Well, well. It looks like the heatwave hitting DC has encouraged the Judges on the panel reviewing the SEC’s proxy access rule to finish their opinion earlier than expected. The rule has been struck down by the DC Circuit as arbitrary and capricious for failure to meet the SEC’s mandate to consider the effect of new rules on efficiency, competition and capital formation. I suspect there will be a torrent of blogging about this one.
The Court found that the SEC failed to consider the potential costs of empowering conflicted investors, like Union Pension funds. It’s ironic that in an over 400 page rule, the SEC offered no discussion of this issue. The Court found that the SEC failed to properly consider the frequency with which shareholders would bring proxy contests. The Court also noted that a company’s fiduciary duties might compel a board to resist a proxy access nominee, and found that the SEC failed to adequately consider the effect of this problem. The Court also found that the SEC failed to consider readily available empirical data which questioned the benefits of the rule, giving particular attention to the Buckberg/Macey Report. It also questioned the persuasiveness of an empirical study on which the SEC relied (See J. Harold Mulherin & Annette B. Poulsen, Proxy Contests & Corporate Change: Implications for Shareholder Wealth, 47 J. Fin. Econ. 279 (1998)).
This decision brings to light a fundamental problem at the SEC. Speaking against my own interest as a securities lawyer, I think it is an agency with too many lawyers and not enough economists. The Federal Reserve and Federal Trade Commission are better regulators because they have teams of sharp economists to consider the effects of new rules. As Senator Shelby noted in a recent hearing, the SEC on the other hand has over a thousand lawyers and less than 25 economists. Today’s decision is one of the predictable results. So were similar decisions striking down rules on the same basis in American Equity v. SEC and in Chamber of Commerce v. SEC.
The SEC has now proposed rules on proxy access in 2011, 2009, 2007 and 2003. It still doesn’t have a rule in place. That’s a lot of man hours to put into writing a rule that is never ultimately adopted. I wonder if Chairman Schapiro will look to re-write the rule given all the deadlines she is facing under Dodd-Frank. I don’t think we’ve seen the last of Rule 14a-11, but I think it may be awhile before it is resurrected. What would a new SEC rule look like? I doubt it would cover investment companies, as the opinion gave particular attention to the SEC’s decision to apply the rule to them. I would also suspect it would allow for an opt-out procedure. We’ll see.
Let’s not forget that the changes to Rule 14a-8 are still in place. So shareholders can still adopt election bylaws which specify proxy access procedures at a particular company. It’s never to early for boards to consider putting into place the proxy access defenses that I have developed.