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26 Aug. 2011 | Comments (0)

If you think the federal appeals court decision to strike down the new SEC proxy access rule was the only salvo in the Corporate America’s fight against regulatory reform measures included in the Dodd-Frank Act, think again. From what I can gather, it seems support is growing to throw out the whistleblower bounty program rules as well. And that just might be the beginning. In the past month, there have been two publications that allude to the possibility of business groups using the same argument model in the U.S. Chamber of Commerce/Business Roundtable lawsuit that successfully struck down the shareholder director nomination rules (AKA shareholder proxy access). Also, a partner and senior associate of the law firm that represented the chamber in the proxy access suit has authored an article that rails against the new SEC whistleblower rules, although it does not mention litigation as a way to fight the SEC. In an Aug. 17 article in the New York Times, Ben Protess writes that “Industry groups have been examining legal challenges to the Securities and Exchange Commission’s new corporate whistle-blower program and a provision surrounding the extraction of oil and natural gas from foreign countries (conflict minerals), people briefed on the talks said.” In the same article, Protess mentions that business groups have recently met in Washington, D.C., to discuss “Dodd-Frank Excesses.” The purpose of the meetings was to determine which rules would be subject to the plaintiff’s bar. The Times article also cites the law the chamber and Business Roundtable used as a basis for their lawsuit. That 1996 law requires the SEC to promote “efficiency, competition and capital formation.” It has been used before to strike down other SEC rules, such as the time in 2005 it tried to regulate the mutual fund industry more closely. When you take into account that attorneys at Gibson, Dunn & Crutcher LLP, the law firm that represented the chamber, wrote an article in the July/August Securities Litigation Report entitled The SEC’s Final Whistleblower Rules: The Floodgates Open on a New Wave of Whistleblower Claims, as the SEC Authorizes Massive Bounties to Anonymous Tipsters, you get the sense war against SEC regulations has only begun. Jonathan C. Dickey, a Gibson Dunn partner, and Brian M. Lutz, a senior associate at the firm, wrote in the first sentence: “Despite anguished pleas from public companies that great mischief is about to be unleashed on Corporate America by anonymous tipsters who may report false allegations of securities fraud to the government, on May 25 the Securities and Exchange Commission turned a deaf ear to these concerns and issued its final ‘whistleblower’ rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act.” In their conclusion, Dickey and Lutz start to lay the foundation for another lawsuit against the SEC, this time regarding the whistleblower rules. They wrote: “We fear that, when in doubt, the Enforcement Division will credit the allegations of these anonymous tipsters, at least to the point of forcing the company to respond to broad information requests from the SEC Staff, and consume valuable time and resources better spent on operating the business. “Unfortunately, for these issuers, they will be forced to respond to these information requests – or worse, formal subpoenas and testimony – with one arm tied behind their back, prevented from knowing their accusers or effectively changing and contextualizing the information provided by these sources.” If you read between the lines, you could see the argument being made in a lawsuit against the SEC that cites that 1996 law as was the case in the proxy access suit. (By the way, the SEC is still mulling over whether it will appeal that court decision.) In addition to the speculation in the New York Times article, blogger Broc Romanek of thecorporatecounsel.net wrote about the precedent set in the proxy access suit and how it could affect other parts of the Dodd-Frank Act. Citing a memo from Covington & Burling, Broc writes that the proxy access decision could have broad implications for other Dodd-Frank Act rulemaking. As for the Aug. 3 memo itself, the firm wrote: “The SEC and other agencies will need to redouble their economic analysis in the rulemaking process. The most significant aspect of the shareholder access decision is its impact on future rulemakings by the SEC and other federal agencies. At its core, this case was about the level of economic analysis that an agency must employ when considering the potential consequences of a rulemaking.” If you are a corporate secretary, general counsel or anyone else involved in preparing proxies or the corporate governance function at your company, prepare for a lot of uncertainty when it comes to the Dodd-Frank Act rulemaking process. It could get quite bumpy.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

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