Academic journal article Harvard Law Review

Administrative Law - Corporate Governance Regulation - D.C. Circuit Finds SEC Proxy Access Rule Arbitrary and Capricious for Inadequate Economic Analysis

Academic journal article Harvard Law Review

Administrative Law - Corporate Governance Regulation - D.C. Circuit Finds SEC Proxy Access Rule Arbitrary and Capricious for Inadequate Economic Analysis

Article excerpt


In the midst of a contested, voluminous notice-and-comment rulemaking, Congress's Dodd-Frank Wall Street Reform and Consumer Protection Act (1) (Dodd-Frank Act) authorized the Securities and Exchange Commission (SEC) to expand proxy ballot access for holder-nominated candidates for boards of directors. (2) Recently, in Business Roundtable v. SEC, (3) the D.C. Circuit struck down the resulting SEC rule, finding that the Commission's failure to adequately consider economic consequences made its decision arbitrary and capricious. (4) By parsing in fine detail the methods and results of the SEC's cost-benefit analysis, the panel asserted judicial power in a field that courts struggle to oversee and applied an excessively exhausting standard that all but bars contested reforms. While proxy access proposals are nearly as old as the SEC, a renewed proxy access debate has raged for nearly a decade. (5) Before directors' elections, companies distribute proxy materials that allow shareholders who do not attend annual meetings to vote their shares. (6) Typically, these proxy materials include only those director candidates nominated by the existing board, but reformers have sought enhanced accountability by requiring that companies include shareholder nominees in official proxy materials. (7) Critics have countered that mandating access to proxy ballots would encourage expensive election fights and create corporate inefficiency. (8)

Thus the battle lines were drawn for a June 2009 proposal regarding one of "the most controversial regulatory issues in the Commission's history."(9) Concerned about links between limited board accountability and the economic crisis, (10) the SEC proposed Exchange Act Rule 14a-11 (Rule 14a-11), which would require that companies include qualifying shareholder nominees on proxy ballots. (11) Over the next fifteen months, the Commission received about 600 letters regarding the proposed rule from an array of interested parties. (12)

Near the end of the contentious process, and amid concerns about the SEC's statutory authority to issue a proxy access rule, Congress interceded. (13) Section 971 of Dodd-Frank provides that "[t]he Commission may issue rules [expanding proxy access], under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors."(14) Legislative history suggests Congress intended that the SEC have "wide latitude in setting the terms of such proxy access."(15)

In September 2010, two months after Dodd-Frank became law, the SEC promulgated a final regulation adopting Rule 14a-11 by a partisan three to two vote. (16) The final rule devoted nineteen pages in the Federal Register to cost-benefit analysis of the SEC proposals (17) and another six to potential burdens on efficiency, competition, and capital formation. (18) The Commission explained that Rule 14a-11 would increase corporate performance and argued that any costs of the rule were a necessary consequence of enforcing traditional state law rights. (19)

The Business Roundtable, a consortium of prominent corporate executives, challenged Rule 14a-11 in the Court of Appeals for the D.C. Circuit as based "on a fundamentally flawed assessment of the rules' costs, benefits, and effects on efficiency, competition, and capital formation."(20) The plaintiffs alleged that the application of Rule 14a-11 to investment companies was similarly arbitrary and capricious and that the rule violated First Amendment protections of corporate speech. (21) The SEC stayed the rule pending the outcome of the case. (22)

The D.C. Circuit vacated Rule 14a-11. (23) Writing for a unanimous panel, Judge Ginsburg (24) concluded that the SEC had "failed once again . …

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