105 F.4th 802
5th Cir.2024Background
- In 2020, the SEC adopted a new rule to regulate proxy voting advice firms, aiming to add transparency and accuracy due to concerns over the market dominance and influence of firms like ISS and Glass Lewis.
- The 2020 Rule introduced “notice-and-awareness” conditions requiring proxy firms to share their advice with issuers simultaneously as they disseminate it to clients and to provide mechanisms for registrants' responses to reach clients.
- After a new administration, the SEC rescinded this rule in 2022, citing concerns about timeliness and independence of proxy advice, following a brief, holiday-overlapping comment period.
- Plaintiffs (National Association of Manufacturers and Natural Gas Services Group, Inc.) challenged the rescission as arbitrary and capricious under the APA, arguing that the SEC did not reasonably explain its reversal.
- The district court upheld the SEC's rescission, granting summary judgment to the Commission. Plaintiffs appealed.
- The Fifth Circuit reviewed de novo the district court’s ruling under the APA’s arbitrary and capricious standard.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Adequacy of explanation for policy reversal | SEC failed to explain why it contradicted its 2020 factual findings on timeliness/independence risks | No contradiction; just a policy judgment and risk reassessment | SEC failed to provide required explanation under Fox; reversal arbitrary and capricious |
| Justification for policy rescission on its merits | SEC did not rationally connect facts (timeliness/independence concerns) to rescission | Concerns from clients and commenters justified rescission | Justifications were not reasonable or reasonably explained; reliance on recycled or insufficient concerns |
| Sufficiency of the comment period | Comment period was too short, limiting input | Not directly addressed by SEC on appeal | Not addressed by court since rescission found arbitrary for other reasons |
| Scope of vacatur/severance | Entire rescission should be vacated, not just notice-and-awareness conditions | Remainder of rescission is severable and should stand | Only notice-and-awareness rescission vacated; other portions severable and remain |
Key Cases Cited
- FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) (agency must give detailed explanation for policy reversal based on contradictory factual findings)
- Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) (agencies must articulate rational connection between facts found and decision made)
- FCC v. Prometheus Radio Project, 141 S. Ct. 1150 (2021) (APA requires agency action to be reasonable and reasonably explained)