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D.C. Circuit Axes Proxy Access — and Issues A Timely Reminder

July 25, 2011

In a very strongly worded opinion issued on Friday, the D.C. Circuit vacated the SEC’s shareholder access rules (SEC Release No.  33-9136). Although the immediate practical effect of the Court’s decision is limited — the SEC had stayed the rules pending the Court’s decision — the ruling may have a significant impact on the agency’s Dodd-Frank rulemaking efforts.

Photo by Frank Tellez. Some rights reserved.

The Issue. The Business Roundtable and the Chamber of Commerce challenged the SEC’s rules, which would have required public companies to provide shareholders with information about, and the ability to vote for, shareholder-nominated candidates for the board of directors. The petitioners argued that in promulgating the rules, the SEC violated the Administrative Procedure Act by failing to adequately consider the rule’s effect upon efficiency, competition, and capital formation. The Court agreed.

The Decision. In vacating the rules, the Court held: “the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.”

These are exactly the arguments commenters have made in response to the Dodd-Frank Rules proposed, and in some cases adopted, by the SEC.  For instance, Commissioner Troy A. Paredes dissented from the Commission’s adoption, under the Dodd-Frank Act, of “Rules Implementing Amendments to the Investment Advisers Act of 1940” (SEC Release No. IA-3221) stating:

 It is difficult to identify any appreciable marginal investor protection benefit from the public disclosure that the final rule dictates. To the contrary, there is reason to worry that at least some of the information might be competitively sensitive and that mandating its public disclosure could harm [venture capital] funds and the very investors that the rule purports to protect. Consequently, I am not persuaded that the cost-benefit tradeoff cuts in favor of the public disclosure that the final rule mandates from exempt VC fund managers.

Commissioner Kathleen L. Casey similarly noted that the SEC’s whistleblower rule “significantly underestimates the negative impact on internal compliance programs; and … significantly overestimates our capacity to effectively triage and manage whistleblower complaints.”

Commenters to pending Dodd-Frank Act proposed rules have likewise urged the SEC to be mindful of the cumulative impact of its rules. See, e.g., Center on Executive Compensation May 19, 2011 Comments (in response to proposed compensation committee listing standards); Center for Capital Markets Competitiveness (in response to proposed incentive-based compensation arrangements rules).

The SEC may want to view the D.C. Circuit’s opinion as a timely reminder of the Administrative Procedures Act’s requirements.

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