Popular Criticism of the Proxy Access Case

J.W. Verret —  11 August 2011

Bob Monks has a lot to say about Business Roundtable v. SEC.  Some notable quotes:

“The DC Circuit now has really made a reputation over four or five years of throwing out SEC regulations.  Their reason for doing it is that the SEC has failed to generate cost-benefit information that conforms with their interpretation of what the APA requires for the validity of new regulation.  Obviously this is a judgment that court can make, but if they’re making that judgement four times running it tells you a little more about the court perhaps than about the specific issue or the SEC….What Douglas Ginsburg adduces is a failure of the SEC to produce information about the costs of having independent nominations on the company ballot.  And he speaks of the cost of the directors exercising their fiduciary duty, whether or not to place the name of a nominee on the ballot….You begin to wonder whether there’s any substance to what Douglas Ginsburg is saying.  I mean if he’s scraping up something like the fiduciary duty of the board to consider the nominee you know this is a matter of a de minimis amount of money.  Any why, how can one accord credibility to this opinion?  …It is simply the ranting of the DC Circuit Court that says they haven’t satisfied the gravamen of proof necessary to demonstrate cost-benefit.”

He goes on to call Judge Ginsburg “obdurate.”

I think its important to interpret the Monks rant in historical context.  Bob Monks ran the Office of Pension and Welfare Benefits at the Labor Department during the early Reagan years.  His work there culminated in a mandate issued by his successor that plan fiduciaries are required to actively vote their shares.  Almost immediately upon leaving his post, he founded Institutional Shareholder Services, a proxy advisory company that profited from the artificial demand for proxy advisory services created by the regulatory regime he helped to institute.  He has since been a leading profiteer of the corporate governance advisory industry.  It is an impressive example of rent-seeking in action.

I don’t the see the logic to Bob’s point that the SEC’s four losses before the DC Circuit in the last ten years demonstrate a problem with the Court.  Whether you agree with the NSMIA’s requirement that the SEC perform robust economic analysis of new rules or not, it is apparent that the SEC has ignored continued warnings from the Court.  In the interim, it has wasted agency resources in promulgating rules that are ultimately overturned.  For example, the SEC estimates that it wasted 2.5 million dollars on the failed proxy access rule.  I think that estimate is actually a lowball, as it includes 21,000 man hours of SEC staff time and does not account for opportunity costs.  Imagine what 21,000 hours of time devoted to a ponzi scheme task force could have done, or a top-to-bottom review of SEC rules to highlight inefficient rules for repeal (as President Obama’s recent executive order to the independent agencies actually requires) could have accomplished.

Others have similarly charged reactions to the proxy access case.  In a WaPo article today Harvey Goldschmid, the former SEC Commissioner who championed the first proxy access rule in 2003, responds to the Court scrutiny of the SEC’s economic analysis by urging “But how do you prove that empirically?  If the Court’s unrealistic requirements were applied across the board, the regulatory process would grind to a halt.”  J. Robert Brown is also quoted as saying “What the court is doing is second-guessing economic analysis that can always be second guessed.”

Harvey and Jay no doubt have an impressive knowledge of the securities laws.  I think they could profit from a course in policy analysis.  The legislative history of the securities laws makes clear that the objective is a purely economic one, to stabilize markets, prevent fraud, and maximize economic growth.  The 33′ and 34′ Acts were a response to the stock market crash of 1929 after all.  Cost-benefit analysis is a tough fit in areas where nebulous ideas like justice or equity are at issue (though it is still quite informative) but where as here the underlying objectives are purely economic it is the only legitimate mode of analysis.  It is hard to demonstrate net benefits from new rules, that’s true.  But does that mean we shouldn’t even ask the question?  I suspect their hostility to cost-benefit analysis is actually grounded in their belief that independent agencies are useful tools to accomplish a progressive agenda, including empowering labor unions, promoting climate change regulation, fair trade, affirmative action, and a variety of other liberal causes.  Putting these issues in the hands of independent agencies politicizes the SEC, undermining its credibility and hindering the SEC’s job of promoting the efficient function of American capital markets.

4 responses to Popular Criticism of the Proxy Access Case

  1. 

    Sorry to reply so late, but there’s one thing in Professor Verret’s post that bears correction. Even assuming that the ’33 and ’34 Acts both have only economic goals, and cost benefit analysis is the only legitimate method for seeing a measure furthers those goals, the post completely ignores section 971 of the Dodd Frank Act. That section specifically gives the SEC authority to issue rules on shareholder access to proxies for the purpose of nominating candidates for board membership “under such terms and conditions as the Commission determines are in the interest of shareholders and for the protection of investors.” The quoted language certainly sounds different from the “stabilize markets, prevent fraud, and maximize economic growth” formula. It is markedly different from what the DC Circuit described as the SEC’s “unique obligation” to consider the impact of rules on “efficiency, competition and capital formation.” The language of section 971 seems to harken back to the olden days before impact on capital formation was a relevant factor and the primary goal of the Securities Acts was the protection of investors.

  2. 

    I wish we had someone like Ginsburg on the Supreme Court.

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