Corporation Finance Staff Discusses Status of Proxy Initiatives

The Division of Corporation Finance staff’s comprehensive review of the entire proxy system, which it commonly refers to as the proxy plumbing project, will be completed within the next few months and the results will be published in a concept release, according to Division Deputy Director Brian Breheny. He and other Division staff members discussed the status of the proxy plumbing, notice and access and proxy access initiatives at Practising Law Institute’s securities regulation conference.

Breheny said the staff does not believe that the proxy system is completely broken. It works very well considering the amount of very important information that is delivered in a short amount of time, he noted. Nevertheless, the staff is looking to see if there are ways it can be improved.

The project includes an examination of the integrity of the voting process such as over-voting, under-voting and empty voting, he said. The staff has received comments that the person who votes should be the shareholder with the economic interest, and that if a person has no economic interest they should not be allowed to vote. The staff is thinking about this as part of the project, Breheny said.

The staff also is considering ways to facilitate communications between companies and shareholders, and among shareholders themselves. The role of proxy advisory firms is under review, he noted. Their function has changed since rules governing them were adopted. The cost of distributing proxy materials as well as record date issues are also being examined by the staff.

Breheny said the staff is also considering whether to permit client-directed voting. If approved, shareholders opening an account would be able to designate at that time whether they always want their shares voted with management or not voted with management.

Division Director Meredith Cross addressed the status of the proxy access proposals released in May. The staff is trying to get an adopting release ready in accordance with SEC Chair Mary Schapiro’s expectation that proxy access rules will be in place early in 2010.

Cross said the staff has received many comments, including criticism of the proposed ownership thresholds. Commenters want them to be longer and many have asked for two years, she noted. Other commenters have said that in order to avail themselves of the proxy access rules, shareholders should have a net long position in the company. The staff is thinking about whether the ownership threshold should be tiered and what the level should be, she said.

Most people dislike the proposed first-in standard, according to Cross, and would prefer a largest beneficial owner standard instead. The staff also has received a lot of comments on company liability for information provided on nominees. The staff never intended for companies to have greater responsibility in this area than they have under Rule 14a-8, she said.

Also under consideration are comments suggesting that shareholders should be able to choose the access standard they want, Cross said. On a separate panel at the conference, JPMorgan’s general counsel Stephen Cutler said he hopes the Commission will seriously consider this option. The provision could be subject to a default plan if shareholders do not decide, he suggested.

Breheny reviewed the pending proxy notice and access proposals. Under the existing rules, companies may post their proxy materials online and send only a notice to shareholders that they can find the full set of disclosure documents on their Web sites. Concerns have arisen, Breheny noted, that the timing of mailing the notice is too tight, and that the rules are too specific about what goes into the notice when it is mailed out.

The staff has heard that the rules do not give companies the flexibility to educate investors about the new process, leading to considerable confusion about what investors are supposed to do with the notice. The newly proposed rules remove specific disclosure requirements and provide guidance that the notice does not have to track exactly what the proxy card looks like. The staff is trying to improve the education of shareholders, Breheny said, and it wants to allow companies to include educational materials with the notice.

Cross noted that people might be wondering why the staff is placing so much emphasis on proxies right now. Shareholders are disappointed in corporate leadership, she said, and the proxy is the strongest link is between shareholders and management.