Proxy Access Regulations Revisited

The court invalidated the SEC’s proxy access rule, Rule 14a-11, on the basis that the SEC failed to conduct an adequate cost-benefit analysis. The decision threatens to paralyze rulemaking by the SEC and other administrative agencies and is particularly troubling in light of the heavy rulemaking obligations imposed by Dodd-Frank and the JOBS Act.

In her article, The Long Road Back: Business Roundtable and the Future of SEC Rulemaking, Fisch, argue the deficiencies in the SEC’s Rule 14a-11 rule-making:

cannot accurately be ascribed to inadequate economic analysis. Nor is the demanding standard imposed by DC Circuit’s decision a product of the statutory constraints on SEC rulemaking. Rather it stems from the court’s skepticism about proxy access and the SEC’s policymaking generally.

Fisch argues that Congress took on this role in both Dodd-Frank and the JOBS Act. Dodd-Frank’s explicit authorization of a proxy access rule reflected a congressional policy determination and offered the SEC a weapon against the political obstacles it had previously faced in adopting such a rule.

Here then, I argue, lies the most significant flaw in the Business Roundtable decision. In evaluating Rule 14a-11, the DC Circuit completely disregarded the congressional policy judgment reflected in Dodd-Frank. By substituting its own policy judgment for that of Congress, the DC Circuit threatens not just the ability of administrative agencies to formulate regulatory policy, but the ability of Congress to direct agency policy formation. This article argues that congressional determinations regarding regulatory policy warrant greater judicial deference than the courts have given to them. At the same time, the article warns that congressional direction may implicitly subject an agency’s decisions to greater scrutiny as to whether the agency has been faithful to its legislative directive.

The full article is available for download here.

Meredith Cross, director of the SEC’s Division of Corporation Finance, recently suggested the agency could revisit the issue of proxy access, time permitting, though also noted she was keen to see how private ordering under Rule 14a-8 “played out.”  See Securities Regulation Institute Live Blog: Update from the Division of Corporation Finance, PLI.

See also, Proxy Access Proposals: Review of 2012 Results and Outlook for 2013, The Upcoming Showdown on Shareholder Proxy Access, Enhancing Corporate Suffrage Through Proxy Access by the next SEC chairman Elisse Walter, who once said “We have been waging a fight for a stronger shareholder voice to hold boards accountable.  Unfortunately shareholders lost this round.” (U.S. court shoots down SEC shareholder election rule, Reuters, 7/22/2011).

Background: Proxy Access: A New Version for 2013, The Case for Proxy Access, and Request for Rulemaking To Amend Rule 14a-8(i) To Allow Shareholder Proposals To Elect Directors, August 1, 2002.