WASHINGTON (Reuters)—A panel of judges grilled U.S. securities regulators on Thursday over the potential costs of a rule that business groups say would give activist unions and pension funds too much power to nominate their own candidates for corporate boards.

During oral arguments before the U.S. Court of Appeals for the District of Columbia Circuit, doubts were raised about the Securities and Exchange Commission's estimates for how many contested board elections would result.

The U.S. Chamber of Commerce and the Business Roundtable allege that the SEC has failed to conduct an adequate cost-benefit analysis, a technical but crucial requirement that has seen SEC rules voided in the past.

Few contested elections?

Judges questioned why the SEC's estimates for the number of contested elections were lower with its new rule than estimates for a prior year without the rule.

"It will go down in number with rules designed to make proxy access easier?" asked Chief Judge David Sentelle. "If the answer is yes, then we have a problem."

The proxy access rule, which is on hold pending the court's decision, would require a company to include a shareholder candidate in its voting materials as long as the nominating shareholders have held at least 3% of the voting power of the company's stock for three years.

Fears of undue influence

The Chamber and the Business Roundtable fear minority shareholders may use it to unduly influence board composition and cost companies millions of dollars in contested board elections. They argue the SEC failed to adequately assess the costs of the rule on competition, capital formation and efficiency.

Judge Douglas Ginsburg sounded skeptical not only about the SEC's estimates on the number of contested elections, but also about the fundamental benefits of the rule itself on shareholder democracy.

"The petitioners are telling us that the new regime would be used mostly by labor unions, pension funds and state employee pension funds," Judge Ginsburg told a lawyer for the SEC.

"Are you facilitating challenges for shareholders that are far less than the average shareholder to have the company's interests at heart?" asked Judge Ginsburg.

Which shareholders benefit?

SEC Assistant General Counsel Randall Quinn said the rule will be a benefit because it could make companies "more responsive" to shareholders.

"Responsive to all shareholders, or those narrow shareholders," Judge Ginsburg shot back.

"Those narrow shareholders," Mr. Quinn replied.

"Why is that a benefit?" Judge Ginsburg asked.

Eugene Scalia, an attorney at Gibson Dunn & Crutcher who argued the case for the business groups, told the three-judge panel that the SEC rule should be vacated because the agency "entirely failed" to ascertain its costs.

A final ruling is expected sometime later this year.