Monday, August 01, 2022

Manufacturers, Chamber sue SEC over rescission of proxy rules

By Rodney F. Tonkovic, J.D.

NAM and the Chamber of Commerce have filed separate suits challenging the SEC's rescission of part of its rules governing proxy voting advice. The final rules scrapped conditions to exemptions from the proxy rules' information and filing requirements that were adopted in July 2020. The complaints argue that the Commission provided no justification for this about-face and failed to provide the APA's procedures. The promulgation of the amended rule was arbitrary and capricious, the complaints argue, and it should be vacated and set aside.

Proxy rule rescission. On July 13, 2022, the SEC, by a 3-2 vote, rescinded certain aspects of proxy voting advice rules adopted just two years earlier. The July 2020 rules codified the Commission's view that proxy voting advice is generally a solicitation under the securities regulations. At issue here, the release added conditions in Exchange Act Rule 14a-2(b)(9)(ii)(A) and (B) requiring a proxy voting advice business to adopt and publicly disclose written policies and procedures reasonably designed to ensure:
  • Registrants that are the subject of the proxy voting advice have such advice made available to them when the advice is disseminated to the proxy voting advice business's clients; and
  • The proxy voting advice business provides a mechanism by which its clients can become aware of any written statements regarding its proxy voting advice by registrants who are the subject of such advice, in a timely manner before the security holder meeting.
The 2022 release rescinded these conditions, as well as related safe harbors and exclusions from those conditions, plus a note to Rule 14a-9 and supplemental proxy guidance issued in connection with the 2020 rules. Commissioners Peirce and Uyeda dissented, objecting to what Peirce called dramatic change of course with little justification; both commissioners also pointed to the 30-day comment period, which overlapped the major December holidays.

NAM sues. On July 21, 2022, the National Association of Manufacturers sued the SEC in the Western District of Texas seeking declaratory and injunctive relief. NAM has long supported increased oversight of proxy advisory firms and called the 2020 rules a "major win for the industry." But, when the SEC suspended enforcement of the rules in June 2021, NAM voiced concern and later filed suit challenging the suspension.

The complaint argues that the rescission is procedurally defective and unlawfully arbitrary and capricious and should be set aside in its entirety. Using the same factual record behind the adoption of the 2020 rules the SEC came to a completely different outcome in 2022. Not only did the SEC lack any compelling justification, NAM says, to the extent the agency explains its action, "its contentions are mere platitudes." The Administrative Procedure Act requires much more, and this and other failures of reasoning require the 2022 rule's vacatur "many times over." Regarding this suit, NAM's Chief Legal Officer Linda Kelly said: "The SEC has failed to provide any substantive justification for its dramatic about-face. Manufacturers depend on federal agencies to provide reliable rules of the road, and the SEC's arbitrary actions to rescind this commonsense regulation clearly violate its obligations under the Administrative Procedure Act."

The complaint offers several reasons why NAM believes that the rescission is fatally flawed both procedurally and substantively. First, the Commission rescinded the regulation based on the same factual record behind promulgating the regulation in the first place; plus, the 2020 rule never went into effect so it could be evaluated in practice. NAM argues further that the SEC failed to articulate any explanation for its action, especially in its conclusion that voluntary measures by proxy firms would render some of the mechanisms of the rule unnecessary. In addition, the SEC failed to respond to comments received and only repeated the premises the comments had rebutted, NAM says.

Moreover, the rescission was done without observing the APA's notice and comment procedures, which provides another basis to set aside the entire rulemaking. According to NAM, "all signs indicate that Chair Gensler's SEC had made up its mind to rescind the 2020 Rule before even initiating the notice and comment process." NAM notes that the reconsideration process began with a June 2021 "secret, behind-closed-doors" meeting with only opponents of the 2020 rule, biasing the agency against good-faith consideration of comments from both sides.

Finally, the complaint takes issue with the "unduly short" comment period of 30 days. The comment period ended on December 27, 2021, in the middle of the holiday season, and it was predictable, NAM remarks, that concerned parties were unable to submit comment letters during this period. The abbreviated comment period indicates a lack of good-faith consideration by the SEC, and this provides another reason for the court to set aside the rulemaking, NAM maintains.

Chamber of Commerce. The Chamber of Commerce filed its suit in the Middle District of Tennessee on July 28, 2022. The Chamber also seeks a declaratory judgment that the rescission is arbitrary and capricious and should be vacated in its entirety. It is worth noting that the Chamber has issued a summons to Chairman Gensler, who is being sued in his official capacity.

The Chamber's complaint argues that the rescission violated the Commission's obligations under the APA in numerous ways. Like NAM, the Chamber argues that the Commission's justifications for the rescission are "riddled with flaws and logical inconsistencies" and provide no evidence of new or changed circumstances that would support reversing its position.

In addition, the complaint posits that the rescission's cost-benefit analysis is opportunistically framed. According to the Chamber, the analysis focuses on the benefits to proxy advisors' profitability while ignoring the substantial costs to companies and investors. The SEC also failed to consider alternatives and downplayed or ignored the problems leading to the adoption of the 2020 rule. Plus, by deferring to the advisors' voluntary self-regulation, the Commission had given them special treatment in contrast to other regulated entities for which it has concluded self-regulation is insufficient.

The Chamber asserts that the rescission was "plainly the by-product of political objectives" and contrasts this move away from transparency to efforts in other areas, such as ESG. As the complaint notes, Chairman Gensler was sworn in April 2021, and the Commission "abruptly flip-flopped" on the 2020 rule in June 2021. The complaint also points out the "rushed comment period" that generated about one-tenth of the amount received for the 2020 rule, most of which expressed opposition to the sudden rule change. The Chamber also accuses the Commission of "stonewalling" in its refusal to respond to requests to extend the comment period and in its delay in responding to the Chamber's FOIA requests concerning the June 2021 meeting.

"The SEC's harmful decision to roll back these reforms will allow proxy advisors to operate as a black box, as they have for decades, and create disincentives for companies to go, and stay, public," said U.S. Chamber President and CEO Suzanne P. Clark. She added that the SEC "failed to engage in reasoned decision-making and provided no serious evidence of new or changed circumstances to justify its actions. The Chamber will continue to fight on behalf of businesses to ensure the SEC holds proxy advisors accountable and does not move forward with regulation that harms companies, investors, and the capital markets."

The cases are Nos. 3:22-cv-00561(Chamber) and 7:22-cv-00163 (NAM).