The emperor has no Clothes: Confronting the D.C. Circuit's Usurpation of SEC rulemaking authority

Texas Law Review

Volumn 90, Issue 7, 2012, Pages 1811-1847

  Cox, James D ^a   Baucom, Benjamin J C ^a  

^a DUKE UNIVERSITY   (United States)

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EID: 84867792741     PISSN: 00404411     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (294)

1. Pub. L. No. 111-203, 124 Stat. 1376 (2010).
2. Id. § 971.
3. The amendment provided: (2) The rules and regulations prescribed by the Commission under paragraph (1) may include-(A) a requirement that a solicitation of proxy, consent, or authorization by (or on behalf of) an issuer include a nominee submitted by a shareholder to serve on the board of directors of the issuer; and (B) a requirement that an issuer follow a certain procedure in relation to a solicitation described in subparagraph (A).
4. Id.
5. See, e.g., S.E.C. Sued Over Board Nomination Rule for Investors, N.Y. TIMES DEALBOOK (Sept. 30, 2010, 4:26 AM), http://dealbook.nytimes.com/2010/09/30/s-e-c-sued-over-board-nomination-rule-for-investors (highlighting the lobbying efforts of public pension funds).
6. Security Holder Director Nominations, Exchange Act Release No. 48,626, Investment Company Act Release No. 26,206, 68 Fed. Reg. 60,784, 60,787 (proposed Oct. 23, 2003).
7. The SEC interpreted its shareholder proposal provision, Rule 14a-8, 17 C.F.R. § 240.14a-8(i)(8) (2005), to permit companies to omit a bylaw proposal setting forth a procedure by which stockholders could nominate directors because the proposal related to the election of directors. Am. Fed'n of State, Cnty. & Mun. Emps. v. AIG, 462 F.3d 121, 126 (2d Cir. 2006).
8. The Second Circuit Court of Appeals rejected the SEC's position.
9. Id. at 129-30.
10. Thereupon the SEC amended the rule to expressly authorize excluding a proposal if it "relates to a nomination" of a director. Shareholder Proposals Relating to the Election of Directors, Exchange Act Release No. 56,914, Investment Company Act Release No. 28,075, 72 Fed. Reg. 70,450, 70,456 (Dec. 11, 2007) (codified at 17 C.F.R. pt. 240).
11. Earlier the SEC had proposed two conflicting approaches regarding shareholder nominations. Shareholder Proposals, Exchange Act Release No. 56,160, Investment Company Act Release No. 27,913, 72 Fed. Reg. 43,466, 43,466 (proposed Aug. 3, 2007) (creating a device to allow inclusion of shareholder proposals in a company's proxy statement).
12. id. at 43,487 (proposing an amendment to proxy rules that would exclude shareholder proposals from the company's proxy statement "[i]f the proposal relates to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election").
13. States have not been idle in this debate.
14. See, e.g., DEL. CODE ANN. tit. 8, §§ 112, 113 (2011) (authorizing bylaws providing for the nomination of directors by shareholders and reimbursement of such nominees' election expenses).
15. MODEL BUS. CORP. ACT § 2.06(c) (2010) (providing for authorization of the same).
16. Cf. CA, Inc. v. AFSCME Emps.
17. Pension Plan, 953 A.2d 227 (Del. 2008) (holding a stockholder-proposed bylaw calling for reimbursement of an insurgent's reasonable proxy expenses was a proper subject for shareholder action because it related to the process of carrying out the limited shareholder franchise).
18. See infra notes 161-62 and accompanying text.
19. Facilitating Shareholder Director Nominations, Securities Act Release No. 9136, Exchange Act Release No. 62,764, Investment Company Act Release No. 29,384, 75 Fed. Reg. 56,668, 56,674-75 (Sept. 16, 2010).
20. See Facilitating Shareholder Director Nominations, Securities Act Release No. 9151, Exchange Act Release No. 63,109, Investment Company Act Release No. 29,462, 75 Fed. Reg. 64,641, 64,641 (Oct. 20, 2010) (announcing that effective and compliance dates for amendments to, inter alia, 17 C.F.R. pt. 240 would be indefinitely delayed until further notice).
21. 647 F.3d 1144 (D.C. Cir. 2011).
22. Id. at 1156.
23. Id. at 1148.
24. Securities Exchange Act of 1934 § 3(f), 15 U.S.C. § 78c(f) (2006).
25. The three other major securities laws administered by the SEC contain the same Review Standard.
26. See Securities Act of 1933 § 2(b), 15 U.S.C. § 77b(b) (2006).
27. Investment Company Act of 1940 § 2(c), 15 U.S.C. § 80a-2(c) (2006).
28. Investment Advisers Act of 1940 § 202(c), 15 U.S.C. § 80b-2(c) (2006).
29. Chamber of Commerce v. SEC, 412 F.3d 133, 142-44 (D.C. Cir. 2005).
30. The D.C. Circuit heard a second challenge to the same rule, but that decision did not apply or analyze the statutory Review Standard regarding efficiency, competition, and capital formation.
31. See Chamber of Commerce v. SEC, 443 F.3d 890, 894 (D.C. Cir. 2006) (stating that the focus was on whether the Commission relied on material not in the rulemaking record in deciding not to modify the rule).
32. Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 167-68 (D.C. Cir. 2010).
33. Bus. Roundtable, 647 F.3d at 1148-49.
34. Id. at 1150.
35. Id.
36. Id. at 1151.
37. Id.
38. Id. at 1153.
39. Id. (emphasis added).
40. This view of the quiet life the SEC earlier enjoyed before the D.C. Circuit has been previously explored by one of the authors.
41. See James D. Cox, Premises for Reforming the Regulation of Securities Offerings: An Essay, 63 LAW & CONTEMP. PROBS. 11, 37-39 (2000) (noting that with the exception of an earlier decision on another matter by the Business Roundtable, "[f]ew decisions have seriously questioned the validity of an SEC rule").
42. We distinguish the cases discussed in this article from the earlier reversal the SEC suffered in Business Roundtable, which held that the SEC lacked the substantive authority to impose a one-share, one-vote requirement for public companies. Bus. Roundtable v. SEC, 905 F.2d 406, 408 (D.C. Cir. 1990).
43. None of the cases reviewed here held that the SEC lacked the substantive authority to regulate the matter at issue.
44. 412 F.3d 133 (D.C. Cir. 2005).
45. Id. at 136-37.
46. The SEC enacted these rules, by a split vote of three to two, under the Investment Company Act.
47. See Investment Company Governance, Investment Company Act Release No. 26,520, 69 Fed. Reg. 46,378, 46,378, 46,390 (Aug. 2, 2004) (codified at 17 C.F.R. pt. 270) (adopting amendments to the Investment Company Act over the dissent of two commissioners).
48. Investment Company Governance, 69 Fed. Reg. at 46,388.
49. See id. at 46,386-87 (analyzing the costs and benefits of the amendments to the Investment Company Act).
50. See Chamber of Commerce, 412 F.3d at 144 ("In sum, the Commission violated its obligation under 15 U.S.C. § 80a-2(c), and therefore the APA, in failing adequately to consider the costs imposed upon funds by the two challenged conditions.").
51. See id. at 143 ("With respect to the 75% independent director condition, the Commission ... claimed it was without a 'reliable basis for determining how funds would choose to satisfy the [condition] and therefore it [was] difficult to determine the costs associated with electing independent directors.'... With respect to the costs of the independent chairman condition, counsel maintains the Commission 'was not aware of any costs associated with the hiring of staff because boards typically have this authority under state law, and the rule would not require them to hire employees.'" (citations omitted)).
52. Id. (emphasis added).
53. Id. at 144.
54. Id.
55. To support its conclusion, the court cited to a single case-its own decision in Public Citizen v. Federal Motor Carrier Safety Administration, 374 F.3d 1209 (D.C. Cir. 2004)-for the proposition that, even in the "face of uncertainty, [an] agency must 'exercise its expertise to make tough choices about which of the competing estimates is most plausible, and to hazard a guess as to which is correct, even if... the estimate will be imprecise.'" Chamber of Commerce, 412 F.3d at 143 (quoting Pub. Citizen, 374 F.3d at 1221).
56. See Chamber of Commerce, 412 F.3d at 144 ("We conclude the Commission's failure to consider the disclosure alternative violated the APA.").
57. Id.
58. See id. at 142 ("[A]lthough we recognize that an agency acting upon the basis of empirical data may more readily be able to show it has satisfied its obligations under the APA,... we are acutely aware that an agency need not-indeed cannot-base its every action upon empirical data " (citations omitted)).
59. See id. at 142-43 (holding that the Commission did not violate the APA by declining to conduct its own empirical study or by failing to closely consider a study offered to it via the noticeand-comment process, given that the SEC identified problems with the study).
60. Id. at 142 (quoting Investment Company Governance, 69 Fed. Reg. at 46,383).
61. 613 F.3d 166 (D.C. Cir. 2010).
62. Id. at 167.
63. Id. at 167-68.
64. Id. at 168.
65. See id. at 167 ("As a result of this new rule, [fixed indexed annuities] are subject to the full panoply of requirements set forth by the Act ").
66. Id. at 177.
67. Id. (quoting Indexed Annuities and Certain Other Insurance Contracts, Securities Act Release No. 8996, Exchange Act Release No. 59,221, 74 Fed. Reg. 3138, 3171 (Jan. 16, 2009) (codified in part at 17 C.F.R. pt. 240)) (internal quotation marks omitted).
68. Id.
69. See id. ("We hold that the Commission's consideration of the effect of Rule 151A on... competition... was arbitrary and capricious.").
70. See id. ("The SEC purports to have analyzed the effect of the rule on competition, but does not disclose a reasoned basis for its conclusion that Rule 151A would increase competition.").
71. Id. (citation omitted) (internal quotation marks omitted).
72. Id. at 177-78.
73. As the court observed, the Review Standard did not call for the SEC to consider "whether any rule would have an effect on competition," but rather "whether the specific rule will promote efficiency, competition, and capital formation."
74. Id. at 178 (emphasis in original).
75. Id.
76. Id.
77. Id.
78. Id. (emphasis added).
79. Id.
80. See Chamber of Commerce v. SEC, 412 F.3d 133, 144 (D.C. Cir. 2005) (characterizing disclosure as "a familiar tool in the Commission's tool kit").
81. 613 F.3d at 178.
82. Id.
83. Id. at 178-79.
84. Id. at 179.
85. Id.
86. Id.
87. Although this combination of requirements was formally applied by statute to the SEC's general rulemaking authority in 1996, the provisions were applied to many of the SEC's rulemaking powers since the early years of the Commission.
88. Compare National Securities Market Improvement Act of 1996, Pub. L. No. 104-290, § 106(b), 110 Stat. 3416, 3424 (1996) (codified at 15 U.S.C. § 77b(b) (2006)) (applying this combination of requirements to the SEC's general rulemaking authority), with 15 U.S.C. § 79e(a) (Supp. IV 1938) (permitting the SEC, subject to those two restrictions, to utilize rules and regulations concerning the form of applications for registering as a holding company), and 15 U.S.C. § 79j(a) (Supp. I 1935) (permitting the SEC, subject to those two restrictions, to utilize rules and regulations regarding the form of applications for acquiring securities or capital assets).
89. National Securities Markets Improvement Act § 106. Oddly, NSMIA added the Review Standard only to the Securities Act of 1933 § 2(b), 15 U.S.C. § 77b(b) (2006), the Securities Exchange Act of 1934 § 3(f), 15 U.S.C. § 78c(f) (2006), and the Investment Company Act of 1940 § 2(c), 15 U.S.C. § 80a-2(c) (2006). In 1999, Congress added similar language to the Investment Advisers Act of 1940 § 202(c), 15 U.S.C. § 80b-2(c)(2006).
90. Gramm-Leach-Bliley Act, Pub. L. No. 106-102, § 224, 113 Stat. 1338, 1402 (1999).
91. National Securities Markets Improvement Act § 106.
92. See, e.g., 142 CONG. REC. E1928-29 (daily ed. Oct. 4, 1996) (speech of Rep. Thomas J. Bliley, Jr., Chairman, House Committee on Commerce) (discussing NSMIA's preemption of state authority over securities offerings and claiming disparate state laws hindered competition).
93. H.R. REP. NO. 104-864, at 39-40 (1996) (Conf. Rep.), reprinted in 1996 U.S.C.C.A.N. 3920, 3920-21 (discussing NSMIA's preemption of state authority concerning regulating securities offerings).
94. Securities Investment Promotion Act of 1996, S. 1815, 104th Cong. § 310 (b)(1) (1996).
95. Id. § 310(b)(2)(A).
96. Id. § 310(b)(2)(B).
97. The Securities Investment Promotion Act of 1996: Hearing on S. 1815 Before S. Comm. on Banking, Hous., and Urban Affairs, 104th Cong. 47 (1996) (statement of Arthur Levitt, Chairman, U.S. Sec. & Exch. Comm'n).
98. Id. at 147 (statement of Paul Saltzman, Senior Vice President and General Counsel, Public Securities Association).
99. S. REP. NO. 104-293, at 16 (1996).
100. See id. at 2 (summarizing the report to follow).
101. Compare H.R. REP. NO. 104-864, at 27 (1996) (Conf. Rep.) with Securities Investment Promotion Act of 1996, S. 1815, 104th Cong. § 310(b) (1996).
102. Compare Securities Amendments of 1996, H.R. 3005, 104th Cong. (as passed by House, June 19, 1996) with H.R. REP. NO. 104-864, at 10 and National Securities Market Improvement Act of 1996, Pub. L. No. 104-290, § 106, 110 Stat. 3416, 3424 (1996) (codified at 15 U.S.C. §§ 77b, 78c(f), 80a-2(c) (2006)).
103. H.R. REP. NO. 104-622, at 39 (1996) (emphasis added).
104. Id.
105. Id. at 24.
106. Id.
107. Id. at 16 (emphasis added).
108. Id. at 38.
109. Id. at 39 (emphasis added).
110. See H.R. 2131, 104th Cong. § 8(b) (1995) (requiring the SEC to consider or determine whether an action will "promote efficiency, competition, and capital formation").
111. See supra notes 74-75 and accompanying text.
112. Bus. Roundtable v. SEC, 647 F.3d 1144, 1153 (D.C. Cir. 2011).
113. Gramm-Leach-Bliley Act, Pub. L. No. 106-12, § 224, 113 Stat. 1338, 1402 (codified at 15 U.S.C. § 80b-2(c) (2006)) (incorporating the Review Standard into § 202 of the Investment Advisers Act).
114. Id.
115. RICHARD SCOTT CARNELL ET AL., THE LAW OF BANKING AND FINANCIAL INSTITUTIONS 18 (4th ed. 2009) (calling the Glass-Steagall Act a "centerpiece of American banking policy" between its enactment in 1933 and its later repeal).
116. See KENNETH R. BENSON ET AL., FINANCIAL SERVICES MODERNIZATION: GRAHAM-LEACH-BLILEY ACT OF 1999, LAW AND EXPLANATION 3, 21 (1999) (summarizing the main purposes of the Graham-Leach-Bliley Act, none of which include updating SEC rulemaking procedures).
117. H.R. REP. NO. 106-434, at 165 (1999) (Conf. Rep.).
118. See id. at 164-65.
119. H.R. REP. NO. 106-74, pt. 3, at 120 (1999).
120. See supra notes 74-75 and accompanying text.
121. 142 CONG. REC. 25,810 (1996) (statement of Rep. Thomas Bliley).
122. H.R. REP. NO. 106-434, at 165.
123. See H.R. REP. NO. 104-622, at 16 (describing the witness testimony before the subcommittee as indicating a need for modernization of the SEC's regulatory scheme to avoid inefficient, costly, and duplicitous rules that fail to adequately protect investors).
124. Compare Gramm-Leach-Bliley Act, Pub. L. 106-102, § 224, 113 Stat. 1338, 1402 (1999) (codified at 15 U.S.C. § 80b-2(c) (2006)) with National Securities Market Improvement Act of 1996, Pub. L. No. 104-290, § 106(a), 110 Stat. 3416, 3424 (1996) (codified at 15 U.S.C. § 77b(b) (2006)).
125. S. 257, 105th Cong. § 11 (as introduced on Feb. 4, 1997).
126. H.R. 5660, 106th Cong. § 119 (2000) (codified at 7 U.S.C. § 19(a) (2006)) (enacted by incorporation by reference in the Consolidated Appropriations Act of 2001, Pub. L. No. 106-554, § 1(a)(5), 114 Stat. 2763, 2763 (2000)).
127. The only reference in the legislative history to this change states generally that the standard calls on the CFTC to consider costs and benefits of its actions and that the standard does not apply to investigative or emergency actions. H.R. REP. NO. 106-711, pt. 1, at 40 (2000).
128. H.R. REP. NO. 106-711, pt. 3, at 59 (2000).
129. S. REP. NO. 106-390, at 13 (2000).
130. See supra notes 65-72 and accompanying text.
131. Bus. Roundtable v. SEC, 647 F.3d 1144, 1153 (D.C. Cir. 2011).
132. 467 U.S. 837 (1984).
133. See id. at 843 (describing the two steps required by the newly minted analysis).
134. See id. at 842-43 ("Rather, if the statute is silent or ambiguous with respect to [a] specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.").
135. Administrative Procedures Act, 5 U.S.C. § 706(2)(A) (2006).
136. See 1 RICHARD J. PIERCE, JR., ADMINISTRATIVE LAW TREATISE § 7.4, at 599-600 (5th ed. 2010) (arguing that State Farm's reasoned decisionmaking requirement forces agencies to discuss all major considerations it took into account in formulating a new, major rule to demonstrate that its rule meets the reasoned decisionmaking requirement).
137. 463 U.S. 29 (1983).
138. Id. at 43.
139. PIERCE, supra note 104, § 7.4, at 599.
140. 108. 435 U.S. 519 (1978).
141. Id. at 525.
142. Id. at 524.
143. see also Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633 (1990) (reaffirming this principle in the context of informal agency adjudications).
144. PIERCE, supra note 104, § 7.8, at 661.
145. See Vt. Yankee, 435 U.S. at 543 ("Absent constitutional constraints or extremely compelling circumstances the administrative agencies should be free to fashion their own rules of procedure and to pursue methods of inquiry capable of permitting them to discharge their multitudinous duties." (citations omitted) (internal quotation marks omitted)).
146. 374 F.3d 1209 (D.C. Cir. 2004).
147. Id. at 1214-16.
148. Id. at 1216.
149. See id. (citing 49 U.S.C. § 31136(a)(4) (2006)).
150. The agency's organic statute, the Motor Carrier Safety Act, stated that "[a]t a minimum, the regulations [promulgated by the agency] shall ensure that... the operation of commercial motor vehicles does not have a deleterious effect on the physical condition of the operators." 49 U.S.C. § 31136(a)(4) (2006) (emphasis added).
151. See Pub. Citizen, 374 F.3d at 1217 (requiring the agency to explain its justification for the new rule and vacating the judgment due to the agency's failure to consider or discuss the required statutory factor when it issued its new rule).
152. Id. at 1216.
153. See id. ("Several of petitioners' other objections also raise troubling concerns about the [agency's] decisionmaking process. We do not, however, enter final judgment on those, as we are vacating and remanding the matter in any case").
154. Id.
155. Id. at 1221 (citing 49 U.S.C. § 31506(d) (2006)).
156. For other examples of Congress directing those charged with implementing the statute to consider the costs and benefits to any new regulations or requirements, see also 49 U.S.C. § 31136(c)(2)(A) (2006) and 49 U.S.C. § 31502(d) (2006).
157. Pub. Citizen, 374 F.3d at 1221-22.
158. Chamber of Commerce v. SEC, 412 F.3d 133, 143 (D.C. Cir. 2005) (citing Pub. Citizen, 374 F.3d at 1221).
159. Id. (quoting Pub. Citizen, 374 F.3d at 1221) (internal quotation marks omitted).
160. The language from Public Citizen, quoted by the Chamber of Commerce court, was itself dicta. The Public Citizen court declined to "enter [a] final judgment on" the failure to quantify and consider costs of a proposed rule, but stated it was including the discussion of this point merely "for a sense of completeness." Pub. Citizen, 374 F.3d at 1216-17.
161. Pub. Citizen, 374 F.3d at 1212 (emphasis added).
162. 49 U.S.C. § 31502(d) (2006) (emphasis added).
163. see also id. § 31136(c)(2) ("Before prescribing regulations under this section, the Secretary shall consider, to the extent practicable[,] ... costs and benefits ").
164. Vt. Yankee Nuclear Power Corp. v. NRDC, 435 U.S. 519, 524 (1978).
165. see also Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 644-46 (1990) (reaffirming this principle in the context of informal agency adjudications).
166. PIERCE, supra note 104, § 7.8, at 661.
167. 452 U.S. 490 (1981).
168. Id. at 510-11.
169. American Textile is a natural extension of Vermont Yankee, since if the reviewing court cannot impose a standard other than that adopted by Congress, the reviewing court cannot impose cost-benefit analysis where Congress has stated another review standard.
170. Id. at 510-12, 510 n.30.
171. One such example the Court referenced was where the statute requires the agency to use "the best available and safest technologies..., except where the Secretary determines that the incremental benefits are clearly insufficient to justify the incremental costs."
172. Id. at 510 (emphasis omitted).
173. Id. at 512.
174. see Entergy Corp. v. Riverkeeper, Inc., 129 S. Ct. 1498, 1508 (2009) (stating that in American Textile the agency did not need to "engage in cost-benefit analysis," in part because the statute did not contain such a requirement).
175. American Equity was originally decided in 2009.
176. See Am. Equity Inv. Life Ins. Co. v. SEC, 572 F.3d 923, 936 (D.C. Cir. 2009) (remanding and requiring the SEC to "either complete an analysis sufficient to satisfy its obligations under § 2(b) [of the Securities Act], or explain why that section does not govern this rulemaking"), amended and superseded, 613 F.3d 166, 179 (D.C. Cir. 2010).
177. The opinion was reissued with amendments in 2010 to reflect the Court's decision that vacating the SEC rule was the appropriate remedy. Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166 (D.C. Cir. 2010).
178. Am. Equity, 613 F.3d at 176-79.
179. Id. at 177-79.
180. Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).
181. See Am. Equity, 613 F.3d at 177 (discussing how the SEC's § 2(b) analysis regarding "competition" failed because the Commission "d[id] not disclose a reasoned basis for its conclusion that Rule 151A would increase competition" (emphasis added)).
182. id. at 179 ("The SEC's failure to analyze the efficiency of the existing state law regime renders arbitrary and capricious the SEC's judgment that applying federal securities law would increase efficiency." (emphasis added)).
183. See State Farm, 463 U.S. at 33, 43 (articulating the requirement under the National Traffic and Motor Vehicle Safety Act of 1966 that the Secretary of Transportation "consider 'relevant available motor vehicle safety data'" and "articulate a satisfactory explanation for its action including a 'rational connection between the facts found and the choice made'" (citations omitted)).
184. Am. Equity, 613 F.3d at 176-79.
185. Indexed Annuities and Certain Other Insurance Contracts, Securities Act Release No. 8996, Exchange Act Release No. 59,221, 74 Fed. Reg. 3138, 3169-72 (Jan. 16, 2009) (codified in part at 17 C.F.R. pt. 240).
186. State Farm, 463 U.S. at 33-34 (articulating the statutory requirement that the NHTSA "consider... whether the proposed standard 'is reasonable, practicable and appropriate'" and "the 'extent to which such standards will contribute to carrying out the purposes' of the [National Traffic and Motor Vehicle Safety Act of 1966]").
187. In assessing the cost-benefit analysis engaged in by the NHTSA, the court remarked that "[t]he agency's obligation is to articulate a 'rational connection between the facts found and the choice made.'"
188. Id. at 59.
189. Id. at 54-55.
190. Id. at 57.
191. Investment Company Governance, Investment Company Act Release No. 26,520, 69 Fed. Reg. 46,378, 46,386-87, 46,388-89 (Aug. 2, 2004) (codified at 17 C.F.R. pt. 270).
192. see Chamber of Commerce v. SEC, 412 F.3d 133, 144 (D.C. Cir. 2005) (finding that even if there is uncertainty as to the effects of a proposed rule on efficiency, competition, capital formation, or costs this does not excuse the SEC from its statutory obligation to consider the economic consequences of a proposed regulation).
193. See Chamber of Commerce, 412 F.3d at 144 (holding that the SEC violated the APA when it failed to consider the costs of two conditions in its proposed regulations).
194. The Office of Information and Regulatory Affairs (OIRA) is the product of the Paper Reduction Act of 1980. About OIRA, WHITE HOUSE, OFFICE MGMT. & BUDGET, http://www.whitehouse.gov/omb/inforeg_administrator.
195. President Reagan soon mobilized the office to undertake cost-benefit analysis of non-independent regulatory agencies through Executive Order 12,291.
196. Exec. Order No. 12,291, 3 C.F.R. 127 (1981).
197. see Thomas O. McGarity, Presidential Control of Regulatory Agency Decisionmaking, 36 AM. U. L. REV. 443, 478 & n.171 (1987) (discussing presidential efforts to increase agency accountability through the use of executive orders).
198. See Robert W. Hahn & Cass R. Sunstein, A New Executive Order for Improving Federal Regulation? Deeper and Wider Cost-Benefit Analysis, 150 U. PA. L. REV. 1489, 1506 (2002) (stating that President Reagan considered, but declined, subjecting independent agencies to these reviews).
199. OIRA and review by a federal appellate court, however, are not mirror images of one another. While the appellate court can be expected to have a point of view, it is less likely to be swayed by external influence than OIRA. Indeed, there is a good deal of information surrounding the conduct and outcomes of OIRA review that calls into question the detachment with which costs and benefits were assessed.
200. There is every reason to fear that the independence of the review process within the executive branch of government is not likely to be as insulated from external influence as occurs in the more transparent adversarial setting of judicial review.
201. See Nicholas Bagley & Richard L. Revesz, Centralized Oversight of the Regulatory State, 106 COLUM. L. REV. 1260, 1305-07 (2006) (applying public choice theory and arguing that the OIRA would be vulnerable to lobbying by interest groups).
202. Moreover, OIRA reviews are not themselves subject to judicial review.
203. Id. at 1309.
204. For criticism of the OIRA process, see generally Alan B. Morrison, OMB Interference with Agency Rulemaking: The Wrong Way to Write a Regulation, 99 HARV. L. REV. 1059 (1986).
205. Richard B. Stewart, The Reformation of American Administrative Law, 88 HARV. L. REV. 1667, 1784 (1975) (footnotes omitted).
206. See, e.g., Frank E. Cooper, Judicial Review of Administrative Decisions, 3 U. DET. L.J. 53, 54-55 (1940) (introducing the article's topic of balancing administrative authority and judicial review of administrative decisions).
207. Cuthbert W. Pound, Constitutional Aspects of American Administrative Law, 9 A.B.A. J. 409, 413 (1923) (questioning the extent to which administrative decisions should be exempt from judicial review).
208. Patricia M. Wald, Judicial Review in Midpassage: The Uneasy Partnership Between Courts and Agencies Plays On, 32 TULSA L.J. 221, 221 (1996) (providing a D.C. Circuit judge's opinion on how current doctrines of judicial review work in practice).
209. See supra notes 78-79 and accompanying text.
210. See supra note 22 and accompanying text.
211. See Martin Shapiro, Administrative Discretion: The Next Stage, 92 YALE L.J. 1487, 1508 (1983) (suggesting courts can deal with uncertainty by reading statutes as placing the burden of proof on agencies, and resolving unclear situations in favor of industry).
212. See, e.g., id. (describing a case where the court read into a statute a requirement that the agency establish significant risk for low-level benzene exposure before setting a maximum exposure level as stripping the agency of its discretion).
213. See Larry Margasak, House Republicans Stepping Up Anti-Regulation Effort, HUFFINGTON POST (Dec. 2, 2011), http://www.huffingtonpost.com/2011/12/02/house-gop-anti-regulation-bills_n_1125242.html (describing anti-regulation bills proposed by House Republicans in December 2011).
214. Frank Newport, Americans Leery of Too Much Gov't Regulation of Business, GALLUP (Feb. 2, 2010), http://www.gallup.com/poll/125468/Americans-Leery-Govt-Regulation-Business.aspx (finding 57% of Americans are worried about too much regulation of business).
215. Lydia Saad, At 13%, Congress' Approval Ties All-Time Low, GALLUP (Oct. 12, 2011), http://www.gallup.com/poll/150038/Congress-Approval-Ties-Time-Low.aspx (finding low approval of Congress across political affiliation).
216. A reflection of the anti-regulatory bias toward securities regulatory issues is Congress' recently enacted Jumpstarting Our Business Startups Act, which includes, among numerous provisions removing regulation for so-called "emerging growth companies" and other startups, a call on the SEC to review the disclosure regulations for registering securities so as to "modernize and simplify the registration process and reduce the costs and other burdens" associated with regulation.
217. See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, § 108, 126 Stat. 306, 313 (2012).
218. This is the only reference, however, in the legislation to any assessments of regulatory costs and burdens.
219. See supra notes 74-77 and accompanying text. 157.
220. See supra notes 13-14 and accompanying text.
221. See supra notes 2, 6-10 and accompanying text.
222. Bus. Roundtable v. SEC, 647 F.3d 1144, 1150-52 (D.C. Cir. 2011).
223. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, § 971, 124 Stat. 1376, 1915 (2010).
224. See S. REP. NO. 111-176, at 146-47 (2010) (discussing proxy access and the Section's grant of great discretion to the SEC in delineating such access).
225. While stating that § 972 of the Dodd-Frank Act did not require the SEC to engage in rulemaking, it recognized that the provision gives the SEC wide latitude in terms of proxy access.
226. Id. at 146.
227. The report explains that "[t]he Committee feels that it is proper for shareholders, as the owners of the corporation, to have the right to nominate candidates for the Board using the issuer's proxy under limited circumstances."
228. Id.
229. It then proceeds to quote from the testimony of several hearing witnesses enthusiastically supporting proxy access.
230. Id. at 146-47.
231. See id. at 146 ("The authority gives the SEC wide latitude in setting the terms of such proxy access If the SEC proposes rules, interested persons can offer their views on the appropriateness of proposed regulatory terms in the public comment process. The Committee feels that it is proper for shareholders, as the owners of the corporation, to have the right to nominate candidates for the Board using the issuer's proxy under limited circumstances.").
232. supra notes 62-64 and accompanying text.
233. Investment Company Act of 1940 § 10(a), 15 U.S.C. § 80a-10(a) (2006).
234. See supra notes 62-64 and accompanying text.
235. See supra notes 64-71 and accompanying text.
236. See DEL. CODE ANN. tit. 8, § 113 (2011) (authorizing bylaws providing reimbursement of proxy contest expenses incurred in connection with the election of directors).
237. Facilitating Shareholder Director Nominations, Securities Act Release No. 9136, Exchange Act Release No. 62,764, Investment Company Act Release No. 29,384, 75 Fed. Reg. 56,668, 56,675 (Sept. 16, 2010) (codified at 17 C.F.R. pts. 200, 232, 240, and 249) (stating that Rule 14a-11 cannot be used by a shareholder seeking to change control of the company).
238. Rule 14a-11 was struck down by the D.C. Circuit shortly after it was enacted. Bus. Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011) (discussing the costs of Rule 14a-11 and holding that the SEC acted arbitrarily and capriciously in not assessing the "economic effects of [this] new rule").
239. Broadly speaking, it is on this point that commentators appear united in their condemnation of proxy access, believing that broader interests and long-term objectives pursued by the board will be compromised by interests groups seeking short-term and narrower objectives.
240. See, e.g., William W. Bratton & Michael L. Wachter, The Case Against Shareholder Empowerment, 158 U. PA. L. REV. 653, 690 (2010) ("[S]hareholder empowerment will make it much more difficult for a good board of directors to resist pressures to manage to the market.").
241. Lisa Fairfax, Delaware's New Proxy Access: Much Ado About Nothing?, 11 TRANSACTIONS: TENN. J. BUS. L. 87, 92 (2009) ("[G]ranting all shareholders access to the proxy statement could increase the influence of shareholders with narrow or special interests ").
242. See supra note 78 and accompanying text.
243. MAGNUM FORCE (Warner Bros. Pictures 1973).
244. See supra notes 74-98 and accompanying text.
245. In a recently circulated internal memo, the SEC appears to have instructed its staff to provide even greater economic analysis of its proposed rules by involving economists early and often in the rulemaking process and requiring economists' approval before adopting a final rule.
246. Sarah N. Lynch, SEC Looks to Economists for Legal Cover, REUTERS (Apr. 16, 2012),
247. http://www.reuters.com/article/2012/04/16/us-sec-economic-analysis-idUSBRE83F16W20120416.
248. See generally The SEC's Aversion to Cost-Benefit Analysis: Hearing Before the Subcomm. on TARP, Fin. Servs. & Bailouts of Pub. & Private Programs of the H. Comm. on Oversight & Gov't Reform, 112th Cong. (2012) [hereinafter SEC's Aversion to Cost-Benefit Analysis] (statement of Mary Schapiro, Chairman, U.S. Sec. & Exch. Comm'n) (discussing in general terms a recently circulated internal "guidance" on SEC rulemaking).
249. The SEC appears to be taking small steps towards the approach we recommend: Chairman Schapiro recently testified to Congress that in the future, when a proposed rule's costs and benefits cannot reasonably be quantified, the adopting release should provide: (1) some explanation of why that is the case, and (2) a "qualitative analysis of the likely economic consequences of the proposed rule." SEC's Aversion to Cost-Benefit Analysis, supra note 172, at 16 (statement of Mary Schapiro, Chairman, U.S. Sec. & Exch. Comm'n).
250. See Tai-Kong Kam et al., Competition Among Markets: The Repeal of Rule 390, 27 J. BANKING & FIN. 1711, 1712 (2003) (stating that Rule 390's prohibition on trading stocks off of the exchange dated back to the 18th century).
251. Id.
252. The table for challenging the New York Stock Exchange's off-board trading restrictions was set by amendments to the 1975 Securities Act that, among other features, directed the SEC to "facilitate the establishment of a national market system."
253. Securities Act Amendments of 1975, Pub. L. No. 94-29, § 7, 89 Stat. 97, 112 (1975) (codified as amended at 15 U.S.C. § 78k-1 (2006)).
254. Congress also required the SEC "to review any and all rules of national securities exchanges which limit or condition the ability of members to effect transactions in securities otherwise than on such exchanges" and report its finding to Congress as well as commence proceedings "to amend any such rule imposing a burden on competition which does not appear to the Commission to be necessary or appropriate."
255. Id. at § 7(c)(4)(A).
256. The industry resisted the notion that competition was desirable or would be enhanced by relaxing the off-board trading rule.
257. See Wall Street Firms Defend Rules Favoring Members of Exchange, N.Y. TIMES, Sept. 25, 1975, at 67 (describing a letter by twenty-two Wall Street firms expressing their uniform opinion that the benefits of relaxing the off-board rule would be dwarfed by the resulting costs).
258. While the SEC did propose Rule 19c-2, which would have repealed the restriction outright, Announcement of Proceeding Regarding Exchange Off-Board Trading Rules, Exchange Act Release No. 13,662, 12 SEC DIGEST 947 (proposed June 23, 1977), it ultimately withdrew that proposal and adopted Rule 19c-3, which tested the impact of removing the off-board trading restrictions by holding that securities listed after April 26, 1979 would not be subject to that restriction.
259. Off-Board Trading Restrictions, Exchange Act Release No. 16,888, 45 Fed. Reg. 41,125, 41,127 (June 18, 1980) (codified at 17 C.F.R. pt. 240) ("The Commission... believes that the Rule is justified by its experimental value which will further the purposes of the Act by providing actual experience with the effects of concurrent over-the-counter and exchange trading.").
260. Further experimentation occurred, albeit as a result of pressure from Congress, when the SEC initiated for thirty companies, during a test period of six months, a linkage among seven stock exchanges and the OTC market to see if their trading would move away from their prime-listed market. Electronic Link of 7 Exchanges; OTC Will Begin, WALL ST. J., May 7, 1982, at 5.
261. The NYSE repealed Rule 390 in December 1999 and the SEC approved its actions in 2000. NYSE Rulemaking: Order Approving Proposal to Rescind Exchange Rule 390, Exchange Act Release No. 42,758, 65 Fed. Reg. 30,175, 30,176 (May 10, 2000).
262. The repeal had the broad support of Wall Street, which saw business being drawn away from the exchanges by the various proprietary electronic communications networks where trades could be executed more quickly and cheaply than on the NYSE.
263. See Robert Sales, The Quest to Kill 390, WALL ST. & TECH., Dec. 1999, at 37, 37 (contending that executives of the largest broker-dealers on Wall Street had all vocalized opposition to Rule 390).
264. By then, Rule 390 covered only 30% of the NYSE-listed issuers who represented approximately half of the exchange's volume.
265. Id. at 38.
266. See Short Sales, Exchange Act Release No. 50,103, 69 Fed. Reg. 48,008, 48,012-13 (Aug. 6, 2004) (adopting proposed rule 202T, allowing the SEC to establish a pilot program "to suspend any short sale price test for such securities and for such time periods as the Commission deems necessary or appropriate").
267. The one-third were chosen by selecting every third company on a list, starting with the second company. Lynn Bai, The Uptick Rule of Short Sale Regulation: Can It Alleviate Downward Price Pressure from Negative Earnings Shocks?, 5 RUTGERS BUS. L.J. 1, 11 (2008). This provided a control group of the companies not included in the pilot study sample.
268. Id. at 5.
269. For an overview of the history of the Uptick Rule, see generally Charles M. Jones, Shorting Restrictions: Revisiting the 1930s, 47 FIN. REV. 1 (2012).
270. See Jonathan R. Macey et al., Restrictions on Short Sales: An Analysis of the Uptick Rule and Its Role in View of the October 1987 Stock Market Crash, 74 CORNELL L. REV. 799, 800-01 (1989) ("The uptick rule, Rule 10a-1, implemented in the wake of the 1929 crash and changed only slightly since then, states that a 'short sale can only occur at a price above ("price tick") the immediate sale price, or at a price equal to the price of the most immediate sale if the most recent price change was positive.'").
271. For critics of the revisions to the Uptick Rule, see generally David P. McCaffrey, Review of the Policy Debate over Short Sale Regulation During the Market Crisis, 73 ALB. L. REV. 483 (2010).
272. Melissa W. Palombo, Note, The Short-Changing of Investors: Why a Short Sale Price Test Rule Is Necessary in Today's Markets, 75 BROOK. L. REV. 1447 (2010).
273. Charles R. Schwab, Restore the Uptick Rule, Restore Confidence, WALL ST. J., Dec. 9, 2008, http://online.wsj.com/article/SB122878208553589809.html.
274. See ROBERT A. SCHWARTZ, MICRO MARKETS: A MARKET STRUCTURE APPROACH TO MICROECONOMIC ANALYSIS 386 (2010) ("Fixed commissions and off-board trading restrictions were established by an accord known as the Buttonwood Tree Agreement that was signed by 24 securities brokers on May 17, 1792 ").
275. E.g., Bai, supra note 177 (conducting an empirical analysis of the effects of the Uptick Rule).
276. Kalman J. Cohen & Robert M. Conroy, An Empirical Study of the Effect of Rule 19c-3, 33 J.L. & ECON. 277 (1990) (studying the effects of Rule 19c-3).
277. Karl B. Diether et al., It's SHO Time! Short-Sale Price Tests and Market Quality, 64 J. FIN. 37 (2009) (examining the effects of the suspension of short-sale price tests).
278. The SEC also studied the effects of the experiment. E.g., DIV. MKT. REGULATION, U.S. SEC, Study III: Market Fragmentation, Competition, and Regulation, in SEC MARKET 2000: AN EXAMINATION OF CURRENT EQUITY MARKET DEVELOPMENTS III-10 (1994) (finding a "limited amount of internalization" resulting from the removal of some off-board restrictions and concluding that the Division was "not surprise[d] that studies both have failed to show a strong negative effect from Rule 19c-3 or strong evidence that the additional competition in these stocks has appreciably improved their markets").
279. OFFICE OF ECON. ANALYSIS, U.S. SEC, ECONOMIC ANALYSIS OF THE SHORT SALE PRICE RESTRICTIONS UNDER THE REGULATION SHO PILOT 4-5 (2007), available at http://www.sec.gov/news/studies/2007/regshopilot020607.pdf (analyzing the economic impact of the SHO pilot).
280. See supra notes 163-164 and accompanying text.
281. See Amy Feldman, Surviving Sarbanes-Oxley, INC. MAG., Sept. 2005, at 132, 137 ("Many observers believe there ought to be different rules for companies of different sizes, or at least clearer guidelines on how small companies should apply the rules.").
282. Public statement from Marshall E. Blume & Chester S. Spratt, Shadow Fin. Regulatory Comm., The Equity Markets: One Size Does Not Fit All (Feb. 22, 2010), available at http://www.aei.org/files/2010/02/22/Statement%20No.%20287.pdf (reviewing the SEC's proposed rules, and noting that "the trades of small retail investors and stitutional investors are fundamentally different and should not be viewed as interchangeable").
283. See Troy A. Paredes, Comm'r, U.S. Sec. & Exch. Comm'n, Twelfth Annual A.A. Sommer, Jr. Lecture on Corporate, Securities and Financial Law (Oct. 27, 2011), available at http://www.sec.gov/news/speech/2011/spch102711tap.htm ("[T]he federal securities laws have long recognized the need to be measured, as there is a tradition of scaling federal securities regulation in important respects to provide small businesses relief from select burdens that may be especially onerous for them.").
284. E.g., 17 C.F.R. § 229.101(h) (2011) (setting out lesser reporting obligations).
285. id. at § 229.201(e) (allowing for the election of an appropriate index to use in the preparation of reports).
286. id. at § 229.303(a) ("[T]he discussion shall focus on each relevant, reportable segment or other subdivision of the business and on the registrant as a whole.").
287. Most recently, Dodd-Frank excused non-accelerated filers, those with a market capitalization (excluding shares of affiliates) less than $75 million from the auditor attestation of management's assessment of internal controls.
288. See Press Release, American Accounting Association, Reviled Though It Has Been, Sarbanes-Oxley's Section 404 Substantially Reduces Corporate Financial Misstatements, Study Finds (Nov. 16, 2010), available at http://aaahq.org/newsroom/Sarbanes-Oxley%27sSection404.htm ("[T]his year's Dodd-Frank financial-reform bill permanently exempts companies with less than $75-million capitalization from a key provision of 404 that requires an outside auditor to attest annually to firms' internal-control evaluations.").
289. See, e.g., 17 C.F.R. §§ 229.10(f),.101(h),.301(c),.407(g) (2011) (reducing or eliminating many of Regulation S-K's reporting requirements for smaller companies).
290. Securities Offering Reform, Securities Act Release No. 8501, Exchange Act Release No. 50,624, Investment Company Act Release No. 26,649, 69 Fed. Reg. 67,392, 67,396-97 (proposed Nov. 17, 2004) (codified as amended at 17 C.F.R. pts. 228, 229, 230, 239, 240, 243 and 274) (justifying the SEC's decision to provide large companies (well-known seasoned issuers) with greater disclosure and registration flexibility by stating that issuers with high levels of market capitalization also tend to have high levels of analyst coverage and institutional ownership, and, thus, high levels of market scrutiny).
291. Daniel J. Morrissey, The Securities Act at Its Diamond Jubilee: Renewing the Case for a Robust Registration Requirement, 11 U. PA. J. BUS. L. 749, 763 (2009) (observing that the SEC rules give large companies (seasoned issuers and well-known seasoned issuers) more freedom to conduct offering activity during the registration process).
292. See, e.g., Groups, Stressing Economic Impact, Ask SEC to Host Roundtable on Pay Ratio Rulemaking, 44 SEC. REG. & L. REP. 153 (2012) (detailing the requests for the SEC to better consider economic impact in conducting pay-ratio rulemaking).
293. Yin Wilczek, Democratic Lawmakers Urge SEC to Adopt 'Strong' Resource Extraction Disclosure Rule, 44 SEC. REG. & L. REP. 256 (2012) (reporting that American Petroleum Institute's comment letter was a roadmap for appellate review if the SEC adopts any rules related to carrying out the Dodd-Frank mandate for disclosures related to payments made by exploration companies to foreign governments).
294. Yin Wilczek, Industry Calls on SEC to Re-Assess Economic Impact of Conflict Minerals Rule, 43 SEC. REG. & L. REP. 2256 (2011) (speculating that despite a statutory mandate the SEC would face stiff challenges with the new rule related to conflict minerals mandated by Dodd-Frank).