Business Roundtable v. SEC: Shareholder Access and the Panel of Judges

We are examining the briefs in Business Roundtable v. SEC, the case filed in the DC Circuit challenging the SEC's access rule (14a-11). We take a minute to examine the decision makers who will hear this case. 

The DC Circuit does something no other circuit in the country does.  It reveals the judges on the panel at the time the briefs are filed.  Parties in the other circuits (except the 8th) do not know the identity of their panel until just before, or the day of, oral argument.  Parties in the DC Circuit sometimes know early enough in the process to be able to write their briefs specifically for the particular individuals who will hear the case.  The DC Circuit's practice is set out in Neutral Assignment of Judges at the Court of Appeals. 

Why does the DC Circuit do this?  A former Chief Judge of the DC Circuit indicated that parties sometimes view the panel as predictive of the outcome of the case and, by revealing the identity, may help encourage settlement and reduce the court's docket.  See Circuit Practices, n. 17 Appendix to Neutral Assignment of Judges at the Court of Appeals (As then Chief Judge Edwards wrote:  "It occurred to us that this false assumption [that panel composition permitted prediction of the outcome] might lead some parties to settle their claims to avoid certain panels.  We were happy to accommodate those who might thus settle their cases and thereby reduce our caseload."  Letter from Harry T. Edwards, Chief Judge, D .C. Circuit, to Professor J. Robert Brown, Jr., Sept. 24, 1998.  Judge Edwards also indicated that the judges were unaware whether early notification in fact actually produced more settlements.).  

As a result of this practice, the judges on this case have been identified and, for the SEC, it is not a particularly favorable panel.  They include the chief judge, David Sentelle, Judge Douglas Ginsburg, both appointed by President Reagan, and Janice Rogers Brown, appointed by the most recent George Bush.  For a list of judges and the president appointing them, go here. 

Judges Sentelle and Ginsburg sat on the panel that invalidated an SEC rule excluding fixed indexed annuities from the definition of "annuity contract" under Section 3(a)(8) of the 1933 Act.  See Am. Equity Inv. Life Ins. Co. v. SEC, 572 F.3d 923 (DC Cir. 2009), modified in 2010 U.S. App. LEXIS 14249  (DC Cir. July 12, 2010).  The panel did not find that the SEC lacked the authority to adopt the rule but had instead made procedural errors in adopting the rule, specifically by failing to adequately assess the impact of the rule on competition. 

The willingness of these judges to intervene in SEC rulemaking can be seen less from the holding and more from the remedy.  As the language in the modified opinion describes, the court opted to vacate the rule.  Vacatur turns on the seriousness of the deficiency and the "disruptive consequences" to the agency. 

With respect to the seriousness of the deficiency, the panel noted that the Commission was in "the midst of analyzing the effect of the rule upon the law of each state" and, as a result, "the Commission cannot know whether that analysis will support reissuing Rule 151A until it has been completed."  In other words, the uncertainty of the outcome of the analysis (something always the case when the court finds that the analysis was not conducted) by itself renders the deficiency "serious."  This effectively reads the element out of the test.

As for the consequences to the SEC, the panel simply noted that "[b]y its own terms, Rule 151A has not yet gone into effect, and until such time as it does, the regulations supplied by state law will remain  in place."  Again, the panel did not actually analyze the impact of vacatur on the agency but simply opted to preserve the status quo.  In other words, the panel did not feel obligated to do a meaningful analysis of the impact of its decision in vacating the SEC rule. 

Judge Ginsburg also wrote the opinion in Chamber of Commerce v. SEC, 412 F.3d 133 (DC Cir. 2005), striking down the SEC's rule seeking to require mutual funds to increase the number of independent directors and have an independent chair. 

Its hard to draw conclusions from such a small number of cases.  Nonetheless, the cases do suggest that a majority of the panel will not hesitate to invalidate an SEC rule on procedural grounds even where the substantive authority of the agency is clear. 

Fortunately, however, this case does not provide much room for second guessing the Commission.  Any predilections of the judges on the panel towards intervention in the rulemaking process should ultimately make no difference.