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Nazareth Previews Commission's Ambitious December Schedule

The SEC intends to take a holistic approach to the many major rules and proposals it will consider in December, according to Commissioner Annette Nazareth. On the Commission's schedule are, among other things, the proxy access rules, the electronic delivery of proxy statements and guidance on preparing section 404 management reports on internal control over financial reporting. At the Practising Law Institute's recent securities regulation conference, Nazareth said the Commission will consider how all of these initiatives fit together to promote fair and efficient markets.

She acknowledged that implementation of section 404 has been very difficult, but believes that the forthcoming guidance will help. The guidance will be principles-based, she said, and will take into account the more than 150 comments the SEC received on its July concept release.

The guidance will not dictate how to perform an assessment, nor will it dismantle systems currently used to perform assessments, she said. "You should expect it to be general principles on how to perform assessments and to comply with section 404 in the most cost-effective manner," she said.

In addition to section 404 help from the SEC, companies will be getting relief from the PCAOB at about the same time, Nazareth stated. The PCAOB intends to issue proposed amendments to Auditing Standard No. 2 very close to the SEC's December 13 open meeting. She expects the changes to reduce or eliminate the prescriptive nature of that standard.

The electronic proxy delivery proposal will shift the default delivery method of proxy statements from paper to the Internet, according to Nazareth. She believes the proposal will have many benefits, including enabling companies to hyperlink to background materials. Investors might be able to use the e-proxy system to more easily track information across companies, she said.

Another possible benefit, in her opinion, is that increased online voting could encourage greater investor participation in the corporate governance of the companies they hold. The proposal fits with shareholders' increasing expectations that they will be involved in governance issues, she said.

The proposal coincides with the amendment of NYSE rule 452, and the combination could dramatically increase board accountability. The rule 452 amendments state that brokers can no longer vote their customers' shares in uncontested director elections when the customers fail to vote. Brokers are permitted to cast these votes on "routine" matters under certain circumstances, but the amendments reclassify uncontested director elections as non-routine.

Brokers historically have voted for management's board nominees, and the loss of this block of favorable votes could alter a director election in cases where there are a number of withhold votes. Coupled with the fact that more than 100 companies have adopted a form of majority voting in director elections, Nazareth said, boards are becoming increasingly accountable to company shareholders.

Proponents of the proxy access rules, which are also on the Commission's December 13 meeting agenda, claim that those rules would increase board accountability, she noted. They also believe that access would promote better communication and limit conflicts of interest in the election of directors.

Opponents of the rules fear instability and the loss of qualified board candidates, according to Nazareth, who noted that the SEC's 2003 proxy access proposals generated 13,000 comments on both sides of the issue.

"My view is that Congress intended for section 14(a) to address fair corporate suffrage," she said. "Proper proxy access could further Congressional intent by enabling shareholders to vote in the most informed and fair manner."

John Filar Atwood