The DC Circuit struck down the SEC's shareholder access rule on administrative law grounds. Essentially, the court found that the Commission did not engage in sufficient cost benefit analysis and, as a result, acted in an arbitrary fashion. As we have noted, this opinion does not comport with the requirement that courts give deference to agencies in the rulemaking process. For an article on the decision, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC.
The poor reasoning of the decision could have been a mistake but the judges on the circuit are sophisticated and have considerable experience with administrative law issues. It is also possible that the decision was more political, with the panel disagreeing substantively with the decision to permit shareholder access. The issue does not have to be limited to either party. Presumably judges appointed by presidents of either party may act in this manner.
With that possibility in mind, we note the recent statements by Cass Sunstein in the New York Review of Books. According to Sunstein:
Here is a simple way to test whether political convictions matter in legal disputes over regulations. Ask just two questions. (1) Is the regulation being challenged by industry or instead by a public interest group? (2) How many of the three judges were appointed by a Republican president and how many by a Democratic president? If you know the answers to these two questions, it turns out that you know something important about the likely outcome. Here are three facts:
When the affected industry challenges a rule, Republican appointees are significantly more likely than Democratic appointees to vote to strike down that rule.
When a public interest group challenges a rule, Democratic appointees are significantly more likely than Republican appointees to vote to strike down that rule.
Judges’ likely votes are greatly affected by the positions of their colleagues. Sitting with two fellow Republican appointees, a Republican appointee becomes even more likely to side with industry. Sitting with two Democratic appointees, a Democratic appointee becomes even more likely to agree with a public interest group.
Of course the law imposes constraints; judges cannot strike rules down simply because they dislike them. But there is no question that the ultimate fate of rules protecting health, safety, and the environment may ultimately depend on whether the judges on the panel were appointed by a Republican or a Democrat.
The decision in the access case fits into this pattern. To the extent that this explains the decision, the solution is not more staff who conduct cost benefit analysis at the SEC but the filling of the three vacancies currently in place at the DC Circuit.