* Business groups say SEC failed to assess rule's costs
* Doubts about agency's estimates for contested elections
* Ginsburg questions benefit to shareholder democracy
By Sarah N. Lynch
WASHINGTON, April 7 A panel of judges grilled
U.S. securities regulators on Thursday over the potential costs
of a rule that business groups say 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.
The U.S. Chamber of Commerce and the Business Roundtable
allege that the SEC has failed to conduct an adequate
cost-benefit analysis, a technical but crucial requirement that
has seen SEC rules voided in the past.
Judges questioned why the SEC's estimates for the number of
contested elections were lower with its new rule than estimates
for a prior year without the rule.
"It will go down in number" with rules designed to make
proxy access easier? asked Chief Judge David Sentelle. "If the
answer is yes, then we have a problem."
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.
The Chamber and the Business Roundtable fear minority
shareholders may use it to unduly influence board composition
and cost companies millions of dollars in contested board
elections. They argue the SEC failed to adequately assess the
costs of the rule on competition, capital formation and
Judge Douglas Ginsburg sounded skeptical not only about the
SEC's estimates on the number of contested elections, but also
about the fundamental benefits of the rule itself on
"The petitioners are telling us that the new regime would
be used mostly by labor unions, pension funds and state
employee pension funds," Ginsburg told a lawyer for the SEC.
"Are you facilitating challenges for shareholders that are
far less than the average shareholder to have the company's
interests at heart?" asked Ginsburg.
SEC Assistant General Counsel Randall 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?" Ginsburg asked.
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.
A final ruling is expected sometime later this year.
(Reporting by Sarah N. Lynch, editing by Tim Dobbyn)