SEC Wins Appeal on Proxy Adviser Rule Reversal, Chamber Mulls Options

In a significant legal development, a federal appeals court has ruled in favor of the Securities and Exchange Commission (SEC), upholding the agency's decision to rescind certain Trump-era regulations on proxy advisers. The ruling, issued on September 10, 2024, marks a setback for the U.S. Chamber of Commerce, Business Roundtable, and Tennessee Chamber of Commerce & Industry, who had challenged the SEC's actions in 2022.

The case highlights the ongoing tension between corporations and proxy advisers, entities that emerged in the 1980s to assist institutional investors in navigating complex corporate voting decisions. These advisers have gained substantial influence over the years, leading to concerns from companies about their growing power in shaping investor decisions.

Responding to the court's decision, an SEC spokesperson expressed satisfaction, stating, > "We are still reviewing the decision but the Commission is pleased that the Sixth Circuit confirmed that the Commission's rulemaking was consistent with its legal obligations."

The U.S. Chamber of Commerce, founded in 1912 and representing the world's largest business organization, indicated it was considering further legal action. A spokesperson for the Chamber stated they were weighing "all legal options to challenge the SEC's illegal rollback" of the proxy rule.

The contested regulations, implemented during the Trump administration's deregulatory push, required proxy firms to provide companies with a preview of their voting advice and allow clients to see any company responses. Critics argued these requirements could compromise the independence of proxy advisers.

In 2022, the SEC, under the Biden administration's regulatory approach, rescinded these exemptions, preventing them from taking effect. This decision aligned with the administration's broader efforts to reverse many Trump-era policies, particularly in areas of regulation and environmental protection.

U.S. Circuit Judge Julia Gibbons, writing for the majority, upheld a lower court's April 2023 decision. She found that the SEC had acted within the bounds of administrative law, providing a "thoughtful and thorough explanation" for its policy reversal. This reasoning aligns with the principles established in the Administrative Procedure Act of 1946, which governs how federal agencies propose and establish regulations.

However, the decision was not unanimous. In a dissenting opinion, U.S. Circuit Judge John Bush argued that the SEC had failed to allow sufficient time for public comment and inadequately estimated the costs and benefits of its "dramatic policy shift." This split decision underscores the complexity and contentiousness of regulatory issues in the financial sector.

The case, heard in the U.S. Court of Appeals for the Sixth Circuit, which covers Kentucky, Michigan, Ohio, and Tennessee, demonstrates the ongoing legal challenges faced by regulatory agencies in balancing corporate interests with investor protections. As the debate over proxy adviser influence continues, this ruling may have far-reaching implications for corporate governance and shareholder rights in the United States.