The Disclosure-Conduct Distinction?

In his written comments to the SEC on proxy reform posted below, Professor Stephen Bainbridge argues for a restricted view of the SEC’s authority to regulate the director election process.  His argument relies heavily on the reasoning of Business Roundtable v. SEC and the disclosure-conduct disctinction the Business Roundtable court sought to preserve.

The “disclosure-conduct” distinction heralded in Business Roundtable is based on the oft-repeated generalization that the federal securities laws are disclosure-based rather than conduct-oriented.  As I have discussed, such an assertion curiously ignores many provisions of the federal securities laws that directly proscribe conduct.  After the adoption of Sarbanes-Oxley which contains a number of significant corporate governance provisions, the disclosure-conduct distinction as a demarcation of SEC authority becomes far less tenable.

In an essay, Revisiting Business Roundtable and Section 19(c) in the Wake of the Sarbanes-Oxley Act, 23 Yale Journal on Regulation 249 (2006), Jeffrey Wu questions the continued viability of the Business Roundtable holding.  Here is the abstract:

Although section 19(c) of the Exchange Act authorizes the SEC to modify stock exchange rules “in furtherance of the purpose” of the Exchange Act, federalism has frustrated the SEC’s attempt to use that power to effect corporate governance reform. In Business Roundtable v. SEC, the D.C. Circuit vacated the SEC’s “one share, one vote” rule, on grounds that Congress did not intend for the SEC to intrude into corporate governance, which traditionally has been considered the domain of state law. However, the Sarbanes-Oxley Act has changed the federalism calculus of section 19(c). Because Sarbanes-Oxley’s amendments to the Exchange Act established a new federal policy of fighting fraud through corporate governance reform, federalism has lost much of its vitality as a constraint on SEC authority. Accordingly, the SEC should now have the power to use section 19(c) to promulgate corporate governance standards in furtherance of the purpose of Sarbanes-Oxley, particularly its audit committee provisions.

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