(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Key Senator Backs SEC Proposal on Shareholder Director Nominations

Sen. Carl Levin strongly supports an SEC proposal allowing shareholders to directly nominate candidates for the board of directors. He called the initiative an important step in addressing the problem of inattentive and compliant boards of directors that fail to protect shareholder interests. In a comment letter, Sen. Levin, ranking member on the investigations subcommittee, praised the SEC for trying to eliminate the monopoly that corporate management currently exercises over director nominations.

That said, the lawmaker opined that the proposed triggering mechanisms for shareholder nominations are too restrictive and would not allow shareholder nominations to take place in a timely or responsive manner. In particular, he contended that the requirement that two years elapse before shareholders can require management to include a shareholder-supported nominee in the proxy materials is an excessive span of time in today's fast moving markets.

To allow a more timely shareholder response, Sen. Levin urged the SEC to adopt the additional triggering mechanism proposed in a comment letter from 15 members of the Harvard Business and Law Schools' ad hoc group on the study of corporate governance. In addition to the triggers now included in the proposed rule, the Harvard group would allow shareholders to include a nomination in a company's proxy materials for the current annual election of directors if proposed by 10% of the shareholders. In the senator's view, this mechanism would enable shareholders to obtain corrective action within the span of a year when a significant proportion of shareholders support such action.

The senator also urged the SEC to adopt the alternative triggering mechanism described in the proposed rule, which would allow a shareholder nomination if the company failed to implement a shareholder proposal which, during the previous year's annual meeting, had received a majority of the shareholder votes cast during the meeting. Few shareholder proposals receive majority support; observed the senator, and those that do usually address egregious management conduct. This triggering mechanism would alter boardroom dynamics, he reasoned, by creating a straightforward incentive for directors and management alike to respond to shareholder concerns commanding a majority of shareholder votes.

Finally, Sen. Levin said that the proposed shareholder nomination process should be applied not only to operating companies, but also to investment companies. In light of the unfolding mutual fund scandals, effective corporate governance, including meaningful boardroom oversight, is as important for a mutual fund as for an operating company, he emphasized. The fact that mutual funds also hold corporate stock worth an estimated $3 trillion provides another reason for the Commission to ensure that their corporate governance structures are functioning well, and that mutual fund board members are attentive and responsive to shareholder concerns.