Schapiro Discusses SEC’s Proxy Reform Initiatives

In remarks at the Practising Law Institute’s 41st annual institute on securities regulation, SEC Chair Mary Schapiro described initiatives that are underway with respect to proxy reform. Previous reform efforts have not been successful due to various legal, philosophical and logistical issues, she said. Schapiro believes the failure to reform the shareholder voting process has affected company and board responsiveness to shareholder concerns. She said she is committed to adopting a shareholder access initiative early in 2010.

The SEC has reexamined its proxy disclosure rules to see if investors are receiving necessary information. As a result of that review, the staff has proposed additional disclosure requirements related to the qualification of directors and nominees, the structure of board governance, compensation consultant fees and conflicts, and overall compensation policies. The SEC is also looking at more timely disclosure of annual meeting voting results. Schapiro said the SEC is seeking better and more timely disclosure, not simply more disclosure.

The SEC has proposed revisions to the e-proxy notice and access model since retail voting participation has decreased in the two years since its adoption. The proposed rules will provide companies with more flexibility in the format they use to notify shareholders about the availability of the proxy materials on the Internet.

Since the New York Stock Exchange eliminated broker discretionary voting for uncontested elections of directors at shareholder meetings, the staff is aware of concerns about shareholder participation and education. Schapiro believes the NYSE’s rule will improve corporate governance and enhance accountability. The staff is hard at work on the educational front, she advised.

Schapiro reviewed the recent staff legal bulletin in which the Division of Corporation Finance provided guidance on certain issues that may not be excluded from proxy materials under the shareholder proposal process. Shareholder proposals that focus on CEO succession planning will no longer be deemed ordinary business and generally will not be excludable from the company’s proxy materials. Going forward, the staff will also focus on the subject matter of shareholder proposals relating to risk to determine whether they constitute ordinary business. Schapiro said the change in staff position should make it easier for investors to engage companies on these issues.

The staff is conducting a comprehensive review of the mechanics by which proxies are voted and the means by which information is conveyed. Schapiro has asked the staff to draft a concept release in the coming months to seek public comments on the proxy voting system as a whole.

The concept release will seek views on whether the current rules adequately address whether votes are cast by those with an economic interest in the securities. Comments will be sought on issues relating to overvoting and empty voting. The staff also will ask for input on increasing the voting rate by retail investors. Some have proposed client-directed voting, according to Schapiro, in which brokers would be allowed to solicit voting instructions from their shareholder clients in advance of the company proxy materials.

The SEC’s concept release will solicit views on whether companies should be allowed to learn the identities of all of their shareholders to more easily communicate with them. The staff will also explore the role of proxy advisory firms in corporate voting and whether rules should be adopted to ensure that their recommendations are based on accurate information. The staff will also consider whether proxy advisory firms are disclosing conflicts of interest they may have in providing voting recommendations.

Schapiro said the staff wants to make sure that any amendments to the federal proxy rules will be flexible enough to adapt to changing legal developments at the state level, such as dual record dates for annual meetings.

In the coming year, the staff will also begin a comprehensive review of the line item disclosure requirements in annual and quarterly filings. Schapiro said the goal is to determine whether some of the required information should be omitted and whether certain information that is not required should be added. The SEC wants to make sure that investors receive the right information, she said, not just more information.