An amicus brief filed by the Council of Institutional Investors and TIAA-CREF strongly defends the SEC's proxy access rule against a challenge by business groups in federal court. A number of other significant institutional investors signed on to the brief, including CalPERS, the Wisconsin Investment Board, and the New York State Employees Retirement System. The brief was filed in the DC Circuit Court of Appeals, where the business groups are challenging the rule. Oral argument is set for April 7, 2011. (Business Roundtable and Chamber of Commerce v. SEC, DC Circuit Court of Appeals, No. 10-1305). The brief first points out that the Dodd-Frank Act specifically sanctions the SEC's adoption of the proxy access rule. Seeking to restore investor confidence and management accountability in the wake of the recent financial crisis, Congress reaffirmed the SEC's authority to establish proxy access rules that are in the interests of shareholders and for the protection of investors. Congress' decision was well founded, said amici, since economists and courts alike have long recognized the costs that investors suffer when corporate officers make decisions based on interests that diverge from those of long-term shareholders. Because attending shareholder meetings is impractical for most shareholders, noted the brief, state law typically allows shareholders to vote for directors by proxy. For 70 years, the SEC has sought to ensure that the proxy process functions as a reasonable substitute for in-person meetings. The current proxy process, however, does not, concluded amici. Shareholders generally cannot have their director nominees placed on the company proxy, but must instead circulate competing proxy materials and campaign for support separately. The costs can be prohibitive, noted the brief, and incumbents can impose significant procedural hurdles. Absent a realistic prospect of removal, directors can fail to act in the long-term interests of the corporation, with disastrous results. Responding to those failures, Rule 14a-11 allows certain shareholders to include director nominees in the company's proxy materials. In the view of the institutional investors, the SEC carefully circumscribed that right, limiting it to shareholders with a large, long-term stake in the corporation, while deterring shareholders with parochial agendas. Experience abroad with similar rules strongly supports the SEC's conclusion that, while proxy access will rarely be invoked, it provides broad benefits. Some benefits are that the rule enhances the possibility of shareholder candidates communicating with management and significant investors, and that it improves management performance. Arguments that proxy access will force corporations to oppose parochial-interest nominees or make concessions to avoid such contests ignore the experience of foreign systems, the preconditions limiting proxy access to long-term shareholders; and the minimal chance that parochial nominees will be elected. The business groups challenging the rule also asserted that the SEC did not explain why proxy access contests would occur less frequently than traditional proxy contests. But as the SEC observed and overseas proxy access demonstrates, proxy access is rarely exercised precisely because it provides management with incentives to address shareholder concerns before contested elections become necessary. According to amici, the SEC properly rejected the petitioners' private-ordering approach under which each corporation would independently decide whether to allow proxy access. The notion that one generation of shareholders could disenfranchise the next is contrary to the purpose of shareholder meetings, posited amici. Moreover, such a company-by-company approach would impose staggering costs. In addition, in the view of the investors, effective private ordering is not possible because many companies impose impediments such as supermajority requirements, restrictions on shareholders' ability to amend or propose bylaws, and board repeal of shareholder-adopted bylaws. The proxy access rule, by contrast, provides a baseline that improves corporate accountability for all shareholders. The brief also said that the SEC properly justified its decision not to exempt investment companies from proxy access. The rule's core purpose of facilitating the exercise of shareholders' traditional state-law rights to nominate and elect the directors who are supposed to protect their interests applies with equal force to investment company boards and operating company boards alike.
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