NEW ORLEANS (Legal Newsline) - President Biden's Securities Exchange Commission was wrong to undo rules passed during Donald Trump's time in office, a federal appeals court has ruled.
The U.S. Court of Appeals for the Fifth Circuit on June 26 ruled against the SEC in its defense of the change, finding it was "arbitrary and capricious and therefore unlawful." The decision came in a challenge by the National Association of Manufacturers and Natural Gas Services Group in Texas federal court.
The 2020 rule at issue came about after 10 years of consideration. It regulated businesses that provide proxy voting advice to institutional shareholders of public corporations.
Considering the amount of investments institutional investors make, they often hire proxy voting companies to help voice their opinions during shareholder meetings. Those firms research matters subject to vote and advise their clients, and also execute their clients votes directly.
Conflict-of-interest concerns were raised by 2010 about the proxy voting companies. Starting during Barack Obama's administration, the SEC began looking deeper. A regulatory proposal was published in 2019 that made it illegal for persons who solicit proxies from making misstatements or omissions and make certain disclosures.
Notably, it required proxy firms to provide registrants, which can cast votes on behalf of investors, a certain amount of time to review advice before it is even disseminated to the proxy firm's clients. Proxy firms complained this would prevent them from providing timely advice to their clients.
The final 2020 rule addressed these concerns with notice-and-awareness conditions. Advice from proxy firms would send their advice to registrants at the same time or before it was sent to the actual clients.
The awareness part let clients know of concerns by registrants prior to shareholder votes. Ultimately, the SEC under, Biden's chairperson Gary Gensler, rescinded the rule in 2021, a month before the notice-and-awareness conditions were to take effect.
It was officially rescinded in 2022. Gone also were an anti-fraud regulation and requirements for proxy voting guidance. The SEC's reasoning cited worries about timeliness and independence.
"Timeliness was raised as a concern in 2019, when the proposed rule would have required proxy firms to set aside time for registrants to review and provide feedback on advice before the advice was distributed to clients," Judge Edith Jones wrote.
"But the 2020 Rule did away with the pre-dissemination requirement... It is thus wholly implausible that the the 2020 Rule's contemporaneous-disclosure requirement would pose a threat to timely delivery of proxy voting advice. The advice could be delivered at the usual time; it simply had to be delivered to registrants as well."
The Biden SEC's complaint of timeliness in delivering proxy recommendations is a "facially irrational concern of proxy firms," that was not explained adequately in the rescission, Jones wrote.
The same went for alleged independence problems with the 2020 rule.
"In the 2022 Rescission, the SEC nowhere explains how a drawn-out voting process would affect the independence of proxy voting advice," Jones wrote.
"But the proxy firms have no interest in whether the voting process becomes drawn out as to registrants. To the contrary, a major purpose of the 2020 Rule was to enlighten shareholders when registrants choose to respond to proxy firm advice.
"The impact on the shareholder voting process does not affect proxy firms."
The rescission of the notice-and-awareness conditions were reversed by the Fifth Circuit, and the matter is remanded to the SEC.