The striking down of the Securities and Exchange Commission's proxy-access rules last month by a federal court did more than puncture the hopes of investor advocates wanting to nominate directors. It may also have fed the growing sentiment of business interests that are trying to unwind or at least delay the Dodd-Frank Act's many provisions still in flux.
Margaret Tahyar, a partner at law firm Davis Polk, implied as much on her firm's Website, suggesting that other agencies tasked with fulfilling the requirements of the 2010 financial-reform law could similarly find their rules criticized by the court system. It's a fair prediction, considering that, as Tahyar wrote, "the speed of deadlines under the Dodd-Frank Act has essentially forced a very minimal economic review of hundreds of regulations."
The problem that the U.S. Court of Appeals for the District of Columbia Circuit had with the SEC rules came down to costs. The court determined that the SEC "acted arbitrarily and capriciously for having failed . . . [to] adequately address the economic effects of a new rule." The petitioners said the SEC did not quantify the costs that companies would incur for protesting investor nominations and did not back up the expected benefits.
The rule would have allowed investors that have held 3% of a company's shares for three years to nominate board members. Nearly a year ago, the SEC commissioners voted 3-2 in favor of the rule, with the two Republicans dissenting. They cited cost as one of their main concerns. "The release fails to fairly and adequately consider the costs and impact of these rules," SEC commissioner Kathleen Casey said.
This is not the first time the SEC has been criticized for estimates put together on rules that have yet to be implemented. The predictions are easy targets for critics and a low-hanging fruit for groups that want regulators to make rules the least burdensome possible. You may remember the SECıs initial estimate of Sarbanes-Oxley Section 404 compliance at $91,000, which in retrospect is laughable. With the recent court ruling and legislation designed to "improve" the commission, the SEC may need to slow down and rethink the many Dodd-Frank mandates on its plate, not just its rewrite of the proxy-access rules.
One particular proposal is mired in controversy, both for its topic and for the fact it doesn't fall directly in the SEC's purview. The conflict-minerals provision of Dodd-Frank directed the SEC to come up with a disclosure rule for companies to track the sources of minerals used in products or components that may come from the Democratic Republic of Congo. The commission has estimated it will affect upwards of 5,000 companies and put more than $71 million in the pockets of third parties that would help these companies comply with the rule.
As for proxy access, the SEC could drop the rule altogether, although long-term observers of the agency who have watched it work on these rules for years doubt that will happen. Most likely, the SEC will spend the next several months rewriting its rule for a new proposal next year. And critics will yet again push for more delays.