The Securities and Exchange Commission has put off action on the regulation that would have made it easier for major shareholders to remove corporate board members and nominate new ones. In that case, a federal appeals court in the District of Columbia last year reprimanded the SEC for failing to adequately consider the economic consequences of the rule.
Some experts who tracked that decision said the ruling set an insurmountable hurdle for assessing the costs and benefits of a regulation — essentially asking the agency to calculate the cost of things that don’t have a strict dollar value or can’t be predicted.
By contrast, the cost to industry is more easily quantifiable, which means the court’s decision favors Wall Street interests, said Michael Greenberger, a former CFTC director.
“In the hands of conservative jurists, the benefits never exceed the costs,” said Greenberger, a professor at the University of Maryland law school. “It’s a game you can’t win.”
The ruling has cast a pall over administrative agencies, many of which are pressed for money and staff and running behind on congressionally mandated deadlines for finalizing regulations, Greenberg and other observers said. The SEC, for one, didn’t appeal the court’s ruling. Instead, it has redoubled its efforts and devoted more time to analyzing the costs and benefits of its rules, said Michael Conley, the SEC’s deputy general counsel.
That’s “slowed down the pace of regulation,” Conley said, “but we’re rising to the challenge.”
Generally, legal experts say, courts tend not to second-guess the expertise of an agency when it comes to crafting rules, especially highly technical ones, which is why some observers have been surprised by the rulings.
J. Robert Brown, a professor at the University of Denver law school, said agencies risk being overturned if they act in an arbitrary way. But in defining what is arbitrary, agencies get a lot of latitude.
“The courts have to ask: Does the agency have the authority to do what it’s doing?” Brown said. “Once it’s determined that they have the authority, the standard of review by the courts is supposed to be very deferential to the agencies.”
But Scalia said the SEC in particular has been tripped up repeatedly in court because of a 1996 law that imposed heightened responsibilities on the agency to consider how its rules affect “efficiency, competition and capital formation.”
It’s these considerations that helped him block an SEC regulation in the mid-2000s that would have required mutual fund boards to be led by chairmen independent of management, and another in 2009 that would have allowed the SEC to regulate a particular kind of annuity as a security.
“It’s not that the courts are suddenly applying heightened standards,” Scalia said. “The standards have been applied for years, and the errors committed by the agencies are errors that at any time before any panel of judges would have resulted in the rule being invalidated.”