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Business Roundtable Critical of Shareholder Election Rules

An SEC proposal giving shareholders direct access to the proxy process by requiring companies, including investment companies, to include in their proxy materials the names of shareholder nominees for director exceeds the Commission's statutory authority, in the view of the Business Roundtable. In an exhaustive comment letter on the proposal, replete with numerous cites, the roundtable argued that neither the proxy provisions nor any other section of the Exchange Act authorizes the SEC to regulate the internal affairs of corporations.

While the SEC's rulemaking authority is sweeping, said the roundtable, it is not unlimited. The proposal would establish a new federal right of shareholders to gain access to company proxy materials to nominate directors, emphasized the roundtable, in the absence of any corresponding state privilege. Currently, shareholders are provided proxies allowing a vote only on company-nominated candidates.

While the proxy provisions empower the SEC to ensure that shareholders receive full and accurate disclosure, argued the business group, the proxy rules have never been construed to allow the Commission to directly regulate corporate action. The distinction between disclosure and direct regulation of corporate governance is critical, said the group, citing the 1990 opinion of the U.S. Circuit Court of Appeals for the District of Columbia Circuit in Business Roundtable v. SEC, 1990 CCH Dec. ¶95,291, in which the court said that the Exchange Act cannot embrace regulation of an issue that is a part of corporate governance traditionally left to the states. The court held Rule 19c-4 to be beyond the SEC's authority because it directly controlled the substantive allocation of power among classes of shareholders. Rule 19c-4 barred the listing of stock of companies that restricted or disparately reduced the per share voting rights of existing common stockholders.

In its comment letter, the roundtable contended that the proxy provisions do not authorize the SEC to regulate corporate suffrage by allowing the agency to dictate the matters on which shareholders would vote. Rather, the Commission is authorized to ensure the adequacy of disclosure made in the proxy process.

The Exchange Act does not does not authorize the SEC to regiment business, reasoned the roundtable, because corporate governance is a matter of internal management that has traditionally and almost exclusively been reserved to the states. State corporate law governs the director nomination and election process. The SEC proposal would supplant state law in this regard, said the business group, thereby creating an unprecedented regime of federal intrusion into and control over the direction of state-chartered corporations.

The roundtable conceded that the Sarbanes-Oxley Act expressly authorized the SEC to make rules affecting some aspects of corporate governance, including directing national securities exchanges and associations to require independent audit committees. But the Sarbanes-Oxley Act did not address the question of director nominations, continued the business group, and the act confirms that, absent express congressional authorization, the Commission lacks statutory authority to regulate corporate governance.