Court Strikes Down Dodd-Frank Proxy Rule

The Competitive Enterprise Institute hails today’s decision of the D.C. Circuit Court of Appeals striking down the Securities and Exchange Commission’s (SEC) proxy access regulation, marking the first court invalidation of a rule stemming from the Dodd-Frank “financial reform” act. CEI has pointed out the detrimental effects of many provisions of Dodd-Frank, which yesterday marked its first anniversary as a law, on entrepreneurship and growth.

Even before Dodd-Frank was enacted, CEI scholars had long warned of the dangers of federal “proxy access” proposals, both in usurping the traditional role of states in setting procedures for corporate director elections, and in empowering special interest shareholders, such as unions, at the expense of ordinary shareholders. The SEC’s rule would have required public companies and all their shareholders to subsidize the campaigns of directors nominated by shareholders owning as little as 3 percent of a company’s shares.

John Berlau, Director of CEI’s Center for Investors and Entrepreneurs, said: “The Court’s unanimous decision is a victory for economic rationality in regulation, for federalism in laws governing incorporation, and above all, for the interests of ordinary shareholders, as opposed to those with special-interest agendas not related to investor value. The three-judge panel unanimously ruled that the way the SEC majority rammed through the rule was ‘arbitrary and capricious on its face,’ ignoring scholarly data about the costs of this rule that would get passed on to shareholders. Although the Court did not reach the constitiutional questions in this case, we agree with the plaintiffs Business Roundtable and U.S. Chamber of Commerce that ‘proxy access’ is compelled speech that should not survive First Amendment scrutiny. Ordinary shareholders should not be forced to subsidize campaigns of director candidates of Big Labor or any other interest group whose agenda they may believe is detrimental to their interests as investors in the company.”

CEI Labor Policy Analyst Ivan Osorio said, “As part owners, shareholders have a right to be heard regarding public companies’ governance, a right that state law has largely recognized. Unfortunately, in recent years, labor unions and advocacy groups have seized upon the shareholder resolution as a means to advance political agendas that are inimical to the interest of the firm—and of shareholders who have bought into the firm to earn a return on their investment. The SEC new proxy voting rule would have made it easier for such activists to pursue their political agendas at the expense of investors.”