Citigroup did not succeed in its bid to set aside a shareholder proposal that would bar a person from joining the audit committee if there’s some bankruptcy history on that individual’s resume.

In a letter from the Securities and Exchange Commission, Citigroup learned the staff did not buy the company’s assertion that a shareholder proposal to pursue a bylaw amendment regarding audit committee service should be excluded from the company’s proxy statement. Activist shareholder John Chevedden proposed an amendment that would bar someone from serving on Citigroup’s audit committee if that same individual was a director at a public company when the company filed for “Chapter 11” reorganization under bankruptcy law.

In his proposal, Chevedden, who says he wants to see more effective corporate governance at Citigroup, points out Judith Rodin served on the company’s audit committee after she was a director at AMR Corporation when it filed for reorganization under bankruptcy law. He also points out another board member, Joan Spero, was a director at Delta Air Lines when it filed for reorganization protection as well. “Under our current rules the Citi board could appoint Ms. Spero to the audit committee right after the annual meeting,” he writes.

Citigroup asked the SEC for a “no action” letter, or permission to exclude the proposal from its proxy without incurring any enforcement action from the SEC. The SEC declined. Under three different sections of the rule on excluding shareholder proposals, the SEC said it could not concur with Citigroup’s view that the proposal should be excluded.

“We are unable to conclude that the proposal is so inherently vague or indefinite that neither the shareholders voting on the proposal, nor the company in implementing the proposal, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires,” the SEC wrote. “We are also unable to conclude that you have demonstrated objectively that the portions of the supporting statement you reference are materially false or misleading.” Later the SEC writes, “In our view, the company does not lack the power or authority to implement the proposal.”

Dan Goelzer, an attorney with Baker McKenzie and a former member of the Public Company Accounting Oversight Board, alerted his clients that the proposal reflects the increased scrutiny that shareholders are giving to audit committee members. It could also foreshadow what might be in store for audit firms if shareholders are ever given the opportunity to know which engagement partner at a given firm oversees the company’s external audit, he says.

The PCAOB has been working for several years on a controversial rule to give investors just such information, requiring audit firms to identify the engagement partner in audit reports or in some other filing with the PCAOB. “Shareholders may seek to preclude the audit committee from using the services of an engagement partner when another client of that partner has been involved in a restatement, bankruptcy, or some other adverse financial reporting event,” Goelzer says.