Judicial review of SEC rules: Managing the costs of cost-benefit analysis

Minnesota Law Review

Volumn 97, Issue 1, 2012, Pages 278-305

  Benedict, Rachel A ^a  

^a UNIVERSITY OF MINNESOTA LAW SCHOOL   (United States)

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EID: 84874424753     PISSN: 00265535     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (100)

1. See Letter from Mary L. Schapiro, Chairman, Sec. & Exch. Comm'n, to Scott Garrett, Representative, U.S. House of Representatives 2 (Aug. 5, 2011), available at http://www.law.du.edu/documents/corporate-governance/sec-and -governance/SEC-letter%208-5-11.pdf.
2. Bus. Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011).
3. See Exchange Act Release No. 34-3347, 7 Fed. Reg. 10,653 (Dec. 18, 1942)
4. Exchange Act Release No. 13,901, 12 SEC Docket 1630 (Aug. 29, 1977)
5. Exchange Act Release No. 34-31,326, 52 SEC Docket 2028 (Oct. 16, 1992)
6. Exchange Act Release No. 34-47,778, 80 SEC Docket 248 (May 1, 2003).
7. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 971, 124 Stat. 1376 (2010).
8. Bus. Roundtable, 647 F.3d at 1148
9. J. Robert Brown, Jr., Shareholder Access and Uneconomic Analysis: Business Roundtable v. SEC 2 (Univ. of Denver Strum Coll. of Law, Working Paper No. 11-14, 2011), available at http://ssrn.com/abstract=1917451.
10. Administrative Procedure Act, 5 U.S.C. § 706 (2006).
11. See Bus. Roundtable, 647 F.3d at 1148
12. Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 177-79 (D.C. Cir. 2010)
13. Chamber of Commerce v. SEC, 412 F.3d 133, 143-44 (D.C. Cir. 2005).
14. U.S. GEN. ACCOUNTING OFFICE, GAO-02-302, SEC OPERATIONS: INCREASED WORKLOAD CREATES CHALLENGES 13 (2002) (highlighting the disproportionately small increase in the number of SEC staff compared with the growth of its workload over the last decade).
15. See Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act, SEC. & EXCHANGE COMMISSION, http://www.sec.gov/spotlight/ dodd-frank.shtml (last modified Sept. 7, 2012).
16. See Ira Teinowitz, Investor Council Urges SEC to Keep Fighting on Proxy Access, THE DEAL PIPELINE (Aug. 24, 2011, 6:04 AM), http://www.thedeal.com/ content/regulatory/investor-council-urges-sec-to-keep-fighting-on -proxy-access.php.
17. See CONG. BUDGET OFFICE, REGULATORY IMPACT ANALYSIS: COSTS AT SELECTED AGENCIES AND IMPLICATIONS FOR THE LEGISLATIVE PROCESS viii (1997), available at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/40xx/doc4015/ 1997doc04-entire.pdf.
18. See 1 CHARLES H. KOCH, JR., ADMINISTRATIVE LAW AND PRACTICE § 4:10 (3d ed. 2010).
19. Renee M. Jones, Legitimacy and Corporate Law: The Case for Regulatory Redundancy, 86 WASH. U. L. REV. 1273, 1306-08 (2009).
20. see also FCC v. Fox Television Stations, Inc., 556 U.S. 502, 536 (2009) (Kennedy, J., concurring) ("If agencies were permitted unbridled discretion, their actions might violate important constitutional principles of separation of powers and checks and balances.").
21. George B. Shepherd, Fierce Compromise: The Administrative Procedure Act Emerges from New Deal Politics, 90 NW. U. L. REV. 1557, 1558-59 (1996) ("The APA expressed the nation's decision to permit extensive government, but to avoid dictatorship and central planning.").
22. Administrative Procedure Act, 5 U.S.C. § 706(2)(A) (2006).
23. see 551 U.S. 644, 658 (2007) (quoting Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).
24. Greenbaum v. EPA, 370 F.3d 527, 542 (6th Cir. 2004) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962))
25. see also Bluewater Network v. EPA, 370 F.3d 1, 11 (D.C. Cir. 2004)
26. Anderson v. U.S. Dep't of Transp., 213 F.3d 422, 423 (8th Cir. 2000).
27. FCC v. Fox Television Stations, Inc., 556 U.S. 502, 513-14 (2009) ("We have made clear, however, that 'a court is not to substitute its judgment for that of the agency,' and should 'uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned.'" (quoting Motor Vehicle Mfrs. Ass'n, 463 U.S. at 43; Bowman Transp., Inc. v. Ark.-Best Freight Sys., Inc., 419 U.S. 281, 286 (1974))).
28. Securities Exchange Act of 1934, 15 U.S.C. § 78c(f) (2006) ("Whenever . . . the Commission is engaged in rulemaking . . . the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation."). The Investment Company Act of 1940 sets forth the same requirement.
29. See 15 U.S.C. § 80a-2(c) (2006). While the efficiency, competition, and capital formation considerations collectively compose the requirement to conduct an economic analysis, the protection of investors was the SEC's founding mission. The Investor's Advocate: How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, SEC. & EXCHANGE COMMISSION, http://www.sec.gov/about/whatwedo.shtml (last modified Oct. 12, 2012).
30. See, e.g., Bus. Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011) ("The Commission . . . has a 'statutory obligation to determine as best it can the economic implications of the rule.'" (quoting Chamber of Commerce v. SEC, 412 F.3d 133, 143 (D.C. Cir. 2005)))
31. Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 177-79 (D.C. Cir. 2010) (finding that the SEC failed to consider the rule's effects on efficiency, competition, and capital formation when it did not engage in a well-reasoned economic analysis).
32. CASS R. SUNSTEIN, THE COST-BENEFIT STATE: THE FUTURE OF REGULATORY PROTECTION xi (2002).
33. see also Susan Rose-Ackerman, Putting Cost-Benefit Analysis in Its Place: Rethinking Regulatory Review, 65 U. MIAMI L. REV. 335, 335 (2011) (recognizing the value of cost-benefit analysis but arguing that its use should be limited to regulatory areas that comport well with its underlying assumptions).
34. See Indus. Union Dep't, AFL-CIO v. Am. Petrol. Inst., 448 U.S. 607, 644-46 (1980) (finding that the statute and its legislative history contemplated that the agency undertake some measure of a cost-benefit analysis before promulgating a new regulatory standard)
35. See Brett Friedman et al., Recent Decisions of the United States Court of Appeals for the District of Columbia Circuit: Administrative Law, 74 GEO. WASH. L. REV. 619, 656-57 (2006) (noting that the lack of a clear standard for reviewing SEC economic analyses "puts a large amount of power in the hands of future courts").
36. See Bus. Roundtable v. SEC, 647 F.3d 1144, 1148 (D.C. Cir. 2011)
37. Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 177-79 (D.C. Cir. 2010)
38. Chamber of Commerce v. SEC, 412 F.3d 133, 143-44 (D.C. Cir. 2005).
39. Chamber of Commerce, 412 F.3d at 136.
40. Investment Company Governance, 69 Fed. Reg. 46,378, 46,383-84 (Aug. 2, 2004).
41. Chamber of Commerce, 412 F.3d at 142 ("[W]e are acutely aware that an agency need not-indeed cannot-base its every action upon empirical data; depending upon the nature of the problem, an agency may be 'entitled to conduct . . . a general analysis based on informed conjecture.'" (quoting Melcher v. FCC, 134 F.3d 1143, 1158 (D.C. Cir. 1998))).
42. Investment Company Governance, 69 Fed. Reg. at 46,387.
43. Chamber of Commerce, 412 F.3d at 144 (holding that the SEC violated its duty to consider whether the rule would promote efficiency, competition, and capital formation under the Investment Company Act, rendering the rule arbitrary under the APA)
44. see Administrative Procedure Act, 5 U.S.C. § 706(2)(A) (2006)
45. Investment Company Act of 1940, 15 U.S.C. § 80a-2(c) (2006).
46. Chamber of Commerce, 412 F.3d at 144.
47. Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 179 (D.C. Cir. 2010).
48. Indexed Annuities and Certain Other Insurance Contracts, 74 Fed. Reg. 3138, 3161-72 (Jan. 16, 2009).
49. Am. Equity, 613 F.3d at 177-79.
50. Bus. Roundtable v. SEC, 647 F.3d 1144, 1156 (D.C. Cir. 2011).
51. See Exchange Act Release No. 34-3347, 7 Fed. Reg. 10,653 (Dec. 18, 1942)
52. Exchange Act Release No. 34-13,901, 12 SEC Docket 1656 (Aug. 29, 1977)
53. Exchange Act Release No. 34-31,326, 52 SEC Docket 2028 (Oct. 16, 1992)
54. Exchange Act Release No. 34-47,778, 80 SEC Docket 248 (May 1, 2003)
55. Exchange Act Release No. 34-56,160, 91 SEC Docket 544 (July 27, 2007).
56. Bus. Roundtable, 647 F.3d at 1147.
57. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 971, 124 Stat. 1376 (2010).
58. Facilitating Shareholder Director Nominations, 75 Fed. Reg. 56,668, 56,753-76 (Sept. 16, 2010) (producing twenty-three pages of cost-benefit analysis for the proxy access rule).
59. Bus. Roundtable, 647 F.3d at 1148-49.
60. Stan-ley Keller, What Now for Proxy Access?, HARV. L. SCH. F. ON CORP. GOVERN-ANCE & FIN. REG. (Aug. 18, 2011, 9:29 AM), http://blogs.law.harvard. edu/corpgov/2011/08/18/what-now-for-proxy-access/ (stating his concern about the "high, nigh impossible, bar the Court set that could put in jeopardy most SEC rulemaking of any complexity or controversy").
61. See Frank B. Cross, Pragmatic Pathologies of Judicial Review of Administrative Rulemaking, 78 N.C. L. REV. 1013, 1019 (2000) ("The shadow of judicial review has a pervasive effect on agency decisionmaking, and the commands of preceding cases can have an enormous unforeseen effect on policy-making, even in areas that are not related directly to the policies previously litigated.").
62. See JERRY L. MASHAW, GREED, CHAOS, AND GOVERNANCE: USING PUBLIC CHOICE TO IMPROVE PUBLIC LAW 165 (1997) (noting that most commentators agree judicial review of agency rules causes uncertainty because of the courts' lack of sophistication in agency matters).
63. See Thomas O. McGarity, Some Thoughts on "Deossifying" the Rule-making Process, 41 DUKE L.J. 1385, 1412 (1992). "Important rulemaking initiatives grind along at such a deliberate pace that they are often consigned to regulatory purgatory, never to be resurrected again."
64. David S. Hilzenrath, Appeals Decision Is a Victory for Opponents of SEC's New Wall Street Regulations, WASH. POST (Aug. 11, 2011), http://www. washingtonpost.com/business/economy/appeals-decision-is-a-victory-for-opponents- of-secs-new -wall-street-regulations/2011/08/05/gIQAGSAg8I-story.html (quoting former SEC commissioner Harvey J. Goldschmid's comment that "[i]f the court's un-realistic requirements were applied across the board, the regulatory process would grind to a halt").
65. Order Granting Stay, Securities Act Release No. 9149, Exchange Act Release No. 63,031, Investment Company Act Release No. 29,456, File No. S7-10-09 (Oct. 4, 2010).
66. See Yin Wilczek, Corporate Governance: Court Vacates SEC's Proxy Access Rule, Cites Failure to Assess Economic Impact, BANKING DAILY, July 25, 2011, available at 2011 WL 2938907.
67. R. Shep Melnick, Administrative Law and Bureaucratic Reality, 44 ADMIN. L. REV. 245, 246 (1992) ("Judicial review has subjected agencies to debilitating delay and uncertainty. Courts have heaped new tasks on agencies while decreasing their ability to perform any of them.").
68. Gray v. Powell, 314 U.S. 402, 412 (1941) ("It is not the province of a court to absorb the administrative functions to such an extent that the executive or legislative agencies become mere fact-finding bodies deprived of the advantages of prompt and definite action.").
69. See Stephen Breyer, Judicial Review of Questions of Law and Policy, 38 ADMIN. L. REV. 363, 383 (1986).
70. Comprehensive cost-benefit analysis for minor rules will generally be an inefficient use of agency resources, since a single cost-benefit analysis can cost more than six million dollars.
71. See CONG. BUDGET OFFICE, REGULATORY IMPACT ANALYSIS: COSTS AT SELECTED AGENCIES AND IMPLICATIONS FOR THE LEGISLATIVE PROCESS viii (1997), available at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/40xx/doc4015/ 1997doc04-entire.pdf.
72. See WILLIAM F. WEST, ADMINISTRATIVE RULEMAKING: POLITICS AND PROCESSES 188 (1985).
73. see also Brett McDonnell, Dynamic Statutory Interpretations and Sluggish Social Movements, 85 CALIF. L. REV. 919, 920-21 (1997) (suggesting that political activists often choose to achieve short-run gains through judicial action rather than long-run gains through directly appealing to Congress because court action does not require mobilizing as many supporters).
74. See, e.g., Donald C. Langevoort, The SEC as a Lawmaker: Choices About Investor Protection in the Face of Uncertainty, 84 WASH. U. L. REV. 1591, 1594 (2006) (suggesting that interest groups have broad policy objectives beyond an opposition to the particular rule when they bring legal challenges).
75. Jim Puzzanghera, SEC Chairwoman Warns of Budget Constraints as Republicans Look to Cut More, L.A. TIMES (Feb. 4, 2011, 1:08 PM), http://latimesblogs.latimes.com/money-co/2011/02/sec-budget-schapiro- republicans -financial-reform-wall-street.html.
76. See James B. Stewart, As a Watchdog Starves, Wall Street Is Tossed a Bone, N.Y. TIMES (July 15, 2011), http://www.nytimes.com/2011/07/16/business/ budget-cuts-to-sec-reduce-its-effectiveness.html?-r=1 (noting that the SEC's 2011 budget was frozen despite the vast expansion of its duties under the Dodd-Frank legislation and arguing that the House Appropriations Committee is "starving the agency responsible for bringing financial wrongdoers to justice").
77. See, e.g., J.W. Verret, The Curious Case of the Proxy Access Rule, TRUTH ON THE MARKET (July 22, 2011, 1:26 PM), http://truthonthemarket.com/2011/07/22/ the-curious-case-of-the-proxy -access-rule/ (suggesting that the SEC's fundamental problem is that "it is an agency with too many lawyers and not enough economists").
78. see also Jerry L. Mashaw & David L. Harfst, Regulation and Legal Culture: The Case of Motor Vehicle Safety, 4 YALE J. ON REG. 257, 294 (1987) (arguing that judicial review of the decision process "gives enormous leverage to the status quo, whether the status quo is no rule . . . or the continuance of a rule").
79. See H.R. REP. NO. 104-622, at 24 (1996).
80. see also Letter from Jeff Mahoney, Gen. Counsel, Council of Institutional Investors, to Mary L. Schapiro, Chairman, Sec. & Exch. Comm'n 2 (Aug. 19, 2011), available at http://www.cii.org/UserFiles/file/resource%20center/ correspondence/2011/08- 1911%20Letter%20to%20SEC%20on%20Proxy%20Access%20%28Final%29.pdf (arguing that the court's decision in Business Roundtable v. SEC prevented the SEC from implementing "a critically important rule designed to benefit long-term investors and the markets").
81. Securities Exchange Act of 1934, 15 U.S.C. § 78c(f) (2006)
82. Investment Company Act of 1940, 15 U.S.C. § 80a-2(c) (2006).
83. Administrative Procedure Act, 5 U.S.C. § 706(2)(A) (2011).
84. Antonin Scalia, Back to Basics: Making Law Without Making Rules, REGULATION, July/Aug. 1981, at 25, 26 ("The courts have attached many procedural requirements not explicit in the APA. Th[i]s include[s] the requirement[] . . . that the agency justify the rule in detail and respond to all sub-stantial objections raised by the public comments. The 'arbitrary and capricious' standard for judicial review has evolved from a lick-and-a-promise to a 'hard look' by appellate courts.").
85. see also Richard J. Pierce, Jr., Two Problems in Administrative Law: Political Polarity on the District of Columbia Circuit and Judicial Deterrence of Agency Rulemaking, 1988 DUKE L.J. 300, 310 ("In order to survive judicial review, an agency's 'concise general' statement of basis and purpose must deal comprehensively and in detail with each issue raised in comments, no matter how trivial that issue appears to the agency.").
86. The Mission and Structure of the Office of Management and Budget, OFF. OF MGMT. & BUDGET, http://www.whitehouse.gov/omb/organization-mission/ (last visited Oct. 17, 2012).
87. See CURTIS W. COPELAND, CONG. RESEARCH SERV., R41974, COST-BENEFIT AND OTHER ANALYSIS REQUIREMENTS IN THE RULEMAKING PROCESS 17 (2011), available at http://www.fas.org/sgp/crs/misc/R41974.pdf
88. OFFICE OF MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, 2011 REPORT TO CONGRESS ON THE BENEFITS AND COSTS OF FEDERAL REGULATIONS AND UNFUNDED MANDATES ON STATE, LOCAL, AND TRIBAL ENTITIES 31 (2011).
89. See Steven Croley, White House Review of Agency Rulemaking: An Empirical Investigation, 70 U. CHI. L. REV. 821, 830 (2003) (arguing that OMB review of agency rules provides a "quality check on pending rules")
90. see also Elaine Buckberg et al., Will Court Short-Circuit Dodd-Frank?, POLITICO (Aug. 15, 2011), http://www.politico.com/news/stories/0811/61363. html#ixzzlV6GiBAVP ("Better regulation, able to survive review by the D.C. Circuit Court, will likely require incorporating substantive and independent economic analysis into the development of every rule as standard operating procedure.").
91. See Exec. Order No. 12,866, 58 Fed. Reg. at 51,737 (excluding all independent regulatory agencies from the scope of the executive order).
92. Peter L. Strauss, Presidential Rulemaking, 72 CHI.-KENT L. REV. 965, 983-84 (1997) (arguing that the President should not act "as if rulemakings were his rulemakings").
93. See SEC Regulatory Accountability Act, H.R. 2308, 112th Cong. § 2 (2011).
94. see also Arthur Levitt, Jr., Don't Gut the SEC, N.Y. TIMES (Aug. 7, 2011), http://www.nytimes.com/2011/08/08/opinion/dont-gut-the-sec.html ("What we need is not a requirement to do more cost-benefit analysis, but better tools to do the work well and with more precision. Otherwise, cost-benefit analysis will become a permanent and immovable wall to future efforts to improve the stability, safety and transparency of financial markets.").
95. The executive order requiring OMB review of executive agency rules similarly limits OMB review to rules that are economically significant (i.e., rules with an annual economic effect greater than $100 million). See Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Sept. 30, 1993).
96. See, e.g., Greenbaum v. EPA, 370 F.3d 527, 542 (6th Cir. 2004) (finding the APA's arbitrariness standard satisfied when there is a "rational connection between the facts found and the choice made" (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168 (1962)))
97. Bluewater Network v. EPA, 370 F.3d 1, 11 (D.C. Cir. 2004) (same)
98. Anderson v. U.S. Dep't of Transp., 213 F.3d 422, 423 (8th Cir. 2000) (same)
99. Office of Commc'n of United Church of Christ v. FCC, 707 F.2d 1413, 1440 (D.C. Cir. 1983) ("[C]ost-benefit analyses epitomize the types of decisions that are most appropriately entrusted to the expertise of an agency; certainly appellate briefs and arguments would illequip a court that would seek to balance for itself the myriad considerations involved in any complex administrative policy decision.").
100. A court is not permitted to substitute its own policy judgment for that of the agency. FCC v. Fox Television Stations, Inc., 556 U.S. 502, 513-14 (2009).