Policy Documents

SEC ‘Proxy Access’ Rule Could Empower Unions, Political Activists

Steve Stanek –
October 22, 2010

The U.S. Chamber of Commerce and the Business Roundtable have filed a lawsuit against the Securities and Exchange Commission (SEC) over a "proxy access" rule they say will open the door to political activism at odds with investor interests.

“While Congress may have authorized the SEC to consider a proxy rule, Congress never exempted the SEC from following the law when promulgating new regulations,” said Robin Conrad, executive vice president of the National Chamber Litigation Center, the Chamber’s public policy law firm. “The SEC failed to engage in evidence-based rulemaking, and we intend to hold the SEC to its statutory obligation to conduct a thorough cost-benefit analysis.”

The lawsuit contends the proxy access rule violates the First Amendment and the Taking Clause of the Fifth Amendment by forcing the majority of a company's shareholders to use company resources to subsidize special interest minority shareholders. It also accuses the SEC of "arbitrary and capricious" violations of the Administrative Procedure Act, because the agency disregarded data on costs and other issues from numerous letters during the public comment period.

‘Afoul of Constitutional Liberties’
One of those commenters was John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute (CEI).

In a statement, Berlau said: "On behalf of American investors and entrepreneurs, CEI applauds the suit for pointing out that the ‘proxy access’ rule is essentially a wolf-in-sheep's clothing: it will not only harm job creation and retirement savings, but will also run afoul of companies and shareholders' constitutional liberties.”

Berlau said the SEC's proxy access rule “would empower unions, animal rights activists, and other political special interest groups in the corporate boardroom at the expense of ordinary shareholders.”
Threshold at Just 3 Percent
The SEC’s ruling came on a 3-2 vote in August on authority granted by the recently enacted Dodd-Frank financial reform law. The proxy access rule forces a company to subsidize the campaigns of director candidates nominated by as few as three percent of the firm's shareholders.

The lawsuit points out, “‘Even if holders of 95 percent of a company's shares find this use of a proxy to be a waste of corporate assets, they are barred from preventing it.'"
SEC Commissioner Troy Paredes was one of the commission’s two dissenters. He warned the rule may empower "special interest directors" with "goals that compete with maximizing firm value."

‘Special-Interest Group Clout’
“A fundamental principle of state corporation laws is that all shareholders holding the same class of securities have the same rights. The new rule will discriminate among shareholders, since the SEC would increase the clout of special-interest groups at the expense of the vast majority of shareholders,” said former SEC commissioner Paul Atkins, who served from 2002-2008.

David Hirschmann, president and CEO of the U.S. Chamber’s Center for Capital Markets Competitiveness, said in a statement, “The SEC’s proxy access rule empowers unions and other special interests at the expense of the vast majority of retail shareholders. This special interest-driven rule will give small groups of special interest activist investors significant leverage over a business’ activities. This will undermine a company’s ability to grow and create jobs.”

Larry Ribstein, a professor in the College of Law at University of Illinois, said, “One of the great myths about the SEC’s new proxy access rule is that it is pro-shareholder, or at least gives new clout to shareholders.  This is simply wrong, since the SEC evidently did not intend to help shareholders, or at least anything like a significant fraction of the universe of shareholders, and almost certainly has not succeeded in doing so.”

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing editor of Finance, Insurance & Real Estate News.