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Dodd-Frank Regulators Beware: New Rules Will Not Survive Without Sound Economic Justification

Jane C. Luxton | luxtonj@pepperlaw.com

In late July, the Court of Appeals for the District of Columbia (D.C. Circuit) handed the Securities and Exchange Commission (SEC) a scathing rebuke, after reviewing the agency’s first Dodd-Frank Act (DFA) regulation, a rule that would have required publicly traded companies to include in proxy materials potentially voluminous information on director candidates nominated by shareholders rather than by the board of directors. The opinion in Business Roundtable v. SEC sent a strong message that the agency’s proposed “proxy access” rule must meet much higher standards than the SEC had expected with respect to cost-benefit analysis and justification. Saying the SEC had “acted arbitrarily and capriciously,” and therefore impermissibly under the Administrative Procedure Act (APA), by “inconsistently and opportunistically fram[ing] the costs and benefits of the rule; fail[ing] adequately to quantify the certain costs or to explain why those costs could not be quantified; neglect[ing] to support its predictive judgments; contradict[ing] itself; and fail[ing] to respond to substantial problems raised by commenters,” the court vacated the final rule.

 

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