The ruling, by the United States Court of Appeals for the District of Columbia Circuit, is at least 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 unions, pension funds and other institutional investor groups and fiercely opposed by business lobbyists, by a 3-2 vote last year. The rule would have required companies to include in their proxy materials information about shareholder-nominated candidates for election to a corporate board of directors.
Past efforts by the S.E.C. to guarantee shareholders access to company proxy statements have been challenged over whether the agency had the authority or whether it was primarily a matter of state law. But the Dodd-Frank Act, the regulatory overhaul signed into law last July, gave the S.E.C. explicit authority to write new proxy access rules.
The new regulation was scheduled to become effective in November, but the agency stayed that pending the outcome of a court challenge filed by the U.S. Chamber of Commerce and the Business Roundtable, a trade group for corporate executives. The case, No. 10-1305, was argued before the appeals court in April.
Under the rule, groups that owned at least 3 percent of the voting power of a company’s stock for at least three years could nominate candidates for a corporate board and have them included in the company’s proxy materials, mailed to shareholders at the company’s expense.
Currently, outside groups mounting a proxy contest to elect board candidates must pay for their distribution of materials.
The three-judge appeals court 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, in its adoption of the proposal.
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 directly to the Supreme Court. It also could abandon the initiative or restart the rulemaking process with a new proposal, including additional economic analyses and comments from the public.
A second S.E.C. regulation, which allows shareholders to submit proposals for proxy access at their companies, adopted at the same time, is unaffected by the court’s decision.
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,” Thomas J. Donohue, president and chief executive of the chamber, 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.”
The panel said the commission had not sufficiently supported its conclusion that increasing the potential for shareholder-nominated directors would improve performance and shareholder value.
Roger J. Dennis, dean of the law school at Drexel University in Philadelphia, said the D.C. Circuit has been particularly tough on the S.E.C.’s rulemaking in recent years.
“Cost-benefit analysis is not a science,” he said. Requiring the commission to have “excruciating detail” on the costs and benefits of a proposal “is a stealth way of telling them that they don’t have the right to regulate it.”
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