In a widely-publicized decision issued on July 22, 2011, the United States Court of Appeals for the District of Columbia Circuit vacated the Securities and Exchange Commission's (SEC or Commission) "Proxy Access Rule." Business Roundtable and Chamber of Commerce of the United States v. SEC, No. 10-1305 (D.C. Cir. July 22, 2011). The Court of Appeals found that the Rule had been promulgated in violation of the Administrative Procedure Act because the Commission had failed "adequately to consider the Rule's effect upon efficiency, competition, and capital formation," as required by statute. Slip op. at 3 (emphasis added).
The Appellate Court's willingness to engage in a rigorous review of the agency's rulemaking conclusions and evidentiary support under an "arbitrary and capricious" review standard may signal a more aggressive judicial effort to supervise agency rulemaking, notwithstanding the deference accorded to agency legal interpretations under Chevron and Auer. In particular, where a regulatory agency is required by statute to make specific findings to support the rulemaking under review or bases a "public interest" determination on fact-based findings, disaffected interests may have gained access to a new and potent disciplinary weapon.
The SEC's Proxy Access Rule
The Proxy Access Rule was an effort by the SEC to facilitate "shareholder democracy" by requiring public companies to include director nominees put forward by qualified shareholders in proxy materials circulated by the company. The Rule sought to provide an alternative to the current practice in which a shareholder who wishes to nominate a Board candidate must file a separate proxy statement and solicit votes independently. Under the proposed Rule, subject to certain limitations, if a qualifying shareholder provided notice to a company of a proposed Board nominee, the company was required to include information about the shareholder and the proposed nominee, including a statement of up to 500 words in support of the nominee, in the company's proxy statement and to include the nominee on the proxy voting card circulated by the company. 
The Commission found that, as required by law, the Rule could create "potential benefits of improved board and company performance and shareholder value" sufficient to justify its potential costs. Slip op. at 5. The Commission's goal was to ensure that "the proxy process functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders." Slip op. at 3.
The D.C. Circuit's Analysis
At the outset of its analysis, the court quoted the APA review standard ("arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law") and then set forth a relatively routine formulation of that standard, i.e. that the court must assure itself that the agency has "examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choices made." Slip op. at 6. Then, however, the court emphasized that "the Commission has a unique obligation to consider the effect of a new rule upon 'efficiency, competition, and capital formation,' [statutory citations], so that its failure to 'apprise itself-and hence the public and the Congress-of the economic consequences of a proposed regulation' makes promulgation of the rule arbitrary and capricious and not in accordance with law." Slip op. at 6.
The court proceeded to subject the Commission's data and analysis to exacting scrutiny, finding in summary that "the Commission acted arbitrarily and capriciously for having failed once again . . . adequately to assess the economic effects of a new rule" because it
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.
Slip op. at 7.
In the course of its more detailed analysis in support of this summary, the court stated that
- Key aspects of the Commission's cost/benefit determination "had no basis beyond mere speculation" (slip op. at 9);
- The Commission failed to "estimate and quantify" identifiable costs that should have weighed in the balance (slip op. at 10);
- The Commission discounted empirical data for inadequate reasons and "instead relied exclusively and heavily upon two relatively unpersuasive studies" (slip op. at 11);
- Because of the inadequacies of its cost/benefit analysis, the Commission's conclusion in support of the Rule was "not sufficiently supported" (slip op. at 12); and
- The Commission's reasoning was "illogical and, in an economic analysis, unacceptable" (slip op. at 12).
The court also found that the Commission failed to respond to comments concerning the costs that could be imposed under the prospective rule by investors with special interests, such as unions and local governments whose principal focus might well be jobs or other issues besides shareholder value, concluding that "[b]y ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the Commission acted arbitrarily." Slip op. at 15.
In a somewhat discrete discussion of the Commission's cost/benefit analysis concerning the projected frequency of election contests under the new Rule, the court similarly found that the Commission acted arbitrarily insofar as it failed to make a finding on the extent to which election contests under the Rule would take the place of traditional proxy contests and, as a consequence, failed to have any proper basis to determine whether the Rule would result in a net benefit. Slip op. at 16. The court also found that the Commission's consideration of this issue was internally inconsistent because "the Commission anticipated frequent use of [the Rule] when estimating benefits, but assumed infrequent use when estimating costs." Slip op. at 17. 
An Avenue to More Searching Review?
After Chevron restricted the chances for persuading a reviewing court to set aside an agency rulemaking based on the court's independent interpretation of the agency's governing statute, the prospects for a successful rulemaking challenge appeared dim. Arbitrary and capricious review of agency findings supporting a rulemaking was generally viewed as a steep climb so long as the agency articulated findings in keeping with statutory requirements and/or laying a public interest/effectuation-of-statutory purpose foundation for adopting the rule.
The Chamber of Commerce decision gives teeth to arbitrary and capricious review of agency findings necessary to support agency rulemakings and could move the review process for informal rulemaking closer to the substantial evidence standard applicable under the APA to agency proceedings on the record. While the issue in Chamber of Commerce was framed by statutorily required findings, the need for some fact-based findings arises in virtually every rulemaking. If a court determines the agency's findings to be arbitrary and capricious, the rule might be set aside as contrary to law, as in Chamber of Commerce, where the flawed findings were required by statute. Even where agency findings are established as a matter of discretion, or in order to comply with an otherwise judicially unenforceable Executive Order requiring cost benefit analysis, a determination that the findings are flawed seems likely to establish that the rule itself, lacking supporting findings, is arbitrary.
Counsel seeking to blunt agency rulemaking initiatives would be well advised to analyze proposed rulemaking notices to determine the predicate findings for the agency proposal. Counsel should use the comment process to cast doubt on the agency's factual support and/or to provide additional facts that put the agency's proposed findings in question. Facing more rigorous judicial oversight under Chamber of Commerce, the agencies themselves will have to give additional attention to factual disputes in informal rulemakings. If they fail, the courts may now be ready to hold them to account.