Will Court Short-Circuit Dodd-Frank?

Mon Aug 15 16:24:38 EDT 2011
By Dr. James Overdahl with Dr. Jonathan Macey, Sam Harris Professor of Corporate Law at Yale University, and former NERA economist Dr. Elaine Buckberg

In an op-ed published in Politico, the authors argue that the US Securities and Exchange Commission's (SEC) failure to adequately consider the economic effects of its rules is undermining its ability to reform the regulatory landscape under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The DC Circuit Court of Appeals cited this failure in a July 22 decision, Business Roundtable v. SEC, which vacated the SEC rule giving shareholders the right to nominate board of directors through a proxy vote. Though the SEC had run a cost-benefit analysis of its rule, the DC Circuit found the quality, objectivity, and completeness of the analysis insufficient. This decision has special significance, note the authors, because the SEC rule that it struck down was the first of approximately 250 new regulations required under Dodd-Frank. This case is just the latest in several recent successful court challenges to SEC rules. In all these cases, the court identified weaknesses in the SEC's regulatory reasoning, resulting in the challenged rules being rejected and sent back to the commission for further consideration. The clear message in all these decisions, the authors argue, is that regulators must take more seriously the economic effects of their proposed rules in order to withstand judicial review.