A federal appeals court in New Orleans has dealt a blow to the SEC, saying the agency’s rescinding of proposed Trump Administration proxy-voting rules was “arbitrary and capricious.”
The decision by the 5th U.S. Circuit Court of Appeals on June 26 reversed a lower court’s support of the Biden Administration’s rescission. The appeals court panel, in a 3-0 vote, ordered the revoking of the Trump rule covering “notice-and-awareness conditions” to be sent back to the SEC.
“The agency failed adequately to explain its decision to disregard its prior factual finding that the notice-and-awareness conditions posed little or no risk to the timeliness and independence of proxy voting advice,” the judges wrote in the case of National Association of Manufacturers et al. vs. United State Securities and Exchange Commission et al.
“The agency failed to provide a reasonable explanation why these risks were so significant under the 2020 Rule as to justify its rescission,” the judges added.
“These shortcomings” of the Biden Administration’s SEC require the “notice-and-awareness conditions” component of the SEC’s action to be vacated, they wrote. This provision required proxy firms to provide their voting advice to their clients and companies at the same time. The rule also said proxy firms had to provide their customers with what companies said about the recommendations.
The 2020 rule was proposed by the Trump Administration with Jay Clayton as chairman, but it never took effect, the court noted. It was scheduled to start Dec. 1, 2021; but the SEC, under Chair Gary Gensler, rescinded it in November 2021, the court explained.
In addition to the “notice-and-awareness conditions” component, the 2020 rule also “codified the SEC’s interpretation that proxy voting advice qualifies as proxy solicitation,” the court wrote. The rule “confirmed that proxy voting advice is subject to the anti-fraud regulations governing proxy solicitations by adding an explanatory note” to the code of federal regulations.
However, the appeals court’s ruling for remand did not include these other provisions even though the plaintiffs, National Association of Manufacturers and Natural Gas Services Group Inc., wanted all of the Gensler SEC action be thrown out.
The plaintiffs sued the SEC and Gensler in July 2022, but a U.S. District Court judge in Midland, Texas, ruled for the defendants in December 2022.
“This decision confirms that federal agencies are bound by the rule of law, even as administrations change,” Linda Kelly, the chief legal officer of the National Association of Manufacturers, said in a June 27 news release.
“Manufacturers depend on the SEC to be a steady regulatory hand at the wheel of America’s world-leading capital markets — an obligation the agency abandoned in rescinding the commonsense, compromise 2020 proxy advisory firm rule,” she wrote. “We will continue to fight in court to uphold the 2020 rule — and to work with the SEC and with Congress to ensure appropriate oversight of these powerful actors.”
A representative of the SEC did not immediately respond to a request for comment.
