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Friday
Mar082013

Corporate Governance, the DC Circuit, and Four Open Slots

As we have discussed often on this Blog, the DC Circuit is busily rewriting the Administrative Procedures Act, at least with respect to rules issued by the SEC.  The decision by the circuit to strike down the shareholder access rule in Business Roundtable, as we have discussed often, was poorly reasoned and misapplied administrative law concepts.  The case had more the appearance of disagreement on the substance of the rule than application of neutral procedures designed to ensure public participation and a rational result. For a discussion of the case, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC.

The result has been that the SEC has had to hire more economists in order to meet the standards imposed by the DC Circuits.  Since the SEC does not have an unlimited budget, every economist hired by the SEC pushes out another employee, perhaps a lawyer in the Division of Enforcement or an accountant in the Office of the Chief Accountant.  Additional economists may have an important role but they should be hired because the agency views it as the best use of resources not because of the DC Circuit has commanded. 

Moreover, in some ways, the approach taken by the DC Circuit may only be a beginning.  Cases like Business Roundtablehave no doubt helped spawn other challenges to SEC rules.  The Conflict Minerals rule is now before the DC Circuit; so it the mineral extraction disclosure rule.  While there is nothing wrong with parties challenging poorly developed rules, the issue could in fact turn upon a cramped interpretation of the requirements of the APA. 

The approach of the DC Circuit will likely change only with a shift in the court's membership.  This, however, has proved exceedingly difficult.  The court currently has four openings (Judge Sentelle was the most recent judge to go senior).  During President Obama's first term, the Senate did not confirm any new judges to the DC Circuit.  This inability of a first term president to secure an appointment to the DC Circuit is unusual.

As the WSJ recently noted, this is not likely to change.  The President has submitted two nominees:  Caitlin Halligan and Srikanth Srinivasan.  Ms. Halligan was nominated back in 2010.  A recent attempt to end the filibuster on Ms. Halligan's nomination failed.  

It is possible that Congress will continue to filibuster appointees to the DC Circuit.  The Circuit is often the farm club for future Supreme Court justices and, as a result, nominees often receive heightened scrutiny.  But as more spots open, the ability of the court to do its job and decide critical administrative law matters will decline.  This will place pressure on Congress to confirm.  In the meantime, the reduction in capacity will likely cause cases challenging SEC rules to take take longer to resolve and force companies to engage in implementation despite the legal uncertainty.  

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