D.C. Circuit Panel Vacates SEC's Proxy Access Rule

WASHINGTON, D.C. - (Mealey's) The Securities and Exchange Commission acted "arbitrarily and capriciously" in enacting its proxy access rule pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, a District of Columbia Circuit U.S. Court of Appeals panel ruled July 22 in granting petitioners' petition for review and vacating the rule (Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission, No. 10-1305, D.C. Cir.). 

The Business Roundtable and the Chamber of Commerce of the United States of America filed a petition for review in the D.C. Circuit, seeking a ruling that the SEC violated the Administrative Procedure Act by failing to adequately consider the rule's effect upon efficiency, competition and capital formation, as required by Section 3(f) of the Securities Exchange Act of 1934 and Section 2(c) of the Investment Company Act of 1940. 

The rule, Rule 14a-11 of the Exchange Act, requires public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for boards of directors. 

In granting review and vacating the rule, the panel agreed with the petitioners that the SEC "acted arbitrarily and capriciously for having failed once again . . . adequately to assess the economic effects of a new rule." 

"Here 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.  For these and other reasons, its decision to apply the rule to investment companies was also arbitrary," the panel said. 

"Because we conclude the Commission failed to justify Rule 14a-11, we need not address the petitioners' additional argument the Commission arbitrarily rejected proposed alternatives that would have allowed shareholders of each company to decide for that company whether to adopt a mechanism for shareholders' nominees to get access to proxy materials." 

The SEC proposed the rule and adopted it with the goal of ensuring "the proxy process functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders." 

The SEC amended the proposed rule and adopted Rule 14a-11 by a 3-2 vote, but after the petitioners sought review in the D.C. Circuit, it stayed the final rule, which was to become effective on Nov. 15, pending the outcome of the instant action. 

Chief Circuit Judge David B. Sentelle wrote the panel's opinion and was joined by Circuit Judges Douglas H. Ginsburg and Janice Rogers Brown. 

[Editor's Note:  Full coverage will be in the August issue of Mealey's Emerging Securities Litigation.  In the meantime, the opinion is available at www.mealeysonline.com or by calling the Customer Support Department at 1-800-833-9844.  Document #57-110808-001Z.  For all of your legal news needs, please visit www.lexisnexis.com/mealeys.] 

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