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WASHINGTON-The honeymoon for Christopher Cox may soon be over at the Securities and Exchange Commission. A Democratic commissioner recently said he expects that the SEC will be divided over a vote later this month on investor rights. If so, this will be the first time the agency has been split on a critical vote since Cox took charge at the SEC almost two years ago. At issue is a federal appeals court ruling on Sept. 5 that the SEC was wrong to let American International Group Inc. (AIG) exclude from its proxy an investor proposal intended to make it easier for shareholders to nominate alternative director candidates on corporate ballots. American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group Inc., No. 05-2825-cv (2d Cir.). To resolve the difference between the SEC’s interpretation of the rules and the court’s, Cox’s most viable options would force him to choose between one option sure to be opposed by the SEC’s two Democrats and another that faces resistance from at least one of his Republican colleagues. “It will be difficult to get unanimity,” SEC Commissioner Roel Campos told reporters after giving a speech to the Consumer Federation of America in Washington. Draft coming SEC observers expect Cox to introduce a draft rule on Dec. 20 clearly spelling out that companies may block shareholder groups from placing director candidates on company proxy cards. Democratic SEC commissioners Campos and Annette Nazareth oppose that idea and support giving shareholders the ability to nominate one or two candidates on the company proxy documents. Republican Commissioner Paul Atkins is likely to be opposed to their suggestion. “I think there are others on the commission that don’t want shareholder access at all, who view that as sort of a danger to the conduct of business, and I think that is totally wrong,” Campos said. The other Republican commissioner, Kathleen Casey, has not voiced her views publicly. Campos said he was open to some compromises, including letting the court decision sunset after a one-year pilot period so that investors and the business community can observe the extent to which shareholders attempt to nominate their own director candidates on corporate boards, and what that could mean for those businesses. The corporate community contends that giving shareholders the ability to nominate one or two of their own director candidates on a company proxy card could give groups such as labor unions and environmentalists too much power on boards. Such a situation could also violate the corporation’s ability to comply with its fiduciary duties to shareholders. Under the proposal AIG wants to reject, shareholders holding a 3% stake for one year in a company could ask other investors to enhance their ability to nominate one or two directors on the company’s proxy in an election against incumbent directors the following year. For dissidents, access to the corporate proxy would cut significantly the printing and mailing costs of waging a proxy contest. Dissidents, who today are typically activist hedge fund managers, now must make their pitches to shareholders separate from the company’s materials. Institutional investors such as pension funds are not known for instigating proxy fights because of the cost, but easier access to ballots would likely break down their reluctance to nominate dissident directors. Under SEC Rule 14a-8, companies may reject shareholder votes on any proposal that “relates to an election.” The court found that the SEC had misinterpreted its rules because, rather than directly relate to an election, the shareholder proposal only set in motion a process for eventually allowing investor candidates on the company ballot. Other GOP commissioners prevented Cox’s predecessor, William Donaldson, also a Republican, in his efforts to provide an avenue for shareholders to place director nominees on the company proxy. Donaldson in 2003 introduced a proposal that would have allowed shareholders to nominate directors, in some circumstances, on the company ballot. He was forced to drop the idea because of opposition from business groups and the SEC’s two other Republican commissioners, including Atkins.

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