Oct. 2 (Bloomberg) -- The U.S. Securities and Exchange Commission will delay rules making it easier for investors to oust corporate directors, a step that may give banks a reprieve from shareholders seeking retribution over the financial crisis.

SEC Chairman Mary Schapiro has backed away from approving a rule this year to let hedge funds, institutional investors and shareholder groups put candidates on corporate proxy statements, according to people familiar with the matter. Commissioners are unlikely to vote until 2010, meaning the provision won’t be in place for next year’s board elections at companies such as Citigroup Inc., said the people who declined to be identified because the talks are private.

“This gives the banks more breathing room,” said James Cox, a professor at the Duke University School of law in Durham, North Carolina. “They are still reeling from the credit meltdown. A year from now, they may have more robust profits and that would certainly dampen anxiety among their shareholders.”

The SEC proposed its so-called proxy access rule in May, with Schapiro saying the billions of dollars of losses suffered by financial companies raised “serious questions” about the oversight performed by boards of directors.

A final vote had been scheduled for November, said the people. The agency is planning a delay to give its staff more time to review more than 500 comment letters, many of which raise concerns about the proposal, the people said.

‘Waited Years’

“Not having proxy access in place in time for the start of the 2010 proxy season is disappointing, but shareowners have waited years,” said Amy Borrus, deputy director of the Council of Institutional Investors, a Washington-based trade group that represents pension funds and labor unions with assets under management exceeding $3 trillion. “A few more months won’t be the end of the world.”

SEC spokesman John Nester declined to discuss the agency’s timetable for approving a rule.

“The goal is to adopt an enduring rule that ensures investors can exercise their rights over the long run,” Nester said.

Investor anger at financial companies peaked at this year’s annual meetings. Bank of America Corp. shareholders stripped Chief Executive Officer Ken Lewis of his chairman post in April after he was faulted over the bank’s acquisition of Merrill Lynch & Co. Lewis announced Sept. 30 that he will leave the company by the end of the year.

Citigroup Shareholders

More than 25 percent of Citigroup shareholders withheld votes for board members John Deutch, who led the New York-based bank’s accounting and risk management committee, and Michael Armstrong, who preceded him in the post. They were faulted by investors for oversight failures after Citigroup lost $28 billion last year.

Activist investors such as Carl Icahn and Nelson Peltz have long fought to get their nominees elected to the boards of companies they say are underperforming. Under current SEC rules, the process requires distributing a ballot with the names of dissident nominees. Unions and pension funds say the expense of sending out a separate proxy is a barrier for most investors.

The SEC proposal would let investors who have held at least 1 percent of a large company’s shares for one year nominate a limited number of directors on the corporate proxy. Shareholders would have to own a bigger percentage of stock to recommend board members for smaller companies.

Shareholders’ Rights

The U.S. Chamber of Commerce has questioned the SEC’s authority to adopt rules, arguing that power over shareholders’ rights to nominate directors lies with states.

The nation’s biggest business lobby, which in 2006 successfully sued to overturn an SEC rule that required mutual funds to appoint independent chairmen, hired Gibson, Dunn & Crutcher LLP to represent its interests in the proxy debate.

U.S. Senator Charles Schumer, a New York Democrat, proposed legislation in May that would give the SEC clear authority to set rules for director elections.

Schumer, in a statement released today, called the SEC’s decision a “disappointment” and urged Schapiro to “avoid a lengthy delay.” He also said he’s making “good progress” in urging the Senate to consider his legislation as part of broader efforts to overhaul financial regulation.

Former SEC Commissioner Harvey Goldschmid said there’s a benefit in the agency waiting for Congress to act because it’s likely to be sued.

“I believe the commission has the power to put proxy access into effect now, but legislation would avoid a lot of wheel-spinning litigation over a period of years,” said Goldschmid, a professor at Columbia Law School in New York.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: October 2, 2009 17:21 EDT