April 7, 2011 / 7:42 PM / in 7 years

UPDATE 1-Judges grill U.S. SEC over proxy access costs

* 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 (Reuters) - 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 shareholder.

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 contested elections.

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 closing argument.

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 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.

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 authority.

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 duty.

Ginsburg asked Quinn how he knew that companies would “roll over” and support a shareholder nominee instead of a management-backed candidate.

“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)

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