U.S. SEC seen restricting proxy access at meeting

WASHINGTON Nov 27 (Reuters) - Investor advocates expect the U.S. Securities and Exchange Commission on Wednesday to sharply limit shareholders' ability to nominate directors, with some warning such a decision would face a legal challenge.

In one of the most contentious issues to come before the agency in recent months, SEC commissioners are to consider two proxy proposals that address the ways shareholders can nominate directors through the corporate proxy process.

For years, the SEC routinely allowed companies to exclude shareholder proposals that could lead to director nominations. But the agency was forced to act after a federal appeals court questioned the SEC's interpretation of its own proxy rules last year in a case involving insurer AIG, and opened the door for shareholders to propose bylaw changes that would allow them to nominate directors in the future.

One proposal at the meeting on Wednesday would allow companies to exclude shareholder proposals from the annual proxy, a document that has traditionally been tightly controlled by corporate executives.

The other would give shareholders a way to nominate corporate directors if they own at least 5 percent of a company's stock and if other conditions are met, such as disclosure requirements.

"All indications are that Chairman (Christopher) Cox will roll back the AIG decision and take back shareholder rights to nominate directors," said Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees (AFSCME) union.

"I think he will create more uncertainty tomorrow by changing the rule, opening a Pandora's box of litigation."

AFSCME, Ferlauto added, was "prepared to take whatever action necessary to protect shareholder rights."

Cox has said the AIG court decision injected uncertainty into the proxy process for 2007 and the SEC must clarify its own approach for the 2008 proxy season. He indicated the agency might revisit the issue next year and start from scratch.

Tom Lehner, director of public policy at Business Roundtable, which represents chief executives at 160 companies, said he also anticipates the SEC will go back to its approach before the AIG decision and then reopen the topic next year.

"If that's what they do for the 2008 proxy season, that's the right decision," Lehner said. "The critical function of the board is to represent all shareholders, not particular shareholder groups."

But investor advocates say the AIG decision gave shareholders more rights in the 2007 proxy season and the SEC should not strip them in 2008 while it reconsiders the issue.

"Taking away something we have now for something promised in the future is not a good thing," said Clark McKinley, a spokesman for the California Public Employees' Retirement System. "It would shut us out of the 2008 proxy season."

Senior Democrats on the Senate and House committees that oversee the SEC have expressed concern about the SEC operating with four commissioners instead of five and urged the agency to delay acting on proxy access until it is fully staffed.

One Democratic SEC commissioner left for a law firm in September. The remaining Democrat announced her resignation, but has not set a departure date.

Another long-shot possibility is that the SEC might not vote on its two proposals, saying a recent U.S. Supreme Court decision upholds its proxy access interpretation before the AIG decision. Cox told the Senate banking committee earlier this month that the Supreme Court reversed another panel of the Second Circuit in a similar case involving an agency that changed its interpretation of its rules.

During that testimony, Cox also indicated the agency is open to amending the two proxy proposals.

"There is a widespread assumption that having published the two proposals, the commission has only a binary choice -- that we must adopt one of them or do nothing," he said. "But in fact, we may also adopt a rule that is different than either of those proposed."

The SEC has the ability to adopt rules that are different from those originally proposed if the agency's questions asked during the comment period covered the scope of the changes. (Reporting by Karey Wutkowski; editing by Andre Grenon)