Second Circuit Reaffirms SEC’s Authority SEC Authority to Create Exemptions to Security Exchange Act’s Proxy Statement Requirements and Upholds Exemption For Foreign Private Issuers – Defense Motion to Dismiss Class Action Affirmed
On June 1, 2006, in Schiller v. Tower Semiconductor Ltd., 449 F.3d 286 (2d Cir. 2006), the Second Circuit addressed a “novel” challenge to exemptions for foreign private issuers to the proxy statement requirements of the Securities Exchange Act (“the Act”). The challenge came in the form of a putative class action premised on the allegation that a proxy statement issued by Tower Semiconductor “was materially misleading and therefore violated §§ 14(a) and 20(a) of the Securities Exchange Act of 1934 . . ., 15 U.S.C. §§ 78n(a), 78t, and certain regulations, including Rule 14a-9, 17 C.F.R. § 240.14a-9 (2004),” id., at 289. The defense moved to dismiss the class action on the grounds that Tower was a foreign private issuer (an Israeli corporation) and therefore exempt from § 14(a) by virtue of Rule 3a12-3 of the Act. See 17 C.F.R. § 240.3a12-3 (2004). Plaintiffs’ lawyer responded that the Securities Exchange Commission (SEC) “exceeded its authority in promulgating Rule 3a12-3,” id. The District Court agreed with defense counsel and dismissed the class action.
The Second Circuit affirmed. Preliminarily, the Court summarized the nature of the dispute as follows:
Section 14(a) of the Exchange Act bars the dissemination of proxy statements “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.” 15 U.S.C. § 78n(a). Rule 14a-9 provides that proxy statements are not to be “false or misleading with respect to any material fact.” 17 C.F.R. § 240.14a-9(a). By its own terms, however, § 14(a) does not apply to “exempted securit[ies].”
Schiller, at 290-91. Rule 3a12-3(b), in turn, provides that: “Securities registered by a foreign private issuer . . . shall be exempt from section 14(a), 14(b), 14(c), 14(f) and 16 of the Act.” 17 C.F.R. § 240.3a12-3(b). This exemption was originally promulgated in 1935, id., at 291, and while the Court stressed that it was upholding the exemption “not because of its impressive longevity” but rather “because it was promulgated pursuant to the [SEC’s] statutory mandate,” id., at 305, the author believes it particularly noteworthy that Congress had not seen fit to eliminate the exemption during the intervening 70 years.
We do not here summarize the Court’s lengthy analysis, which covers both substantive and procedural challenges to the SEC’s exemption. At bottom, in response to the substantive challenge the Court held that the SEC “can promulgate an exemption once it has determined that the exemption serves the public interest while at the same time leaving in place adequate investor protections.” Schiller, at 297. And in response to the procedural challenges, the Court held (1) that the SEC is not required “to make a formal finding or follow the other procedures that Schiller advocates,” id., at 301-02, and (2).there was sufficient evidence to conclude that the SEC properly analyzed the relevant factors and “determined that these protections [discussed in the opinion] were adequate in light of the important goal of ‘maintaining existing markets in foreign securities,’” and that the Rule 3a12-3 exemption “was not inconsistent with the public interest or the protection of investors,” id., at 304.
NOTE: The Second Circuit held that its review of the SEC’s regulation was under the APA (Administrative Procedures Act), Schiller, at 292-93, and did not reach the statute of limitations argument because the defense failed to raise it as an affirmative defense to plaintiffs’ complaint, id., at 293-94. The Court also rejected a claim that the SEC had “primary jurisdiction” over the dispute, which would have necessitated that the legal challenges advanced in the class action be brought first to the SEC before being filed in federal court, id., at 294-95.