The Securities and Exchange Commission this week unveiled a much-anticipated proposed rule on proxy access that is being criticized by some investors as too onerous and restrictive.

The proposed rule--one of two options floated by the SEC--was narrowly endorsed at a July 25 meeting of the five-member commission with Republican Chairman Christopher Cox joining Democratic Commissioners Annette Nazareth and Roel Campos in supporting the measure.

The draft rule would allow investors holding 5 percent of a company’s equity for one year to propose a bylaw allowing for access, agency officials said. The filer would be free to set the terms of director nominations, according to the commission, so long as that procedure complied with applicable state law and the company's charter and bylaws. The proponent also would need to file a Schedule 13G with expanded disclosures detailing past interactions with the company.

A second proposed rule, which would effectively bar access by allowing companies to omit the resolutions, was floated as a tradeoff to push the other proposal forward, sources said. That measure was supported by Republican Commissioners Paul Atkins and Kathleen Casey as well as Cox. Both draft rules will be subject to public comment after appearing in the Federal Register.

The commission's proposal allowing for access is problematic, given that the filing requirement of 5 percent ownership will limit the ability of most shareholders to push for access, some investors say.

"Five percent would be tantamount to overturning the AIG decision" said Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, and Municipal Employees (AFSCME), referring to an appellate court decision last year that opened the door to access resolutions. "Shareholders would not be able to bring proposals under this rule."

Echoing those concerns before endorsing the measure, Campos noted that the collective holding of members of the Council of Institutional Investors equates to less than 1 percent of outstanding equity at large U.S. firms.

"I have deep reservations that … the high threshold may make [the rule] useless," Campos said. "I want to encourage investors to make their views known." Campos suggested a scalable approach whereby holding thresholds for filing would be lower at larger companies and higher at small and mid-sized firms.

Mounting Pressure on the SEC
Pressure to act on proxy access has been building after an appellate court ruled in September that the agency erred in allowing insurer American International Group (AIG) to omit a 2005 AFSCME proposal calling for access.

The New York-based court faulted the agency’s inconsistent interpretations of SEC Rule 14a-8(i)(8), which allows companies to omit proposals that "relate to an election of directors." Since 1990, the SEC has applied that language broadly to exclude proposals that deal with election procedures generally, including the access resolutions from AFSCME and other investors. The court concluded that the SEC should have explained why it had changed its approach.

In January, the commission declined to rule on a similar omission request from Hewlett-Packard, thereby allowing investors to file access proposals this year.

Meeting attendees familiar with the text of the draft proposals told ISS that the second proposal was structured to potentially allow for a reversal of the AIG decision. The proposal's language reinforces and codifies the commission’s post-1990 approach to proposals dealing with election procedures, according to an agency statement.

At the meeting, Atkins unsuccessfully pressed SEC staff to confirm that adoption of the measure would in fact serve that purpose.

Business interests, who are supporting the second proposal, say they will oppose any effort to give investors a greater say in director nominations, arguing special interests will use it to "advance their agenda" at the expense of retail and other investors.

"With all the recent governance changes, boards of directors are already extremely responsive to shareholder interests," David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said in a statement. "Unions have long sought these expanded powers to leverage organizing concessions from boards that are not supported by a majority of workers or shareholders."

If the commission adopts the second proposal, which Nazareth dubbed "non-access," shareholders would have to mount a costly proxy fight to get their nominees on the ballot. Few institutional investors, except for some hedge funds and private equity firms, have the financial resources to mount a successful proxy challenge at an S&P 500 company.

So far this year, access proposals have fared well. A non-binding proposal received majority support at Cryo-Cell International on July 16, the company reported, while 45 percent and 43 percent of votes cast "for" and "against" supported similar measures earlier this year at UnitedHealth Group and Hewlett-Packard, respectively. Those proposals sought to enable shareholders holding at least 3 percent of equity over a period of two years to nominate directors. In April, Comverse Technology adopted a bylaw to allow investors with more than a 5 percent stake to nominate one candidate.

The measure proposed this week differs from the draft access rule issued by the SEC in October 2003. That proposal was abandoned later amid opposition from business interests and Bush administration officials.

The 2003 rule, which would have applied to all companies, provided that proxy access would be triggered either by the receipt of withhold votes for one or more directors totaling at least 35 percent of the votes cast, or a majority vote on an access resolution submitted by a shareholder or group holding 1 percent of the company's stock. The company then would have been required to include in its proxy materials a nominee proposed by shareholders owning more than 5 percent of the company's stock for two years.