In an unexpected move, the U.S. Securities and Exchange Commission announced today that it would grant a request by two corporate groups to delay implementation of its long-awaited proxy access rule. 

The SEC acted after the U.S. Chamber of Commerce and the Business Roundtable filed a Sept. 29 lawsuit that seeks to overturn the rule. The commission said it would join the groups in seeking an expedited review by the U.S. Court of Appeals for the D.C. Circuit. Even if the appeals court acts quickly and upholds the controversial rule, it’s not likely that proxy access would take effect until at least the 2012 proxy season. 

The challenged provision, SEC Rule 14a-11, seeks to authorize shareholder groups that have held more than a 3 percent stake for at least three years to nominate board candidates to appear on management proxy statements. The rule had been slated to take effect on Nov. 15 and would have impacted companies holding meetings during the second half of the spring 2011 proxy season. The business groups assert that the rule is "arbitrary and capricious" in its treatment of state law; and that the SEC failed to properly consider the costs of access or the effects on "efficiency, competition, and capital formation."

"Few issues in corporate governance have generated more disagreement or stronger passions, in part because of the serious disruptions that issuers of securities and others have long feared would result," the two groups argued in their request for delay.  "Proxy access has waited more than 65 years. There is no discernable harm to delaying the effective date of the rules until the resolution of the petition for review."

The SEC acknowledged these concerns in its order granting a stay. “The Commission finds that, under all of the circumstances of this matter, a stay of Rule 14a-11 and related rule amendments is consistent with what justice requires. Among other things, a stay avoids potentially unnecessary costs, regulatory uncertainty, and disruption that could occur if the rules were to become effective during the pendency of a challenge to their validity,” the SEC said in its order.

The SEC also said it would delay an amendment to Rule 14a-8, which would have allowed investors to file bylaw proposals that seek more permissive access procedures. That rule change was not challenged by the corporate groups, which have argued that companies and investors should be able to adopt issuer-specific provisions instead of being subject to uniform federal standards. The SEC said it decided to delay the implementation of this rule change, “because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.”

The SEC's decision, especially its move to also delay the Rule 14a-8 amendment, surprised both investors and corporate advisers. The Dodd-Frank Act, which was enacted in July, included authorization for the SEC to adopt a proxy access rule, so many SEC observers expected that the commission would move forward to implement the rule after obtaining that legal support.

Con Hitchcock, a lawyer for labor funds, observed that the SEC order was "a way to lower the temperature of this debate."

"While we are disappointed in the delay, it is not the end of the world," said Amy Borrus, deputy director of the Council of Institutional Investors. "The Council and concerned investors have pressed for years for this basic shareowner right. A few more months’ wait will not make a big difference.  Given the timing of the rule approval and publication in the Federal Register, it was already a stretch for active investors to use access in the 2011 proxy season. We look forward to expedited resolution of this case because of the cloud of uncertainty hanging over the rules as a result of the litigation. We continue to believe that access to the proxy is a fundamental shareowner right and that it will make boards of U.S. public companies more responsive to shareowners and more diligent in their oversight of management."