Last month’s ruling by the U.S. Court of Appeals for the District of Columbia Circuit (the “Court”) in the closely watched case of Business Roundtable v. SEC1 not only overturned the landmark Securities and Exchange Commission (the “SEC”) shareholder proxy access rule, but also created a potential roadmap for businesses and industry groups seeking to challenge many other rules to be issued by the SEC and other federal regulators under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). In holding that the SEC acted “arbitrarily and capriciously” and failed to adequately assess the economic effects of the new proxy access rule, the Court put the SEC and other regulators on notice that future rulemaking by the agencies must meet a much higher standard with respect to cost-benefit analysis and justification.
Businesses and industry groups have been quick to seize on the Court’s holding as a basis for challenging other Dodd-Frank rulemaking by the SEC and the Commodity Futures Trading Commission (the “CFTC”) – especially those rules that received considerably less cost-benefit analysis than the proxy access rule.2 Observers believe that controversial rules such as the new or pending SEC conflict minerals disclosure rules,3 compensation disclosure rules4 and whistleblower rules5 may be particularly vulnerable to a challenge along the same lines as the SEC’s proxy access rule.6 Because it is generally not cost-effective or politically desirable for a single company to challenge the rules directly, it is expected that the majority of these suits will be brought by influential trade groups, such as the U.S. Chamber of Commerce.
Dodd-Frank contains more than 300 provisions that expressly require or permit rulemaking by federal agencies. Many of the mandatory rulemaking provisions specify the details of the rules to be issued, but some discretionary provisions allow agencies to issue such rules as may be necessary. Most of the rulemaking provisions in Dodd-Frank do not indicate how the regulations should be developed.7 However, the Administrative Procedure Act imposes certain procedural requirements on rulemaking by federal agencies, and the Securities Exchange Act of 1934 and the Investment Company Act of 1940 both require regulatory authorities to consider a rule’s effect on efficiency, competition and capital formation when determining whether it is necessary or appropriate or in the public interest.
In Business Roundtable v. SEC, the plaintiffs challenged the Dodd-Frank-mandated proxy access rule, arguing that the SEC failed adequately to consider the rule’s effect upon efficiency, competition and capital formation, including, among other things, the costs companies would have incurred in opposing shareholder nominees and the consequences of union and state pension funds using the rule. Despite the more than 60 pages of cost-benefit analysis contained in the new rule and the approximately 21,000 SEC staff hours dedicated to drafting the rule over a two-year period,8 the Court held that the SEC “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’s decision in Business Roundtable v. SEC may not only encourage legal challenges to Dodd-Frank rulemaking by federal agencies, but may also delay the rulemaking process itself. As of July 2011, less than 13% of the new regulations required by Dodd-Frank had been fully adopted.9 The SEC recently announced yet another new timeline for adoption of future rules, pushing back final adoption dates for many rules well into 2012. Similarly, the CFTC announced that it would delay the effectiveness of certain Dodd-Frank regulations until as late as the end of 2011 in order to re-examine the status of final rulemaking in light of the changed regulatory landscape.