U.S. Court of Appeals for the D.C. Circuit

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D.C. Circuit vacates SEC Proxy Access Rule

July 22, 2011

The D.C. Circuit vacated the Proxy Access Rule. The Court agreed with the petitioners, the U.S. Chamber and the Business Roundtable, that the Securities and Exchange Commission promulgated the Rule in violation of the Administrative Procedure Act, 5 U.S.C. § 551 et seq., because, among other reasons, the Commission failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation, as required by Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940.

Among numerous other criticisms of the Rule, the Court said that the SEC “once again” “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.” (p. 7). The Court expressly criticized the SEC's cost reasoning, saying that “this type of reasoning, which fails to view a cost at the margin, is illogical and, in an economic analysis, unacceptable.” (p. 13). The Court also faulted the SEC for arbitrarily “ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds.” (p. 15). The Court also said that the SEC's reason for applying the Rule to investment companies was “unutterably mindless.” (p. 21).

This is the first time a court has vacated a Dodd-Frank regulation.

Stay granted

October 04, 2010

The SEC granted the U.S. Chamber and Business Roundtable's request for a stay of the Proxy Access Rule.

U.S. Chamber files challenge to SEC Proxy Access Rule

September 29, 2010

The U.S. Chamber, along with the Business Roundtable, filed a challenge to the Securities and Exchange Commission's (SEC) final rules requiring a corporation to include in its proxy materials director nominees put forward by a shareholder who has owned three percent or more of company stock for at least three years. The petitioners charge that the rule is arbitrary and capricious, violates the Administrative Procedure Act, and that the SEC failed to properly assess the rule's effects on “efficiency, competition and capital formation” as required by law. The petitioners also noted that while Congress may have authorized the SEC to consider a proxy rule, Congress never exempted the SEC from following the law when promulgating new regulations. The petitioners argued that the SEC failed to engage in evidence-based rulemaking and should have conducted a thorough cost-benefit analysis.

Eugene Scalia and Daniel Davis of Gibson, Dunn & Crutcher LLP served as counsel for the U.S. Chamber.

Petition for review and motion for stay filed 9/29/10. Stay granted 10/4/10. Joint motion for expedited consideration filed 10/8/10. Statement of issues filed 11/4/10. Petitioners' opening brief filed 11/30/10. Investment Company Institute brief filed 12/9/11. State of Delaware brief filed 12/9/11. Motion of TIAA-CREF to file separate brief filed 1/6/11. Responses to TIAA-CREF motion to file separate brief filed 1/18/11. SEC initial brief filed 1/19/11. Petitioners' opposition to law professors' brief filed 1/28/11. Reply of law professors filed 1/31/11. Order granting law professors' motion to file issued 2/9/11. Reply brief filed 2/10/11. State of Delaware brief filed 2/24/11. Final brief and final reply brief filed 2/25/11. Decided 7/22/11. SEC announces it will not seek review of DC Circuit decision 9/6/11.

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