Business Roundtable and the Future of SEC Rulemaking

Jill E. Fisch is a Professor of Law at the University of Pennsylvania Law School.

The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. One of the most serious was the DC Circuit’s 2011 decision in Business Roundtable v. SEC, in which the court invalidated the SEC’s proxy access rule, Rule 14a-11, on the basis that the SEC had failed to conduct an adequate cost-benefit analysis. By imposing an onerous, and possibly insurmountable procedural burden, the decision threatens to paralyze rulemaking by the SEC and other administrative agencies. The effect is particularly troubling in light of the heavy rulemaking obligations imposed by Dodd-Frank and the JOBS Act.

In my article, The Long Road Back: Business Roundtable and the Future of SEC Rulemaking (forthcoming in Seattle University Law Review), I critically evaluate the Business Roundtable decision. Specifically, I argue that, although Rule 14a-11 suffered from a number of flaws, flaws I have noted in other work (see Fisch, The Destructive Ambiguity of Federal Proxy Access, 61 Emory L. J. 435 (2012)), the deficiencies in SEC’s rule-making that led to the adoption of Rule 14a-11 cannot accurately be ascribed to inadequate economic analysis. Nor is the demanding standard imposed by DC Circuit’s decision a product of the statutory constraints on SEC rulemaking. Rather it stems from the court’s skepticism about proxy access and the SEC’s policymaking generally.

The SEC’s inability to defend its proxy access rule against attack was, in part, a product of two important constraints on its policy formation – the notice and comment requirements of the Administrative Procedure Act and the Government in the Sunshine Act. Although commentators have defended both these requirements in terms of transparency and democratic values, they sacrifice consensus building as well as decision-making efficiency, and they allow for the increased influence of political forces and interest groups. These sacrifices are of particular concern in the context of SEC rulemaking and, I argue, were at the heart of a problematic Rule 14a-11.

Although it may be impractical to modify existing constraints on the SEC’s rule-making process, an alternative is for Congress to exercise a greater role in formulating regulatory policy. Without evaluating whether this shift is normatively desirable, I argue that Congress took on this role in both Dodd-Frank and the JOBS Act. Dodd-Frank’s explicit authorization of a proxy access rule reflected a congressional policy determination and offered the SEC a weapon against the political obstacles it had previously faced in adopting such a rule.

Here then, I argue, lies the most significant flaw in the Business Roundtable decision. In evaluating Rule 14a-11, the DC Circuit completely disregarded the congressional policy judgment reflected in Dodd-Frank. By substituting its own policy judgment for that of Congress, the DC Circuit threatens not just the ability of administrative agencies to formulate regulatory policy, but the ability of Congress to direct agency policy formation. This article argues that congressional determinations regarding regulatory policy warrant greater judicial deference than the courts have given to them. At the same time, the article warns that congressional direction may implicitly subject an agency’s decisions to greater scrutiny as to whether the agency has been faithful to its legislative directive.

The full article is available for download here.

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