## Facts

- The SEC adopted Exchange Act Rule 14a-11 (2010), a “proxy access” rule requiring most public companies to include in company proxy materials certain director nominees submitted by qualifying shareholders.
- Rule 14a-11 set eligibility thresholds, including ownership of at least 3% of voting securities held continuously for at least three years, and limits on the number of seats subject to proxy access.
- Congress, through § 971 of the Dodd–Frank Act, confirmed the SEC’s authority to issue proxy-access rules.
- Business Roundtable and the Chamber of Commerce, representing corporate members subject to federal proxy rules, petitioned for review in the D.C. Circuit.
- Petitioners argued the SEC’s rulemaking was arbitrary and capricious under the APA because the SEC inadequately evaluated economic consequences, including effects on efficiency, competition, and capital formation as required by Exchange Act § 3(f) and Investment Company Act § 2(c).
- The challenge also targeted the SEC’s decision to apply Rule 14a-11 to registered investment companies.

## Issues

1. Whether the SEC acted arbitrarily and capriciously under the APA by failing to adequately consider Rule 14a-11’s effects on efficiency, competition, and capital formation as required by Exchange Act § 3(f) and Investment Company Act § 2(c).
2. Whether applying Rule 14a-11 to registered investment companies was arbitrary and capricious for failure to conduct an adequate, context-specific economic analysis.
3. Whether the SEC arbitrarily rejected alternative approaches (an issue the court did not reach after resolving the rule’s invalidity).

## Decision

- The court granted the petition for review and vacated Rule 14a-11 in its entirety.
- The court held the SEC acted arbitrarily and capriciously by failing to adequately assess the rule’s economic effects and by insufficiently supporting its judgments in the administrative record.
- The court separately held the SEC’s application of the rule to investment companies was arbitrary and capricious.
- Because the SEC failed to justify the rule, the court did not decide challenges concerning the SEC’s rejection of alternatives.

## Legal Principles

- Under the APA, an agency rule is invalid if the agency fails to engage in reasoned decisionmaking, including addressing material comments and supporting predictive judgments with record-based analysis.
- When statutes require consideration of specified economic factors (here, efficiency, competition, and capital formation), the agency must meaningfully evaluate those factors as part of the rulemaking record.
- An agency acts arbitrarily and capriciously when it inconsistently frames costs and benefits, fails to quantify material costs (or explain why quantification is not feasible), relies on unsupported predictions, contradicts its own analysis, or does not respond to significant problems raised by commenters.
- Extending a rule to distinct regulated entities (such as investment companies) requires analysis that addresses differences in structure and regulatory context; assumptions of similar costs and benefits without adequate explanation can be arbitrary.

## Conclusion

The D.C. Circuit vacated the SEC’s proxy-access rule because the Commission did not provide a sufficiently supported and consistent economic analysis, including statutory consideration of effects on efficiency, competition, and capital formation, and because its application of the rule to investment companies lacked adequate justification.


Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011)