Appeals decision is a victory for opponents of SEC’s new Wall Street regulations

They lost Round 1 when Congress wrote the law. They lost Round 2 when regulators began turning the law into rules. But business groups fighting regulatory measures adopted in response to the financial crisis could still score a knockout in another arena: the federal courts.

A recent appeals court decision could spell trouble for the Securities and Exchange Commission as it puts in place some of the most far-reaching Wall Street regulations in years, experts say. The potential points of contention include issues as diverse as whistleblower rewards, derivatives trading and executive pay. The ruling also could prompt court challenges to the work of other agencies, including environmental regulations that corporations denounce as damaging to the economy.

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Aug. 4 (Bloomberg) -- Curtis Stefanak, counsel at SNR Denton LLP, discusses his view that hedge fund managers are returning money to outside investors in an bid to avoid changes in regulation under the Dodd-Frank law.

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July 22 (Bloomberg) -- Josh Rosner, managing director of Graham Fisher and Co., talks about the impact of the Dodd-Frank financial overhaul bill a year after it was implemented.

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In a ruling that has captured the attention of Washington lobbyists and policy wonks, a three-judge panel said the SEC did not adequately analyze the economic consequences of a rule that would make it easier for shareholders to oust members of corporate boards. The court declared that the SEC had acted “arbitrarily and capriciously.”

In declaring the SEC’s cost-benefit analysis inadequate, the judges set what might be an impossibly high standard, some observers say.

“What the court is doing is second-guessing economic analysis that can always be second-guessed,” said J. Robert Brown Jr., a professor at the University of Denver’s Sturm College of Law.

In justifying the rule, the SEC had said that it would improve the way corporations are run. “But how do you prove that empirically?” asked Harvey J. Goldschmid, a professor at Columbia Law School and a former Democratic SEC commissioner.

“If the court’s unrealistic requirements were applied across the board, the regulatory process would grind to a halt,” he said.

The case pitted two of the capital’s most influential business groups against the government’s primary Wall Street watchdog. It’s called B usiness Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission.

In a July decision, a three-judge panel of the U.S. Court of Appeals in Washington struck down a new SEC rule that would have allowed major shareholders to place board candidates on a company ballot.

Boards are generally self-perpetuating; the incumbent directors decide whose names appear on the ballots mailed at company expense. If outsiders want to challenge the official slate, they must mount a “proxy contest,” which can be as much of an uphill battle as a political write-in campaign if not more so because it involves sending voting materials to shareholders at the challengers’ expense.

The SEC said the new rule could make board members more responsive to shareholders and more independent from management, and less complacent. By improving the way companies are run, the rule could increase shareholder value and restore investor confidence, the SEC said.

In adopting the rule, the agency was using authority granted by Congress last year to extend proxy access to shareholders.