In August 2011, Professor Lucian Bebchuk and nine other law professors submitted this petition asking that the Securities and Exchange Commission adopt rules requiring public companies to disclose to shareholders the use of corporate resources for political activities. In early January, Professor Bebchuk confidently predicted in this post that the SEC would issue a notice of proposed rulemaking “by April”. At the time, I was not so sure. See SEC Includes Disclosure of Corporate Political Spending Rule in Unified Agenda – What Does it Mean?
Agency rule making is essentially an exercise of quasi-legislative power. The U.S. Constitution, however, provides that “All legislative Powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.” U.S. Const. Art. I, §1. Nonetheless, the courts have allowed Congress to delegate, but not abdicate, the legislative powers vested in it. In general, Congress can delegate so long as it supplies an “intelligible principle” for the agency to follow in exercising the delegated power. J.W. Hampton, Jr. & Co. v. U.S., 276 U.S. 394, 409 (1928).
With that as background, let’s return to the professor’s petition. In the very first sentence, the professors state that they are submitting the petition under Section 14 of the Exchange Act. Section 14(a) prohibits the solicitation of proxies in respect of securities registered under Section 12 of the Exchange Act “in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” Thus, the statute establishes two standards – “the public interest” and “the protection of investors”. Note that these standards are in the disjunctive – rules need not be in the public interest and necessary for the protection of investors.
Are these intelligible principles? Can the public’s interest in any subject really justify SEC rulemaking? If so, then this would fly in the face of the historical basis for delegation of legislative authority to executive branch agencies – agency expertise. The SEC has no particular expertise in the regulation of political speech. It is, after all, the SEC, not the FEC. The protection of investors is equally non-specific. The question that must be asked is from what are investors to be protected? If there are no boundaries, can they be overstepped?
While I recognize that the Exchange Act repeatedly invokes the public interest and the protection of investors, one must ask where’s the “intelligible principle” in Section 14(a)? In the so-called “hot oil” case, Panama Refining Co. v. Ryan, 293 U.S. 388 (1935), Justice Charles Evans Hughes struck down two federal statutes on the basis of the non-delegation doctrine:
“As to the transportation of oil production in excess of state permission, the Congress has declared no policy, has established no standard, has laid down no rule. There is no requirement, no definition of circumstances and conditions in which the transportation is to be allowed or prohibited.”
Id. at 253-53. The same could be said about Section 14(a).