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DC Circuit Court Strikes Down SEC's Proxy Access Rule

In a unanimous decision, the Federal Court for the DC Circuit struck down the SEC's 2010 proxy access rule, holding that the SEC acted "arbitrarily and capriciously" for failing adequately to assess the economic effects of the rule.  The SEC had adopted the rule to facilitate the ability of shareholders to nominate and elect board members.  The court ruled that the SEC both failed to support its conclusion that increased proxy access would improve board performance and increase shareholder value, and that the SEC had failed to take into account the likely costs of the proposal.

The SEC adopted the proxy access rule in August 2010.  Shortly thereafter, the Business Roundtable sued the SEC, arguing for the rule to be invalidated.  The ICI filed a "friend of the court" brief, arguing that the rules should not apply to investment companies.  The SEC immediately stayed the final rule, pending the court decision.

The court struck down the SEC's new rule in its entirety.  Additionally, the Court specifically addressed the rule's application to investment companies, in the event the SEC were to consider adopting a "newly justified" version of the rule.  The Court noted,

"The Commission failed adequately to address whether the regulatory requirements of the ICA reduce the need for, and hence the benefit to be had from, proxy access for shareholders of investment companies, and whether the rule would impose greater costs upon investment companies by disrupting the structure of their governance."

Further, the court said, the SEC's reasoning "did almost nothing to explain why the rule would nonetheless yield the same benefits for shareholders of investment companies as it would for shareholders of operating companies."  In part, this was because the SEC failed to address the concern that shareholder elected directors would impose greater costs on unitary and cluster board structures.  While the Commission had noted that it thought these concerns could be mitigated, the court noted that this reasoning did "not adequately address the probability the rule will be of no net benefit as applied to investment companies."

Finally, in responding to the Commission's reasoning that shareholders of investment companies might benefit from receiving information justifying a cluster or unitary board structure, the court said simply:

"That is an unutterably mindless reason for applying the rule to investment companies."

The full text of the Court's opinion is available at:$file/10-1305-1320103.pdf