Business Roundtable and Chamber of Commerce v. U.S. Securities and Exchange Commission (SEC)

Case Updates

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.

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

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.