Securities Regulation Daily Consumer, paper industry groups lacked basis to dispute SEC rule on electronic shareholder reports
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Friday, August 16, 2019

Consumer, paper industry groups lacked basis to dispute SEC rule on electronic shareholder reports

By Mark S. Nelson, J.D.

The D.C. Circuit denied a petition for review of the SEC’s Investment Company Act Rule 30e-1 because a consumer group lacked Article III standing and a paper industry group asserted interests not protected or regulated by the securities laws.

A D.C. Circuit panel held that neither a consumer group nor a paper industry group could challenge a rule adopted by the SEC that had flipped the default requirement for providing shareholder reports from one that required paper reports to one that required electronic reports, albeit with a notice provision and an option for investors to request paper reports. The SEC adopted Investment Company Act Rule 30e-3 in June 2018, as the court noted, to reduce costs to investment companies and to recognize shareholders’ preference for electronic reports. Petitioners Consumer Action and Twin Rivers Paper Company LLC, however, lacked standing to challenge the rule or otherwise asserted interests that are not protected or regulated by the federal securities laws (Twin Rivers Paper Company LLC v. SEC, August 16, 2019, Katsas, G.).

Consumer group lacked standing. The court bifurcated its analysis in order to focus separately on Consumer Action’s Article III standing and Twin Rivers’ interests under the federal securities laws. Under Article III, a court may hear cases and controversies but only if a petitioner has sustained an injury in fact that is fairly traceable to the defendant’s challenged conduct and which is likely to be redressed by a favorable court decision. Representational standing via a group such as Consumer Action has additional requirements, of which one is that a group member has sustained an injury in fact such that they would have standing to sue in their own right. An injury in fact must be concrete and particularized and actual or imminent, not conjectural or hypothetical.

The court explained that a petitioner has the burden of establishing Article III standing and may do so by submitting affidavits of individual group members. With respect to Consumer Action, the group’s opening brief was not supported by the names of identified members and corresponding affidavits. General references in the petition to the types of persons who Consumer Action seeks to represent failed to state whether any of the group’s members were among those people.

Moreover, the court concluded that Consumer Action’s attempt to submit affidavits of group members via its reply brief came too late. Here, the court distinguished a case cited by Consumer Action for the proposition that its late submissions could be excused. Specifically, the court noted that the cited case involved a petitioner who later cured its defective initial submission with emphasis on the fact that the petitioner had made an initial submission.

The court then cited three reasons why good cause did not exist to excuse Consumer Action’s late submission: (1) the group’s initial submission was weak; (2) the reply brief raised a new theory of standing ("In short, the original suggestion of impaired access and understanding has morphed into an objection about having to make a free phone call"); and (3) standing was not obvious from the late submission because the ideological basis asserted was non-concrete and, although the lost time theory was "debatable," Consumer Action still failed to allege standing in its opening brief.

Industry petitioners not aligned with shareholders. The court said Twin Rivers and its fellow petitioners would have to show that their interests are within the zone of interests to be protected or regulated by Rule 30e-3. That would require a showing that Twin Rivers was either an intended beneficiary or a "suitable challenger" whose interests mesh closely with those of an intended beneficiary. Twin Rivers alleged that the rule could make paper products less desirable.

The court said, for one, that Twin Rivers could not be an intended beneficiary of the rule because the securities laws invariably emphasize shareholders, not the sellers of paper products. Nor could Twin Rivers be a "suitable challenger" because it lacks a systematic tie to the intended beneficiaries of the securities laws—shareholders. According to the court, the SEC cited a preference among shareholders for electronic disclosures going forward and, thus, Twin Rivers’ position would result in a "systematic misalignment" with that goal (emphasis in original).

Moreover, the court said that Twin Rivers’ allegations regarding statutory limits on SEC rulemaking (i.e., the public interest; investor protection; the promotion of efficiency, competition and capital formation; necessary or appropriate burdens on competition) were too broad when compared to allegations made in other cases, which the court distinguished. As a result, the court concluded that Twin Rivers’ asserted interests were outside those to be protected or regulated by the applicable rule.

The case is No. 18-1213.

Attorneys: Jane Charlotte Luxton (Lewis Brisbois Bisgaard & Smith LLP) for Twin Rivers Paper Co. LLC. Tracey Anne Hardin for the SEC.

Companies: Consumer Action; Twin Rivers Paper Company LLC

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