Federal appeals court rules SEC's repeal of some rules is illegal.

The Indirect arbitrageFederal Court of Appeals ruled on Wednesday that the U.S. Securities and Exchange Commission (SEC) violated the law when it partially repealed certain rules in 2022. Critics argue that these rules hinder the independence of proxy advisory firms that help investors vote in corporate elections.

The Fifth Circuit Court of Appeals, in a unanimous 3-0 vote, stated that the SEC's rationale for repealing the rules enacted two years earlier by the Trump administration was "arbitrary and capricious, and therefore unlawful."

The repealed regulations required proxy firms, such as Institutional Shareholder Services and Glass Lewis, to notify companies when providing advice to clients and make the companies' written responses available to clients.

When announcing these changes, SEC Chair Gary Gensler stated that they would promote the timeliness and independence of proxy voting advice, thereby protecting investors and promoting shareholder democracy.

A spokesperson for the SEC said that the agency is reviewing the ruling and will determine the appropriate next steps.

The repeal was challenged by the Natural Gas Services Group and the National Association of Manufacturers. NGS provides compression equipment to the energy industry.

Linda Kelly, Chief Legal Officer of the National Association of Manufacturers, said in a statement, "Today's ruling confirms that federal agencies must follow the law, even during times of governmental transition."

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