provide investment advice in the same manner as those who are exempt under subsection (C), and exempting them would thus serve the same purpose. See infra Part III.

Under the first step of Chevron analysis, if the terms of subsection (F) unambiguously preclude the SEC's interpretation, we must reject it. See Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-44, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). If the terms are ambiguous, however, we must proceed to Chevron's second step and defer to the SEC's interpretation if it is reasonable. See id.; Nat'l Cable & Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 980, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005).

II

The court begins and ends its analysis at Chevron step one, concluding that the SEC unambiguously lacks authority under subsection (F) to exempt any broker-dealers beyond those specified in subsection (C). Court Op. at 492. The court reaches this conclusion based on its examination of the [495] subsection (F) terms "such other persons" and "within the intent of this paragraph." I fail to appreciate the clarity of either term. Indeed, apart from the inherent ambiguity of the words themselves, clarity is particularly elusive because subsection (F)'s final clause—"as the Commission may designate by rules"—expressly authorizes the SEC to determine the intent of the paragraph and designate further exceptions by regulation. As the Supreme Court instructed in Chevron, where "there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation[,][s]uch legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute." Chevron, 467 U.S. at 843-44, 104 S.Ct. 2778; see Am. Council on Educ. v. FCC, 451 F.3d 226, 232 (D.C.Cir.2006).

A

Like my colleagues, I begin with the term "within the intent of this paragraph." Under Chevron, a statutory term is unambiguous only if Congress has "directly spoken to the precise question at issue." 467 U.S. at 842-43, 104 S.Ct. 2778. The court is obviously correct in stating that "the plain text of subsection (C) exempts only broker-dealers who do not receive special compensation for investment advice"—that is, broker-dealers who do not receive compensation other than commissions. Court Op. at 488 (emphasis added). But that is not the precise question before us. That question is whether Congress intended subsection (F) to permit the SEC to exempt broker-dealers beyond those already exempt under subsection (C).

The court cannot point to any words in paragraph 11, or in any other paragraph of the Act, that suggest a negative answer to that question—or that explain what Congress intended with respect to that question at all. Instead, the court appears to rely on a version of the expressio unius canon—the principle that the mention of one thing implies the exclusion of another—by reasoning that the exception for some broker-dealers in subsection (C) means that coverage of all other broker-dealers must be "within the intent of" paragraph 11. But this court has repeatedly held that expressio unius is "an especially feeble helper in an administrative setting, where Congress is presumed to have left to reasonable agency discretion questions that it has not directly resolved." Martini v. Fed. Nat'l Mortgage Ass'n, 178 F.3d 1336, 1343 (D.C.Cir.1999) (quoting Cheney R.R. Co. v. ICC, 902 F.2d 66, 69 (D.C.Cir.1990)) (internal quotation marks omitted); see Texas Rural Legal Aid, Inc. v. Legal Servs. Corp., 940 F.2d 685, 694 (D.C.Cir.1991) ("[T]he expressio canon is simply too thin a reed to support the conclusion that Congress has clearly resolved the issue."). The canon's negative inference is particularly implausible where—as in subsection (F)—Congress has explicitly authorized additional exceptions beyond those specified in the statute.

Turning from the statutory text to the legislative history, the court quotes a committee report stating that the "`term "investment adviser" is so defined as specifically to exclude . . . brokers (insofar as their advice is merely incidental to brokerage transactions for which they receive only brokerage commissions).'" Court Op. at 488 (quoting S. REP. NO. 76-1775, at 22 (1940)) (emphasis added by the court); see also H.R. REP. NO. 76-2639, at 28 (1940). This quotation, however, has the same problem identified above. The committee was referring only to the specific exclusion provided by subsection (C), and not to the further exclusions permitted by subsection (F). That is made clear by the sentence that follows the one quoted by the court: "In addition, the Commission is authorized by rules and regulations or order, to make certain further exceptions [496] according to prescribed statutory standards." S. REP. NO. 76-1775, at 22 (emphasis added); see also H.R. REP. NO. 76-2639, at 28. There is nothing in the committee report that explains Congress' intentions with respect to those "further exceptions."

B

The court also perceives clarity in the subsection (F) term "such other persons." According to the court, "other persons" excludes any person who is a member of one of the broad categories referenced in paragraph 11's five specific exceptions. Because some broker-dealers are referenced in subsection (C), the court concludes that the subset of broker-dealers covered by the fee-based brokerage rule cannot constitute "other persons" within the meaning of subsection (F). See Court Op. at 488-89. The SEC, by contrast, contends that "other persons" excludes only those persons who actually come within one of the five preceding exceptions. On the SEC's reading, the fee-based brokerage rule is a permissible exercise of the Commission's delegated authority because it exempts broker-dealers other than those exempted by subsection (C).

Because the IAA does not define "other persons," the court turns to the dictionary to find its meaning. There, the court learns that "the word `other' connotes `existing besides, or distinct from, that already mentioned or implied.'" Id. at 489 (quoting 2 THE SHORTER OXFORD ENGLISH DICTIONARY 1391 (2d ed.1936, republished 1939)). But like the text and the legislative history, the dictionary fails to resolve the precise question at issue. It cannot tell us whether the persons "already mentioned" in subsection (C) are "any broker or dealer," as one might reasonably conclude if one looked only at the first four words of the subsection, or instead are "any broker or dealer whose performance of such services is solely incidental to the conduct of his business . . . and who receives no special compensation therefor," as one might reasonably conclude if one looked at all the words of the subsection. The SEC takes the latter approach, and neither the plain text nor the dictionary bars that construction. This should end the Chevron step one inquiry.

Turning away from the IAA altogether, the court next looks to judicial precedents construing two different provisions—Federal Rule of Civil Procedure 60(b) and the Securities Exchange Act of 1934. These cases, however, shed no light on the IAA.

In Liljeberg v. Health Services Acquisition Corp., 486 U.S. 847, 108 S.Ct. 2194, 100 L.Ed.2d 855 (1988), the Supreme Court interpreted Rule 60(b), which allows a court to grant relief from a final judgment for any of five sets of specific reasons (e.g., mistake), or—under the Rule's sixth clause—for "any other reason justifying relief." FED. R. CIV. P. 60(b). Although Liljeberg does state that "`clause (6) and clauses (1) through (5) are mutually exclusive,'" Court Op. at 489 (quoting Liljeberg, 486 U.S. at 864 n. 11, 108 S.Ct. 2194), the case is wholly inapposite. First, the Court was interpreting Rule 60(b) de novo, not reviewing an agency interpretation entitled to Chevron deference. At most, then, the Court's statement indicates what it regarded as the best interpretation of the phrase "any other reason," not what it saw as the only possible interpretation. Second, the reason the Court read Rule 60(b) as it did was that the rule contains a one-year statute of limitations for seeking relief under clause (1), while motions under clause (6) need only be brought within a "reasonable time." Hence, barring a party from basing a clause (6) claim on the same grounds specified in clause (1) was necessary "to prevent clause (6) from being used to circumvent the 1-year limitations period that applies to clause (1)." Liljeberg, 486 U.S. [497] at 864 n. 11, 108 S.Ct. 2194. There is nothing similar in the structure of IAA paragraph 11. Finally, the reading of Rule 60(b)'s "any other reason" clause rejected by the Supreme Court is actually the inverse of the SEC's reading of subsection (F). The Court stated that "a party may `not avail himself of the broad "any other reason" clause' . . . if his motion is based on grounds specified in clause (1)." Id. (emphasis added) (quoting Klapprott v. United States, 335 U.S. 601, 613, 69 S.Ct. 384, 93 L.Ed. 266 (1949)). That is, a person who qualifies for relief under clause (1) cannot also obtain relief under clause (6). Here, by contrast, the SEC employed subsection (F)'s "such other persons" language to create an exception for persons who could not qualify for an exception under any of the preceding subsections.

This circuit's interpretation of the Securities Exchange Act in American Bankers Association v. SEC, 804 F.2d 739 (D.C.Cir. 1986), is likewise inapposite. There, the court declined to accord Chevron deference to an SEC interpretation because it concerned the allocation of jurisdiction between the SEC and other agencies. The Exchange Act expressly excludes "banks," which are regulated by the federal banking agencies, from the definitions of "brokers" and "dealers," which are regulated by the SEC. See id. at 743 (citing 15 U.S.C. § 78c(a)(4)-(5)). The Act also contains a definition of "banks." See id. at 744 (citing 15 U.S.C. § 78c(a)(6)). Although all of the Exchange Act's definitions are preceded by an "unless the context otherwise requires" clause, American Bankers rejected the SEC's effort to use that clause to redefine "banks" so as to subject some to SEC regulation. Such a "rote phrase," the court said, "cannot provide the authority for one of the agencies whose jurisdictional boundaries are defined in the statute to alter by administrative regulation those very jurisdictional boundaries." Id. at 754 (emphasis added). But there is no other agency in the picture in this case. Nor is the Exchange Act's narrow direction to look to "context" to avoid "absurd consequences," id. at 753, equivalent to subsection (F)'s express delegation of authority to the SEC to make further exceptions to the IAA. Indeed, American Bankers itself suggested that, had the Exchange Act contained such an "express delegation," the result in that case might well have been different. Id. at 749.

In short, these cases do not illustrate an "underlying principle" that resolves the interpretive question in this case. Court Op. at 489. To the contrary, they merely tell us how courts have construed dissimilar language in dissimilar circumstances—that is, in situations where, unlike here, Chevron deference is inappropriate. There is, therefore, nothing in the text or structure of paragraph 11—or in any judicial precedent—that compels the statutory construction that the court has adopted.

C

Finally, the court seeks to buttress its arguments from text and structure with three more general considerations. First, it examines "the problems Congress sought to address in enacting the IAA." Id. at 489. That the first item the court turns to in that examination is a 1939 "comprehensive study conducted by the SEC," id., should cast some doubt on whether the court is better equipped to interpret the study's import than the authoring agency. In any event, my colleagues learn little from this or any other aspect of the historical context beyond the fact that "[t]he IAA's essential purpose was to `protect the public from the frauds and misrepresentations of unscrupulous tipsters and touts.'" Id. at 490 (quoting H.R. REP. No. 76-2639, at 28). There is no doubt that this accurately identifies the intent of Congress at a [498] high level of generality. But it, too, fails to address the precise question at issue here—the meaning of subsection (F). Nor should it come as any surprise that—as discussed in Part III below—the SEC neither disputes that the IAA's essential purpose was to protect the public from fraud and misrepresentation, nor believes that its fee-based brokerage rule would be a boon to unscrupulous tipsters and touts.

My colleagues contend that "an additional weakness exists in the SEC's interpretation" because it "flouts six decades of consistent SEC understanding of its authority under subsection (F)." Id. at 490. The only SEC opinions quoted for that proposition are two releases that refer only to subsection (C). Neither mentions subsection (F) at all, and neither considers whether an exception for fee-based brokerage would be appropriate under that (or any other) subsection. See id. at 490-91 n. 7 (citing 43 Fed.Reg. 19,224, 19,226 (May 4, 1978), and 11 Fed.Reg. 10,996 (Sept. 27, 1946) (republishing SEC General Counsel opinion letter of Oct. 28, 1940)).

But even if the SEC had changed its construction of subsection (F), "`change is not invalidating, since the whole point of Chevron is to leave the discretion provided by the ambiguities of a statute with the implementing agency.'" Brand X, 545 U.S. at 981, 125 S.Ct. 2688 (quoting Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 742, 116 S.Ct. 1730, 135 L.Ed.2d 25 (1996)). It is well-settled that "[a]n agency's interpretation of a statute is entitled to no less deference . . . simply because it has changed over time." Nat'l Home Equity Mortgage Ass'n v. Office of Thrift Supervision, 373 F.3d 1355, 1360 (D.C.Cir.2004). Indeed, Chevron itself deferred to a changed agency interpretation. See Chevron, 467 U.S. at 863-64, 104 S.Ct. 2778. As the Court said in Brand X, "[u]nexplained inconsistency is, at most, a reason for holding an interpretation to be an arbitrary and capricious change from agency practice under the Administrative Procedure Act"—an issue my colleagues do not address. 545 U.S. at 981, 125 S.Ct. 2688. In any event, the SEC's construction is neither inconsistent nor, as discussed in Part III, unexplained.

Last, my colleagues state that "the broader language found in § 206A [of the IAA] supports the conclusion that subsection (F) must be read more narrowly." Court Op. at 492. Whether the exempting power delegated to the SEC under § 206A is in fact broader than that delegated by subsection (F) is unclear. Compare 15 U.S.C. § 80b-6a, with id. § 80b-2(a)(11)(F). But even if it were, the court does not explain how § 206A, which was not added to the IAA until 1970, can provide insights into the intent of the Congress that enacted subsection (F) in 1940.

Because I fail to perceive the clarity required to vacate the SEC's fee-based brokerage rule under the first step of Chevron analysis, I proceed to the second step.

III

Under Chevron step two, "if the implementing agency's construction is reasonable," a court must "accept the agency's construction of the statute, even if the agency's reading differs from what the court believes is the best statutory interpretation." Brand X, 545 U.S. at 980, 125 S.Ct. 2688 (citing Chevron, 467 U.S. at 843-44 & n. 11, 104 S.Ct. 2778).

For the same reasons that I find subsection (F)'s use of the term "such other persons" ambiguous, see supra Part II.B, I conclude that the SEC's construction of that term is reasonable. There is nothing implausible about interpreting those words to encompass anyone not actually exempt under one of the five preceding exceptions. [499] In so doing, the SEC does not "rewrite the statute." Court Op. at 491. Rather, it gives effect to one of two plausible interpretations of the statutory language.

The reasonableness of the SEC's interpretation of "such other persons" does not end the analysis, of course. Any regulatory exception must also be consistent with "the intent of" paragraph 11. The remaining question, then, is whether an exception for broker-dealers who provide investment advice solely incidental to their business as broker-dealers, but who are paid fee-based rather than commission-based compensation, is consistent with that intent.

The SEC has presented a reasonable case for concluding that it is. The Commission explained that, at the time of the IAA's passage in 1940, broker-dealers were providing investment advice and receiving compensation in only two ways: "as an auxiliary part of the traditional brokerage services for which their brokerage customers paid fixed commissions and, alternatively, as a distinct advisory service for which their advisory clients separately contracted and paid a fee." Certain Broker-Dealers, 70 Fed.Reg. at 20,428. Congress was concerned about the potential for fraud and misrepresentation when advice was provided in the latter form— whether it was provided by broker-dealers charging separately for such advice or by others whose only business was to provide advice for a fee. See id. at 20,429-30 & n. 60. In enacting the IAA, however, Congress did not express the same concern about investment advice included within a larger package of brokerage services—as evidenced by the exception contained in subsection (C).

As the SEC interprets the legislative history, subsection (C) was intended to exempt broker-dealers when they gave investment advice as part of a package of traditional brokerage services, but not when they sold advice as a distinct service for a separate fee. See id. at 20,430. The 1940 SEC release quoted by the court, Court Op. at 490-91 n. 7, is to precisely that effect:

Clause (C) . . . amounts to a recognition that brokers and dealers commonly give a certain amount of advice to their customers in the course of their regular business, and that it would be inappropriate to bring them within the scope of the [IAA] merely because of this aspect of their business. On the other hand, that portion of clause (C) which refers to "special compensation" amounts to an equally clear recognition that a broker or dealer who is specially compensated for the rendition of advice should be considered an investment adviser and not be excluded from the purview of the Act. . . .

11 Fed.Reg. 10,996 (Sept. 27, 1946) (emphasis added) (republishing SEC General Counsel opinion letter of Oct. 28, 1940). Since, at the time, the only kind of compensation that exchange rules permitted a broker-dealer to charge for a traditional package of services was the fixed brokerage commission, subsection (C)'s exception for broker-dealers receiving such compensation effectively exempted all broker-dealers who provided advice as part of such a package. See Certain Broker-Dealers, 70 Fed.Reg. at 20,431 & n. 75.

For several decades after the IAA was passed, subsection (C)'s "no special compensation" rule—understood to mean "no compensation other than brokerage commissions"—continued to exempt the only group of broker-dealers who gave advice as part of a traditional package of brokerage services. See id. at 20,431. In 1975, however, the SEC eliminated the requirement that broker-dealers charge only fixed commissions for brokerage services. See id. at 20,431 n. 74. In the 1990s, broker-dealers began to take advantage of the [500] change by offering their customers fee-based brokerage accounts as an alternative to commissions. According to the SEC, these accounts provide customers with the same traditional package of brokerage services, but instead of paying a commission on each trade, a customer pays either a fixed fee or a fee based on the amount of assets in the account. See id. at 20,425.

In 1999, in response to these developments, the SEC first proposed what would become the final rule now before us. The Commission concluded that "these new fee-based brokerage programs . . . were not fundamentally different from traditional brokerage programs" and that broker-dealers had simply "re-priced traditional brokerage programs rather than . . . created advisory programs." Id. at 20,426. Although fee-based brokers receive "special compensation" in the technical sense that they are paid in a form other than brokerage commissions, such brokers provide investment advice only as a part of a traditional package of brokerage services, just like the brokers who have always been exempt from the IAA. And unlike the broker-dealers who Congress intended to include within the Act's coverage via subsection (C)'s bar on "special compensation," the subset of broker-dealers exempted by the final rule do not charge a separate fee or separately contract for investment advice. (The final rule expressly excludes such broker-dealers from the exception. See 17 C.F.R. § 275.202(a)(11)-1(b)(1).) Because the SEC reasonably believed that an exception for the broker-dealers covered by the final rule—a group that did not exist in 1940—would serve the same purpose as the exception that Congress created when it passed the IAA, the Commission reasonably concluded that its final rule was consistent with the intent of paragraph 11. As the Commission explained:

There is no evidence that the "special compensation" requirement was included in section 202(a)(11)(C) for any purpose beyond providing an easy way of accomplishing the underlying goal of excepting only advice that was provided as part of the package of traditional brokerage services. In particular, neither the legislative history of section 202(a)(11)(C) nor the broader legislative history of the Advisers Act as a whole suggests that, in 1940, Congress viewed the form of compensation for the services at issue—commission versus fee-based compensation—as having any independent relevance in terms of the advisory services the Act was intended to reach.

Certain Broker-Dealers, 70 Fed.Reg. at 20,431 (footnote omitted).

The SEC also reasonably explained why its new exception was consistent with the IAA's more general purpose of preventing fraud and misrepresentation. As the Commission points out, broker-dealers who are exempt from the IAA are not free from oversight, but instead are regulated under the Securities Exchange Act of 1934 and by self-regulatory organizations such as the New York Stock Exchange. Id. at 20,424. That regulation, the SEC explained, "provide[s] substantial protections for broker-dealer customers." Id. at 20,433. To supplement that regulation, the final rule further provides that broker-dealers cannot qualify for the exception unless they make specified disclosures about potential conflicts of interest to their customers. 17 C.F.R. § 275.202(a)(11)-1(a)(1).

Moreover, a major impetus to promulgation of the rule was the SEC's concern that commission-based compensation has conflict-of-interest and fraud potential of its own. Charging a commission for each transaction, the SEC said, gives brokers an incentive "to churn accounts, recommend unsuitable securities, and engage in aggressive marketing of brokerage services." [501] Certain Broker-Dealers, 70 Fed. Reg. at 20,425. Under fee-based brokerage programs, by contrast, "compensation no longer depends on the number of transactions . . ., thus reducing incentives . . . to churn accounts, recommend unsuitable securities, or engage in high-pressure sales tactics." Notice of Proposed Rulemaking, 64 Fed.Reg. 61,226, 61,228 (Nov. 10, 1999). The SEC feared that, if fee-based brokers remained subject to the IAA's administrative burdens while commission-based brokers did not, a salutary evolution toward the former would be discouraged. See Certain Broker-Dealers, 70 Fed.Reg. at 20,426.

The Financial Planning Association and its amici advance a host of reasons to question the SEC's judgment that the fee-based brokerage exception will not undermine investor protection. Whatever the validity of those concerns, they reflect policy disputes of the type that Chevron counsels us to leave to agency resolution. As the Supreme Court emphasized:

When a challenge to an agency construction of a statutory provision, fairly conceptualized, really centers on the wisdom of the agency's policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges—who have no constituency— have a duty to respect legitimate policy choices made by those who do.

Chevron, 467 U.S. at 866, 104 S.Ct. 2778.

IV

The SEC's interpretation of the Investment Advisers Act is "a reasonable interpretation of an ambiguous statute." Christensen v. Harris County, 529 U.S. 576, 586-87, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000). This is not to suggest that my colleagues' interpretation is unreasonable, but only to acknowledge that when there are two reasonable interpretations of a statutory provision, a court must bow to the "interpretation made by the . . . agency." Chevron, 467 U.S. at 844, 104 S.Ct. 2778. Doing so, I respectfully dissent from the opinion of the court.

[1] In the wake of the Enron and WorldCom collapses, Congress enacted the Credit Rating Agency Reform Act of 2006 ("CRARA"), Pub.L. No. 109-291, 120 Stat. 1327, 1337 (2006), which included an amendment to the IAA to add a new exception to the definition of "investment adviser" in § 202(a)(11) for statistical rating organizations. CRARA § 4(b)(3), Pub.L. No. 109-291. Hence, subsection (F) is now found in 15 U.S.C. § 80b-2(a)(11)(G). References in this opinion are to the IAA prior to this 2006 amendment.

[2] We refer to brokers and dealers as "broker-dealers" because their different roles are irrelevant for purposes of this appeal. See IAA, 15 U.S.C. §§ 80b-2(a)(3), (a)(7); Securities Exchange Act, 15 U.S.C. §§ 78c(a)(4) (broker), (a)(5) (dealer).

[3] See, e.g., Pub.L. No. 86-507, 74 Stat. 201 (1960); Pub.L. No. 86-624, 74 Stat. 412 (1960); Pub.L. No. 86-750, 74 Stat. 885 (1960); Pub.L. No. 91-547, 84 Stat. 1430, 1433 (1970) (adding § 206A); Pub.L. No. 94-29, 89 Stat. 163 (1975).

[4] The required disclosure consists of the following statement:

Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons' compensation, may vary by product and over time.

Section (a)(1)(ii), 70 Fed.Reg. 20,454.

[5] The FPA initially filed a petition in 2004 for review of the 1999 temporary rule. See 69 Fed.Reg. 51,620 n. 4 (Aug. 20, 2004). After the SEC promulgated the final rule on April 12, 2005, FPA again petitioned for review. The court consolidated the petitions by Order of May 11, 2005.

[6] See, e.g., 86 Cong. Rec. S2844-45, 2847 (daily ed. Mar. 14, 1940); 86 Cong Rec. S8843 (daily ed. June 21, 1940); 86 Cong. Rec. H9807, 9809, 9815-16 (daily ed. Aug. 1, 1940); 86 Cong. Rec. S10077 (daily ed. Aug. 8, 1940).

[7] Very shortly after enactment of the IAA, the SEC advised that any charges directly related to the giving of investment advice would be special compensation. On October 28, 1940, the SEC General Counsel issued an opinion stating:

Clause (C) of section 202(a)(11) amounts to a recognition that brokers and dealers commonly give a certain amount of advice to their customers in the course of their regular business, and that it would be inappropriate to bring them within the scope of the Investment Advisers Act merely because of this aspect of their business. On the other hand, that portion of clause (C) which refers to "special compensation" amounts to an equally clear recognition that a broker or dealer who is specially compensated for the rendition of advice should be considered an investment adviser and not be excluded from the purview of the Act merely because he is also engaged in effecting market transactions in securities.

11 Fed.Reg. 10,996 (Sept. 27, 1946) (reprinting SEC General Counsel opinion letter of October 28, 1940). Thus, any charges "directly related to the giving of advice" would be special compensation. Id.

This contemporary interpretation was reflected as well when the SEC addressed two-tiered pricing arrangements (including a discounted fee arrangement) in 1978:

[I]f a broker-dealer has in effect, either formally or informally, two general schedules of fees available to a customer, the lower without investment advice and the higher with investment advice[,] and the difference is primarily attributable to this factor . . . the [SEC] would regard the extra charge as "special compensation" for investment advice.

43 Fed.Reg. 19,224, 19,226 (May 4, 1978). The SEC made clear at the time that "[t]his would be the case even in a situation, currently nonexistent, in which a current `full service' firm implements a `discount' or `execution-only' service." Id.; see also Townsend & Assocs., Inc., SEC No-Action Letter, 1994 SEC No-Act. LEXIS 739 (Sept. 21, 1994); Am. Capital Fin. Servs., Inc., SEC No-Action Letter, 1985 SEC No-Act. LEXIS 2209 (Apr. 29, 1985).

[8] Section 211(a) provides:

The Commission shall have authority from time to time to make, issue, amend, and rescind such rules and regulations and such orders as are necessary or appropriate to the exercise of the functions and powers conferred upon the Commission elsewhere in this subchapter. For the purposes of its rules or regulations the Commission may classify persons and matters within its jurisdiction and prescribe different requirements for different classes of persons or matters.

15 U.S.C. § 80b-11(a).

[9] Congress added a seventh exception in 2006. My citations, like the court's, are to the preamendment statute.

Irving Morris, Karen L. Morris (Argued), Abraham Rappaport, Seth D. Rigrodsky, Morris and Morris, Wilmington, DE, for Appellants.

Matthew D. Anhut, Jonathan N. Eisenberg, Kirkpatrick & Lockhart, Washington, [268] DC, for Appellee Merrill, Lynch, Pierce, Fenner & Smith, Inc.

Joseph A. Boyle, Kelley, Drye & Warren, Parsippany, NJ, Bruce Coolidge, Robert B. McCaw (Argued), Wilmer, Cutler & Pickering, Washington, DC, for Appellee PaineWebber, Inc.

Frank M. Holozubiec, Kirkland & Ellis, New York City, for Appellee Dean Witter Reynolds.

Richard H. Walker, Eric Summergrad, Susan F. Wyderko, Jacob H. Stillman, Securities & Exchange Commission, Washington, DC, for Amicus Curiae Securities & Exchange Commission.

Before: STAPLETON and NYGAARD, Circuit Judges, and MAZZONE,^[1] District Judge.

Before: SLOVITER, Chief Judge, BECKER, STAPLETON, MANSMANN, GREENBERG, SCIRICA, NYGAARD, ALITO, ROTH and LEWIS, Circuit Judges.

Reargued En Banc October 29, 1997.

Before: STAPLETON and NYGAARD, Circuit Judges, and MAZZONE,^[1] District Judge.

Reargued En Banc Oct. 29, 1997.

Before: SLOVITER, Chief Judge, BECKER, STAPLETON, MANSMANN, GREENBERG, SCIRICA, NYGAARD, ALITO, ROTH and LEWIS, Circuit Judges.

OPINION OF THE COURT

STAPLETON, Circuit Judge.

I.

Plaintiff-Appellants are investors who purchased and sold securities on the NASDAQ market, the major electronic market for "over-the-counter" securities, during the two year period from November 4, 1992 to November 4, 1994 ("the class period"). The defendants are NASDAQ market makers. NASDAQ is a self-regulating market owned by the National Association of Securities Dealers ("NASD"), subject to oversight by the Securities and Exchange Commission ("SEC").

An "over-the-counter" market like NASDAQ differs in important respects from the more familiar auction markets, like the New York and American Stock Exchanges. The NYSE and AMEX markets are distinguished by a physical exchange floor where buy and sell orders actually "meet," with prices set by the interaction of those orders under the supervision of a market "specialist." In a dealer market like NASDAQ, the market exists electronically, in the form of a communications system which constantly receives and reports the prices at which geographically dispersed market makers are willing to buy and sell different securities. These market makers compete with one another to buy and sell the same securities using the electronic system; NASDAQ is, then, an electronic inter-dealer quotation system.

In a dealer market, market makers create liquidity by being continuously willing to buy and sell the security in which they are making a market. In this way, an individual who wishes to buy or sell a security does not have to wait until someone is found who wishes to take the opposite side in the desired transaction. To account for the effort and risk required to maintain liquidity, market makers are allowed to set the prices at which they are prepared to buy and sell a particular security; the difference between the listed "ask" and "bid" prices is the "spread" that market makers capture as compensation.

The electronic quotation system ties together the numerous market makers for all over-the-counter securities available on NASDAQ. All NASDAQ market makers are required to input their bid and offer prices to the NASD computer, which collects the information and transmits, for each security, the highest bid price and lowest ask price currently available. These prices are called the "National Best Bid and Offer," or NBBO. The NASD computer, publicly available to all NASDAQ market makers, brokers and dealers, displays and continuously updates the NBBO for each offered security.

Plaintiffs allege that technological advances made it feasible during the class period for the defendant market makers to execute [269] orders at prices quoted on private on-line services like SelectNet and Instinet and that those prices were frequently more favorable to their investor clients than the NBBO price. According to plaintiffs, the defendants regularly used these services and knew that prices better than NBBO were often available through them. Even though they knew that their investor clients expected them to secure the best reasonably available price, plaintiffs say, the defendants executed plaintiffs' orders at the NBBO price when they knew that price was inferior and when they, at the same time, were trading at the more favorable price for their own accounts. In this way, they were able to inflate their profit margins at the expense of their investor clients. This practice is alleged to violate section 10 of the Securities Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.

The plaintiffs also charge defendants with two other violations of section 10 and Rule 10b-5. Market makers who simultaneously hold a market order for both sides of a transaction may obtain more favorable prices than the NBBO by "crossing" these in-house orders. Transactions handled in this way are executed within the spread, giving both the purchaser and seller a better price. Similarly, a customer order can be matched by a market maker with an in-house limit order on the other side of the transaction. Since a limit order specifies a particular price at which to execute a transaction, matching another customer order at that price may beat the currently displayed NBBO quote for that security. Plaintiffs allege that the failure of the defendants to execute orders of their clients in these ways when feasible constitutes a fraudulent practice because, by executing at the NBBO rather than matching customer orders, the defendants capture the full market "spread" as a fee for their services without incurring any actual risk in the transaction.

II.

The defendants filed a motion to dismiss for failure to state a claim upon which relief could be granted. At the direction of the district court, this motion was converted into a motion for summary judgment, which was ultimately granted. See In re Merrill Lynch Securities Litigation, 911 F.Supp. 754 (D.N.J.1995). The district court rested its decision on two principal grounds. First, the court determined that the defendants made no misrepresentation. Though recognizing that the defendants, by accepting plaintiffs' orders, impliedly represented that they intended to execute those orders in conformity with the "duty of best execution," the court considered the scope of this duty sufficiently ill-defined that execution at the NBBO could not, as a matter of law, be found inconsistent with the duty. The court concluded that in the face of uncertainty about the scope of defendants' duty of best execution, holding them liable would be "highly imprudent." 911 F.Supp. at 771. Second, the court held that, even if defendants made a material misrepresentation, they could not, as a matter of law, have acted with the requisite scienter.

To state a claim for securities fraud under § 10 of the Securities Act of 1934 and Rule 10b-5, plaintiffs must demonstrate: (1) a misrepresentation or omission of a material fact in connection with the purchase or sale of a security; (2) scienter on the part of the defendant; (3) reliance on the misrepresentation; and (4) damage resulting from the misrepresentation. See Sowell v. Butcher & Singer, Inc., 926 F.2d 289, 296 (3d Cir.1991). Because plaintiffs have demonstrated that a genuine issue of material fact exists as to the elements of their securities fraud claim, we will reverse the district court.

III.

The parties agree that a broker-dealer owes to the client a duty of best execution. They further agree that a broker-dealer, by accepting an order without price instructions, impliedly represents that the order will be executed in a manner consistent with the duty of best execution and that a broker-dealer who accepts such an order while intending to breach that duty makes a misrepresentation that is material to the purchase or sale. The parties differ, however, on whether a trier of fact could conclude from this record that the implied representation [270] made by the defendants included a representation that they would not execute at the NBBO price when prices more favorable to the client were available from sources like SelectNet and Instinet.

As we explain hereafter, this difference can be resolved only by determining whether, during the class period or some portion thereof, it was feasible for the defendants to execute trades through SelectNet and Instinet when prices more favorable than the NBBO were being quoted there. This is a matter concerning which the record reflects a material dispute of fact. If such prices were reasonably available and the defendants, at the time of accepting plaintiffs' orders, intended to execute them solely by reference to the NBBO, they made a material misrepresentation in connection with the purchase or sale of the securities involved. If a finder of fact could infer, in addition, that the defendants' implied representation was knowingly false or made with reckless indifference, it would follow that summary judgment for the defendants was inappropriate.

The duty of best execution, which predates the federal securities laws, has its roots in the common law agency obligations of undivided loyalty and reasonable care that an agent owes to his principal.^[2] Since it is understood by all that the client-principal seeks his own economic gain and the purpose of the agency is to help the client-principal achieve that objective, the broker-dealer, absent instructions to the contrary, is expected to use reasonable efforts to maximize the economic benefit to the client in each transaction.

The duty of best execution thus requires that a broker-dealer seek to obtain for its customer orders the most favorable terms reasonably available under the circumstances. See, e.g., Sinclair v. SEC, 444 F.2d 399, 400 (2d Cir.1971) (fiduciary duty requires broker-dealer "to obtain the best available price" for customers' orders); Arleen W. Hughes, 27 S.E.C. 629, 636 (1948) ("A corollary of the fiduciary's duty of loyalty to his principal is his duty to obtain ... the best price discoverable in the exercise of reasonable diligence."), aff'd sub nom. Hughes v. SEC, 174 F.2d 969 (D.C.Cir.1949). Accord Order Execution Obligations, Exchange Act Release No. 37,619A, 61 Fed. Reg. 48290, 48322 (Sept. 12, 1996) ("Final Rules"). That is, the duty of best execution requires the defendants to execute the plaintiffs' trades at the best reasonably available price.^[3] While ascertaining what prices are reasonably available in any particular situation may require a factual inquiry into all of the surrounding circumstances, the existence of a broker-dealer's duty to execute at the best of those prices that are reasonably available is well-established and is not so vague as [271] to be without ascertainable content in the context of a particular trade or trades.

As the SEC has recognized on a number of occasions, the scope of the duty of best execution has evolved over time with changes in technology and transformation of the structure of financial markets.^[4] For example, before the creation of NASDAQ, a broker in an over-the-counter market satisfied her duty of best execution by contacting at least three market makers prior to executing a client's order. See Order Execution Obligations, Exchange Act Release No. 36,310, 60 Fed.Reg. 52792, 52793 (Oct. 10, 1995) ("Proposed Rules"). With the advent of NASDAQ and the NBBO computer system providing instant access to the best bid and offer available nationwide, the standard for satisfying the duty of best execution necessarily heightened. After the class period, the SEC issued rules that altered the definition of the NBBO to include consideration of many of the alternative sources of liquidity that plaintiffs claim should have been consulted during the class period, such as SelectNet and Instinet. See Final Rules, 61 Fed.Reg. at 48306-16. Prospectively, at least, this heightened the standard still further.

Because the scope of the duty of best execution is constantly evolving and because the "reasonably available" component of the duty is fact dependent, broker-dealers have long been required to conform customer order practices with changes in technology and markets. For example, the NASD's Rules of Fair Practice, adopted in 1968, required brokers in the over-the-counter market to "use reasonable diligence to ascertain the best inter-dealer market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under the prevailing market conditions." NASD Manual (CCH), art. III § 1, ¶ 2151.03 (1995) (Interpretation A). Included in the factors used to satisfy the requirement of "reasonable diligence" are both "the number of primary markets checked," and the "location and accessibility to the customer's broker-dealer of primary markets and quotations sources." Id.

Almost a year before the end of the class period, the SEC staff issued a report entitled "Market 2000: An Examination of Current Equity Market Developments." This report notes that the SEC has consistently taken the position that the evolving nature of the markets requires a broker-dealer to "periodically assess the quality of competing markets to ensure that its order flow is directed to markets providing the most advantageous terms for the customer's order." Market 2000 Report, 1994 SEC LEXIS 136, *11-12. As the term "periodically assess" suggests and as the SEC confirms in its amicus briefing before us, this segment of the report was not speaking to the issue of whether, during the class period, the duty of best execution included a requirement that broker-dealers engage in an order-by-order analysis of competing markets. It does, however, expressly recognize a duty on the part of broker-dealers to periodically examine their practices in light of market and technology changes and to modify those practices if necessary to enable their clients to obtain the best reasonably available prices.

The plaintiffs' orders did not specify the price at which they should be executed. It is a reasonable inference that plaintiffs, in placing their orders, sought their own economic advantage and that they would not have placed them without an understanding that the defendants would execute them in a manner that would maximize plaintiffs' economic benefit from the trade. Given the objective of the agency and the regulatory background we have reviewed, we conclude that a trier of fact could infer that the defendants' acceptance of the orders was reasonably understood as a representation that they would not be executed at the NBBO price when better prices were reasonably available elsewhere. Accordingly, we must examine the record evidence relevant to whether prices quoted on private on-line services like SelectNet and Instinet were reasonably available during the [272] class period and whether those prices were more favorable than the NBBO when plaintiffs' orders were executed.

The evidence pointed to by plaintiffs indicates that (1) SelectNet and Instinet were in existence throughout the class period; (2) the quotations reported by these services reflected buyers and sellers ready to trade at the quoted prices; (3) the defendants themselves actively traded on SelectNet and Instinet during the class period; and (4) other respected members of the brokerage community, since before the class period, have regarded these services as providing reasonably available prices and have executed orders through them when the prices reported were more favorable to the client than the NBBO price. In addition, the plaintiffs have tendered expert testimony confirming the reasonable availability of execution sources other than the NBBO during the class period.

With respect to whether SelectNet and Instinet prices were more favorable at the time their orders were executed, plaintiffs point to an SEC study of prices during the three month period from April through June 1994. The SEC found that "approximately 85% of the bids and offers displayed by market makers in Instinet and 90% of the bids and offers displayed on SelectNet were at better prices than those posted publicly on NASDAQ." Final Rules, 61 Fed.Reg. at 48308. Plaintiffs have also tendered evidence of a few trades executed for them by defendants at the NBBO where evidence of contemporaneous offers on Instinet and SelectNet indicate that lower prices were available. Plaintiffs have filed a Rule 56(f) affidavit indicating that they need discovery in order to provide similar evidence with respect to the remainder of their trades.^[5]

To be sure, the defendants, with record support, insist that consulting other sources besides the NBBO would have added substantial expense and delay to the execution of plaintiffs' orders, more than offsetting any improvements that might have been available in terms of price.^[6] This, however, does nothing more than create a material dispute of fact which we are not permitted to resolve in favor of the defendants at this juncture.

We believe the evidence is sufficient to allow a reasonable trier of fact to conclude that, by the time of the class period, both technology and over-the-counter markets had developed to a point where it was feasible to maximize the economic benefit to the client by taking advantage of better prices than the NBBO. Summary judgment for defendants on this element of plaintiffs' claim was therefore not appropriate.

IV.

As we have noted, recovery on a federal securities fraud claim requires a showing [273] of scienter: a deliberate or reckless misrepresentation of a material fact. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 1380-81, 47 L.Ed.2d 668 (1976); Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.1985). The alleged misrepresentation here is an implied representation made by the defendants when they agreed to execute the plaintiffs' orders that they intended to maximize the plaintiffs' economic gain in the transaction. Since the defendants knew of the plaintiffs' profit motivation, they must have understood, according to the plaintiffs, that plaintiffs would expect them to obtain a price more advantageous to the plaintiffs than the NBBO when one was readily available. If the defendants intended not to act in a manner consistent with this expectation when they accepted the orders and yet did not so advise plaintiffs, plaintiffs insist that the defendants can be found to have made an implied representation that they knew to be false.

We believe that a reasonable trier of fact could find this chain of inferences persuasive based on a straight forward economic analysis of the plaintiffs' relationship with the defendants. In addition, however, plaintiffs rely upon evidence showing that respected members of the brokerage community recognized, even prior to the class period, that trades were readily available from sources other than the NBBO and that their clients expected them to take advantage of those sources whenever it would benefit the client. See, e.g., Declaration of Paul M. Lacy [A 718]; Declaration of Junius W. Peake [A 755]; Declaration of Richard Y. Roberts [A 775]. Moreover, the plaintiffs have shown that an SEC study found clear evidence of a two-tiered market during the class period, in which NASDAQ market makers routinely traded at one price with retail clients like the plaintiffs and at a better price for themselves through quotation services like SelectNet and Instinet. See Final Rules, 61 Fed.Reg. at 48307-08. They have further shown that the possibility that the duty of best execution might require resort to sources other than the NBBO was being actively debated during the class period and that that debate ultimately resulted, shortly after the class period, in a regulation effectively requiring as much. Id.

All of this would allow a reasonable trier of fact to find that the defendants' misrepresentation — namely, that they would execute plaintiffs' trades in a manner maximizing plaintiffs' economic gain — was at least reckless, if not intentional. See Healey v. Catalyst Recovery of Penn., Inc., 616 F.2d 641, 649 (3d Cir.1980) (defining recklessness as an extreme departure from ordinary care).

Defendants have countered with affidavits of other respected members of the brokerage community stating that their practice during the class period was the same as that of the defendants. This evidence could, of course, be regarded by a trier of fact as probative of the defendants' state of mind when they accepted plaintiffs' orders. But these affidavits do no more than raise a material issue of fact as to whether the defendants knew of the expectation plaintiffs claim to have had; they do not settle the matter.

At trial, the defendants would certainly be entitled to argue to the jury that, because of industry practice, they thought their clients would expect them to execute only at the NBBO or that they never thought about their clients' expectations. Moreover, any evidence, derived from knowledge of industry practice or elsewhere, that the plaintiffs were generally aware of the defendants' exclusive reliance on the NBBO would, of course, be quite probative of whether the plaintiffs had the expectations they claim. But the defendants, in elevating the practice of a segment of the industry to be outcome determinative, lose sight of the fact that the basis for the duty of best execution is the mutual understanding that the client is engaging in the trade — and retaining the services of the broker as his agent — solely for the purpose of maximizing his own economic benefit, and that the broker receives her compensation because she assists the client in reaching that goal. Based on this mutual understanding and the absence of any express limitations on the brokers' responsibility, a trier of fact could find that the defendants, although intending to execute with sole reference to the NBBO, understood that they were expected [274] to utilize sources other than the NBBO when a better price was readily available.^[7]

V.

In concluding as we do, we are not unmindful of the fact, deemed determinative by the district court, that execution of customer orders at the NBBO was a practice "widely, if not almost universally followed" in the securities industry during the class period. 911 F.Supp. at 772. Under the district court's logic, a Section 10(b) defendant would be entitled to summary judgment even if it were her regular practice to knowingly violate the duty of best execution, so long as she could identify a sufficient number of other broker-dealers engaged in the same wrongful conduct to be able to argue in good faith that the underlying duty was "ambiguous." We cannot accept an analysis that would produce such a result.

Even a universal industry practice may still be fraudulent. See Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1171-72 (2d Cir.1970) (non-disclosure of widespread industry practice may still be non-disclosure of material fact); Opper v. Hancock Securities Corp., 250 F.Supp. 668, 676 (S.D.N.Y.) (industry custom may be found fraudulent, especially on first occasion it is litigated) aff'd, 367 F.2d 157 (2d Cir.1966); see also Vermilye & Co. v. Adams Express Co., 88 U.S. (21 Wall.) 138, 146, 22 L.Ed. 609 (1874). Indeed, the SEC recently completed an investigation in which it found that certain practices by NASDAQ market makers, not at issue here, were fraudulent even though they were widely followed within the industry. See Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 Regarding the NASD and the NASDAQ Market, 1996 SEC LEXIS 2146 (Aug. 8, 1996).

As defendants emphasize, the practice of exclusive reliance on the NBBO has never been held to be fraudulent by any court or regulator. On the other hand, there is no statute, rule, regulation, or interpretation, by the SEC or by a court, that authoritatively establishes that, for all trades, the NBBO exhausted the category of "reasonably available prices" during the class period. This absence of precedent did not, however, absolve the district court of the duty to resolve the plaintiffs' securities fraud claim once it was presented in this suit.

"In the final analysis, ultimate responsibility for construction and enforcement of the securities laws must rest with the court." Langert v. Q-1 Corp., Fed. Sec. L. Rep. (CCH) ¶ 94,445, at 95,540, 1974 WL 377 (S.D.N.Y.1974). The district court was not deprived of this enforcement authority just because no court or regulator had previously chosen to exercise such authority with respect to the practice challenged here. See, e.g., Chasins, 438 F.2d at 1171-72 (finding that defendant's failure to disclose its market maker status was material omission under Section 10(b), despite fact that SEC had never previously held that such disclosure was required).

VI.

On the record before us, we believe a reasonable trier of fact could conclude that the defendants misrepresented that they would execute the plaintiffs' orders so as to maximize the plaintiffs' economic benefit, and that this misrepresentation was intentional or reckless because, at the time it was made, the defendants knew that they intended to execute the plaintiffs' orders at the NBBO price even if better prices were reasonably available. A reasonable trier of fact could thus find scienter with respect to a material misrepresentation, as well as the other elements essential to a Section 10(b) fraud claim. Accordingly, we will reverse the summary [275] judgment entered by the district court and remand for further proceedings.

[1] Hon. A. David Mazzone, United States District Judge for the District of Massachusetts, sitting by designation.

[2] See, e.g., Hall v. Paine, 224 Mass. 62, 112 N.E. 153, 158 (1916) ("broker's obligation to his principal requires him to secure the highest price obtainable"); Restatement of Agency (Second) § 424 (1958) (agent must "use reasonable care to obtain terms which best satisfy the manifested purposes of the principal"). See also Opper v. Hancock Securities Corp., 250 F.Supp. 668, 676 (S.D.N.Y.) ("[T]he duties of a securities broker are, if anything, more stringent than those imposed by general agency law."), aff'd, 367 F.2d 157 (2d Cir.1966). Moreover, as the district court correctly recognized, the best execution duty "does not dissolve when the broker/dealer acts in its capacity as a principal." 911 F.Supp. at 760. Accord E.F. Hutton & Co., Exchange Act Rel. No. 25887, 49 S.E.C. 829, 832 (1988) ("A broker-dealer's determination to execute an order as principal or agent cannot be `a means by which the broker may elect whether or not the law will impose fiduciary standards upon him in the actual circumstances of any given relationship or transaction.'") (citation omitted).

[3] Other terms in addition to price are also relevant to best execution. In determining how to execute a client's order, a broker-dealer must take into account order size, trading characteristics of the security, speed of execution, clearing costs, and the cost and difficulty of executing an order in a particular market. See, e.g., Payment for Order Flow, Exchange Act Release No. 33,026, 58 Fed.Reg. 52934, 52937-38 (Oct. 13, 1993). When the plaintiffs state that better "prices" were reasonably available from sources other than the NBBO, we understand that to mean that, given an evaluation of price as well as all of the other relevant terms, the trade would be better executed through a source of liquidity other than the NBBO (e.g. SelectNet, Instinet, in-house limit orders or market orders held by the defendants, or limit orders placed by the public in the Small Order Execution System). Similarly, for convenience, we use the phrases "best reasonably available price" and "best terms" interchangeably.

[4] See, e.g., Final Rules, 61 Fed.Reg. at 48322-23 ("The scope of this duty of best execution must evolve as changes occur in the market that give rise to improved executions for customer orders, including opportunities to trade at more advantageous prices. As these changes occur, broker-dealers' procedures for seeking to obtain best execution for customer orders also must be modified to consider price opportunities that become `reasonably available.'").

[5] Defendants suggest that the lack of evidence of injury in all plaintiffs' transactions supports an affirmance on the basis of lack of standing. We believe the evidence we have reviewed in text supports plaintiffs' claim to standing. Plaintiffs submitted evidence that would warrant a finding that several trades were made on their behalf when better prices were contemporaneously available from other sources. The SEC study of 1994 prices suggests that, more likely than not, there were other trades in this category. In any event, the plaintiffs have filed a Rule 56(f) affidavit that would preclude a summary judgment for defendants on this issue at this time.

[6] In particular, the defendants rely upon the existence during the class period of the Small Order Execution System ("SOES"). SOES is an electronic routing system that was created in 1984 to allow orders from small investors to be automatically executed at the NBBO. Defendants claim that since the NBBO was the exclusive source for trades executed through SOES, the duty of best execution was presumptively met for these trades. The evidence to which the defendants point supports their position that execution at the NBBO was a common practice in handling orders from small investors. It does not alone, however, require a finding that trades at better prices through SelectNet or Instinet were not reasonably available even for small orders or that a broker-dealer's duty of best execution was automatically discharged by executions through SOES. While size is undoubtedly a relevant factor in determining the scope of the duty of best execution, for summary judgment purposes we find the state of the record with respect to small orders no different than the record with respect to other orders. The affidavit of Richard Y. Roberts, who served as the chairman of the SEC throughout the class period, notes that, to his knowledge, the SEC did not take the position that execution through SOES automatically satisfied the duty of best execution, and indicates that, in his opinion, such a position would be contrary to several SEC releases. At any rate, not all of plaintiffs' orders were executed through SOES.

[7] The foregoing analysis is generally applicable to plaintiffs' claim that it was reasonably feasible for defendants to "cross" customer orders on opposing side of a transaction and match customer orders with in-house limit orders. Plaintiffs' record support, including affidavits from respected members of the investment community, raises a disputed issue of material fact as to whether these practices were reasonably feasible during the class period. If the defendants intended to execute plaintiffs' orders at the NBBO despite the reasonable availability of these alternative pricing sources, and if the defendants acted knowingly or with reckless indifference to the falsity of their material representations, then plaintiffs have a securities fraud claim for these practices as well.

[1421] David C. Frederick, Washington, D.C., for Petitioners.

Curtis E. Gannon, for United States as amicus curiae, by special leave of the Court, supporting the Petitioners.

John D. Donovan, Jr., Boston, MA, for Respondent.

Michael J. Brickman, James C. Bradley, Nina H. Fields, Richardson, Patrick, Westbrook & Brickman, LLC, Charleston, SC, Guy M. Burns, Johnson, Pope, Bokor, Ruppel, & Burns, LLP, Tampa, Florida, David C. Frederick, Brendan J. Crimmins, Daniel G. Bird, Jennifer L. Peresie, Kellogg, Huber, Hansen, Todd, Evans & Figel, [1422] P.L.L.C., Washington, D.C., Ernest A. Young, Chapel Hill, NC, John M. Greabe, Hopkinton, NH, for Petitioners.

Jeffrey A. Lamken, Baker Botts L.L.P., Washington, D.C., Aaron M. Streett, Baker Botts L.L.P., Houston, TX, John D. Donovan, Jr., Robert A. Skinner, Benjamin S. Halasz, Brian R. Blais, Ropes & Gray LLP, Boston, MA, for Respondent.

Justice ALITO delivered the opinion of the Court.

We consider in this case what a mutual fund shareholder must prove in order to show that a mutual fund investment adviser breached the "fiduciary duty with respect to the receipt of compensation for services" that is imposed by § 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-35(b) (hereinafter § 36(b)).

I

A

The Investment Company Act of 1940 (Act), 54 Stat. 789, 15 U.S.C. § 80a-1 et seq., regulates investment companies, including mutual funds. "A mutual fund is a pool of assets, consisting primarily of [a] portfolio [of] securities, and belonging to the individual investors holding shares in the fund." Burks v. Lasker, 441 U.S. 471, 480, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979). The following arrangements are typical. A separate entity called an investment adviser creates the mutual fund, which may have no employees of its own. See Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 93, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991); Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 536, 104 S.Ct. 831, 78 L.Ed.2d 645 (1984); Burks, 441 U.S., at 480-481, 99 S.Ct. 1831. The adviser selects the fund's directors, manages the fund's investments, and provides other services. See id., at 481. Because of the relationship between a mutual fund and its investment adviser, the fund often "`cannot, as a practical matter sever its relationship with the adviser. Therefore, the forces of arm's-length bargaining do not work in the mutual fund industry in the same manner as they do in other sectors of the American economy.'" Ibid. (quoting S.Rep. No. 91-184, p. 5 (1969) (hereinafter S. Rep.)).

"Congress adopted the [Investment Company Act of 1940] because of its concern with the potential for abuse inherent in the structure of investment companies." Daily Income Fund, 464 U.S., at 536, 104 S.Ct. 831 (internal quotation marks omitted). Recognizing that the relationship between a fund and its investment adviser was "fraught with potential conflicts of interest," the Act created protections for mutual fund shareholders. Id., at 536-538, 104 S.Ct. 831 (internal quotation marks omitted); Burks, supra, at 482-483, 99 S.Ct. 1831. Among other things, the Act required that no more than 60 percent of a fund's directors could be affiliated with the adviser and that fees for investment advisers be approved by the directors and the shareholders of the fund. See §§ 10, 15(c), 54 Stat. 806, 813.

The growth of mutual funds in the 1950's and 1960's prompted studies of the 1940 Act's effectiveness in protecting investors. See Daily Income Fund, 464 U.S., at 537-538, 104 S.Ct. 831. Studies commissioned or authored by the Securities and Exchange Commission (SEC or Commission) identified problems relating to the independence of investment company boards and the compensation received by investment advisers. See ibid. In response [1423] to such concerns, Congress amended the Act in 1970 and bolstered shareholder protection in two primary ways.

First, the amendments strengthened the "cornerstone" of the Act's efforts to check conflicts of interest, the independence of mutual fund boards of directors, which negotiate and scrutinize adviser compensation. Burks, supra, at 482, 99 S.Ct. 1831. The amendments required that no more than 60 percent of a fund's directors be "persons who are interested persons," e.g., that they have no interest in or affiliation with the investment adviser.^[1] 15 U.S.C. § 80a-10(a); § 80a-2(a)(19); see also Daily Income Fund, supra, at 538, 104 S.Ct. 831. These board members are given "a host of special responsibilities." Burks, 441 U.S., at 482-483, 99 S.Ct. 1831. In particular, they must "review and approve the contracts of the investment adviser" annually, id., at 483, 99 S.Ct. 1831, and a majority of these directors must approve an adviser's compensation, 15 U.S.C. § 80a-15(c). Second, § 36(b), 84 Stat. 1429, of the Act imposed upon investment advisers a "fiduciary duty" with respect to compensation received from a mutual fund, 15 U.S.C. § 80a-35(b), and granted individual investors a private right of action for breach of that duty, ibid.

The "fiduciary duty" standard contained in § 36(b) represented a delicate compromise. Prior to the adoption of the 1970 amendments, shareholders challenging investment adviser fees under state law were required to meet "common-law standards of corporate waste, under which an unreasonable or unfair fee might be approved unless the court deemed it `unconscionable' or `shocking,'" and "security holders challenging adviser fees under the [Investment Company Act] itself had been required to prove gross abuse of trust." Daily Income Fund, 464 U.S., at 540, n. 12, 104 S.Ct. 831. Aiming to give shareholders a stronger remedy, the SEC proposed a provision that would have empowered the Commission to bring actions to challenge a fee that was not "reasonable" and to intervene in any similar action brought by or on behalf of an investment company. Id., at 538, 104 S.Ct. 831. This approach was included in a bill that passed the House. H.R. 9510, 90th Cong., 1st Sess., § 8(d) (1967); see also S. 1659, 90th Cong., 1st Sess., § 8(d) (1967). Industry representatives, however, objected to this proposal, fearing that it "might in essence provide the Commission with ratemaking authority." Daily Income Fund, 464 U.S., at 538, 104 S.Ct. 831.

The provision that was ultimately enacted adopted "a different method of testing management compensation," id., at 539, 104 S.Ct. 831 (quoting S.Rep., at 5 (internal quotation marks omitted)), that was more favorable to shareholders than the previously available remedies but that did not permit a compensation agreement to be reviewed in court for "reasonableness." This is the fiduciary duty standard in § 36(b).

[1424] B

Petitioners are shareholders in three different mutual funds managed by respondent Harris Associates L.P., an investment adviser. Petitioners filed this action in the Northern District of Illinois pursuant to § 36(b) seeking damages, an injunction, and rescission of advisory agreements between Harris Associates and the mutual funds. The complaint alleged that Harris Associates had violated § 36(b) by charging fees that were "disproportionate to the services rendered" and "not within the range of what would have been negotiated at arm's length in light of all the surrounding circumstances." App. 52.

The District Court granted summary judgment for Harris Associates. Applying the standard adopted in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (C.A.2 1982), the court concluded that petitioners had failed to raise a triable issue of fact as to "whether the fees charged ... were so disproportionately large that they could not have been the result of arm's-length bargaining." App. to Pet. for Cert. 29a. The District Court assumed that it was relevant to compare the challenged fees with those that Harris Associates charged its other clients. Id., at 30a. But in light of those comparisons as well as comparisons with fees charged by other investment advisers to similar mutual funds, the Court held that it could not reasonably be found that the challenged fees were outside the range that could have been the product of arm's-length bargaining. Id., at 29a-32a.

A panel of the Seventh Circuit affirmed based on different reasoning, explicitly "disapprov[ing] the Gartenberg approach." 527 F.3d 627, 632 (2008). Looking to trust law, the panel noted that, while a trustee "owes an obligation of candor in negotiation," a trustee, at the time of the creation of a trust, "may negotiate in his own interest and accept what the settlor or governance institution agrees to pay." Ibid. (citing Restatement (Second) of Trusts § 242, and Comment f). The panel thus reasoned that "[a] fiduciary duty differs from rate regulation. A fiduciary must make full disclosure and play no tricks but is not subject to a cap on compensation." 527 F.3d, at 632. In the panel's view, the amount of an adviser's compensation would be relevant only if the compensation were "so unusual" as to give rise to an inference "that deceit must have occurred, or that the persons responsible for decision have abdicated." Ibid.

The panel argued that this understanding of § 36(b) is consistent with the forces operating in the contemporary mutual fund market. Noting that "[t]oday thousands of mutual funds compete," the panel concluded that "sophisticated investors" shop for the funds that produce the best overall results, "mov[e] their money elsewhere" when fees are "excessive in relation to the results," and thus "create a competitive pressure" that generally keeps fees low. Id., at 633-634. The panel faulted Gartenberg on the ground that it "relies too little on markets." 527 F.3d, at 632. And the panel firmly rejected a comparison between the fees that Harris Associates charged to the funds and the fees that Harris Associates charged other types of clients, observing that "[d]ifferent clients call for different commitments of time" and that costs, such as research, that may benefit several categories of clients "make it hard to draw inferences from fee levels." Id., at 634.

The Seventh Circuit denied rehearing en banc by an equally divided vote. 537 F.3d 728 (2008). The dissent from the denial of rehearing argued that the panel's rejection of Gartenberg was based "mainly on an economic analysis that is ripe for reexamination." 537 F.3d, at 730 (opinion of Posner, [1425] J.). Among other things, the dissent expressed concern that Harris Associates charged "its captive funds more than twice what it charges independent funds," and the dissent questioned whether high adviser fees actually drive investors away. Id., at 731.

We granted certiorari to resolve a split among the Courts of Appeals over the proper standard under § 36(b).^[2] 556 U.S. ___, 129 S.Ct. 1579, 173 L.Ed.2d 675 (2009).

II

A

Since Congress amended the Investment Company Act in 1970, the mutual fund industry has experienced exponential growth. Assets under management increased from $38.2 billion in 1966 to over $9.6 trillion in 2008. The number of mutual fund investors grew from 3.5 million in 1965 to 92 million in 2008, and there are now more than 9,000 open- and closed-end funds.^[3]

During this time, the standard for an investment adviser's fiduciary duty has remained an open question in our Court, but, until the Seventh Circuit's decision below, something of a consensus had developed regarding the standard set forth over 25 years ago in Gartenberg, supra. The Gartenberg standard has been adopted by other federal courts,^[4] and "[t]he SEC's regulations have recognized, and formalized, Gartenberg-like factors." Brief for United States as Amicus Curiae 23. See 17 CFR § 240.14a-101, Sched. 14A, Item 22, para. (c)(11)(i) (2009); 69 Fed.Reg. 39801, n.31, 39807-39809 (2004). In the present case, both petitioners and respondent generally endorse the Gartenberg approach, although they disagree in some respects about its meaning.

In Gartenberg, the Second Circuit noted that Congress had not defined what it meant by a "fiduciary duty" with respect to compensation but concluded that "the test is essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arm's-length in the light of all of the surrounding circumstances." 694 F.2d, at 928. The Second Circuit elaborated that, "[t]o be guilty of a violation of § 36(b), ... the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Ibid. "To make this determination," the Court stated, "all pertinent facts must be weighed," id., at 929, and the Court specifically mentioned [1426] "the adviser-manager's cost in providing the service, ... the extent to which the adviser-manager realizes economies of scale as the fund grows larger, and the volume of orders which must be processed by the manager." Id., at 930.^[5] Observing that competition among advisers for the business of managing a fund may be "virtually non-existent," the Court rejected the suggestion that "the principal factor to be considered in evaluating a fee's fairness is the price charged by other similar advisers to funds managed by them," although the Court did not suggest that this factor could not be "taken into account." Id., at 929. The Court likewise rejected the "argument that the lower fees charged by investment advisers to large pension funds should be used as a criterion for determining fair advisory fees for money market funds," since a "pension fund does not face the myriad of daily purchases and redemptions throughout the nation which must be handled by [a money market fund]." Id., at 930, n. 3.^[6]

B

The meaning of § 36(b)'s reference to "a fiduciary duty with respect to the receipt of compensation for services"^[7] is hardly pellucid, but based on the terms of that provision and the role that a shareholder action for breach of that duty plays in the overall structure of the Act, we conclude that Gartenberg was correct in its basic formulation of what § 36(b) requires: to face liability under § 36(b), an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining.

1

We begin with the language of § 36(b). As noted, the Seventh Circuit panel thought that the phrase "fiduciary duty" incorporates a standard taken from the law of trusts. Petitioners agree but maintain that the panel identified the wrong trust-law standard. Instead of the standard that applies when a trustee and a settlor negotiate the trustee's fee at the time of the creation of a trust, petitioners invoke the standard that applies when a trustee seeks compensation after the trust is created. Brief for Petitioners 20-23, 35-37. A compensation agreement reached at that time, they point out, "`will not bind the beneficiary' if either `the trustee failed to make a full disclosure of all [1427] circumstances affecting the agreement'" which he knew or should have known or if the agreement is unfair to the beneficiary. Id., at 23 (quoting Restatement (Second) of Trusts § 242, Comment i). Respondent, on the other hand, contends that the term "fiduciary" is not exclusive to the law of trusts, that the phrase means different things in different contexts, and that there is no reason to believe that § 36(b) incorporates the specific meaning of the term in the law of trusts. Brief for Respondent 34-36.

We find it unnecessary to take sides in this dispute. In Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238 (1939), we discussed the meaning of the concept of fiduciary duty in a context that is analogous to that presented here, and we also looked to trust law. At issue in Pepper was whether a bankruptcy court could disallow a dominant or controlling share-holder's claim for compensation against a bankrupt corporation. Dominant or controlling shareholders, we held, are "fiduciar[ies]" whose "powers are powers [held] in trust." Id., at 306, 60 S.Ct. 238. We then explained:

"Their dealings with the corporation are subjected to rigorous scrutiny and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein. ... The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain. If it does not, equity will set it aside." Id., at 306-307[, 60 S.Ct. 238] (emphasis added; footnote omitted); see also Geddes v. Anaconda Copper Mining Co., 254 U.S. 590, 599, 41 S.Ct. 209, 65 L.Ed. 425 (1921) (standard of fiduciary duty for interested directors).

We believe that this formulation expresses the meaning of the phrase "fiduciary duty" in § 36(b), 84 Stat. 1429. The Investment Company Act modifies this duty in a significant way: it shifts the burden of proof from the fiduciary to the party claiming breach, 15 U.S.C. § 80a-35(b)(1), to show that the fee is outside the range that arm's-length bargaining would produce.

The Gartenberg approach fully incorporates this understanding of the fiduciary duty as set out in Pepper and reflects § 36(b)(1)'s imposition of the burden on the plaintiff. As noted, Gartenberg insists that all relevant circumstances be taken into account, see 694 F.2d, at 929, as does § 36(b)(2), 84 Stat. 1429 ("[A]pproval by the board of directors ... shall be given such consideration by the court as is deemed appropriate under all the circumstances" (emphasis added)). And Gartenberg uses the range of fees that might result from arm's-length bargaining as the benchmark for reviewing challenged fees.

2

Gartenberg's approach also reflects § 36(b)'s place in the statutory scheme and, in particular, its relationship to the other protections that the Act affords investors.

Under the Act, scrutiny of investment adviser compensation by a fully informed mutual fund board is the "cornerstone of the ... effort to control conflicts of interest within mutual funds." Burks, 441 U.S., at 482, 99 S.Ct. 1831. The Act interposes disinterested directors as "independent watchdogs" of the relationship between a mutual fund and its adviser. Id., at 484, 99 S.Ct. 1831 (internal quotation marks omitted). To provide these directors with the information needed to judge whether an adviser's compensation [1428] is excessive, the Act requires advisers to furnish all information "reasonably ... necessary to evaluate the terms" of the adviser's contract, 15 U.S.C. § 80a-15(c), and gives the SEC the authority to enforce that requirement. See § 80a-41. Board scrutiny of adviser compensation and shareholder suits under § 36(b), 84 Stat. 1429, are mutually reinforcing but independent mechanisms for controlling conflicts. See Daily Income Fund, 464 U.S., at 541, 104 S.Ct. 831 (Congress intended for § 36(b) suits and directorial approval of adviser contracts to act as "independent checks on excessive fees"); Kamen, 500 U.S., at 108, 111 S.Ct. 1711 ("Congress added § 36(b) to the [Act] in 1970 because it concluded that the shareholders should not have to rely solely on the fund's directors to assure reasonable adviser fees, notwithstanding the increased disinterestedness of the board" (internal quotation marks omitted)).

In recognition of the role of the disinterested directors, the Act instructs courts to give board approval of an adviser's compensation "such consideration ... as is deemed appropriate under all the circumstances." § 80a-35(b)(2). Cf. Burks, 441 U.S., at 485, 99 S.Ct. 1831 ("[I]t would have been paradoxical for Congress to have been willing to rely largely upon [boards of directors as] `watchdogs' to protect shareholder interests and yet, where the `watchdogs' have done precisely that, require that they be totally muzzled").

From this formulation, two inferences may be drawn. First, a measure of deference to a board's judgment may be appropriate in some instances. Second, the appropriate measure of deference varies depending on the circumstances.

Gartenberg heeds these precepts. Gartenberg advises that "the expertise of the independent trustees of a fund, whether they are fully informed about all facts bearing on the [investment adviser's] service and fee, and the extent of care and conscientiousness with which they perform their duties are important factors to be considered in deciding whether they and the [investment adviser] are guilty of a breach of fiduciary duty in violation of § 36(b)." 694 F.2d, at 930.

III

While both parties in this case endorse the basic Gartenberg approach, they disagree on several important questions that warrant discussion.

The first concerns comparisons between the fees that an adviser charges a captive mutual fund and the fees that it charges its independent clients. As noted, the Gartenberg court rejected a comparison between the fees that the adviser in that case charged a money market fund and the fees that it charged a pension fund. 694 F.2d, at 930, n. 3 (noting the "[t]he nature and extent of the services required by each type of fund differ sharply"). Petitioners contend that such a comparison is appropriate, Brief for Petitioners 30-31, but respondent disagrees. Brief for Respondent 38-44. Since the Act requires consideration of all relevant factors, 15 U.S.C. § 80a-35(b)(2); see also § 80a-15(c), we do not think that there can be any categorical rule regarding the comparisons of the fees charged different types of clients. See Daily Income Fund, supra, at 537, 104 S.Ct. 831 (discussing concern with investment advisers' practice of charging higher fees to mutual funds than to their other clients). Instead, courts may give such comparisons the weight that they merit in light of the similarities and differences between the services that the clients in question require, but courts must be wary of inapt comparisons. As the panel below noted, there may be significant differences between the [1429] services provided by an investment adviser to a mutual fund and those it provides to a pension fund which are attributable to the greater frequency of shareholder redemptions in a mutual fund, the higher turnover of mutual fund assets, the more burdensome regulatory and legal obligations, and higher marketing costs. 527 F.3d, at 634 ("Different clients call for different commitments of time"). If the services rendered are sufficiently different that a comparison is not probative, then courts must reject such a comparison. Even if the services provided and fees charged to an independent fund are relevant, courts should be mindful that the Act does not necessarily ensure fee parity between mutual funds and institutional clients contrary to petitioners' contentions. See id., at 631. ("Plaintiffs maintain that a fiduciary may charge its controlled clients no more than its independent clients").^[8]

By the same token, courts should not rely too heavily on comparisons with fees charged to mutual funds by other advisers. These comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm's length. See 537 F.3d, at 731-732 (opinion dissenting from denial of rehearing en banc); Gartenberg, supra, at 929 ("Competition between money market funds for shareholder business does not support an inference that competition must therefore also exist between [investment advisers] for fund business. The former may be vigorous even though the latter is virtually non-existent").

Finally, a court's evaluation of an investment adviser's fiduciary duty must take into account both procedure and substance. See 15 U.S.C. § 80a-35(b)(2) (requiring deference to board's consideration "as is deemed appropriate under all the circumstances"); cf. Daily Income Fund, 464 U.S., at 541, 104 S.Ct. 831 ("Congress intended security holder and SEC actions under § 36(b), on the one hand, and directorial approval of adviser contracts, on the other, to act as independent checks on excessive fees"). Where a board's process for negotiating and reviewing investment-adviser compensation is robust, a reviewing court should afford commensurate deference to the outcome of the bargaining process. See Burks, 441 U.S., at 484, 99 S.Ct. 1831 (unaffiliated directors serve as "independent watchdogs"). Thus, if the disinterested directors considered the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if a court might weigh the factors differently. Cf. id., at 485, 99 S.Ct. 1831. This is not to deny that a fee may be excessive even if it was negotiated by a board in possession of all relevant information, but such a determination must be based on evidence that the fee "is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been [1430] the product of arm's-length bargaining." Gartenberg, supra, at 928.

In contrast, where the board's process was deficient or the adviser withheld important information, the court must take a more rigorous look at the outcome. When an investment adviser fails to disclose material information to the board, greater scrutiny is justified because the withheld information might have hampered the board's ability to function as "an independent check upon the management." Burks, supra, at 484, 99 S.Ct. 1831 (internal quotation marks omitted). "Section 36(b) is sharply focused on the question of whether the fees themselves were excessive." Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321, 328 (C.A.4 2001); see also 15 U.S.C. § 80a-35(b) (imposing a "fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature" (emphasis added)). But an adviser's compliance or noncompliance with its disclosure obligations is a factor that must be considered in calibrating the degree of deference that is due a board's decision to approve an adviser's fees.

It is also important to note that the standard for fiduciary breach under § 36(b) does not call for judicial second-guessing of informed board decisions. See Daily Income Fund, supra, at 538, 104 S.Ct. 831; see also Burks, 441 U.S., at 483, 99 S.Ct. 1831 ("Congress consciously chose to address the conflict-of-interest problem through the Act's independent-directors section, rather than through more drastic remedies"). "[P]otential conflicts [of interests] may justify some restraints upon the unfettered discretion of even disinterested mutual fund directors, particularly in their transactions with the investment adviser," but they do not suggest that a court may supplant the judgment of disinterested directors apprised of all relevant information, without additional evidence that the fee exceeds the arm's-length range. Id., at 481, 99 S.Ct. 1831. In reviewing compensation under § 36(b), the Act does not require courts to engage in a precise calculation of fees representative of arm's-length bargaining. See 527 F.3d, at 633 ("Judicial price-setting does not accompany fiduciary duties"). As recounted above, Congress rejected a "reasonableness" requirement that was criticized as charging the courts with rate-setting responsibilities. See Daily Income Fund, supra, at 538-540, 104 S.Ct. 831. Congress' approach recognizes that courts are not well suited to make such precise calculations. Cf. General Motors Corp. v. Tracy, 519 U.S. 278, 308, 117 S.Ct. 811, 136 L.Ed.2d 761 (1997) ("[T]he Court is institutionally unsuited to gather the facts upon which economic predictions can be made, and professionally untrained to make them"); Verizon Communications Inc. v. FCC, 535 U.S. 467, 539, 122 S.Ct. 1646, 152 L.Ed.2d 701 (2002); see also Concord v. Boston Edison Co., 915 F.2d 17, 25 (CA1 1990) (opinion for the court by Breyer, C.J.) ("[H]ow is a judge or jury to determine a `fair price'?"). Gartenberg's "so disproportionately large" standard, 694 F.2d, at 928, reflects this congressional choice to "rely largely upon [independent director] `watchdogs' to protect shareholders interests." Burks, supra, at 485, 99 S.Ct. 1831.

By focusing almost entirely on the element of disclosure, the Seventh Circuit panel erred. See 527 F.3d, at 632 (An investment adviser "must make full disclosure and play no tricks but is not subject to a cap on compensation"). The Gartenberg standard, which the panel rejected, may lack sharp analytical clarity, but we believe that it accurately reflects the compromise that is embodied in § 36(b), and it has provided a workable standard for nearly three decades. The debate between [1431] the Seventh Circuit panel and the dissent from the denial of rehearing regarding today's mutual fund market is a matter for Congress, not the courts.

IV

For the foregoing reasons, the judgment of the Court of Appeals is vacated, and the case remanded for further proceedings consistent with this opinion.

It is so ordered.

Justice THOMAS, concurring.

The Court rightly affirms the careful approach to § 36(b) cases, see 15 U.S.C. § 80a-35(b), that courts have applied since (and in certain respects in spite of) Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923, 928-930 (C.A.2 1982). I write separately because I would not shortchange the Court's effort by describing it as affirmation of the "Gartenberg standard." Ante, at 1425, 1430.

The District Court and Court of Appeals in Gartenberg created that standard, which emphasizes fee "fairness" and proportionality, 694 F.2d, at 929, in a manner that could be read to permit the equivalent of the judicial rate regulation the Gartenberg opinions disclaim, based on the Investment Company Act of 1940's "tortuous" legislative history and a handful of extrastatutory policy and market considerations, id., at 928; see also id., at 926-927, 929-931; Gartenberg v. Merrill Lynch Asset Management, Inc., 528 F.Supp. 1038, 1046-1050, 1055-1057 (S.D.N.Y.1981). Although virtually all subsequent § 36(b) cases cite Gartenberg, most courts have correctly declined its invitation to stray beyond statutory bounds. Instead, they have followed an approach (principally in deciding which cases may proceed past summary judgment) that defers to the informed conclusions of disinterested boards and holds plaintiffs to their heavy burden of proof in the manner the Act, and now the Court's opinion, requires. See, e.g., ante, at 1426 (underscoring that the Act "modifies" the governing fiduciary duty standard "in a significant way: It shifts the burden of proof from the fiduciary to the party claiming breach, 15 U.S.C. § 80a-35(b)(1), to show that the fee is outside the range that arm's-length bargaining would produce"); ante, at 1430 (citing the "degree of deference that is due a board's decision to approve an adviser's fees" and admonishing that "the standard for fiduciary breach under § 36(b) does not call for judicial second-guessing of informed board decisions").

I concur in the Court's decision to affirm this approach based upon the Investment Company Act's text and our longstanding fiduciary duty precedents. But I would not say that in doing so we endorse the "Gartenberg standard." Whatever else might be said about today's decision, it does not countenance the free-ranging judicial "fairness" review of fees that Gartenberg could be read to authorize, see 694 F.2d, at 929-930, and that virtually all courts deciding § 36(b) cases since Gartenberg (including the Court of Appeals in this case) have wisely eschewed in the post Gartenberg precedents we approve.

[1] An "affiliated person" includes (1) a person who owns, controls, or holds the power to vote 5 percent or more of the securities of the investment adviser; (2) an entity which the investment adviser owns, controls, or in which it holds the power to vote more than 5 percent of the securities; (3) any person directly or indirectly controlling, controlled by, or under common control with the investment adviser; (4) an officer, director, partner, copartner, or employee of the investment adviser; (5) an investment adviser or a member of the investment adviser's board of directors; or (6) the depositor of an unincorporated investment adviser. See § 80a-2(a)(3). The Act defines "interested person" to include not only all affiliated persons but also a wider swath of people such as the immediate family of affiliated persons, interested persons of an underwriter or investment adviser, legal counsel for the company, and interested broker-dealers. § 80a-2(a)(19).

[2] See 527 F.3d 627 (C.A.7 2008) (case below); Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321 (C.A.4 2001); Krantz v. Prudential Invs. Fund Management LLC, 305 F.3d 140 (C.A.3 2002) (per curiam). After we granted certiorari in this case, another Court of Appeals adopted the standard of Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (C.A.2 1982). See Gallus v. Ameriprise Financial, Inc., 561 F.3d 816 (C.A.8 2009).

[3] Compare H.R. Rep. No. 2337, 89th Cong., 2d Sess., p. vii (1966), with Investment Company Institute, 2009 Fact Book 15, 20, 72 (49th ed.), online at http://www.icifactbook. org/pdf/2009_factbook.pdf (as visited Mar. 9, 2010, and available in Clerk of Court's case file).

[4] See, e.g., Gallus, supra, at 822-823; Krantz, supra; In re Franklin Mut. Funds Fee Litigation, 478 F.Supp.2d 677, 683, 686 (D.N.J. 2007); Yameen v. Eaton Vance Distributors, Inc., 394 F.Supp.2d 350, 355 (D.Mass.2005); Hunt v. Invesco Funds Group, Inc., No. H-04-2555, 2006 WL 1581846, *2 (SD Tex., June 5, 2006); Siemers v. Wells Fargo & Co., No. C 05-4518 WHA, 2006 WL 2355411, *15-*16 (ND Cal., Aug. 14, 2006); see also Amron v. Morgan Stanley Inv. Advisors Inc., 464 F.3d 338, 340-341 (C.A.2 2006).

[5] Other factors cited by the Gartenberg court include (1) the nature and quality of the services provided to the fund and shareholders; (2) the profitability of the fund to the adviser; (3) any "fall-out financial benefits," those collateral benefits that accrue to the adviser because of its relationship with the mutual fund; (4) comparative fee structure (meaning a comparison of the fees with those paid by similar funds); and (5) the independence, expertise, care, and conscientiousness of the board in evaluating adviser compensation. 694 F.2d, at 929-932 (internal quotation marks omitted).

[6] A money market fund differs from a mutual fund in both the types of investments and the frequency of redemptions. A money market fund often invests in short-term money market securities, such as short-term securities of the United States Government or its agencies, bank certificates of deposit, and commercial paper. Investors can invest in such a fund for as little as a day, so, from the investor's perspective, the fund resembles an investment "more like a bank account than [a] traditional investment in securities." Id., at 925.

[7] Section 36(b) provides as follows:

"[T]he investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser." 84 Stat. 1429 (codified at 15 U.S.C. § 80a-35(b)).

[8] Comparisons with fees charged to institutional clients, therefore, will not "doo[m] [a]ny [f]und to [t]rial." Brief for Respondent 49; see also Strougo v. BEA Assocs., 188 F.Supp.2d 373, 384 (S.D.N.Y.2002) (suggesting that fee comparisons, where permitted, might produce a triable issue). First, plaintiffs bear the burden in showing that fees are beyond the range of arm's-length bargaining. § 80a-35(b)(1). Second, a showing of relevance requires courts to assess any disparity in fees in light of the different markets for advisory services. Only where plaintiffs have shown a large disparity in fees that cannot be explained by the different services in addition to other evidence that the fee is outside the arm's-length range will trial be appropriate. Cf. App. to Pet. for Cert. 30a; see also In re AllianceBernstein Mut. Fund Excessive Fee Litigation, No. 04 Civ. 4885(SWK), 2006 WL 1520222, *2 (S.D.N.Y., May 31, 2006) (citing report finding that fee differential resulted from different services and different liabilities assumed).

[134] [135] [136] Eugene Scalia argued the cause for petitioner. With him on the briefs were John F. Olson, Douglas R. Cox, Cory J. Skolnick, Stephen A. Bokat, and Robin S. Conrad.

Giovanni P. Prezioso, General Counsel, Securities & Exchange Commission, argued the cause for respondent. With him on the brief were Meyer Eisenberg, Deputy General Counsel, Jacob H. Stillman, Solicitor, and John W. Avery, Special Counsel.

Before: GINSBURG, Chief Judge, and ROGERS and TATEL, Circuit Judges.

GINSBURG, Chief Judge.

The Chamber of Commerce of the United States petitions for review of a rule promulgated by the Securities and Exchange Commission under the Investment Company Act of 1940(ICA), 15 U.S.C. § 80a-1 et seq. The challenged provisions of the rule require that, in order to engage in certain transactions otherwise prohibited by the ICA, an investment company — commonly referred to as a mutual fund — must have a board (1) with no less than 75% independent directors and (2) an independent chairman. The Chamber argues the ICA does not give the Commission authority to regulate "corporate governance" and, in any event, the Commission promulgated the rule without adhering to the requirements of the Administrative Procedure Act, 5 U.S.C. § 551 et seq.

We hold the Commission did not exceed its statutory authority in adopting the two conditions, and the Commission's rationales for the two conditions satisfy the APA. We agree with the Chamber, however, that the Commission did violate the APA by failing adequately to consider the costs mutual funds would incur in order to comply with the conditions and by failing adequately to consider a proposed alternative to the independent chairman condition. We therefore grant in part the Chamber's petition for review.

I. Background

A mutual fund, which is "a pool of assets ... belonging to the individual investors holding shares in the fund," Burks v. Lasker, 441 U.S. 471, 480, 99 S.Ct. 1831, 60 L.Ed.2d 404 (1979), is operated by an "investment company" the board of directors of which is elected by the shareholders. Although the board is authorized to operate the fund, it typically delegates that management role to an "adviser," which is a separate company that may have interests other than maximizing the returns to shareholders in the fund. In enacting the ICA, the Congress sought to control "the potential for abuse inherent in the structure of [funds]" arising from the conflict of interests between advisers and shareholders, id.; to that end, the ICA prohibits a fund from engaging in certain transactions by which the adviser might gain at the expense of the shareholders. See generally 15 U.S.C. § 80a-12(a)-(g). Pursuant to the Commission's long-standing Exemptive Rules, however, a fund that satisfies certain conditions may engage in an otherwise prohibited transaction. See, e.g., Rule 10f-3, [137] 17 C.F.R. § 270.10f-3 (2004) (when conditions are satisfied, fund may purchase securities in primary offering although adviser-affiliated broker-dealer is member of underwriting syndicate).

Early in 2004 the Commission proposed to amend ten Exemptive Rules by imposing five new or amended conditions upon any fund wishing to engage in an otherwise prohibited transaction. See Investment Company Governance, Proposed Rule, 69 Fed.Reg. 3472 (Jan. 23, 2004). Although the Commission had amended the same ten rules in 2001 to condition exemption upon the fund having a board with a majority of independent directors (that is, directors who are not "interested persons" as defined in § 2(a)(19) of the ICA), see Role of Independent Directors of Investment Companies, Final Rule, 66 Fed.Reg. 3734 (Jan. 16, 2001), by 2004 the Commission had come to believe that more was required. "[E]nforcement actions involving late trading, inappropriate market timing activities and misuse of nonpublic information about fund portfolios" had brought to light, in the Commission's view, "a serious breakdown in management controls," signaling the need to "revisit the governance of funds." 69 Fed.Reg. at 3472. Accordingly, the Commission proposed to condition the ten exemptions upon, among other things, the fund having a board of directors (1) with at least 75% independent directors and (2) an independent chairman. Id. at 3474.

After a period for comment and a public meeting, the Commission unanimously adopted three of the proposed new conditions and, by a vote of three to two, adopted the two corporate governance conditions challenged here. See Investment Company Governance, Final Rule, 69 Fed. Reg. 46,378 (Aug. 2, 2004). The Commission majority adopted those two conditions in light of recently revealed abuses in the mutual fund industry, reasoning that the Exemptive Rules

rely on the independent judgment and scrutiny of directors, including independent directors, in overseeing activities that are beneficial to funds and fund shareholders but that involve inherent conflicts of interest between the funds and their managers.... These further amendments provide for greater fund board independence and are designed to enhance the ability of fund boards to perform their important responsibilities under each of the rules.

Id. at 46,379. Raising the percentage of independent directors from 50% to 75%, the Commission anticipated, would "strengthen the independent directors' control of the fund board and its agenda," id. at 46,381, and "help ensure that independent directors carry out their fiduciary responsibilities," id. at 46,382. The Commission justified the independent chairman condition on the ground that "a fund board is in a better position to protect the interests of the fund, and to fulfill the board's obligations under the Act and the Exemptive Rules, when its chairman does not have the conflicts of interest inherent in the role of an executive of the fund adviser." Id.

The dissenting Commissioners were concerned the two disputed conditions would come at "a substantial cost to fund shareholders," and they believed the existing statutory and regulatory controls ensured adequate oversight by independent directors. 69 Fed.Reg. at 46,390. Specifically, they faulted the Commission for not giving "any real consideration to the costs" of the 75% condition, id. at 46,390-46,391; for failing adequately to justify the independent chairman condition, id. at 46,391-46,392; and for not considering alternatives to that condition, id. at 46,392-46,393. The Chamber timely petitioned for review, [138] asserting an interest in the new conditions both as an investor and as an association with mutual fund advisers among its members.

II. Analysis

The Chamber makes two arguments on the merits: The Commission had no authority under the ICA to adopt the two conditions; and the Commission violated the APA in the rulemaking by which it promulgated the conditions. Before addressing those arguments, we must assure ourselves of the Chamber's standing, and thus of our jurisdiction.

A. Jurisdiction of the Court

Under Article III of the Constitution the "judicial Power of the United States" is limited to the resolution of "Cases" or "Controversies," a corollary of which is that a party invoking our jurisdiction "must show that the conduct of which he complains has caused him to suffer an `injury in fact' that a favorable judgment will redress." Elk Grove Unified School Dist. v. Newdow, 542 U.S. 1, 124 S.Ct. 2301, 2308, 159 L.Ed.2d 98 (2004). In this case the Chamber claims it is injured by the two challenged conditions because it would like to invest in shares of funds that may engage in transactions regulated by the Exemptive Rules but do not meet those conditions. See Dec'l of Stan M. Harrell ¶ 2 (Chamber currently invests in funds, intends to continue doing so, and would like to invest in funds unconstrained by the conditions).

The Chamber cites two cases for the proposition that loss of the opportunity to purchase a desired product is a legally cognizable injury. Consumer Fed'n of Am. v. FCC, 348 F.3d 1009, 1011-12 (D.C.Cir.2003) (injury-in-fact where merger would deprive plaintiff of opportunity to purchase desired service); Competitive Enter. Inst. v. Nat'l Highway Traffic Safety Admin., 901 F.2d 107, 112-13 (D.C.Cir. 1990) (injury-in-fact where fuel economy regulations foreclosed "opportunity to buy larger passenger vehicles"). The Commission argues in response that there is no evidence a fund of the type in which the Chamber wants to invest would perform better than a fund that conforms to the two corporate governance conditions. In Consumer Federation, however, we held "the inability of consumers to buy a desired product ... constitute[d] injury-in-fact even if they could ameliorate the injury by purchasing some alternative product." 348 F.3d at 1012. Under our precedent, therefore, the Chamber has suffered an injury-in-fact and, because a favorable ruling would redress that injury, it has standing to sue the Commission. And so to the merits.

B. The Commission's Authority under the ICA

The Chamber maintains the Commission did not have authority under the ICA to condition the exemptive transactions as it did. First the Chamber observes rather generally that "matters of corporate governance are traditionally relegated to state law"; and second, it maintains these particular conditions are inconsistent with the statutory requirement that 40% of the directors on the board of an investment company be independent, see 15 U.S.C. § 80a-10(a). The Commission points to § 6(c) of the ICA, 15 U.S.C. § 80a-6(c), as the source of its authority.^[1] That provision [139] conspicuously confers upon the Commission broad authority to exempt transactions from rules promulgated under the ICA, subject only to the public interest and the purposes of the ICA.

The thrust of the Chamber's first contention is that § 6(c) should not be read to enable the Commission to leverage the exemptive authority it clearly does have so as to regulate a matter, namely, corporate governance, over which the states, not the Commission, have authority. For support the Chamber relies principally upon two cases from this circuit concerning the Commission's authority under the Securities and Exchange Act of 1934. Neither of those cases, however, arose from an exercise of authority analogous to the rulemaking here under review.

In Business Roundtable v. SEC, 905 F.2d 406, 416-17 (1990), we held the Commission did not have authority under the 1934 Act to bar a stock exchange from listing common stock with restricted voting rights. The Commission had invoked the provision of that Act authorizing it to make rules "otherwise in furtherance of the purposes" of the Act. Id. at 410. Reasoning that "unless the legislative purpose is defined by reference to the means Congress selected, it can be framed at any level of generality," and the means the Congress selected in the 1934 Act was disclosure, id., we vacated the rule because it went beyond disclosure to regulate "the substance of what the shareholders may enact," id. at 411.

Business Roundtable is of little help to the Chamber because, as the Commission documents, the purposes of the ICA include tempering the conflicts of interest "inherent in the structure of investment companies," Burks, 441 U.S. at 480, 99 S.Ct. 1831; see also 15 U.S.C. § 80a-1(b) ("policy and purposes of [ICA] ... shall be interpreted ... to eliminate" conflicts of interest); and regulation of the governance structure of investment companies is among the means the Congress used to effect that purpose. See Burks, 441 U.S. at 479, 99 S.Ct. 1831 (ICA "functions primarily to impose controls and restrictions on the internal management of investment companies") (emphases removed); id. at 484, 99 S.Ct. 1831 (in enacting ICA Congress "place[d] the unaffiliated directors in the role of independent watchdogs ... who would furnish an independent check upon the management of investment companies"). Moreover, the Commission's effort to enlarge the role of independent directors on the boards of investment companies accords with "the structure and purpose of the ICA [both of which] indicate that Congress entrusted to the independent directors ... the primary responsibility for looking after the interests of the funds' shareholders." Id. at 484-85, 99 S.Ct. 1831.

In Teicher v. SEC, 177 F.3d 1016, 1019-20 (1999), we held a provision of the 1934 Act authorizing the Commission to "place limitations on the activities or functions" of a person convicted of securities fraud in the broker-dealer industry did not authorize it to place limitations upon the activities or functions of that person in an industry regulated under a different "occupational licensing regime" administered by the Commission. The Commission's authority, we reasoned, must be read with "some concept of the relevant domain" in mind; even the Commission did not "suggest that [provision] allows it to bar one [140] of the offending parties from being a retail shoe salesman, or to exclude him from the Borough of Manhattan." Id. at 1019. The present case is different from Teicher because here the Commission did not exercise its regulatory authority to effect a purpose beyond that of the statute from which its authority derives.

The Chamber's second contention is that the conditions conflict with the intent of the Congress, expressed in § 10(a) of the ICA, that 40% of the directors of an investment company be independent. See Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) ("If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress"). Section 10(a), however, states only that a fund may have "no more than" 60% inside directors, 15 U.S.C. § 80a-10(a), which necessarily means at least 40% must be independent and strongly implies a greater percentage may be; it speaks not at all to authority of the Commission to provide an incentive for investment companies to enhance the role of independent directors and, as the Commission is keen to point out, the challenged conditions apply only to funds that engage in exemptive transactions.

C. The Requirements of the APA

The condemnation of the APA extends to any rule that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). Although the "scope of review under the `arbitrary and capricious' standard is narrow and a court is not to substitute its judgment for that of the agency," we must nonetheless be sure the Commission has "examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made." Motor Vehicle Mfrs. Ass'n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983); see also Pub. Citizen v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209, 1216 (D.C.Cir.2004).

The Chamber argues the Commission violated the APA because it (1) failed to show the connection between the abuses that prompted the rulemaking and the conditions newly included in the Exemptive Rules; (2) did not comply with its obligation under the ICA to consider whether those conditions "will promote efficiency, competition, and capital formation," 15 U.S.C. § 80a-2(c); see Pub. Citizen, 374 F.3d at 1216 (rule is "arbitrary and capricious" if agency fails to consider factors "it must consider under its organic statute"); and (3) did not consider reasonable alternatives to the independent chairman condition.

1. Justification for the Rulemaking

The Chamber maintains the "rulemaking is flawed for the elementary reason that the Commission amended ten separate and distinct pre-existing rules [by imposing the two challenged conditions] without any meaningful consideration of them." Similarly, the Chamber argues the Commission did not adequately explain why the conditions it added were necessary in light of the conditions previously contained in the Exemptive Rules. The Commission answers that its stated justification for amending the Exemptive Rules satisfies the standards of the APA. We agree.

In the wake of recent revelations of certain abuses in the mutual fund industry, the Commission was concerned about what it diagnosed as "a serious breakdown in management controls." See 69 Fed.Reg. at 46,378-46,379; 69 Fed.Reg. at 3472. Although it is true, as the Chamber repeatedly [141] notes, that none of the documented abuses involved a transaction covered by the Exemptive Rules, the Commission, as we have said, thought it prudent to amend those rules because the particular abuses that had come to light revealed a more general problem with conflicts of interest than it had previously suspected and portended further abuses if that perceived problem was not addressed. The Commission thus viewed strengthening the role of independent directors in relation to exemptive transactions as a prophylactic measure, not a response to a present problem involving abuse of the Exemptive Rules. See 69 Fed.Reg. at 46,379.

The Chamber claims the Commission's decision was unreasonable because the conditions for engaging in exemptive transactions had already been tightened in 2001. But that begs the question whether the conditions of 2001 were adequate in view of the new evidence that some boards were failing to prevent egregious conflicts of interest involving late trading and market timing. Might not they also fail to police sufficiently the conflicts of interest inherent in the exemptive transactions? That those transactions were already subject to some regulation does not render unreasonable the Commission's judgment that additional regulation was called for as a prophylactic.

Finally, the Chamber argues the "actual terms" of the conditions were not reasonable in light of "the problems [the Commission] claimed justified the rulemaking." Those problems all trace to the failure of investment company boards, for whatever reason, to guard against advisers' conflicts of interest. See 69 Fed.Reg. at 3473 ("boards may have simply abdicated their responsibilities, or failed to ask the tough questions of advisers; in other cases, boards may have lacked the information or organizational structure necessary to play their proper role"). So that boards are apprised of the activities of their fund's adviser, the Commission, in a separate proceeding first required funds to designate a chief compliance officer charged with bringing relevant information to the board. See Compliance Programs of Investment Companies and Investment Advisers, 68 Fed.Reg. 74,714 (Dec. 24, 2003). The Commission then undertook in the present rulemaking to ensure that independent directors would be in a position to put such information to good use.

To that end, the Commission reasonably concluded that raising the minimum percentage of independent directors from 50% to 75% would "strengthen the hand of the independent directors when dealing with fund management, and may assure that independent directors maintain control of the board and its agenda." 69 Fed.Reg. at 46,382. Similarly, the Commission concluded that having an independent chairman would be beneficial because the chairman plays "an important role in setting the agenda of the board[,] ... in providing a check on the adviser, in negotiating the best deal for shareholders when considering the advisory contract, and in providing leadership to the board that focuses on the long-term interests of investors." 69 Fed. Reg. at 46,383. We have no basis upon which to second-guess that judgment.

In sum, the Chamber points to nothing in the ICA to suggest the Congress restricted the authority of the Commission to make "precautionary or prophylactic responses to perceived risks," Certified Color Mfrs. Ass'n v. Mathews, 543 F.2d 284, 296 (D.C.Cir.1976); and the Commission's effort to prevent future abuses of exemptive transactions was not arbitrary, capricious, or in any way an abuse of its discretion, in violation of the APA.

[142] 2. Consideration of Costs

The ICA mandates that when the Commission "engage[s] in rulemaking and is required to consider or determine whether an action is consistent with the public interest [it] shall ... consider ... whether the action will promote efficiency, competition, and capital formation." 15 U.S.C. § 80a-2(c). The Chamber argues the Commission violated this mandate, and hence the APA, by failing (1) to develop new, and to consider extant, empirical data comparing the performance of funds respectively led by inside and by independent chairmen; and (2) to consider the costs of the conditions it was imposing, which costs in turn impede efficiency, competition, and capital formation. The Commission denies the charges.

The particulars of the Chamber's first contention are that the Commission should have directed its staff to do a study of the effect of an independent chairman upon fund performance and that when such a study, commissioned by Fidelity Investments, was presented during the comment period, the Commission gave it short shrift. 69 Fed.Reg. at 46,383 n.52; see Geoffrey H. Bobroff and Thomas H. Mack, Assessing the Significance of Mutual Fund Board Independent Chairs (Mar. 10, 2004). As to the former point, although we recognize that an agency acting upon the basis of empirical data may more readily be able to show it has satisfied its obligations under the APA, see Nat'l Ass'n of Regulatory Util. Comm'rs v. FCC, 737 F.2d 1095, 1124 (D.C.Cir.1984) (in informal rulemaking it is "desirable" that agency "independently amass [and] verify the accuracy of" data), we are acutely aware that an agency need not — indeed cannot — base its every action upon empirical data; depending upon the nature of the problem, an agency may be "entitled to conduct ... a general analysis based on informed conjecture." Melcher v. FCC, 134 F.3d 1143, 1158 (D.C.Cir.1998); Nat'l Ass'n of Regulatory Util. Comm'rs, 737 F.2d at 1124 (failure to conduct independent study not violative of APA because notice and comment procedures "permit parties to bring relevant information quickly to the agency's attention"); see also FCC v. Nat'l Citizens Comm. for Broad., 436 U.S. 775, 813-14, 98 S.Ct. 2096, 56 L.Ed.2d 697 (1978) (FCC, in making "judgmental or predictive" factual determinations, did not need "complete factual support" because "a forecast of the direction in which future public interest lies necessarily involves deductions based on the expert knowledge of the agency").

Here the Commission, based upon "its own and its staff's experience, the many comments received, and other evidence, in addition to the limited and conflicting empirical evidence," concluded an independent chairman "can provide benefits and serve other purposes apart from achieving high performance of the fund." 69 Fed. Reg. at 46,383-46,384. The Commission's decision not to do an empirical study does not make that an unreasoned decision. See BellSouth Corp. v. FCC, 162 F.3d 1215, 1221 (D.C.Cir.1999) ("When ... an agency is obliged to make policy judgments where no factual certainties exist or where facts alone do not provide the answer, our role is more limited; we require only that the agency so state and go on to identify the considerations it found persuasive").

Nor did the Commission violate the APA in its consideration of the Fidelity study. Although Chairman Donaldson did, as the Chamber points out, betray a dismissive attitude toward the value of empirical data, SEC Open Meeting, 57-58 (June 23, 2004) ("there are no empirical studies that are worth much. You can do anything you want with numbers and we've seen evidence of that in a number of our submissions"), [143] the Commission did not reject the Fidelity study or decline to do its own study upon that basis. Rather, the Commission concluded the Fidelity study was "unpersuasive" because, as the authors acknowledged, it did not rule out "other important differences [than independence of the chairman] that may have impacted performance results," 69 Fed.Reg. at 46,383 n.52 (quoting study), and because it did not use a reliable method of calculating fund expenses, id. The Commission also noted that other commenters reviewing the Fidelity study had concluded funds with an independent chairman did "slightly better in terms of returns, but at lower cost." Id. Although a more detailed discussion of the study might have been useful, the Commission made clear enough the limitations of the study, and we have no cause to disturb its ultimate judgment that the study was "unpersuasive evidence." Cf. Hüls Am. Inc. v. Browner, 83 F.3d 445, 452 (D.C.Cir.1996) (court owes "extreme degree of deference to the agency when it is evaluating scientific data within its technical expertise").^[2]

We reach a different conclusion with regard to the Commission's consideration of the costs of the conditions. With respect to the 75% independent director condition, the Commission, although describing three methods by which a fund might comply with the condition, claimed it was without a "reliable basis for determining how funds would choose to satisfy the [condition] and therefore it [was] difficult to determine the costs associated with electing independent directors." 69 Fed. Reg. at 46,387. That particular difficulty may mean the Commission can determine only the range within which a fund's cost of compliance will fall, depending upon how it responds to the condition but, as the Chamber contends, it does not excuse the Commission from its statutory obligation to determine as best it can the economic implications of the rule it has proposed. See Pub. Citizen, 374 F.3d at 1221 (in face of uncertainty, agency must "exercise its expertise to make tough choices about which of the competing estimates is most plausible, and to hazard a guess as to which is correct, even if ... the estimate will be imprecise").

With respect to the costs of the independent chairman condition, counsel maintains the Commission "was not aware of any costs associated with the hiring of staff because boards typically have this authority under state law, and the rule would not require them to hire employees." The Commission made that observation, however, in regard not to the independent chairman condition but to a condition not challenged here, and we cannot therefore consider counsel's rationalization for the regulation under review. See Motor Vehicle Mfrs. Ass'n, 463 U.S. at 50, 103 S.Ct. 2856 ("courts may not accept appellate counsel's post hoc rationalizations for agency action"). In any event, the argument is a non sequitur; whether a board is authorized by law to hire additional staff in no way bears upon the contention that, because of his comparative lack of knowledge about the fund, an independent chairman would in fact cause the fund to incur additional staffing costs.

[144] What the Commission itself did was acknowledge in a footnote that an independent chairman "may choose to hire [more] staff" but it stopped there because, it said, it had no "reliable basis for estimating those costs." 69 Fed.Reg. at 46,387 n.81. Although the Commission may not have been able to estimate the aggregate cost to the mutual fund industry of additional staff because it did not know what percentage of funds with independent chairman would incur that cost, it readily could have estimated the cost to an individual fund, which estimate would be pertinent to its assessment of the effect the condition would have upon efficiency and competition, if not upon capital formation. And, as we have just seen, uncertainty may limit what the Commission can do, but it does not excuse the Commission from its statutory obligation to do what it can to apprise itself — and hence the public and the Congress — of the economic consequences of a proposed regulation before it decides whether to adopt the measure.

In sum, the Commission violated its obligation under 15 U.S.C. § 80a-2(c), and therefore the APA, in failing adequately to consider the costs imposed upon funds by the two challenged conditions.

3. Consideration of Alternatives

Finally, the Chamber argues the Commission gave "inadequate consideration" to suggested alternatives to the independent chairman condition, citing as an example — the only significant one, it seems to us — the proposal, endorsed by the two dissenting Commissioners, that each fund be required prominently to disclose whether it has an inside or an independent chairman and thereby allow investors to make an informed choice. Commission counsel responds by noting generally that the agency is "not required to discuss every alternative raised" and that it did consider the "major alternatives" proposed by commenters, adding more specifically that it had no obligation to consider the dissenters' disclosure alternative because the "Congress rejected a purely disclosure-based approach to regulating conflicts of interest under the [ICA]."

We conclude the Commission's failure to consider the disclosure alternative violated the APA. To be sure, the Commission is not required to consider "every alternative ... conceivable by the mind of man ... regardless of how uncommon or unknown that alternative" may be. Motor Vehicle Mfrs. Ass'n, 463 U.S. at 51, 103 S.Ct. 2856. Here, however, two dissenting Commissioners raised, as an alternative to prescription, reliance upon disclosure, see 69 Fed.Reg. at 46,393 — a familiar tool in the Commission's tool kit — and several commenters suggested that the Commission should leave the choice of chairman to market forces, making it hard to see how that particular policy alternative was either "uncommon or unknown."

The Commission would nevertheless be excused for failing to consider this alternative if it were, for whatever reason, unworthy of consideration. Commission counsel accordingly suggests one such reason, namely, that in the ICA the Congress rejected a "purely disclosure-based approach." See also SEC v. Variable Annuity Life Ins. Co., 359 U.S. 65, 78, 79 S.Ct. 618, 3 L.Ed.2d 640 (1959) (ICA "passes beyond a simple `disclosure' philosophy"). Counsel's statement is true but irrelevant; that the Congress required more than disclosure with respect to some matters governed by the ICA does not mean it deemed disclosure insufficient with respect to all such matters. On the contrary, the ICA requires funds to make extensive disclosures. See, e.g., 15 U.S.C. § 80a-8(b) (fund must file registration statement with Commission); id. § 80a-29(e) (fund must [145] send semiannual report to shareholders); id. § 80a-44(a) (fund must make available to public all documents filed with Commission); see also Mary M. Frank et al., Copycat Funds: Information Disclosure Regulation and the Returns to Active Fund Management in the Mutual Fund Industry, 47 J.L. & ECON. 515 (2004) ("[ICA] regulates information disclosure by mutual funds"). Indeed, the Commission augmented the disclosure requirements of the ICA even as it was considering the independent chairman condition. See Final Rule, Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies, 69 Fed.Reg. 11,244, 11,245 (Mar. 9, 2004).

In sum, the disclosure alternative was neither frivolous nor out of bounds and the Commission therefore had an obligation to consider it. Cf. Laclede Gas Co. v. FERC, 873 F.2d 1494, 1498 (D.C.Cir.1989) ("where a party raises facially reasonable alternatives ... the agency must either consider those alternatives or give some reason ... for declining to do so") (emphases removed). The Commission may ultimately decide the disclosure alternative will not sufficiently serve the interests of shareholders, but the Commission — not its counsel and not this court — is charged by the Congress with bringing its expertise and its best judgment to bear upon that issue. See SEC v. Chenery Corp., 332 U.S. 194, 196-97, 67 S.Ct. 1575, 91 L.Ed. 1995 (1947); see also Motor Vehicle Mfrs. Ass'n, 463 U.S. at 54, 103 S.Ct. 2856.

III. Conclusion

For the foregoing reasons, we grant in part the Chamber's petition for review. This matter is remanded to the Commission to address the deficiencies with the 75% independent director condition and the independent chairman condition identified herein. See Fox Television Stations, Inc. v. FCC, 280 F.3d 1027, 1048-49 (D.C.Cir.2002); Allied-Signal, Inc. v. U.S. Nuclear Regulatory Comm'n, 988 F.2d 146, 150-51 (D.C.Cir.1993).

So ordered.

[1] That section provides:

The Commission, by rules and regulations upon its own motion, or by order upon application, may conditionally or unconditionally exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from any provision or provisions of this [Act] or of any rule or regulation thereunder, if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this [Act].

[2] The Chamber also argues the Congress's subsequent direction to the Commission to "provide[] a justification" for the independent chairman condition, see Consolidated Appropriations Act, 2005, Pub.L. No. 108-447, 118 Stat. 2809 (2004), establishes that the Commission failed to provide an adequate justification in the rulemaking proceeding. That does not follow, however; the Congress may require a more detailed explanation for a rule than is required by the APA. See Motor Vehicle Mfrs. Ass'n, 463 U.S. at 44-45, 103 S.Ct. 2856 (rejecting view "congressional reaction" to rule necessitated stricter judicial review).

[891] [892] [893] Eugene Scalia argued the cause for petitioner. With him on the briefs were John F. Olson, Douglas R. Cox, Cory J. Skolnick, Stephen A. Bokat, Robin S. Conrad, and Amar D. Sarwal.

Giovanni P. Prezioso, General Counsel, Securities & Exchange Commission, argued the cause for respondent. With him on the brief were Jacob H. Stillman, Solicitor, John W. Avery, Special Counsel, and Michael L. Post, Senior Counsel.

Mercer Bullard was on the brief for amici curiae Fund Democracy, Inc. and Consumer Federal of America in support of respondent.

Before: HENDERSON, ROGERS and BROWN, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROGERS.

ROGERS, Circuit Judge.

This appeal concerns the continuing challenge by the Chamber of Commerce of the United States to the rule promulgated on July 27, 2004 ("the Rule") by the Securities and Exchange Commission amending the Exemptive Rules under the Investment Company Act of 1940 ("ICA"), 15 U.S.C. § 80a-1 et seq. (2000). The Rule requires that mutual funds relying on the Exemptive Rules adopt certain governance practices, including those set forth in two conditions: a fund must have (1) a board with no less than 75% independent directors and (2) an independent chair. See Investment Company Governance, Release No. 26,520, 69 Fed.Reg. 46,378, 46,381 (Aug. 2, 2004) ("Adopting Release"). In Chamber of Commerce v. SEC, 412 F.3d [894] 133 (D.C.Cir.2005) ("Chamber I"), the court held that the Chamber had standing to challenge the Rule, the Commission had authority to promulgate the Rule, and the Commission had not violated the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq., except when it failed, as required by the ICA, to determine the costs of the two conditions and when it failed to address a proposed alternative to the independent chair condition. The court remanded the case to the Commission.

The Chamber now challenges the Commission's decision not to modify the two conditions in response to Chamber I. See Investment Company Governance, Release No. 26,985, 70 Fed.Reg. 39,390, 39,398 (July 7, 2005) ("Response Release"). We again hold that the Chamber has standing, and we hold that the Commission had authority to consider whether to modify the Rule prior to issuance of the mandate in Chamber I. We further hold that, although the Commission was not constrained by Chamber I in how to estimate the costs of the conditions, the Commission failed to comply with section 553(c) of the APA, 5 U.S.C. § 553(c), by relying on materials not in the rulemaking record without affording an opportunity for public comment, to the prejudice of the Chamber. On August 10, 2005, the court stayed the two conditions.

I.

Section 2(c) of the ICA requires that when the Commission "engage[s] in rulemaking and is required to consider or determine whether an action is consistent with the public interest, [it] shall . . . consider . . . whether the action will promote efficiency, competition, and capital formation." 15 U.S.C. § 80a-2(c). In Chamber I, the court held:

With respect to the 75% independent director condition, the Commission, although describing three methods by which a fund might comply with the condition, claimed it was without a "reliable basis for determining how funds would choose to satisfy the [condition] and therefore it [was] difficult to determine the costs associated with electing independent directors." 69 Fed.Reg. at 46,387. That particular difficulty may mean the Commission can determine only the range within which a fund's cost of compliance will fall, depending upon how it responds to the conditions but, as the Chamber contends, it does not excuse the Commission from its statutory obligation to determine as best it can the economic implications of the rule it has proposed.

412 F.3d at 143 (citing Pub. Citizen v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209, 1221 (D.C.Cir.2004)). With respect to the independent chair condition, the court noted that the Commission had stated that an independent chair may decide to hire more staff, but that it had no "reliable basis for estimating . . . th[ose] costs." Id. at 144 (citing Adopting Release, 69 Fed.Reg. at 46,387 n. 81) The court held that "[a]lthough the Commission may not have been able to estimate the aggregate cost to the mutual fund industry of additional staff . . . it readily could have estimated the cost to an individual fund, which estimate would be pertinent to its assessment of the effect the condition would have upon efficiency and competition, if not upon capital formation." Id. The court also held that the Commission could not ignore a "facially reasonable" alternative suggested by the two dissenting Members of the Commission. See id. at 145 (citing standard set forth in Laclede Gas Co. v. FERC, 873 F.2d 1494, 1498 (D.C.Cir.1989)).

The Commission responded within a matter of days to the release of Chamber I. The Commission explained that prompt action was required to avoid postponing [895] the January 15, 2006 date for compliance with the Rule in order to ensure protection of fund investors "in the wake of the discovery of serious wrongdoing at many of the nation's largest fund complexes and by officials at the highest levels of those complexes." Response Release, 70 Fed.Reg. at 39,391. This occurred, the Commission explained, because "[f]und managers acted in their own interests rather than in the interests of fund investors (which they are required to do), resulting in substantial investor losses that were well documented at the time [the Commission] adopted the [Rule]," and left investor confidence severely shaken, id.; see Adopting Release, 69 Fed.Reg. at 43,378. In the Commission's view, prompt action could best be accomplished by having the same five Commissioners who had been considering mutual fund governance issues for more than a year and a half "bring the[ir] collective judgment and learning" to the issues identified by the court. See Response Release, 70 Fed.Reg. at 39,391. Because the Chairman was scheduled to resign on June 30, 2005, the Commission decided to respond to Chamber I at its previously scheduled public meeting on June 29, 2005. See id. at 39,391; see also id. at 39,403 (Glassman, Comm'r, dissenting); id. at 39,408 (Atkins, Comm'r, dissenting).

The Commission decided it was unnecessary to reopen the rulemaking record for further comment. Observing that it had previously given notice and called for comment on the costs of complying with the two conditions, the Commission concluded that "the information in the existing record, together with publicly available information on which we may rely, is a sufficient base on which to rest the Commission's consideration of the deficiencies identified by the Court." Id. at 39,390-91 (emphasis added). Based on materials not in the rulemaking record, including what the Commission described as a "widely used industry survey" of mutual fund directors' compensation, the Commission determined a range of costs for each of the options that a fund might use to meet the 75% independent director condition. See id. at 39,392 n. 28, 39,391-94. The Commission viewed the costs to an individual fund of the independent chair condition to derive principally from the increased compensation for the independent chair and the costs of additional staff, the latter cost estimated based on extra-record salary surveys by the Securities Industry Association, a source on which the Commission stated it "commonly rel[ies] in its rulemakings." Id. at 39,394. The Commission stated that it did not expect small funds would hire additional staff. See id.

The Commission concluded, based on these cost estimates, that the costs of complying with the two conditions "are extremely small relative to the fund assets for which fund boards are responsible, and are also small relative to the expected benefits of the two conditions." Id. at 39,395. "Whether the two conditions are viewed separately or together," the Commission stated, "even at the high end of the ranges, the costs of compliance are minimal." Id. This was true as well for small funds. See id. at 39,396 n. 77. Accordingly, regarding section 2(c) of the ICA, the Commission concluded: "[W]e do not expect the amendments to the Exemptive Rules to have a significant adverse effect on efficiency, competition or capital formation because the costs associated with the amendments are minimal and many funds have already adopted the required practices." Id. at 39,396. The Commission noted that as of the time it proposed the Rule, it estimated that "nearly sixty percent of all funds currently me[t] [the 75% independent director] requirement." Adopting Release, 69 Fed.Reg. at 46,387 n. 78; see Response Release, 70 Fed.Reg. at 39,391 & n. 18.

[896] The Commission also set forth its reasons for rejecting the alternative proposal to the independent chair condition: "[I]n light of the nature of investment companies and the purposes of the statutory prohibitions to which the Exemptive Rules apply," the Commission concluded that the condition requiring an independent chair was superior to an expansion of disclosure requirements. See Response Release, 70 Fed.Reg. at 39,396-97. The Commission explained that mutual funds are "unique" because they are managed "by people whose primary loyalty and pecuniary interests lie outside the enterprise," which presents "inherent conflicts of interest and potential for abuses." Id. at 39,396. The Commission reasoned that disclosure alone would not prevent self-dealing by managers. See id. at 39,397. Further, the Commission observed, the independent chair was part of a package of regulatory reforms designed to change the "boardroom culture," id., that would result in benefits that could not be accomplished by disclosure alone, which to become meaningful faced several obstacles given the information that would need to be imparted to an investor, see id.

II.

The Chamber petitions for review, challenging the Commission's decision not to modify the Rule's two conditions on procedural and substantive grounds. Before reaching the merits of the Chamber's challenge, we address the Chamber's standing and the Commission's authority to consider whether to modify the two conditions before issuance of the mandate in Chamber I.

A.

The Commission maintains that the court lacks jurisdiction to consider the Chamber's petition because the Chamber lacks standing under Article III of the Constitution. Specifically, the Commission maintains that the Chamber has failed to show a continuing injury-in-fact and to address the implications of DH2, Inc. v. SEC, 422 F.3d 591 (7th Cir.2005), which the Commission presents as being in conflict with our holding in Chamber I that the Chamber has standing. See Chamber I, 412 F.3d at 138. Whatever may be said of the injury-in-fact analysis in DH2, the holding in Chamber I is the law of this circuit. See LaShawn A. v. Barry, 87 F.3d 1389, 1395 (D.C.Cir.1996) (en banc).

In Chamber I, the court held that the Chamber had standing in light of sworn declarations regarding its investment in, and continuing desire to invest in, mutual funds that are not governed in accordance with the Rule's two conditions. See Chamber I, 412 F.3d at 138. The court concluded these concrete actions and intentions were sufficient because the "inability of consumers to buy a desired product constituted injury-in-fact even if they could ameliorate the injury by purchasing some alternative product." Id. (quoting Consumer Fed'n of Am. v. FCC, 348 F.3d 1009, 1012 (D.C.Cir.2003)) (alterations and internal quotations omitted).

The Chamber seeks in its current petition for review to challenge the same two conditions it challenged in Chamber I. It has substantiated its claim of continued injury through the September 19, 2005 sworn declaration of Stan M. Harrell, Senior Vice President, Chief Financial Officer and Chief Information Officer of the Chamber. See Sierra Club v. EPA, 292 F.3d 895, 899-900 (D.C.Cir.2002). Mr. Harrell avers that the Chamber continues to hold investments in mutual funds, four of which he identifies by name, and currently intends to continue making such investments and wishes to invest in management-chaired funds and in funds with fewer than 75% independent directors. In light of the historical data in the rulemaking [897] record indicating that management-chaired funds may have performed marginally better then independently chaired funds, see Adopting Release, 69 Fed.Reg. at 46,383 n. 52, and the Chamber's concern that the costs of implementing the two conditions will present barriers to entry, especially for small funds, there is no basis to conclude that the circumstances underlying Chamber I's holding that the Chamber had standing have changed.

B.

The Chamber, in turn, challenges the Commission's authority to consider modifying the Rule prior to issuance of the court's mandate in Chamber I. It advances this challenge based on an analogy to Federal Rule of Appellate Procedure 41, which effects a limit on the jurisdiction of a district court while a case is pending on appeal, and like Article III standing, might be viewed as a threshold jurisdictional issue. However, the Chamber's challenge is, in effect, a merits challenge based on section 706(2)(C) of the APA.

Essentially, the Chamber makes a policy argument by analogy. It points to Rule 41, which addresses when the mandate of a court of appeals issues, and to authorities holding that the pendency of an appeal "`divests the district court of control over those aspects of the case involved in the appeal,'" United States v. DeFries, 129 F.3d 1293, 1302 (D.C.Cir.1997) (quoting Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58, 103 S.Ct. 400, 74 L.Ed.2d 225 (1982) (per curiam)); see also FED. R. APP. P. 3, to argue that the district court does not regain jurisdiction over those issues until the court of appeals issues its mandate, cf. In re Thorp, 655 F.2d 997, 998 (9th Cir.1981). To extend this principle to agencies, the Chamber points to an isolated and irrelevant reference in the 1998 Advisory Committee Notes addressing when a court of appeals determination becomes a "fixed" legal obligation for an agency. See FED. R. APP. P. 41 Advisory Committee's Notes (1998 amends., subdiv. (c)). The Chamber then contends that treating district courts and administrative agencies as "divested" of jurisdiction prior to issuance of the court's mandate "is sensible in light of the[ir] comparable role[s] . . . in developing a factual record and narrowing the issues for review." Petitioner's Br. at 32. Such an approach, the Chamber contends, also is consistent with the rule that a court will not entertain a petition for review while a petition for reconsideration is before an agency. Id. (citing United Transp. Union v. ICC, 871 F.2d 1114, 1117 (D.C.Cir.1989)).

The Chamber's contention is unpersuasive. Admittedly, some of the reasons underlying the general principle, expressed in Griggs v. Provident Consumer Discount Co., 459 U.S. at 58, 103 S.Ct. 400, that the jurisdictional authority of district courts and courts of appeal are mutually exclusive regarding issues raised in the appeal, see generally CHARLES ALAN WRIGHT, ARTHUR R. MILLER, & EDWARD H. COOPER, 16A FEDERAL PRACTICE & PROCEDURE JURISDICTION §§ 3949.1, 3987 (3d ed.1999 and 2005 Pocket Part), such as avoiding confusion or a waste of time by having the same matter considered in more than one forum at the same time, see DeFries, 129 F.3d at 1303; United States v. Salerno, 868 F.2d 524, 540 (2d Cir.1989), apply to administrative proceedings, cf. United Transp. Union, 871 F.2d at 1117. However, the Chamber overlooks the fact that administrative agencies, unlike federal courts, are not jurisdictionally constrained by the case-and-controversy limitation in Article III. See U.S. CONST. art. III; Envirocare of Utah, Inc. v. NRC, 194 F.3d 72, 74 (D.C.Cir. 1999); see also Fund Democracy, LLC v. SEC, 278 F.3d 21, 27 (D.C.Cir.2002). Thus, the Chamber must recognize that its analogy based on Rule 41 is not informed by the concerns underlying Article III. It observes that in DeFries this court stated [898] that the principle that a district court lacks jurisdiction to act until the court of appeals' mandate issues is "grounded in solid considerations of efficient judicial administration," 129 F.3d at 1303. Even assuming that Article III concerns do not inform DeFries' holding, the Chamber's contention fails.

The court has previously recognized that agencies possess authority to address issues identified by the court prior to the issuance of its mandate. See, e.g., Hazardous Waste Treatment Council v. EPA, 886 F.2d 355, 371 (D.C.Cir.1989); Nat'l Coal. Against Misuse of Pesticides v. Thomas, 809 F.2d 875, 884-85 (D.C.Cir.1987); Indep. U.S. Tanker Owners Comm. v. Dole, 809 F.2d 847, 855 (D.C.Cir.1987); see also Northern States Power Co. v. U.S. Dep't of Energy, 128 F.3d 754, 761 (D.C.Cir.1997). The Chamber would distinguish those cases on the ground that in those instances the court instructed the agency to proceed, and thus "wielded its mandate to determine when its action attains controlling force so as to marshal litigation in an orderly manner through the legal system." Petitioner's Br. at 33. Even if that distinction were persuasive, no such distinction applies to Alabama Power Co. v. FPC, 511 F.2d 383 (D.C.Cir.1974).

In Alabama Power, the court observed that although "[l]imitations on the [agency's] power to modify an order during the pendency of an appeal may be inferred from Section 313 of the Federal Power Act, 16 U.S.C. § 8251 [(1970)]. . . . [t]he precise scope of these limitations has not been fully defined." 511 F.2d at 388. Section 313 authorized the agency, upon application for rehearing, to set aside or modify an order until the record in the proceeding had been filed in the court of appeals and stated that, upon the filing of a petition for review, the appellate court has exclusive jurisdiction to affirm, modify, or set aside the order. Concluding that it was unnecessary "to define the precise contours of Section 313," the court held that

[a]ssuming the [agency's] remedial powers [are] limited during the pendency of appeal, it nevertheless retains power to consider a petition for amendment and to defer until disposition of the appeal any modification found appropriate or, in a case of urgency, to apply to the reviewing court for a remand order so as to permit amendment.

Id. The court cited Smith v. Pollin, 194 F.2d 349 (D.C.Cir.1952), which established an exception under Rule 41 for district courts to reconsider an order or judgment pending on appeal and to seek remand of the case if it decided to grant relief, id. at 350. By parity of reasoning, the court in Alabama Power held that the Federal Power Commission retained jurisdiction to consider whether it would revise the Rule prior to the issuance of the court's mandate. 511 F.2d at 388.

Alabama Power is dispositive here because the jurisdictional provisions of section 43(a) of the ICA, 15 U.S.C. § 80a-42(a),^[1] are substantially the same as section [899] 313 of the Federal Power Act, 16 U.S.C. § 8251, as construed in Alabama Power. Assuming, as in Alabama Power, that the statute limited the Commission's remedial power prior to the issuance of the mandate in Chamber I, the Commission was not disabled from sua sponte considering whether to modify the Rule's two conditions. See ICA § 6(c), 15 U.S.C. § 80a-6(c). Because the Commission decided not to modify the Rule, there is no need to consider whether, prior to issuance of the mandate, the Commission retained authority to adopt amendments to the Rule without first seeking a remand of the proceeding. While there was a small risk that the Commission's response would have become wasted effort had the court granted the Chamber's petition for rehearing in Chamber I, this risk is balanced against the benefits of allowing an agency broad scope to carry out its mission, cf. Alabama Power, 511 F.2d at 388-89, particularly as the goal of conserving judicial resources is served under the Smith v. Pollin approach adopted in Alabama Power.

Accordingly, we hold that the Chamber has standing under Article III to bring its petition challenging the Rule's two conditions and that the Commission had authority to consider whether to alter the conditions in response to Chamber I prior to the issuance of the mandate.

III.

Section 553 of the APA requires that an agency give notice of a proposed rule setting forth "either the terms or substance of the proposed rule or a description of the subjects and issues involved," 5 U.S.C. § 553(b), and "give interested persons an opportunity to participate in the rule making through submission of written data, views, or arguments with or without opportunity for oral presentation," id. § 553(c). Among the information that must be revealed for public evaluation are the "technical studies and data" upon which the agency relies. See Solite Corp. v. EPA, 952 F.2d 473, 484 (D.C.Cir.1991).

Congress may vest broad rulemaking authority in an agency, and even charge the agency with "swiftly and effectively implementing [a] national policy," Natural Res. Def. Council, Inc. v. SEC, 606 F.2d 1031, 1050 (D.C.Cir.1979) ("NRDC"), but on remand the agency remains bound by the APA's notice and comment requirements, see Simmons v. ICC, 757 F.2d 296, 300 (D.C.Cir.1985); cf. West Virginia v. EPA, 362 F.3d 861, 869 (D.C.Cir.2004). Although judicial review of informal rulemaking is generally limited in scope, see NRDC, 606 F.2d at 1050, and is deferential when rulemaking implicates the agency's expertise, see Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965, 971 (D.C.Cir.1999), more exacting review may be required when the presumption of regularity is rebutted, as may occur when the agency arrives at an identical result on remand under circumstances that throw into question the regularity of its proceedings, see NRDC, 606 F.2d at 1049 n. 23; Food Mktg. Inst. v. ICC, 587 F.2d 1285, 1289-90 (D.C.Cir.1978); see also Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 420, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971). Reviewing the procedures through which agencies develop legislative rules falls within the court's "special area[s] of competence" and generally "contributes to the rationality and fairness of agency decisionmaking [900] without detracting unduly from its effectiveness." NRDC, 606 F.2d at 1049; see Envtl. Def. Fund, Inc. v. Ruckelshaus, 439 F.2d 584, 598 (D.C.Cir. 1971).

Where the court does not require additional fact gathering on remand, as in Chamber I, 412 F.3d at 145, the agency is typically authorized to determine, in its discretion, whether such fact gathering is needed, see Sierra Club v. EPA, 325 F.3d 374, 382 (D.C.Cir.2003) (citing Nat'l Grain & Feed Ass'n v. OSHA, 903 F.2d 308, 310-11 (5th Cir.1990)), and how it should be accomplished, see NRDC, 606 F.2d at 1055. If the agency determines that additional fact gathering is necessary, then notice and comment are typically required. See Action on Smoking and Health v. Civil Aeronautics Bd., 713 F.2d 795, 799-800 (D.C.Cir.1983); cf. Air Transp. Ass'n of Am. v. FAA, 169 F.3d 1, 7 (D.C.Cir.1999); Ass'n of Data Processing Serv. Orgs., Inc. v. Bd. of Governors of the Fed. Reserve Sys., 745 F.2d 677, 684-85 (D.C.Cir.1984).

However, further notice and comment are not required when additional fact gathering merely supplements information in the rulemaking record by checking or confirming prior assessments without changing methodology, see Solite, 952 F.2d at 485, by confirming or corroborating data in the rulemaking record, see Community Nutrition Inst. v. Block, 749 F.2d 50, 57-58 (D.C.Cir.1984); cf. Building Indus. Ass'n of Superior Cal. v. Norton, 247 F.3d 1241, 1246 (D.C.Cir.2001), or by internally generating information using a methodology disclosed in the rulemaking record, Air Transp. Ass'n of Am. v. Civil Aeronautics Bd., 732 F.2d 219, 224 (D.C.Cir.1984); cf. Portland Cement Ass'n v. Ruckelshaus, 486 F.2d 375, 393 (D.C.Cir.1973). For example, in Solite, the agency's explanation of a rule rested on a survey, which was not part of the rulemaking record, that the agency substituted for an older report in the rulemaking record. Solite, 952 F.2d at 481. The court stated that "consistent with the APA, an agency may use `supplementary' data, unavailable during the notice and comment period, that `expands on and confirms' information contained in the proposed rulemaking and addresses `alleged deficiencies' in the pre-existing data, so long as no prejudice is shown." Id. at 484 (quoting Community Nutrition, 749 F.2d at 57-58) (alterations omitted). Such "supplementary" information, the court explained in Community Nutrition, is distinct from "provid[ing] entirely new information critical to the [agency]'s determination." Community Nutrition, 749 F.2d at 57-58 (citations omitted). When the agency relies on supplementary evidence without a showing of prejudice by an interested party, see Solite, 952 F.2d at 484; Community Nutrition, 749 F.2d at 58, the procedural requirements of the APA are satisfied without further opportunity for comment, provided that the agency's response constitutes a "logical outgrowth" of the rule initially proposed, see Envtl. Integrity Project v. EPA, 425 F.3d 992, 996 (D.C.Cir. 2005); Ne. Md. Waste Disposal Auth. v. EPA, 358 F.3d 936, 952 (D.C.Cir.2004).

In essence, the question is whether "at least the most critical factual material that is used to support the agency's position on review . . . [has] been made public in the proceeding and exposed to refutation." Ass'n of Data Processing, 745 F.2d at 684; see Air Transp. Ass'n, 169 F.3d at 7. By requiring the "most critical factual material" used by the agency be subjected to informed comment, the APA provides a procedural device to ensure that agency regulations are tested through exposure to public comment, to afford affected parties an opportunity to present comment and evidence to support their positions, and thereby to enhance the quality of judicial review. See Int'l Union, United Mine [901] Workers of Am. v. Mine Safety & Health Admin., 407 F.3d 1250, 1259 (D.C.Cir. 2005). These considerations are no less relevant when an agency on remand considers whether to modify a rule pending on appeal. See Simmons, 757 F.2d at 300.

The Commission maintains that section 553 did not require further notice and comment in response to Chamber I for two reasons: First, the Rule's two conditions were set out in materially the same terms in the notice of proposed rulemaking, see Investment Company Governance, Release No. 26,323, 69 Fed.Reg. 3472, 3473 (Jan. 23, 2004) ("NOPR"), thus providing all interested parties the opportunity to comment on the proposed amendments and specifically on their costs, see id. at 3481. Second, although the Commission relied on materials not made subject to public comment under section 553(c), the materials were "publicly available" and merely supplemented data in the rulemaking record that had been subject to public comment. See Response Release, 70 Fed. Reg. at 39,391. We agree with the Commission's first point, because the NOPR provided adequate notice, but not the second, because the extra-record materials did not merely supplement the rulemaking record without prejudice to the Chamber, and the public availability of those materials, in this instance, does not merit an exception to the comment requirement of section 553(c). We therefore do not reach the Chamber's contention that the Commission's decision to forgo further notice and comment and rely on extra-record materials was arbitrary and capricious under the APA. Cf. Air Transp. Ass'n, 169 F.3d at 8.

In Chamber I, the court held that the Commission, in order to satisfy "its statutory obligation" under ICA § 2(c), 15 U.S.C. § 80a-2(c), would need "to do what it can to apprise itself — and hence the public and the Congress — of the economic consequences of a proposed regulation before it decides whether to adopt the measure." Chamber I, 412 F.3d at 144. Given this general instruction, the Commission was not required under section 553(b) to give further notice of the two conditions. The NOPR identified the amendments to the Exemptive Rules, proposed the 75% independent director and independent chair conditions, id., and solicited comments and empirical data on costs. See NOPR, 69 Fed.Reg. at 3473. In relevant part, the NOPR stated:

We do not anticipate that these proposals will have a significant effect on efficiency, competition and capital formation with regard to funds because the costs associated with the proposals are minimal and many funds have already adopted some of the proposed practices. . . . We request comments on whether the proposed rule amendments, if adopted, would promote efficiency, competition, and capital formation. Will the proposed amendments or their resulting costs materially affect the efficiency, competition, and capital formation of funds? Comments will be considered by the Commission in satisfying its responsibilities under section 2(c) of the Investment Company Act. Commenters are requested to provide empirical data and other factual support for their views to the extent possible.

Id. The NOPR thus fully informed interested parties of the two conditions and expressly requested comments on costs so that the Commission would be in a position to comply with ICA section 2(c). See Envtl. Integrity Project, 425 F.3d at 996.

The Commission's extensive reliance upon extra-record materials in arriving at its cost estimates, and thus in determining not to modify the two conditions, however, required further opportunity for comment under section 553(c). The Commission [902] justified its decision not to reopen the comment period on the ground that "the information in the existing record, together with publicly available information upon which we may rely, is a sufficient base on which to rest the Commission's consideration of the deficiencies identified by the Court." Response Release, 70 Fed.Reg. at 39,391 (emphasis added); see also id. at 39,392 n. 24. To the extent the Commission suggests that the "publicly available" extra-record materials merely supplemented the rulemaking record, which alone would have been sufficient to allow the Commission to estimate the costs of the two conditions, it ignores what is obvious from the Response Release.

To develop cost estimates for the Rule's two conditions, the Commission relied on privately produced "Management Practice Inc. Bulletin[s]," id. at 39,392 nn. 24, 28, 30; id. at 39,393 nn. 33, 43; id. at 39,394 n. 48; id. at 39,395 n. 73, and a nonpublic survey of compensation and governance practices in the mutual fund industry that is summarized in one of these bulletins, id. at 39,392 n. 28. Neither the bulletins nor the survey were part of the rulemaking record. Nor did the Commission identify the bulletins as materials on which it typically relies in rulemakings. Compare id. at 39,394. Yet these extra-record materials supply the basic assumptions used by the Commission to establish the range of costs that mutual funds are likely to bear in complying with the two conditions. See id. at 39,392. The bulletins constitute the only source of information on the number of directors serving on the boards of most mutual funds, id. n. 24, the median annual salaries for directors, id. n. 28 (summarizing the "widely used" survey), and the rough breakdown between boards overseeing a large number of individual funds and boards overseeing a small number of funds, id. n. 30. With these three assumptions — average number of board members, average salary, and average number of funds overseen by an individual director — the Commission was able to "estimate the annual compensation cost per fund" of the 75% independent director requirement from $4,779 for large fund complexes to $37,500 for boards overseeing only one fund. Id. at 39,392-93.

When the Commission does refer to information in the rulemaking record with regard to the per fund cost calculation for the 75% independent director condition, see id. at 39,393 n. 31, the Commission uses this data to bolster estimates based upon the extra-record materials, and not the other way around. Specifically, the Commission, in referring to two letters in the rulemaking record, "note[s] that commentators' estimated costs of paying new independent directors ranged from $4000 to $20,000, which are roughly comparable with and do not exceed our estimated ranges." Id. (citing letters of New Alternatives Fund, Inc. (Feb. 9, 2004) and Independent Directors of Flaherty & Crumrine Preferred Income Opportunity Fund Inc. (Feb. 23, 2004)). But comparing the range derived from the record data with the range derived from the extra-record data implies that the two ranges are comparable. The ranges are not comparable because the two letters, which are cited as the source of the $4,000 and $20,000 figures, refer only to boards overseeing "small" and "small to mid-sized funds."

Hence, the $4,000 to $20,000 range derived from the rulemaking record is comparable only to the $37,500 figure that the Commission estimated as the per fund cost for boards overseeing a single fund. This comparison of the $37,500 estimate and the $4,000 to $20,000 range suggests that the Commission, acting conservatively, may have overestimated the per fund cost for boards overseeing only a few funds. See Response Release, 70 Fed.Reg. at 39,392. However, the Commission points to no [903] data in the rulemaking record to support its per fund cost estimate for compensation of independent directors overseeing a large number of funds. At best, the rulemaking record supports only one end of the Commission's estimated range; the cost estimate for boards overseeing a large number of funds appears entirely derived from the extra-record materials. See id. 39,392 n. 28. The rulemaking record, then, serves to supplement the extra-record data by providing a cross-check for only the Commission's estimate for small fund families.

Other aspects of the Commission's decision illustrate that it treated extra-record data as primary, rather than supplementary, evidence. Extra-record sources are essential to the Commission's cost estimate for the independent chair condition, which is based on estimates of the cost of compensation for independent directors. See id. at 39,395. With respect to the ancillary, non-compensation costs of the conditions, while the nature of the Commission's estimates is somewhat different — because they are largely based upon such things as the prevailing rates for legal, financial, and other services, matters with which Commission Members are likely to be familiar and which are less susceptible to reasonable disagreement — extra-record data is similarly essential to these estimations to the extent they are affected by the Commission's predictions about how funds would come into compliance and how independent directors will behave. See, e.g., id. at 39,394. Thus, even with respect to ancillary costs, section 553(c) required that interested parties have the opportunity to comment prior to the agency's final decision.

On appeal, the Commission maintains, relying on Solite, 952 F.2d at 484, and Building Industry, 247 F.3d at 1246, that the extra-record materials simply filled gaps in the rulemaking record and "only confirmed the findings delineated in the [NOPR]." Respondent's Br. at 46. By this, the Commission suggests that the extra-record materials were "supplementary" — not in the sense of being unnecessary support for the Commission's cost estimates — but in the sense of filling the gap left in the rulemaking record after the Commission had solicited public comment on the costs of the proposed amendments. The NOPR requested such cost data and stated that the Commission expected "the costs associated with the proposals to be minimal." 69 Fed.Reg. at 3473. However, neither Solite, 952 F.2d at 484, nor Building Industry, 247 F.3d at 1246, suggest that an agency generally may rely, without affording comment, on data critical to support a rule solely because the existing record contains a deficiency that extra-record data might cure.

Rather, for extra-record data to be "supplementary," it must clarify, expand, or amend other data that has been offered for comment. See Air Transp. Ass'n, 169 F.3d at 8. In Solite, the agency relied upon an updated and expanded extra-record study that was based upon a "methodology . . . that did not change significantly from the proposed notices," giving the petitioners "ample opportunity to criticize the [agency's] approach." See 952 F.2d at 485. In Building Industry, the agency relied upon a comprehensive empirical study that "confirmed the findings delineated in the proposal," was supported by data in the record, and "provided additional support for that hypothesis." See 247 F.3d at 1246 (emphasis added). Similarly, the Commission's reliance on the statement in Association of Data Processing "that the `administrative record' might well include crucial material that was neither shown to nor known by the private parties in the proceeding," 745 F.2d at 684, is misplaced, for the court was addressing [904] judicial review of all informal agency actions, including adjudications under the arbitrary and capricious standard, 5 U.S.C. § 706, not addressing an agency's independent requirement to provide notice and comment under section 553(c). See Ass'n of Data Processing, 745 F.2d at 683-84.

The Commission also maintains that it was free to use extra-record data in its response because the Chamber has not, as we have required, shown that it was prejudiced by its lack of opportunity to comment. See Solite, 952 F.2d at 484 (citing Community Nutrition, 749 F.2d at 57-58, and Air Transp. Ass'n, 732 F.2d at 224); see also Air Canada v. Dep't of Transp., 148 F.3d 1142, 1156-57 (D.C.Cir. 1998) (citing 5 U.S.C. § 706). To show prejudice, those protesting the use of supplementary information might "point to inaccuracies in the [supplemental] data," Solite, 952 F.2d at 484, show that the agency "hid or disguised the information it used, or otherwise conducted the rulemaking in bad faith," id., or "indicate with `reasonable specificity' what portions of the [data] it objects to and how it might have responded if given the opportunity," Air Transp. Ass'n, 169 F.3d at 8. The court has not required a particularly robust showing of prejudice in notice-and-comment cases, holding that "an utter failure to comply with notice and comment cannot be considered harmless if there is any uncertainty at all as to the effect of that failure." Sugar Cane Growers Co-op. of Fla. v. Veneman, 289 F.3d 89, 96 (D.C.Cir. 2002) (explaining the standard of McLouth Steel Prods. Corp. v. Thomas, 838 F.2d 1317, 1324 (D.C.Cir.1988)); see also Sprint Corp. v. FCC, 315 F.3d 369, 376-77 (D.C.Cir.2003). Although the instant case does not involve the outright dodge of APA procedures that led the court to permit a limited showing of prejudice, see McLouth Steel Prods. Corp., 838 F.2d at 1323-24, the Chamber has offered objections and studies creating enough "[un]certainty whether petitioner's comments would have had some effect if they had been considered," id. at 1324, to show prejudice.

To be clear, the requirement, deriving from sections 553(c) and 706 that an agency may rely on supplemental materials to fill gaps in the rulemaking record only when there is no prejudice to the interested parties does not mean parties can withhold relevant data and blindside the agency on appeal. When, after an agency explains the basis for its preliminary conclusions by reference to the information on which it has relied and requests data regarding its conclusions, and the agency concludes no such data (or no data the agency concludes is reliable) has been produced during the comment period, the agency may develop data along the lines it has proposed to fulfill its statutory obligations without further public comment. See Solite, 952 F.2d at 484-85. In light of the notice provided, there is no fair-comment prejudice to interested parties under section 553(c) even if the extra-record materials serve as the crucial confirmation of the agency's preliminary conclusions, see Building Indus., 247 F.3d at 1246, or even as the compelling reason for the agency's modification of its preliminary conclusion, see Solite 952 F.2d at 484-85. A contrary rule would provide a perverse incentive for parties opposing a rule to withhold data in order to seek vacation of the rule on appeal.

This is not the situation here. The Commission's bare request for information on costs and its expectation that these costs would be "minimal" did not place interested parties on notice that, in the absence of receiving reliable cost data during the comment period, the Commission would base its cost estimates on an extra-record summary of extra-record survey data that, although characterized as "a [905] widely used survey," was not the sort, apparently, relied upon by the Commission during the normal course of its official business. For purposes of section 553(c), it is one thing to suggest that members of the mutual fund industry are familiar with an extra-record survey and quite another thing to give notice that the Commission would rely on a summary of that survey as set forth in the bulletins. The Chamber's failure to critique the extra-record bulletins and summarized survey until this appeal indicates that it had no reason to anticipate the Commission's ultimate reliance on those materials.

Moreover, the rulemaking record closed almost a year before the Commission returned to the cost issue in July 2005, and during that period more funds had adopted the Rule's conditions. See Response Release, 70 Fed.Reg. at 39,391, 39,398; see id. at 39,407 & n. 23 (Atkins, Comm'r, dissenting). When the Commission decided not to reopen the rulemaking record, individual mutual funds had offered to provide information on their actual implementation costs and the Investment Company Institute had offered to gather such data from its membership. See id. The Chamber alerted the Commission that the actual implementation data would identify how funds had adopted the 75% independent director condition and could indicate whether independent director's fees had increased and whether additional staff had been hired in light of the added costs for the fund.

The Commission would rebut the Chamber's assertions of prejudice by pointing out that the Chamber has not suggested the implementation cost data would show that the Commission's cost estimates are materially inaccurate. This is not the relevant test of prejudice under our precedent, which does not require a showing that the Commission would have reached a different result. See, e.g., Sprint, 315 F.3d at 376-77. While the Chamber's section 553(c) challenge focuses on the procedural faults of the Commission's action, with respect to which the Chamber maintains it had no burden to show such prejudice because it had no knowledge of the specific extra-record information until the Commission relied upon such information in its final decision, see Air Transp. Ass'n, 169 F.3d at 8, the Chamber proffered specific and credible objections to the soundness of the Commission's estimates and hence to its decision not to modify the two conditions. See id.; Sprint, 315 F.3d at 377. Specifically, the Chamber maintains that the Commission's cost estimates were predicated upon an assumption that the extra-record survey summarized in an extra-record bulletin provides information on the salaries solely of independent directors, see Response Release, 70 Fed.Reg. at 39,392 n. 28, which if incorrect "would have depressed the overall salary data and potentially seriously undermined this important cost of the rule," Petitioner's Br. at 46. Cf. Cent. & S. Motor Freight Tariff Ass'n v. ICC, 777 F.2d 722, 737 (D.C.Cir.1985). Although the Chamber also identifies data regarding small funds that it would have presented had it been afforded an opportunity to comment, only data that was unavailable during the comment period is relevant here as the NOPR specifically requested cost data; the actual implementation data, however, would either lend support or not to the Chamber's position that the Commission understated the potential ill effects of the two conditions on smaller mutual funds. Cf. Air Transp. Ass'n, 169 F.3d at 8. Under our precedents, the Chamber need not prove that its comments would have persuaded the Commission to reach a different outcome. The Chamber's demonstration that it had something useful to say about this critical data is sufficient to establish prejudice.

[906] In sum, the combination of circumstances — inadequate notice that the Commission would base its cost estimates for the two conditions on "publicly available" extra-record materials on which it did not typically rely in rulemakings; the Commission's acknowledgment that the rulemaking record contained gaps and did not include reliable cost data; the availability of additional implementation data for the period between the close of the rulemaking record and the Commission's response to Chamber I as more funds adopted the conditions; the Chamber's colorable claim that the Commission's failure to consider such implementation data harms its investment choices — suffices to show that the Chamber has been prejudiced by the Commission's reliance on materials not in, nor merely "supplementary" to, the rulemaking record. See Solite, 952 F.2d at 484; Community Nutrition, 749 F.2d at 57-58.

The Commission seeks to mitigate its procedural burdens in two ways. First, the Commission suggests that public comment was not necessary because the extra-record materials on which it relied were "publicly available." See Response Release, 70 Fed.Reg. at 39,391. In some instances, "publicly available" information, such as "published literature in the fields relevant to the [agency's] proposal," may be so obviously relevant that requiring it be specifically noticed and included in the rulemaking record would advance none of the goals of the APA, see RICHARD J. PIERCE, ADMINISTRATIVE LAW TREATISE § 7.3, at 436-38 (2004), such as improving the quality of the information used by the agency, ensuring fairness to affected parties, or enhancing the quality of judicial review, cf. Sprint, 315 F.3d at 373. The public availability of such information might fall into an implied exception to the general requirement that extra-record data critical to support a legislative rule be subject to public comment, see Community Nutrition, 749 F.2d at 57-58, or, alternatively, go towards negating the petitioner's claims of prejudice when such extra-record information is used to cure deficiencies in the rulemaking record. Neither circumstance is present here.

On appeal, the Commission characterizes the extra-record survey as a "widely used industry survey," Response Release, 70 Fed.Reg. at 39,392 n. 28; Respondent's Br. at 52, noting that an earlier version had been cited by the dissenting commissioners, id., and pointing to the Management Practice Inc. website as one public source for the bulletins summarizing the results of this survey. However, the mere availability of the extra-record bulletins on the internet is insufficient to demonstrate that these bulletins are generally considered reliable sources of information that should be treated as the inevitable background source of information on the mutual fund industry, as might be true, in other contexts, of a relevant study in a broadly cited scientific journal. See PIERCE, ADMINISTRATIVE LAW TREATISE § 7.3, at 436-38. Although the Commission points out that opponents of the two conditions, including the Investment Company Institute, have cited a broad array of publications as the principal sources on fund director compensation during the last decade, this does not explain why these particular privately produced bulletins are trustworthy or confirm that the survey is so reliable or ubiquitous that the procedural requirements for comment should be relaxed when these materials serve as the critical data on which the Commission relies to assess the costs of implementing the two conditions. See Building Indus., 247 F.3d at 1245-46; Ass'n of Data Processing, 745 F.2d at 684-85; see also Int'l Union, UAW v. OSHA, 938 F.2d 1310, 1324 (D.C.Cir.1991) (citing Sierra Club v. Costle, 657 F.2d 298, 398 (D.C.Cir.1981)). Unlike the salary surveys conducted by the Securities Industry Association, which [907] the Commission identified as "a source on which we commonly rely in our rulemakings," Response Release, 70 Fed.Reg. at 39,394, and the Mutual Fund Fact Book, which is a generally cited source of statistical information relied upon by the Commission in other rulemakings, see, e.g., Regulation NMS, Exchange Act Release No. 34-51808, 70 Fed.Reg. 37,496, 37,532 n. 300 (2005), the bulletins received no such commendation by the Commission in the Response Release.

Nor are the Chamber's claims of prejudice materially diminished because the bulletins are "publicly available." The NOPR did not indicate that the Commission intended to rely on these bulletins if reliable cost data was not produced during the comment period, much less indicate that the Commission considered the bulletins to be a source of reliable data for estimating the costs of the two conditions. The fact that the dissenting Commissioners cited a news article that summarized an extra-record survey conducted by the publisher of the bulletins, see Adopting Release, 69 Fed.Reg. at 46,391 n. 24 (Glassman & Atkins, Comm'rs, dissenting), likewise does not indicate that interested parties would have treated a summary of the "widely used survey" as background information or focused their comments on the survey. At best, notice was given that surveys of the type typically relied upon by the Commission in rulemakings should be addressed. In fact, one of the bulletins was not in existence until after the rulemaking record had closed and thus was not "publicly available" for comment. See id. at 39,393 n. 43.

Nor does public access to the bulletins alter the fact that the Commission had acknowledged the inadequacies of the rulemaking record with respect to estimating costs. The Commission's recourse to extra-record materials indicates that even for the more refined task of estimating direct costs described in Chamber I, 412 F.3d at 144, the Commission continued to view the rulemaking record as lacking reliable cost information. Nor, finally, does the availability of the "widely used survey" alleviate the prejudice to the Chamber when the Commission, in light of its prior acknowledgment of the inadequacies of the rulemaking record and the period during which more funds had adopted the conditions, declines to reopen the record to allow the Chamber to submit actual implementation cost data. Although the Commission's judgment in relying on these extra-record sources may be well-founded, the bulletins themselves acknowledge "wide divergence" among the funds represented in the summarized extra-record survey "in the methodologies used to calculate director compensation." Management Practice Inc. Bulletin: More Meetings Means More Pay for Fund Directors at 1 (April 2004) (cited at 70 Fed.Reg. at 39,392 n. 28). In the absence of an explanation by the Commission, this caveat suggests that other, possibly more reliable estimates may exist that could have influenced the Commission's assumptions about director compensation, which supports the Chamber's claim of prejudice.

Second, the Commission justifies its choice to act without re-opening the record by invoking the need to act swiftly:

We find that any further delay or ambiguity surrounding implementation of the rules would disadvantage not only investors but also fund boards and management companies, most of which have already begun the process of coming into compliance with the rules. By acting swiftly and deliberately to respond to the Court's remand order, the Commission will reduce uncertainty, facilitate better decision-making by funds, and ultimately serve the interests of fund shareholders.

[908] Id. at 39,398. The Commission's preference to proceed with the same five Commission Members who were familiar with the rulemaking in considering the cost estimates described in Chamber I, see id. at 39,391, is not the type of exigent circumstance that comes within the narrow "good cause" exception of section 553(b)(B). See Tennessee Gas Pipeline Co. v. FERC, 969 F.2d 1141, 1144 (D.C.Cir.1992); Util. Solid Waste Activities Group v. EPA, 236 F.3d 749, 754 (D.C.Cir.2001). The exception excuses notice and comment in emergency situations, Am. Fed'n of Gov't Employees v. Block, 655 F.2d 1153, 1156 (D.C.Cir. 1981), where delay could result in serious harm, see Jifry v. FAA, 370 F.3d 1174, 1179 (D.C.Cir.2004) (citing Hawaii Helicopter Operators Ass'n v. FAA, 51 F.3d 212, 214 (9th Cir.1995)), or when the very announcement of a proposed rule itself could be expected to precipitate activity by affected parties that would harm the public welfare, see Mobil Oil Corp. v. Dep't of Energy, 728 F.2d 1477, 1492 (Temp.Emer.Ct.App.1983). These exigent circumstances are of a far different nature than the not uncommon circumstance facing commissions when their membership changes during the course of a rulemaking, which may involve appeals and remands and thus extend for a period of years. Although the Commission's membership would change after June 30, 2005, and the even division among the remaining Commissioners could delay further action on the Rule, which the Commission considered necessary to redress "a serious breakdown in management controls," Adopting Release, 69 Fed.Reg. at 43,379, the risk of such delay is hardly atypical and does not satisfy the narrow exception.

Therefore, because the Commission relied on extra-record material critical to its costs estimates without affording an opportunity for comment to the prejudice of the Chamber, we hold that the Commission violated the comment requirement of section 553(c).

IV.

The question remains what is the appropriate remedy for the Commission's procedural violation under section 553(c). The APA provides that the court shall "hold unlawful and set aside agency action, findings, and conclusions found to be . . . without observance of procedure required by law," 5 U.S.C. § 706(2)(D), with "due account . . . taken of the rule of prejudicial error," id. § 706. Under circuit precedent, the decision to remand or vacate hinges upon court's assessment of "the seriousness of the . . . deficiencies (and thus the extent of doubt whether the agency chose correctly) and the disruptive consequences of an interim change that may itself be changed." Allied-Signal, Inc. v. U.S. Nuclear Regulatory Comm'n, 988 F.2d 146, 150-51 (D.C.Cir.1993) (citations omitted).

When the Rule was proposed, the Commission estimated that nearly 60% of mutual funds already complied with the 75% independent director condition. See Response Release, 70 Fed.Reg. at 39,391 & n. 18. The court stayed the effectiveness of the Rule's two conditions on August 10, 2005; the other amendments to the Exemptive Rules, see Adopting Release, 69 Fed.Reg. at 46,381, were scheduled to take effect on January 15, 2006. See 17 C.F.R. § 270.0-1(a)(7)(v), (vi), & (vii) (2005). In the meantime, more mutual funds have voluntarily adopted the challenged conditions. See Response Release, 70 Fed.Reg. at 39,407 (Atkins, Comm'r, dissenting). In other words, the two conditions, which were part of a larger program of regulatory reforms adopted by the Commission to address serious conflicts of interest in the mutual fund industry by changing the "boardroom culture," Response Release, 70 Fed.Reg. at 39,397, have become partially operational.

[909] The Commission's reliance on extra-record materials to fulfill its statutory obligation under ICA § 2(c), 15 U.S.C. § 80a-2(c), effectively acknowledges gaps in the rulemaking record that could not be properly supplemented without further opportunity for comment under section 553(c). Given the circumstances described in Part III of this opinion, a further remand to the Commission without the opportunity for comment would be unproductive. This suggests that vacation of the 75% independent director and independent chair conditions would be appropriate.

However, although vacating the two conditions would be less disruptive than if they had taken effect on January 15, 2006, see Allied Signal, 988 F.2d at 150-51, a significant portion of the mutual fund industry appears to have come into substantial compliance with the Rule. This compliance tends to suggest that immediate vacation of the two conditions risks substantial disruption to the mutual fund industry because of the resultant inconsistent governance practices that would arise within the industry, which also might sow confusion in the investing public. Also, the Commission's decision to rely upon extra-record data without reopening the rulemaking record for comment does not, of itself, indicate that the Commission's cost estimates are incorrect, much less that its conclusion, under ICA § 2(c), that the costs of implementing the two conditions do not outweigh the benefits of adopting the two conditions. See id.

The Commission is in a better position than the court to assess the disruptive effect of vacating the Rule's two conditions. Therefore, the court will vacate the 75% independent director and independent chair conditions of the Rule but, given the court's expectation in Chamber I that the Commission could "readily" address costs, 412 F.3d at 144, withhold the issuance of its mandate pursuant to Rule 41(b) for ninety days. Such an approach is not unprecedented. See Hazardous Waste Treatment Council, 886 F.2d at 371; Nat'l Coal. Against Misuse of Pesticides, 809 F.2d at 884-85; Indep. U.S. Tanker Owners Comm., 809 F.2d at 855; Simmons, 757 F.2d at 300; see also Rodway v. U.S. Dep't of Agric., 514 F.2d at 817-18. This approach will afford the Commission an opportunity to reopen the record for comment on the costs of implementing the two conditions. Within ninety days the Commission shall file a status report with the court, unless the Commission shall have prevailed on a motion to modify, accelerate, or postpone the mandate, and upon further order the mandate will issue.

Accordingly, we grant the Chamber's petition, without reaching its other challenges to the Remand Release, vacate the two conditions, but withhold the issuance of the mandate for ninety days as set forth in this opinion.

[1]Section 43(a) of ICA provides:

Any person or party aggrieved by an order issued by the Commission . . . may obtain a review of such order in the United States court of appeals within any circuit wherein such person resides or has his principal place of business, or in the United States Court of Appeals for the District of Columbia. . . . Upon the filing of such petition such court shall have jurisdiction, which upon the filing of the record shall be exclusive, to affirm, modify, or set aside such order, in whole or in part.

15 U.S.C. § 80a-42(a). It further provides for a modified remand procedure for further findings of fact:

If application is made to the court for leave to adduce additional evidence, and it is shown to the satisfaction of the court that such additional evidence is material and that there were reasonable grounds for failure to adduce such evidence in the proceeding before the Commission, the court may order such additional evidence to be taken before the Commission and to be adduced upon the hearing in such manner and upon such terms and conditions as to the court may seem proper. The Commission may modify its findings as to the facts by reason of the additional evidence so taken, and it shall file with the court such modified or new findings, which, if supported by substantial evidence, shall be conclusive, and its recommendation, if any, for the modification or setting aside of the original order.