On July 22, 2011, the U.S. Court of Appeals for the District of Columbia Circuit struck down Rule 14a-11 under the Exchange Act, which the SEC adopted last year to broaden “proxy access” for shareholders seeking to place their own nominees to boards of directors on a company’s proxy. The text of the court’s opinion can be found here.

Rule 14a-11 as adopted would have required companies that are subject to the proxy rules under the Exchange Act (including registered investment companies) to include the names of nominees submitted by qualifying shareholders, or groups of shareholders, on the company’s proxy statement and proxy voting card, subject to certain limitations. Generally, under the rule a shareholder (or group of shareholders) could qualify by holding at least 3% of a company’s voting stock for at least three years. 

The rule was challenged by the Business Roundtable and the U.S. Chamber of Commerce, which argued that the SEC had failed to adequately consider the costs and benefits of the rule. The Court held that the SEC acted arbitrarily and capriciously by failing to adequately assess the economic effects of the new rule. Additionally, the Court specifically discussed investment companies’ concern that the shareholder protections provided by the Investment Company Act of 1940 (the “1940 Act”) “reduce the need for, and hence the benefit to be had from, proxy access for shareholders of investment companies,” and also that “the rule would impose greater costs upon investment companies by disrupting the structure of their governance.” The Court stated that if the SEC intends to apply “a newly justified version of the rule” to investment companies then the SEC should address “the more serious of the concerns posed by investment companies but left unaddressed by the [SEC].”

The Court’s ruling seems to indicate a willingness on the part of the D.C. Circuit Court to scrutinize the actions of an agency when it adopts regulations authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and those regulations are challenged. This decision might cause regulators to be more apprehensive when adopting rules under the Dodd-Frank Act, which could have broader implications for slowing the pace of financial regulatory action. Additional commentary on the Court’s ruling from a Ropes & Gray partner can be found here.

The case is Business Roundtable and Chamber of Commerce of the U.S. v. Securities and Exchange Commission, No. 10-1305 (D.C. Cir. Jul. 22, 2011).