On June 26, 2024, the U.S. Court of Appeals for the Fifth Circuit vacated the SEC’s 2022 rescission of certain rule amendments regarding proxy advisory firms, holding that the SEC’s explanation for rescinding the amendments was “arbitrary and capricious and therefore unlawful.”

In July 2020, the SEC under the Trump Administration adopted certain amendments to the proxy rules under the Securities Exchange Act of 1934, which were intended to enhance the accuracy and transparency of information provided by proxy voting advice businesses (PVABs) to investors and investment advisers that vote proxies on behalf of their clients, as previously summarized here.  Among other things, the 2020 amendments added conditions in Rule 14a-2(b)(9)(ii) to exemptions from the proxy rules’ information and filing requirements upon which PVABs often rely.  Specifically, the 2020 amendments required (1) PVABs to make their advice available to the companies that are the subject of their advice at or before the time that they made the advice available to their clients; and (2) clients of PVABs to be provided with a means of becoming aware of any written responses by such companies to proxy voting advice.  Two years later, in July 2022, the SEC under the Biden Administration voted to adopt further amendments to the proxy rules, which, among other things, rescinded the aforementioned “notice-and-awareness” conditions in the 2020 amendments and related safe harbors and exclusions, with the SEC noting that “we are no longer persuaded that the potential benefits of those conditions sufficiently justify the risks they pose to the cost, timeliness, and independence of proxy voting advice.”  The 2022 rescission was previously summarized here.

Shortly after the 2022 rescission, the National Association of Manufacturers and the Natural Gas Services Group, Inc. filed suit against the SEC in federal district court, arguing that under the Administrative Procedures Act (APA) the 2022 rescission was arbitrary and capricious as the SEC failed to provide an adequate explanation for its change in policy.  In December 2022, the district court rejected plaintiffs’ arguments and granted summary judgment in favor of the SEC. The plaintiffs appealed the decision to the Fifth Circuit.

On June 26, 2024, the Fifth Circuit reversed the district court’s grant of summary judgment and vacated the SEC’s 2022 rulemaking, solely with respect to the rescission of the 2020 amendments’ notice-and-awareness conditions, and remanded it to the SEC.  As noted in the Fifth Circuit’s opinion, “[t]he APA’s arbitrary-and-capricious standard requires that agency action be reasonable and reasonably explained” and that although federal agencies have the authority to alter or rescind their policies, “[a]n agency’s “failure to explain its decision to ‘disregard facts…that underlay…the prior policy’ is arbitrary and capricious.”  In its decision, the Fifth Circuit held that the SEC acted arbitrarily and capriciously in rescinding the notice-and-awareness conditions of the 2020 amendments in two ways: first by failing “adequately to explain its decision to disregard its prior factual finding that the notice-and-awareness conditions posed little or no risk to the timeliness and independence of proxy voting advice;” and second by failing “to provide a reasonable explanation why these risks were so significant under the 2020 [amendments] as to justify [their] rescission.”

The Fifth Circuit’s memorandum opinion was issued under the caption Nat’l Ass’n of Manufacturers v. SEC, No. 22-51069 (5th Cir. 2024).