someone monitoring the comments could not have responded to the agency's theory.
In its motion for summary judgment, the SEC argues the soundness of its decision and cites several outside sources, all of which apparently were available to the SEC before the published notice of proposed rulemaking.
See Memorandum of Points and Authorities in Support of Defendant's Motion for Summary Judgment and in Opposition to Plaintiffs' Motion for Summary Judgment ("Defendant's Motion") at 5-6, 28-34. This leads the Court to believe that the SEC's decision to raise the percentage thresholds was based on previously formed assumptions without revealing those assumptions for public scrutiny.
Failure to make known agency views at the time of publication of notice circumvents the purpose of the APA notice requirements. Proposed rule changes cannot be "tested" when the public is unaware of both the proposed revision and the theory under which the agency makes its proposal.
A general request for comments is not adequate notice of a proposed rule change. Interested parties are unable to participate meaningfully in the rulemaking process without some notice of the direction in which the agency proposes to go. See Forester v. Consumer Product Safety Commission, 182 U.S. App. D.C. 153, 559 F.2d 774, 787 (D.C. Cir. 1977) (Notice must afford "interested parties a reasonable opportunity to participate in the rulemaking process.").
The SEC argues that its direction was unknown at the time of publication of notice and that the wording of the notice encouraged comments from all sides of the issue, which would develop a complete record for informed decision making. Defendant's Motion at 19 n.11. The Court's decision should not discourage agencies from developing a complete record before issuing a final rule change. The manner of compiling that record, however, must allow for concrete criticism and comments.
If the SEC's direction was unknown, the agency was unprepared to propose a revision, let alone issue a final rule change. After receiving general comments, the SEC should have invited comment on a specific revision of the percentage thresholds and the agency's theory for the proposal. Such action would have tested properly the agency's decision. Any objections to the specific proposal then could have been raised and the percentages adjusted accordingly.
The Court also finds the notice of proposed rulemaking ambiguous. The SEC allegedly proposed two changes to Rule 14a-8(c)(12): a change in the introductory phrase and a change in the percentage thresholds. The former proposed change was explained under a subheading entitled "Rule Changes Under Consideration." 47 Fed. Reg. at 47,429-30. The latter change, however, was listed under a different subheading entitled "Other Issues." Id. at 47,430.
The SEC argues that the latter subheading reasonably should be interpreted as meaning "Other Issues Under Consideration." The Court disagrees.
Not only did the SEC separate the two notices, the agency also published a draft text that included the proposed revision of the introductory phrase of subsection (c)(12) but not any change in the percentage thresholds. Id. at 47,432. The SEC argues that it clearly stated in the background section of the notice of proposed rulemaking that all proposed changes would not be in the draft text. See id. at 47,421. The introduction of the draft text, however, states that "in accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows". Id. at 47,430. No amendment to the percentages followed. In addition, several pages earlier, in the section discussing changes to Rule 14a-8(c), the agency mentioned that changes to subsection (c) "under consideration by the Commission are reflected in [the draft text]." The SEC's intent to specifically revise the percentage thresholds, therefore, was unclear. See American Federation of Labor and Congress of Industrial Organizations v. Donovan, 244 U. S. App. D.C. 255, 757 F.2d 330, 339 (D.C. Cir. 1985).
The comments again evidence the ambiguousness of the notice. While the SEC received 66 comments on the percentage thresholds, 43 letters, or 65 percent, were from issuers. Few comments were received from institutional shareholders, or shareholders in general, who would be most affected by a revision. If notice were given of an increase in the percentage thresholds, more shareholders likely would have responded. See Chocolate Manufacturers Association v. Block, 755 F.2d 1098, 1105 (4th Cir. 1985). The SEC would have received more comments from those likely to oppose the proposal, rather than simply favorable comments from issuers.
Furthermore, none of the commentators presented any data to support their suggestions on the appropriate percentage levels. Few gave any reasons at all.
The general nature of the comments and the absence of greater shareholder response implies fairly that interested parties thought a future proposal was forthcoming and that the present notice and comments would be used to determine if any revision was necessary. See Mobil Oil Corporation v. Federal Power Commission, 157 U.S. App. D.C. 235, 483 F.2d 1238, 1244 (D.C. Cir. 1973). When interested parties are unaware that the present rulemaking procedures will result in specific regulations, the purposes of the APA notice requirements cannot be served.
The Court therefore grants plaintiffs' motion for summary judgment based on inadequate notice of proposed rulemaking. The Court need not consider plaintiffs' other arguments. An appropriate order to this effect was filed on September 13, 1985.