December 3, 2023

Court Rules Against S.E.C. on Proxy Materials

WASHINGTON — A federal appeals court on Friday delivered a sharp rebuke to the Securities and Exchange Commission by throwing out a recently approved regulation that would have required companies to include in their proxy materials information about shareholder-nominated candidates for election as directors.

The ruling, by the United States Court of Appeals for the District of Columbia Circuit, is the third time in six years that the court has thrown out a new S.E.C. rule because the agency failed to adequately assess its economic effects.

The S.E.C. approved the regulation, which has long been sought by pension funds and other institutional investor groups and fiercely opposed by business lobbyists, by a 3-2 vote last year. The rule was scheduled to become effective in November, but the agency stayed that pending the outcome of the court challenge.

That challenge, filed by the Chamber of Commerce and the Business Roundtable, was argued before the appeals court in April.

The rule would have allowed groups that owned at least 3 percent of the voting power of a company’s stock to nominate board candidates and have them included in the company’s proxy materials, which are mailed to shareholders at the company’s expense.

Currently, outside groups that are mounting a proxy contest to elect candidates to a board must pay for their own distribution of materials.

A three-judge panel rebuked the S.E.C. for its failure to satisfy the provisions of the Administrative Procedure Act, which requires cost-benefit studies to justify a new government regulation.

The court ruled that the S.E.C. “acted arbitrarily and capriciously” in failing to adequately consider the rule’s effect on “efficiency, competition and capital formation.”

“Here the commission 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 court said, in a unanimous decision written by Judge Douglas H. Ginsburg.

Kevin J. Callahan, an S.E.C. spokesman, said the agency was “reviewing the decision and considering our options.”

The S.E.C. could seek a rehearing before the panel or the entire appeals court or could appeal the case, No. 10-1305, directly to the Supreme Court. It also could simply abandon the initiative or restart the rulemaking process with a new proposal, including an economic analysis and comments from the public.

A Chamber of Commerce official called the ruling “a big win for America’s job creators and investors.”

“We applaud the court’s decision to prevent special-interest politics from being injected into the boardroom,” Tom Donohue, president and chief executive of the United States Chamber of Commerce, said in a statement. “Companies and directors need to continue to focus on the important work of creating jobs and reviving our economy.  Today’s decision also sends a strong message that regulators need to meet their statutory requirement to clearly prove that the benefits of regulation outweigh the costs.”

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