Ruling could curb financial overhaul

By David S. Hilzenrath
Washington Post / August 12, 2011

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WASHINGTON - They lost Round One when Congress wrote the law. They lost Round Two when regulators began turning the law into rules. But business groups fighting regulatory measures adopted in response to the financial crisis could still score a knockout in another arena: the federal courts.

A recent Appeals Court decision could spell trouble for the Securities and Exchange Commission as it puts in place some of the most far-reaching Wall Street regulations in years, specialists say.

The potential points of contention include issues as diverse as whistleblower rewards, derivatives trading, and executive pay. The ruling also could prompt court challenges to the work of other agencies, including environmental regulations that corporations denounce as damaging to the economy.

A three-judge panel said the SEC did not adequately analyze the economic consequences of a rule that would make it easier for shareholders to oust members of corporate boards.

The court declared that the SEC had acted “arbitrarily and capriciously.’’

“What the court is doing is second-guessing economic analysis that can always be second-guessed,’’ said Robert Brown, a professor at the University of Denver’s Sturm College of Law.

The case pitted two of the capital’s most influential business groups against the government’s primary Wall Street watchdog.

It’s called Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission.

In a July decision, a three-judge panel of the US Court of Appeals in Washington struck down a new SEC rule that would have allowed major shareholders to place board candidates on a company ballot.

The SEC said the new rule could make board members more responsive to shareholders and more independent from management, and less complacent.

By improving the way companies are run, the rule could increase shareholder value and restore investor confidence, the SEC said.

On the other side, the Business Roundtable, which represents chief executives, and the Chamber of Commerce said labor unions could abuse ballot or “proxy’’ access by advancing agendas at odds with the interests of other shareholders.

The business representatives also argued that the SEC failed to account for expenses companies would incur campaigning against outside nominees for board seats.

In the so-called proxy access rule, the SEC devoted nearly 80 pages to a cost-benefit analysis, trying to quantify some costs that are inherently unpredictable even as the agency justified the rule based on intangible value judgments.

In the document issued last August laying out the rule, the SEC acknowledged that companies might spend money campaigning against outside board candidates and listed a range of estimated costs companies have incurred in past proxy contests. But the agency said campaign spending was not required by the rule.

The opinion issued by the three judges, all appointed by Republican presidents, accused the SEC of failing to address concerns raised by industry in formal comments submitted as part of the rule-making process.

“The SEC needs to more seriously address the concerns raised by commenters in the rule-making process,’’ Business Roundtable executive director Larry Burton said in a written response to questions.