Nat'l Ass'n of Mfrs. v. U.S. Sec. & Exch. Comm'n

644 F.Supp.3d 342

NATIONAL ASSOCIATION OF MANUFACTURERS, Natural Gas Services Group, Inc., Plaintiffs, v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION,Gary Gensler, in his Official Capacity as Chair of the SEC, Defendants.

MO:22-CV-00163-DC

United States District Court, W.D. Texas, Midland-Odessa Division

Signed December 4, 2022

Paul W. Hughes, Pro Hac Vice, McDermott Will & Emery LLP, Washington, DC, Debbie E. Green, McDermott Will & Emery LLP, Dallas, TX, for Plaintiffs.

B. David Fraser, Keefe Bernstein, U.S. Securities and Exchange Commission, Fort Worth, TX, Daniel Matro, Pro Hac Vice, Tracey A. Hardin, Pro Hac Vice, United States Securities and Exchange Commission, Washington, DC, for Defendant United States Securities and Exchange Commission.

Daniel Matro, Pro Hac Vice, Tracey A. Hardin, Pro Hac Vice, United States Securities and Exchange Commission, Washington, DC, for Defendant Gary Gensler.

MEMORANDUM OPINION

DAVID COUNTS, UNITED STATES DISTRICT JUDGE

This case concerns arbitrariness and capriciousness under the Administrative Procedure Act ("APA"). Put more simply, this case is about whether the SEC's decision to rescind proxy voting advice conditions and an explanatory note was reasonable and reasonably explained.

BACKGROUND

The questions in this case revolve around proxy voting advice businesses ("PVABs"). PVABs provide institutional investors and intermediaries ("Proxy Clients") with research and analysis on shareholder proposals from publicly traded companies ("Registrants"). PVABs also recommend how their Proxy Clients, who are voting on behalf of their customers, should vote on Registrants' shareholder proposals ("Proxy Voting Advice"). Natural Gas Services Group, one of the National Association of Manufacturers' members ("Plaintiffs"), is a registrant covered by PVABs' Proxy Voting Advice.

Congress has granted the SEC ("Commission") broad authority to regulate the Proxy Voting Advice. The Commission has long considered Proxy Voting Advice to be "solicitation," an act subject to burdensome disclosure and filing requirements ("Proxy Rules").¹ Yet, historically, PVABs could avoid such requirements through two exemptions.

In 2020, the Commission adopted an amendment to the Proxy Rules; PVABs would only be eligible for the exemptions if they met two conditions ("2020 Rule").² First, PVABs would need to include certain conflicts-of-interests disclosures with their delivered Proxy Voting Advice.³ Second, PVABs would need to adopt policies and procedures that (1) made their Proxy Voting Advice available to Registrants "at or prior to the time" PVABs delivered it to their Proxy Clients and (2) provided PVABs' Proxy Clients with a "mechanism" by which they would "become aware" of Registrants' written responses to the Proxy Voting Advice ("Notice-Awareness Conditions").⁴

With the 2020 Rule, the Commission also added to Rule 14a-9, which prohibits materially false or misleading statements, explanatory Note (e).⁵ Note (e) provided examples of material misstatements or omissions related to Proxy Voting Advice.⁶

Yet around two years later, the Commission reversed course, removing the Notice-Awareness Conditions and Note (e) ("2022 Rescission").⁷ The Commission's main reasoning was that the Notice-Awareness Conditions did not "sufficiently justify the risks they pose[d] to the cost, timeliness, and independence of proxy voting advice on which many investors rely."⁸ And when rescinding Note (e), the Commission highlighted that Note (e) presented a "risk of confusion regarding the application of Rule 14a-9 to proxy voting advice."⁹

Plaintiffs sued the Commission and Chair Gary Gensler (in his individual capacity) in July 2022. Plaintiffs alleged that the Commission's decision to rescind the 2020 Rule and Note (e) was (1) arbitrary and capricious and (2) procedurally deficient. A few months later, Plaintiffs and the Commission cross-moved for summary judgment.

LEGAL STANDARD

Federal Rule of Civil Procedure 56 allows a party to move for summary judgment when the party contends no genuine issue of material fact remains, and the party is entitled to judgment as a matter of law. "When assessing a summary judgment motion in an APA case, the district judge sits as an appellate tribunal," and "[t]he entire case on review is a question of law."¹⁰ "In the context of a challenge to an agency action under the APA, '[s]ummary judgment is the proper mechanism for deciding, as a matter of law, whether an agency's action is supported by the administrative record and consistent with the APA standard of review.' "¹¹

DISCUSSION

Congress gave the Commission the authority to regulate proxy solicitation "as necessary or appropriate in the public interest or for the protection of investors."¹² The Commission's authority to craft policy, however, is governed by the APA. Broadly speaking, the APA outlines the procedures an agency must follow when promulgating policy and the external oversight mechanisms for those procedures. One such mechanism is judicial review.

Under the APA, if an agency's action causes a legal wrong or adversely affects a person, that person is entitled to judicial review.¹³ But the APA limits the scope of that review. For example, a reviewing court may set aside agency action only if the findings and conclusions are found to be "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law."¹⁴ This case centers on that standard.

Plaintiffs' big-picture claim is that the Commission's decision to rescind the 2020 Rule was "arbitrary and capricious," thus violating the APA. Plaintiffs' arguments for why the 2022 Rescission was arbitrary and capricious—and the Commission's rebuttals—can be boiled down into three issues:

(1) Was the Commission required to provide a "more detailed justification" because the 2022 Rescission reversed a prior policy position?

(2) Were the Commission's stated justifications for the 2022 Rescission rational?

(3) Was the 2022 Rescission procedurally valid?

Plaintiffs also allege a related (but distinct) claim that the Commission improperly removed Note (e). The Court addresses these issues in turn.

I. Was a "more detailed justification" required?

Plaintiffs first argue that the Commission must give a "more detailed justification" than normal under the "arbitrary and capricious" standard because the 2022 Rescission reversed a prior policy decision.¹⁵

A. The "arbitrary and capricious" standard.

According to the Supreme Court, an agency's action is not "arbitrary and capricious" if the agency examined "the relevant data" and articulated a "satisfactory explanation."¹⁶ A "satisfactory explanation" includes a "rational connection between the facts found and the choice made."¹⁷

The Supreme Court has also stated that, in general, there's no distinction "between initial agency action and subsequent agency action undoing or revising that action."¹⁸ Thus, the normal arbitrary and capricious standard would apply. An exception to that general rule, however, is when an agency's "new policy rests upon factual findings that contradict those which underlay its prior policy."¹⁹ In that case, the agency must give a "more detailed justification."

Here, the Commission first "concluded that no risk to the timeliness and independence remained at all under the 2020 Rule."²⁰ But just two years later, the Commission concluded that the 2020 Rule did pose a risk to the cost, timeliness, and independence of PVABs.²¹ The Commission argues that the 2022 Rescission merely weighed the same risks that the 2020 Rule did but reached a different conclusion: the informational benefits did not justify the "potential adverse effects" to PVABs.²² Plaintiffs counter that the "existence or non-existence of a particular risk is a factual finding."²³ Thus the Commission should have provided a more detailed justification.

So for Plaintiffs' argument to succeed, the 2020 Rule must have been based on the "non-existence" of the risk to PVABs. Indeed, if the 2020 Rule and the 2022 Rescission highlighted the same risk, but weighed it differently, the factual findings didn't change. Rather the Commission's policy conclusion—that the risk to PVABs was not justified—did.

Yet Plaintiffs undercut their own argument in their briefing. For instance, Plaintiffs' briefing concedes that the public commentators' concerns about the 2020 Rule's risk to PVABs existed in 2020. Quoting Plaintiffs, "these 'concerns' were not new; rather, they were 'reiterated' from the 'prior rulemaking process'—that is, the adoption of the 2020 Rule itself."²⁴ Or even more obviously, a heading from Plaintiffs' motion reads: "The SEC has not proffered an adequate explanation for reversing course on the same factual record."²⁵

And even without Plaintiffs' concession, the risk to PVABs existed. Indeed, the Commission believed that the 2020 Rule's final form "addressed the concerns raised by commenters regarding the potential unintended consequences of requiring a proxy voting advice business to engage with a registrant in connection with its proxy voting advice, including those related to timing and the risk of affecting the independence of the advice."²⁶ Or like the 2022 Rescission acknowledged, the Commission originally believed the Notice-Awareness Conditions "adequately mitigated" the "serious concerns that the proposed advance review and feedback conditions would adversely affect the cost, timeliness, and independence of proxy voting advice."²⁷ Yet the Commission ultimately "weigh[ed] these competing concerns differently" in 2022.²⁸ Thus, the risk to PVABs was not a "factual finding" but a policy decision that weighed the same factual record differently.

B. Distinguishing Texas v. Biden.

Because the risk to PVABs was not a factual finding, the Fifth Circuit's opinion in Texas v. Biden can be distinguished from this case. There, the Biden Administration's Department of Homeland Security ("DHS") tried to terminate the Trump Administration's 2019...