By a unanimous 3-0 vote, the panel held that the SEC had violated the Administrative Procedures Act by failing to do an adequate analysis of the rule’s economic impacts. Unless this decision is overturned on appeal, the rule is not only dead, but won’t be replaced for some time. The decision demands a level of analysis of the rule’s economic impacts that is likely impossible since proxy access doesn’t exist, and therefore neither does real data.
The court was derisive when discussing the SEC’s cost-benefit analysis, noting that it was inconsistent. When considering the rule’s benefits, the SEC assumed the rule would lead many shareholders to nominate directors, but in considering the rule’s costs, the SEC said the rule would lead to relatively few proxy contests. Moreover, the court decided the SEC failed to sufficiently consider companies’ concerns that pension funds and unions would use their increased proxy access as a bargaining chip to leverage benefits for their constituencies—such as jobs or better benefits—that had nothing to do with shareholder value. Finally, the court found that the SEC had been wrong to apply the rule to investment companies, understating the costs of the rule to investment companies, and overstating its benefits to shareholders.
The court’s analysis of the SEC’s rule-making process makes clear—though the court does not say this—that the fundamental problem in correcting the matter lies with Congress, not the SEC. The Dodd-Frank Wall Street Reform and Consumer Protection Act empowered the SEC to issue proxy access rules but didn’t say what should be in them or even mandate proxy access. So the decision to grant proxy access is left up to the SEC, but it is that decision the SEC must justify.
In short, unless Congress makes the core judgment call, it’s hard to see how the SEC can formulate a rule that will pass the court’s scrutiny. And given that even in the passage of Dodd-Frank, a bill that was perhaps the most investor-friendly bill to pass in a long time, Congress was unwilling to decide the issue, it’s unlikely representatives will do so anytime soon. So an enforceable proxy access rule is probably years away.
[Article by Abigail Field, Corporate Secretary]
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