SEC Delays Proxy-Access Rules Amid Legal Challenge

The U.S. Securities and Exchange Commission delayed implementation of rules to make it easier for investors to oust corporate directors, as the agency tries to quickly resolve a lawsuit aimed at overturning the regulation.

In announcing the decision, the SEC said it would ask the U.S. Court of Appeals for the District of Columbia for an “expedited review” of a legal challenge by the U.S. Chamber of Commerce and the Business Roundtable, according to a legal order posted on the agency’s website today. The move means rules allowing shareholders to nominate directors on corporate ballots won’t take effect Nov. 15 as planned.

“A stay avoids potentially unnecessary costs, regulatory uncertainty and disruption that could occur” if the rules took effect during the litigation, the SEC said in the order. “Because the commission and petitioners will seek expedited review of petitioners’ challenge, questions about the rules’ validity will be resolved as quickly as possible.”

The Washington-based business groups announced their lawsuit on Sept. 29, saying labor unions and public pension funds would use the nominating power to hijack companies and push political agendas. SEC Chairman Mary Schapiro has said the 2008 credit crisis, which cost financial firms more than $1.82 trillion, shows shareholder deserve more clout in picking board members to oversee companies.

Before the SEC approved its rule in August, shareholders could nominate dissident directors only by mailing a separate ballot and persuading other investors to vote with them. Activist investors such as Carl Icahn and Nelson Peltz have waged proxy fights to get their candidates elected to boards of companies they said were underperforming.

3-2 Vote

The SEC, in a 3-2 vote by commissioners, stipulated that investors or groups of shareholders who own 3 percent of a firm for three years could put candidates on corporate ballots.

Under the regulation, shareholders would be able to nominate at least one director and as much as 25 percent of a board. Investors couldn’t use the rule if their intent is to oust a majority of board members and take over a company.

The financial-regulation law signed by President Barack Obama in July authorized the SEC to provide so-called proxy access. Lawmakers crafted the measure with the aim of making it easier for the SEC to withstand a legal challenge.

Procedural Missteps

The chamber and Business Roundtable argued in their lawsuit that the SEC made procedural missteps in writing its rules, such as failing to adequately weigh the costs imposed on companies.

The business groups said they planned to ask the appeals court for a stay if the SEC refused. The court has previously delayed implementation of SEC rules during legal challenges.

The chamber is the nation’s biggest lobbying group representing corporations. The Business Roundtable’s members include chief executive officers of the largest U.S. companies.

“The commission continues to believe that its rules are lawful and in the best interests of investors,” SEC spokesman John Nester said. “We intend to vigorously defend them in court.”

The SEC’s decision to delay implementation means the new rules won’t be in place in February, March and April of 2011, when most U.S. companies plan to send proxy statements to investors. The SEC expects the legal challenge will be resolved by “late spring,” Nester said.

“Most of the annual meetings are held in the spring, so if the SEC wins in court and the rule is declared valid, we still won’t likely see it used until 2012,” said Charles Elson, chairman of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

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