In an October 2010 Gardere Public Securities Alert, we reported that the SEC had delayed the effectiveness of its new proxy access rule pending resolution of a lawsuit filed by the U.S. Chamber of Commerce and the Business Roundtable.  The U.S. Court of Appeals for the District of Columbia vacated the SEC’s rule on July 22, 2010.

The appeals court held that the SEC was arbitrary and capricious in promulgating the rule, because it did not properly analyze the economic impact of the rule—its costs and benefits.  As noted by the Securities Law Prof Blog, this is not the first time the court has pulled the plug on an SEC rule because of the cost-benefit analysis.  The U.S. Chamber of Commerce and the Business Roundtable jointly lauded the result as a “big win” for business.

Based on the court’s analysis, the SEC minimized or ignored certain of the foreseeable costs associated with the new rule, sometimes employing speculative assumptions.  The court also noted that the SEC relied on insufficient empirical data to support its conclusion that proxy access would improve board performance and increase shareholder value.  The SEC itself had acknowledged the many studies reaching the opposite conclusion, but instead relied on two studies that the court found unpersuasive.  The court also ruled that while generally arbitrary and capricious, the rule was invalid with respect to investment companies.

The proxy access rule was originally proposed by the SEC in June 2009.

OUR TAKE:  For proxy access, it is not at all clear what the SEC’s next step might be.  An appeal seems unlikely and a rigorous cost-benefit analysis would be costly and time-consuming, and with no certainty as to the conclusion.  More broadly, this ruling may energize efforts to attack other SEC rulemaking stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Perhaps the new whistleblower program adopted in May 2011, which has been widely criticized?