Print | Share | Reprint

Investor council urges SEC to keep fighting on proxy access

by Ira Teinowitz | Published August 24, 2011 at 6:04 AM

A leading investor advocacy group is urging the Securities and Exchange Commission to seek a rehearing before the entire U.S. Court of Appeals for the District of Columbia to defend the SEC's proxy access rule.

In an appeal to the SEC, the Council of Institutional Investors warned that a ruling by a three-judge panel of the appeals court could weaken the SEC's ability to issue rules and have them upheld in court.

In a letter sent Aug. 19, CII suggested that a July 22 decision by a three-judge panel of the appeals court ignored "well established principles" that a court is not to substitute its own judgment for that of an agency, especially in establishing a cost-benefit analysis standard for rulemakings.

"The panel's decision does not merely delay the implementation of a critically important rule designed to benefit long-term investors and the markets; it also imposes unnecessary costs on the commission by requiring it to consider anew issues it already fully and reasonably examined," wrote Jeff Mahoney, CII's general counsel. "The panel's decision 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," he added.

The council had supported the proxy access rules and filed a "friend of the court" brief with the appellate court.

The appellate court panel sided with business groups in overturning the SEC proxy access rule designed to make it easier for shareholder proposals to be included in corporate proxies. The panel ruled that the SEC failed to accurately assess the costs of the new requirement versus the potential benefits and sent the rule back to the SEC.

"The commission acted 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," the panel said in its unanimous ruling.

While the ruling has immediate impact only on the proxy access rules, CII expressed concern that it could have longer-term impact on other unrelated rulemakings both at the SEC and at other agencies.

On the proxy access rule and other Dodd-Frank Act rulemakings, the SEC has insisted that avoiding another financial crisis such as the 2008 meltdown would be a clear benefit to the rules it has been creating, but it hasn't always done extensive cost analysis of its proposals.

Business groups and some Republican SEC commissioners have called for the analyses and suggested they are required.

Stanley Keller, a partner at Edwards Angell Palmer & Dodge LLP, said the appellate court panel suggested that the federal Administrative Procedure Act mandates a cost-benefit analysis, a requirement that could equally apply to rules issued by a number of agencies.

He suggested that the ruling's impact could be limited. Rules that could face more court scrutiny would be those an agency tried to mandate without a direct congressional directive, such as the proxy access rule, rather than rules specifically ordered by Congress.

Keller said because Dodd-Frank rules were mandated by Congress, courts could give far more deference to agencies acting in those kind of rulemakings.

The SEC has "cause for concern, not hysteria," he said. Keller said it would be an exaggeration to say the SEC's rulemaking authority will be eviscerated. "At the end of the day, the court is going to do a case-by-case analysis [on any legal challenge to a rule] and it really is the substance of the rule that is at stake."

Keller said the risk the SEC would face in seeking an appeal is that a higher court ruling could impose even more obligations on the agency when it writes rules. An alternate possibility is not to appeal the case and try to distinguish the proxy access case from others, he said.

The appellate court ruling hasn't yet gone into effect, because the court panel set the ruling aside temporarily while the SEC considers whether to appeal the case. An SEC spokesman did not return several calls seeking comment.

Share:

Tags: Council of Institutional Investors | proxy access rule | Securities and Exchange Commission

Regulatory

Investor council urges SEC to keep fighting on proxy access

Free preview

Meet the journalists

Ira Teinowitz

Senior reporter, Washington bureau

Movers & Shakers

Video

Fewer deals despite discount debt

Sectors