New York City Employees' Retirement System v. S.E.C.
| Citation | 45 F.3d 7 |
| Decision Date | 03 January 1995 |
| Docket Number | D,No. 196,196 |
| Parties | 66 Fair Empl.Prac.Cas. (BNA) 1197, 63 USLW 2427, Fed. Sec. L. Rep. P 98,493 NEW YORK CITY EMPLOYEES' RETIREMENT SYSTEM; United States Trust Company; and Women's Division of the Board of Global Ministries of the United Methodist Church, Plaintiffs-Appellees, v. SECURITIES AND EXCHANGE COMMISSION, Defendant-Appellant. ocket 94-6072. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Jacob H. Stillman, Assoc. Gen. Counsel, S.E.C., Washington, DC (Paul Gonson, Sol., Simon M. Lorne, Gen. Counsel, Lucinda O. McConathy, Asst. Gen. Counsel, and Christopher Paik, Senior Counsel, S.E.C., of counsel), for defendant-appellant.
Margaret G. King, Corp. Counsel's Office, New York City (Paul A. Crotty, Corp. Counsel for the City of New York and Barry P. Schwartz, Corp. Counsel's Office, of counsel), for plaintiff-appellee New York City Employees' Retirement System.
Paul M. Neuhauser, Iowa City, IA (Hilary B. Klein, of counsel), for plaintiffs-appellees Women's Div. of the Bd. of Global Ministries of the United Methodist Church and U.S. Trust Co.
Joseph P. Galda, Clark, Ladner, Fortenbaugh & Young, Philadelphia, PA, Daniel J. Popeo, and Paul D. Kamenar, Washington, DC, for amicus curiae Washington Legal Foundation.
William M. Tartikoff and Beth-Ann Roth, Bethesda, MD, for amicus curiae Calvert Group, Ltd.
Before: WALKER, McLAUGHLIN and JACOBS, Circuit Judges.
The plaintiffs, New York City Employees' Retirement System ("NYCERS") and two other institutional investors, sued the Securities and Exchange Commission ("SEC") in the United States District Court for the Southern District of New York (Kimba M. Wood, Judge ), to enjoin the SEC from violating section 553(b) of the Administrative Procedure Act ("APA"). See 5 U.S.C. Sec. 553(b). The lawsuit stemmed from an SEC "no-action" letter, in which the SEC announced that it was changing its interpretation of SEC Rule 14a-8(c)(7). See 17 C.F.R. Sec. 240.14a-8(c)(7) (1994) ("Rule 14a-8(c)(7)"). The plaintiffs claimed that the old interpretation of Rule 14a-8(c)(7) was subjected to notice and comment before it was adopted, and, accordingly, the new interpretation had to follow the same procedures. The plaintiffs also challenged the new interpretation as arbitrary and capricious.
The district court, on plaintiffs' motion for summary judgment determined that the SEC's no-action letter announced a "legislative rule," as that term is used in the APA. See NYCERS v. SEC, 843 F.Supp. 858 (S.D.N.Y.1994). The court therefore enjoined the SEC from issuing any no-action letter inconsistent with the SEC's previous understanding of Rule 14a-8(c)(7) without first submitting the rule for notice and comment. The district court saw no need to address whether the rule was arbitrary and capricious.
The SEC now appeals, arguing that the no-action letter was "interpretive," not legislative, and, as such, was not subject to the APA's notice and comment requirements. The SEC also urges us to dismiss the arbitrary and capricious claim because the plaintiffs may obtain this relief without suing the agency.
We agree with the SEC. Accordingly, we vacate the injunction, reverse the order granting summary judgment, and dismiss the claim that the letter was arbitrary and capricious.
All three plaintiffs are major institutional shareholders, sharing a common sensitivity to their social responsibility. After investing in a company, the plaintiffs regularly use their shareholder status as a bully pulpit to promote non-discriminatory policies in the workplace.
The plaintiffs' powder and shot are proxy materials and shareholder proposals. When the plaintiffs want to change a company policy, they put their idea up for a shareholder vote by submitting a shareholder proposal to the board of directors. Then, the plaintiffs ask the board to include the proposal in the proxy materials that are sent to all shareholders before meetings.
In 1991, Cracker Barrel Old Country Store, Inc. attracted the plaintiffs' ire. That January, Cracker Barrel, a restaurant chain, issued a press release:
Cracker Barrel is founded upon a concept of traditional American values, quality in all we do, and a philosophy of 100% guest satisfaction. It is inconsistent with our concept and values, and is perceived to be inconsistent with those of our customer base, to continue to employ individuals ... whose sexual preferences fail to demonstrate normal heterosexual values which have been the foundation of families in our society.
Upon the heels of this release, Cracker Barrel fired several gay employees.
Cracker Barrel's actions triggered public protests, boycotts, and negative media coverage. To defuse the furor, Cracker Barrel rescinded the anti-gay policy. It did not, however, rehire the former employees. Neither did it expressly include "sexual orientation" among the inappropriate criteria for employment decisions in its published anti-discrimination policy.
In November 1991, plaintiff NYCERS, a Cracker Barrel shareholder, proposed to Cracker Barrel's board of directors that the company expressly prohibit discrimination on the basis of sexual orientation. NYCERS called for a shareholder vote and asked Cracker Barrel to include the proposal in the Cracker Barrel wanted no part of this proposal, and did not even want to include it in the proxy materials. Under Rule 14a-8, however, Cracker Barrel had to include the proposal in the proxy materials unless the proposal dealt with "ordinary business operations." See Rule 14a-8(c)(7). The construction of that term lies at the heart of the controversy, and it requires some exegesis.
proxy materials for the 1992 annual shareholder meeting.
In 1976, the SEC proposed to revise various parts of Rule 14a-8. It wanted to tighten the exception for "ordinary business operations" in subsection (c)(7)--then subsection (c)(5)--so that only proposals regarding "routine, day to day matters relating to the conduct of the ordinary business operations" could be excluded from proxy materials. See Proposals by Security Holders: Notice of Proposed Amendments to Rule, Exchange Act Release No. 12,598 (July 7, 1976), 41 Fed.Reg. 29,982, 29,984 (the "Proposed Amendments"). This way, the SEC believed, corporations could not exclude proposals regarding policies important to shareholders just because they also happened to concern "ordinary business operations."
After reviewing comments on the proposed revision, the SEC decided not to change the subsection in any material way. See Adoption of Amendments Relating to Proposals by Security Holders, Exchange Act Release No. 12,999 (Nov. 22, 1976), 41 Fed.Reg. 52,994, 52,997 (1976) (the "1976 Adoption"). Instead, the 1976 Adoption indicated that the Rule would retain the historical "ordinary business operations" language, but that the SEC staff would thereafter interpret it so that corporations could not exclude proposals regarding "matters which have significant policy, economic or other implications inherent in them." Id.
Befuddled by the 1976 Adoption, Cracker Barrel wrote to the SEC's Corporation Finance Division (the "Division") in 1991, to find out whether the SEC would bring an enforcement action if Cracker Barrel left NYCERS's sexual orientation proposal out of the proxy materials for the 1992 meeting. The letter argued that Rule 14a-8(c)(7) allowed Cracker Barrel to omit NYCERS's proposal because it related to employment policies, and these fell within the ambit of "ordinary business operations."
NYCERS wrote its own letter to the Division, relying upon the "significant policy implications" language in the 1976 Adoption. Contending that employment discrimination is an important policy issue, NYCERS argued that Cracker Barrel had no right to omit NYCERS's proposal.
In October 1992, the Division issued a no-action letter, stating that the SEC would not bring an enforcement action against Cracker Barrel. See Cracker Barrel Old Country Store, Inc., SEC No-Action Letter, 1992 WL 289095 (SEC) (October 13, 1992) (the "Cracker Barrel no-action letter"). The letter conceded that the Division's staff had already experienced difficulty trying to discern when a proposal involved significant policy issues. It also acknowledged that the opaqueness of the standard had led to decisions "characterized by many as tenuous, without substance and effectively nullifying the application of the ordinary business exclusion to employment related proposals." The letter continued:
The Division has reconsidered the application of Rule 14a-8(c)(7) to employment-related proposals in light of these concerns and the staff's experience with these proposals in recent years. As a result, the Division has determined that the fact that a shareholder proposal concerning a company's employment policies and practices for the general workforce is tied to a social issue will no longer be viewed as removing the proposal from the realm of ordinary business operations of the registrant. Rather, determinations with respect to any such proposals are properly governed by the employment-based nature of the proposal.
Id. at * 18. NYCERS petitioned the SEC to reverse the Cracker Barrel no-action letter; the SEC reviewed it, and affirmed.
NYCERS and two other institutional investors feared that the Cracker Barrel no-action letter would frustrate any future attempts by them to change employment policies. So, they three sued the SEC in the The SEC moved for summary judgment dismissing the complaint, arguing that the Cracker Barrel no-action letter (1) was not judicially reviewable; (2) was not subject to APA notice and comment requirements; and (3) was neither arbitrary nor capricious. The plaintiffs cross-moved for summary judgment.
Southern District of New York, seeking a declaration that the no-action letter's jettison of the "significant policy implications" rule was invalid because: (1) the...
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