* Business groups say SEC failed to assess rule's costs
* Doubts about agency's estimates for contested elections
* Ginsburg questions benefit to shareholder democracy
(Adds additional quotes and detail from court arguments)
By Sarah N. Lynch
WASHINGTON, April 7 A panel of judges grilled
U.S. securities regulators on Thursday over the costs of a rule
that business groups charge would give activist unions and
pension funds too much power to nominate their own candidates
for corporate boards.
During oral arguments before the U.S. Court of Appeals for
the District of Columbia Circuit, doubts were raised about the
Securities and Exchange Commission's estimates for how many
contested board elections would result.
There was also skepticism expressed over whether the rule
would enhance corporate democracy to the benefit of the average
The U.S. Chamber of Commerce and the Business Roundtable
are challenging the rule, alleging the SEC has failed to
conduct an adequate cost-benefit analysis, a requirement that
has seen SEC rules overturned in the past.
The SEC said it expects about 51 proxy contests a year with
its rule - a figure less than the 57 contested corporate
elections in 2009.
The three-judge panel struggled to understand how a rule
designed to facilitate shareholder nominees could lead to fewer
They frequently interrupted SEC Assistant General Counsel
Randall Quinn during his arguments to press him on issues, and
questioned him so long that he ran out of time to present a
Rules designed to make proxy access easier will cause the
number of contested proxy elections to "go down in number?"
asked Judge David Sentelle. "If the answer is yes, then we have
The proxy access rule, which is on hold pending the court's
decision, would require a company to include a shareholder
candidate in its voting materials as long as the nominating
shareholders have held at least 3 percent of the voting power
of the company's stock for three years.
A ruling is expected sometime later this year.
Improving proxy access has been a top priority of SEC
Chairman Mary Schapiro since she took the job in 2009.
The Chamber and the Business Roundtable fear minority
shareholders may use the rule to unduly influence board
composition and will cost companies millions of dollars in
contested board elections.
Recognizing that the SEC could face a legal challenge to
proxy access, lawmakers who crafted last year's Dodd-Frank
financial reform law added language bolstering the SEC's
But Dodd-Frank does not protect the SEC from challenges
over rule-making requirements to weigh the benefits against the
costs to competition, capital formation and efficiency.
Eugene Scalia, an attorney at Gibson Dunn & Crutcher who
argued the case for the business groups, told the three-judge
panel that the SEC rule should be vacated because the agency
"entirely failed" to ascertain its costs.
Judge Douglas Ginsburg sounded skeptical about the
fundamental benefits of the rule on shareholder democracy, in
addition to doubts about its costs.
"Are you facilitating challenges for shareholders that are
far less than the average shareholder to have the company's
interests at heart?" Ginsburg asked the SEC lawyer.
Quinn said the rule will be a benefit because it could
make companies "more responsive" to shareholders.
"Responsive to all shareholders, or those narrow
shareholders," Ginsburg shot back.
"Those narrow shareholders," Quinn replied.
"Why is that a benefit?" asked Ginsburg.
The judges also questioned the SEC's contention that
companies could opt to avoid the costs of contested board
elections by not challenging the shareholders' candidate.
Quinn said it would be "reasonable" to consider this
possibility because it is "consistent" with a board's fiduciary
Ginsburg asked Quinn how he knew that companies would "roll
over" and support a shareholder nominee instead of a
"I don't know that," Quinn replied, prompting Sentelle to
suggest that the SEC was "taking it out of thin air."
(Reporting by Sarah N. Lynch, editing by Tim Dobbyn)