By Cydney Posner
Here is an interesting piece from the ISS governance site regarding reactions to the case overturning the SEC's proxy-access rulemaking. (See my article from 7/22/11). The article notes first that the Council of Institutional Investors has urged the SEC to seek an en banc rehearing of the proxy access case from the full U.S. Court of Appeals for the D.C. Circuit. As you probably recall, the court in that case concluded that the SEC had acted "arbitrarily and capriciously" in issuing its proxy access rules when it failed to provide an adequate cost/ benefit analysis. According to the article, the SEC has until September 6 to decide whether to seek en banc review; however, the author observes, the full D.C. Circuit seldom agrees to review panel decisions. CII said that, if the SEC decides not to seek judicial review, it would support the SEC's efforts to prepare a revised proxy access rule. However, CII is opposed to lifting the stay on amendments to Rule 14a-8, which would allow proxy access to proceed only through shareholder proposals, preferring instead a uniform proxy access rule to "private ordering."
CII's advocacy of a rehearing may not be much of a surprise, given its fierce advocacy of proxy access generally. But what may be more interesting is the analysis relating to the impact on future SEC rule-making. According to the article, CII contends that the D.C. Circuit substituted its judgment for that of the SEC in light of mixed empirical evidence, which reflects a failure to abide by well-settled standards of judicial review. Perhaps more important, however, is the potentially broad application of the decision, which " ‘could have long-term negative consequences on the ability of the Commission and other agencies to effectively and efficiently promulgate rules that improve the regulation of the markets. As former SEC Commissioner Harvey J. Goldschmid recently commented, '[i]f the court's unrealistic requirements were applied across the board, the regulatory process would grind to a halt.' This is particularly troubling given the extraordinarily high demands that are being placed on the SEC staff at this time….'"
That view was echoed in the article by Law Professor Lawrence Hamermesh: "The July 22 court opinion . . . has potential impact that extends far beyond proxy access. At the risk of being overdramatic, it is entirely possible that the Commission's basic authority to promulgate regulations under the Exchange Act has been fundamentally impaired… The court's legal analysis is problematic, rather, when one ponders the Commission's overall regulatory authority and ability to implement the statutory directives of an elected Congress. When are economic analyses ever conclusive or anything other than 'mixed'? If 'mixed' economic studies mean that the Commission can't act without giving the Chamber of Commerce or the Council of Institutional Investors the option to set a regulation aside, the Commission is essentially hamstrung. This result may well appeal to ideological opponents of regulation, but not to those who believe that reasonable regulation of securities markets is essential to an economically efficient system of capital formation…."
Coincidentally, the SEC today announced its agenda for its next open meeting. The most notable aspect of the announcement was not the subject matter of the items to be presented to the SEC for consideration -- all were related to the Investment Company Act –but rather the form the items took. Instead of a typical rule-making proposal, the three releases were each cast as either a "concept release to solicit public comment" or "advance notice of proposed rulemaking to solicit public comment." It's possible that the subject matter of this meeting just happened to be more conducive to that approach or that the approach is just another version of the SEC's general invitation to the public to comment in advance on matters related to Dodd-Frank. But, given that business groups have been spurred by the appeals court ruling to consider filing lawsuits to block implementation of Dodd-Frank at every turn (see my email of 7/29/11), you have to wonder if this approach is a reflection of a new ultra-cautious SEC trying to avoid future litigation by promulgating rules through an even more interactive, more drawn out, multi-step process?