In its September 5 opinion granting shareholders the right to place proxy access proposals on company proxy statements, the Second U.S. Circuit Court of Appeals was critical of the SEC staff's lack of support for varied interpretations of Rule 14a-8 (i-8). In his decision, Judge Wesley notes, "Although the SEC has substantial discretion to adopt new interpretations of its own regulations in light of, for example, changes in the capital markets or even simply because of a shift in the Commission's regulatory approach, it nevertheless has a 'duty to explain its departure from prior norms.'"

One of the arguments in the case depended on what the interpretation of the word "an" was. The regulation allows proposals to be omitted if they "relate to an election of directors." The opinion states that the language of the regulation was ambiguous. AFSCME argued that the rule was meant to address particular elections but the court also considered the interpretation of American International Group (AIG) and the SEC's amicus brief which argued for a "comparatively broader exclusion, one covering 'a particular election or elections generally.'" Given the difficulty of interpreting the article's meaning in this sentence, the court then looked at past interpretations of the regulation. Of particular importance was a statement published in 1976, the last time the SEC revised the election exclusion.

Since that time, according to the court, the regulation has not been applied consistently. According to the opinion, the SEC's amicus brief did not discuss action prior to 1990 and "characterize[d] the intermittent post-1990 no action letters which continued to apply the pre-1990 position as mere 'mistake[s.]'" The decision notes, "Although we are willing to afford the Commission considerable latitude in explaining departures from prior interpretations, its reasoned analysis must consist of something more that mea culpas."

The SEC was quick to respond. In a September 7 comment, Chairman Cox noted that shareholders rights in proxy process "are best secured under consistent national application of Rule 14a-8 to shareholder proposals." He added, "To provide certainty with regard to shareholder proposals in every judicial circuit, I have directed the staff to prepare recommendations for revisions to Rule 14a-8 that will assure its consistent nationwide application."

Reaction to the decision, and to the SEC's plan to revisit proxy access, was immediate. Not surprisingly, AFSCME was thrilled, with President Gerald McEntee calling the decision "hugely significant for shareholders." He added, "This ruling can give shareholders a meaningful voice in board elections by opening up the director nominating process. Proxy access is considered the "holy grail" of corporate governance reform because it offers shareholders the opportunity to change the composition of boards. This ruling will make directors think twice before they put their own interests above the interests of their shareholders."

Harvard Law School Professor Lucian Bebchuk, who filed a brief in support of AFSCME's appeal with four other Harvard professors, characterized the decision as a "very strong outcome" and pointed out that the proxy rules exist to "facilitate the ability of shareholders to participate in corporate decision making."

Damon Silvers, AFL-CIO Associate General Counsel welcomed the SEC's announcement that it will be reviewing the proxy access rule, and issue a staff proposal for public comment. "I think investors would welcome a broad reopening of proxy access by the commission, particularly in light of failures of corporate boards in recent years, most recently the option disaster. I'm sure there are some in the corporate community that will be looking to take rights away from shareholders in this area, especially after the 2nd Circuit affirmed that shareholders do indeed have these rights. I'm sure that's not where Chairman Cox would want the commission to go."