I posted this at SRK, since they seem to use their online tournaments to backup their ridiculous rule system.
There are good reasons why lag is a serious hazard to overcome when it comes to competitive play.
I'll use pikachu, my main, as an example.
There are many tactics as pikachu that I can execute in a way to compensate for lag. For example, my fair->fsmash/usmash/anything is a good tactic I use a lot, because pika's fair has good priority. When the fair connects, I instinctively perform my following attack even though I'm not seeing my character hit the ground on the screen yet. This basic principle of executing tactics regardless of how quickly you're seeing the response to your controls on the screen is the best way to compensate for lag. But these are proactive tactics. The problem with lag is in reactive tactics.
A common pika technique is to dsmash and follow up with thunder if the opponent goes straight up. However, I don't want to just spam thunder after dsmash as I might have a better option or I might be punished depending on where my opponent DIed. Lag makes this really difficult though, because my opponent can actively DI or spam air dodge trying to avoid the thunder without having to watch the screen, while I have to wait until I see where my opponent goes on the screen and react appropriately. If my opponent goes straight up, and I see this on the screen and try to thunder, he will be far more successful getting away with DI or an air dodge online because lag gives him more time to avoid my thunder. Yet, had this been at a real tournament, my thunder would have been instant and he would have been less likely to avoid it.
Another problem is with chain-grabbing. As pika, I have available to me a huge amount of chain-grabbing options on many different characters. I can dthrow chaingrab, and I can fthrow chaingrab. The fthrow on some characters is the better option, but unfortunately, it's also the most difficult to execute online because of lag. Given that I have to run forward a bit after the throw to grab again, and that I have to compensate for my opponent's DI, again my opponent has the advantage of actively avoiding the grabs by spamming upb/air dodge/shine, while I have to react to what I see on the screen. With the small amount of frames I have to grab before my opponent can escape, it's much easier for him to do so with lag.
This is just one example of many for pika, and no doubt of many for all characters. Keep in mind to the many, many different opportunities in a match that a player has to react to what he sees on the screen, yet for all intents and purposes, it already happened because his reaction won't come in time due to lag, yet it more likely would have had it been at a real tournament.