SEC Approves Shareholder Access Rule

Federal securities regulators on Wednesday voted to let companies deny shareholders access to annual proxy ballots, a move governance advocates say could make corporate America less responsive to investors.

With the lone Democrat on the Securities and Exchange Commission dissenting, the panel voted 3-1 at a public meeting on the controversial shareholder rights issue, which had generated more than 34,000 comment letters from the public.

Annette Nazareth, the Democratic commissioner, said the SEC's action "stands in the way of shareholders' rights to elect directors."

Within minutes of the SEC vote, an effort to test the new rule was launched. The American Federation of State, County and Municipal Employees, or AFSCME, formally asked JPMorgan Chase & Co. and Bear Stearns Cos. to allow all shareholders to vote on bylaw changes for electing directors. The New York-based investment firms are among a number of Wall Street companies that have recently taken multimillion-dollar hits to earnings in writedowns for losses on high-risk mortgage securities.

Richard Ferlauto, AFSCME's director of corporate governance and pension investment, said the government employees' union took the action "because of our concerns regarding the mismanagement of subprime credit issues and risk exposure among the financial companies that we own."

AFSCME was joined by the New Jersey Division of Investments and the North Carolina treasurer's office in its request to Bear Stearns and by the treasurer's office in its JPMorgan Chase request.

In coming weeks, "a number of additional proposals will be filed by us and significant numbers of public funds," Ferlauto said.

If JPMorgan Chase and Bear Stearns use the new SEC ruling to bar AFSCME's request, Ferlauto said Wednesday that the union is "prepared to litigate to defend" a September federal appeals court ruling that denied American International Group Inc.'s effort to bar a similar proxy-access proposal. AIG had said it was relying on the SEC proxy-access rule that was in place before Wednesday's vote.

A second unfilled Democratic seat on the five-member SEC panel added to the controversy over the vote on shareholder rights. Democrat Roel Campos, who left in September, likely would have voted to adopt a proposal making it easier and cheaper for dissident shareholders to elect their candidates to a company's board.

That proposal would have allowed shareholders who together owned at least 5 percent of a company's stock to propose changes to the company's bylaws on elections for directors.

Proposed bylaw changes would then have been voted on by all shareholders, giving stock holders the right to get their board candidates on ballots printed and distributed at a company's expense.

Instead, the SEC adopted a competing proposal that codifies the status quo, allowing companies to ignore shareholder proposals related to the election of board members. Dissident investors must wage costly proxy fights and appeal to shareholders at their own expense if they seek new directors on a company's board or a bylaw change.

It's "a sad day for shareowners," said Ann Yerger, executive director of the Council of Institutional Investors, a group representing public pension funds.

In a statement, the CII said it "is deeply disappointed that the Securities and Exchange Commission, which takes pride in its mission as the investor's advocate, has adopted a rule that weakens investor protections."

A dozen big public pension funds made last-ditch efforts last week to persuade SEC Chairman Christopher Cox, a Republican, not to proceed with the vote. The pension funds _ including the nation's largest, the California Public Employees' Retirement System _ together own more than $300 billion worth of stock in U.S. companies.

Cox persisted, saying shareholder-rights rules needed to be in place before the annual corporate proxy season starts next spring.

Sen. Christopher Dodd, D-Conn., who heads the Senate Banking Committee, and other Democratic lawmakers had urged the SEC not to make new rules until Democratic vacancies were filled with commissioners to be named by President Bush and approved by the Senate. Besides Campos' vacancy, Nazareth plans to leave in the coming months.

The SEC's action "will leave shareholders with inadequate recourse to influence insular boards that are unresponsive to shareholder concerns," Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said in a statement Wednesday. The SEC "should have waited until it was at full membership and was able to deal comprehensively with the issue of proxy access," Frank's statement said.

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