Business Roundtable v. SEC: The Necessary Course to Understand the Decision

We are planning a series of posts on the DC Circuit's decision in Business Roundtable v. SEC, the case that struck down Rule 14a-11. Before doing so, however, we note the following comment by JW Verret at Truth on the Market.

He has suggested that those faulting the economic analysis used by the court ought to take a course in policy analysis.  As he writes:

• I think they could profit from a course in policy analysis.  The legislative history of the securities laws makes clear that the objective is a purely economic one, to stabilize markets, prevent fraud, and maximize economic growth.  The 33′ and 34′ Acts were a response to the stock market crash of 1929 after all.  Cost-benefit analysis is a tough fit in areas where nebulous ideas like justice or equity are at issue (though it is still quite informative) but where as here the underlying objectives are purely economic it is the only legitimate mode of analysis.  It is hard to demonstrate net benefits from new rules, that’s true.  But does that mean we shouldn’t even ask the question?  I suspect their hostility to cost-benefit analysis is actually grounded in their belief that independent agencies are useful tools to accomplish a progressive agenda, including empowering labor unions, promoting climate change regulation, fair trade, affirmative action, and a variety of other liberal causes.  Putting these issues in the hands of independent agencies politicizes the SEC, undermining its credibility and hindering the SEC’s job of promoting the efficient function of American capital markets.

There are several comments to be made about this approach.  First, the post mistakenly assumes that the issue in the case was cost-benefit analysis.  In fact, the primary authority used by the court in Business Roundtable was the SEC's obligation to analyze the effects of a rule on competition, efficiency and capital raising.  See Section 3(f), 15 USC 78c(f).

Second, the comment that cost-benefit analysis "is the only legitimate mode of analysis" reflects JW Verrett's "policy" perspective but it does not reflect the law.  In adopting Section 3(f), Congress had this to say:

• “The new section makes clear that matters relating to efficiency, competition, and capital formation are only part of the public interest determination, which also includes, among other things, consideration of the protection of investors.  For 62 years, the foremost mission of the Commission has been investor protection, and this section does not alter the Commission’s mission.” 

H. Rep. 104-622, 104^th Cong., 2^nd Sess., at 39 (June 17, 1996).  See also Section 3(f) in 1996, Pub. L. No. 104-290, § 106(a), 110 Stat. 3416, 3424).  In other words, the efficiency analysis was only one step required of the Commission.  Congress left open the possibility that the goals of investor protection could sometimes override the results of the economic analysis.

Finally, criticism of Business Roundtable is not criticism of cost-benefit analysis per se.  It is criticism of the particular requirements imposed by the court on the SEC.  As we will show in later posts, the court required the SEC to assess costs that are unproven to exist, required the SEC to assume that pension plans will violate their fiduciary obligations and then assess the costs of those violations, and imposed on the SEC a definition of fiduciary obligations that do not comport with the requirements of state law. 

Perhaps JW Verrett could use a course in administrative law.  For more thoughts on the court's opinion in Business Roundtable, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC.

Comments

[Harry Gerla]

Even assuming that the ’33 and ’34 Acts both have only economic goals, and cost benefit analysis is the only legitimate method for seeing a measure furthers those goals, Professor Verret's post is flawed because it completely ignores section 971 of the Dodd Frank Act. That section specifically gives the SEC authority to issue rules on shareholder access to proxies for the purpose of nominating candidates for board membership “under such terms and conditions as the Commission determines are in the interest of shareholders and for the protection of investors.” The quoted language certainly sounds different from the “stabilize markets, prevent fraud, and maximize economic growth” formula. It is markedly different from what the DC Circuit described as the SEC’s “unique obligation” to consider the impact of rules on “efficiency, competition and capital formation.” The language of section 971 seems to harken back to the olden days before impact on capital formation was a relevant factor and the primary goal of the Securities Acts was the protection of investors

[Former Law Student]

In my opinion, Sec. 971 of the Dodd Frank Act was put into place specifically to prevent a ruling such as the one issued by the DC Circuit. One wonders if the DC Circuit even bothered reviewing the applicable law or if they instead spent their time maneuvering their decision so it would reach their desired outcome.