July 28, 2011
The SEC, the D.C. Circuit, and the Rule of Law
Earlier this week, Steve posted an interesting list of many of the recent cases the SEC has lost in the D.C. Circuit (including the latest proxy access case). Steve closed by noting that "an agency has to work really hard to lose this much," and that he was "inclined to think that the SEC simply doesn't care enough about the rule of law." That may be true, but if a lack of respect for the rule of law is an issue here (and that's a big "if"), then I'd like to add that the D.C. Circuit may also be deserving of some criticism. Steve himself notes that "the Financial Planning case is just bad statutory interpretation by the court." To that one can add Brett McDonnell's comments regaring the proxy access case that I posted here (remember, we are talking about the court concluding that the SEC acted arbitrarily and capriciously):
The SEC's documents proposing and finalizing the rule are about extensive as I have ever seen from that agency, and they had voluminous comments from all sides to help guide them. The D.C. Circuit cherrypicks areas where it asserts the SEC didn't do enough. It will almost always be possible to do that with any agency rulemaking. Requiring that level of deliberation could well make the task of rule-writing for Dodd-Frank more daunting still. This opinion is little more than the judges ignoring the proper judicial rule of deference to an agency involved in notice-and-comment rulemaking and asserting their own naked political preferences. Talk about judicial activism.
To this I would also add Jay Brown's take:
In some respects, the DC Circuit's decision … is a grave disappointment. The SEC has the authority to adopt an access rule, that was confirmed in Dodd-Frank. The rule was carefully crafted and vetted over a year long process. The panel, however, didn't like the rule and imposed an almost impossible burden on the SEC. It wasn't enough, for example, for the SEC to conclude that access could benefit boards and point to some studies making that point. Instead, the Agency had to rely on the right studies. The opinion criticized those used by the SEC but did not do the same with respect to those on the other side. In other words, it is clear that the court agreed with one side but not the other. One way or another that panel was going to strike down the rule. That the DC Circuit would issue a political decision is no real surprise. The circuit is full of judges who likely were too controversial for their home state senators to nominate. Without senators in Congress, DC has no politicians who can object to the White House nominees. As a result, the White House has a free hand and can more easily appoint controversial idealogues…. What the case shows is how far behind the courts are with respect to the evolution of the corporate governance process. Two of the [three] judges on the panel were appointed by President Reagan at the height of the law and economics movement. That was the hey day of deregulation and the view that the market can resolve all issues. The shallowness of that philosophy was brought home in the most recent recession. But it is clear that this panel views interference in the management prerogative with disfavor and does not need much excuse to overturn it.
Point well taken, but I don't agree that the D.C. Circuit is nitpicking. The SEC has done a pretty lousy job of reviewing the evidence of costs and benefits, and one would think they would learn, if only to try to appease the D.C. Circuit. Who, for example, thought there was a chance the SEC would win the second Chamber of Commerce case, where they essentially readopted the rule in record time without doing anything to address the court's concerns? And frankly, I think the D.C. Circuit has let them off too easy on questions of statutory authority, striking down some rules on APA and other grounds, where a strong case could be made that they lacked the statutory authority to adopt the rule.
With all that, and some of the setbacks in enforcement cases that try to extend the law beyond a reasonable construction, I think a clear case can be made that at least part of the problem is an internal disregard for the rule of law. And I don't see this as an ideological issue. The D.C. Circuit cases bring it to light, but it's a longstanding problem that encompasses both Democratic-majority and Republican-majority commissions.
Posted by: Steve Bradford | Jul 28, 2011 10:34:59 AM
I will admit I've noted something similar myself before:
Posted by: Stefan | Jul 29, 2011 8:36:41 AM