We haven't yet had a chance to say much about the Commission's decision to deny shareholders access to the proxy statement for bylaws that would require management to sometimes include shareholder nominees in the company's proxy statement.  The Commission voted on November 28, 2007 to adopt the rule proposal that would allow companies to exclude these proposals under Rule 14a-8.  The adopting release (published on December 6) for the rule ishere. 

The Chairman gave a statement at the open meeting justifying his decision to vote with Casey and Atkins to deny access.  It was a disappointment and in some cases wrong.  His opening statement deliberately used scare tactics to justify his decision. 

What were some of the arguments for adopting the non-access proposal?  Chairman Cox noted that if the Commission did nothing, there would be an "easy end run around the Commission's required disclosures and our antifraud rules in proxy contests."  As a result, "doing nothing would put all investors at risk." 

Second, he contended that there was enormous uncertainty in the law, with parties having to "go to court" to determine their rights.  

With respect to the legal uncertainty, Chairman Cox asserted that "there can be no denying the fact that in the wake of two recent court decisions, one by the second circuit and another by US supreme court, there is widespread public confusion and disagreement over what our 31 year old rule 14a-8 says about bylaw proposals for director elections."  The basis for his assertion?  The Second Circuit's decision in AFSCME applied only to three states, leaving the law elsewhere uncertain.  Moreover, the Supreme Court's decision in Long Island Care cast even the Second Circuit's decision into doubt.  "As a result of this decision, it is more likely today that even a second circuit court would uphold the SEC's longstanding interpretation of our proxy access rule."

It's of course true that the Second Circuit ruling only applies within that circuit.  Nonetheless, the Second Circuit is often persuasive in the area of the securities laws.  Moreover, the analysis in the case is compelling.  To claim that there is massive uncertainty because only one circuit has spoken on the issue is to ignore the weight of the circuit and the weight of the legal analysis.  It is, in fact, quite common for the Securities and Exchange Commission to change its policies based upon the decision of a single circuit (the DC Circuit the most prominent example).  Examples?  The Agency substantially revised the proxy rules after the DC Circuit's decision in SEC v. Medical Committee for Human Rights, 432 F.2d 659 (DC Cir. 1970), vacated and remanded, 404 U.S. 403 (1972), and abandoned one share one vote after the lone decision in Business Roundtable, 905 F.2d 406 (DC Cir. 1990). 

The argument that the Supreme Court's decision in Long Island Care throws the second circuit's decision into doubt is even less persuasive.  We have talked about this decision already.  Suffice it to say that anyone with a passing knowledge of administrative law would know that the decision came up in a very different context and has little or no application to the agency's interpretation of Rule 14a-8.  The Supreme Court in Long Island Care had to determine the validity of a rule adopted by the Department of Labor through the notice and comment process.  In other words, the rule at issue was put out for public comment, fully vetted and adopted in a transparent process.  In those circumstances, the law provides agencies with considerable deference. 

The interpretation at issue in AFSCME was not done pursuant to notice and comment, shifted over time, and was not supported by thoughtful analysis.  These are the types of positions that in general are not entitled to the same degree of deference, if any, as a rule adopted pursuant to notice and comment. 

In the adopting release, which just came out on December 6, the Commission quoted Long Island Care where the Supreme Court said that "as long as interpretive changes create no unfair surprise . . . the change in interpretation alone presents no separate ground for disregarding the Department's present interpretation."  127 S. Ct. at 2349.  The quote completely ignores the context of the case, which involved notice and comment rulemaking.  Indeed, the quote deliberately obscured this point.  Note that the quote contains an ellipsis.  The omitted language?  "and the Department's recourse to notice-and-comment rulemaking in an attempt to codify its new interpretation, see 58 Fed. Reg. 69311, makes any such surprise unlikely here."   In other words, the Supreme Court itself noted the importance of the rulemaking context and the Commission chose to omit the mention.

The Commission's position is not made more convincing by the use of selective quotations that deliberately omit critical portions of the analysis.  As Commissioner Nazareth accurately observed in in herwritten remarks:

• Yet the LongIslandCare decision was not mentioned in any of the discussion at the open meeting nor in the proposing release. I find it striking that so much emphasis is now placed on a case that apparently no one thought worthy of discussing at the proposing stage and that, as far as I am aware, did not appear in any of the literally thousands of comment letters we received on the non-access proposal. And certainly nothing in the case compels this particular outcome today. It is entirely within the Commission’s authority to further shareholder rights, but the majority has determined not to do so.

Despite the thousands of comments, none mentioning the case, the Commission acts as if this case is dispositive.  It isn't.  On this point, Chairman Cox has his law wrong.