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SEC Proposes Internet Posting of Proxy Material

The SEC will seek comments on a proposal to permit companies to satisfy their obligations to furnish proxy materials to their shareholders by mailing a notice advising that the material is available on a specified Internet Web site. The notice to shareholders, expected to be the size of a post card, would state the date, time and location of the upcoming shareholder meeting, advise of the electronic availability of the materials and the Web site address, and provide a toll free number and email address through which shareholders could request paper copies. Chairman Christopher Cox noted that the proxy rules are one of the last remaining areas where paper delivery is still the norm, rather than the exception.

Cox suggested that the most revolutionary long-run benefit of the proposal would be the eventual elimination of the prohibitive costs of proxy solicitations. Soliciting parties other than companies would have a less costly means of waging a proxy contest. Not only would investors have more timely access to proxy materials, but the cost savings would also directly benefit the shareholders. Cox hastened to add that, with all of the benefits that Internet access to the proxy materials can bring, he does not foresee a time when the SEC will ever eliminate the option of obtaining printed documents for those investors who want them.

The SEC's proposal would require a plain English description of the matters to be considered at the shareholder meeting, including the company's recommendations with respect to those matters. The proxy card would have to be accompanied by, and delivered through, the same medium as the notice or the proxy statement. If a shareholder requests a paper document, it must be sent within two business days. The proposal emphasizes that it will have no impact on state laws relating to the solicitation of proxies or the holding of annual meetings.

Third parties would also be able to rely on the proposed notice and access model. While the company must provide the notice at least 30 days before a meeting, persons other than the company would have to provide their notice by the later of 30 days before the meeting or 10 days after the company files its proxy materials. A soliciting person could limit the solicitation to shareholders who are willing to access the proxy materials electronically. The soliciting person would not have to deliver a notice to shareholders unless he or she wants to deliver the proxy card or a request for voting instructions to the shareholders instead of directing them to an Internet Web site. Corporation Finance Director Alan Beller said the proposal, if adopted, will lower the barriers to entry for contesting elections since it will eliminate the costs of printing and mailing proxy statements.

Commissioner Cynthia Glassman outlined the matters that are not included in the proposal, such as shareholder access to the proxy card or broker voting. She inquired about the status of a rulemaking petition submitted by the Business Roundtable asking the SEC to reexamine the shareholder communications system in light of technological and regulatory developments. Beller agreed that the issues raised in the Business Roundtable petition are important, but controversial.

The Division continues to actively consider the issue and is still hearing from people on both sides of the debate. For example, the AFL-CIO submitted a letter dated October 24, 2005 arguing that the Business Roundtable's April 12, 2004 proposal should not be the basis for either an SEC or a self-regulatory organization action. If the issues were easy, Beller said the staff would have developed a proposal by now. He said he could not predict a time frame for when it may act.

Commissioner Paul Atkins agreed with Glassman's suggestion that the staff draft a proposal based on the Business Roundtable's rulemaking petition and put it out for comments.

Atkins said he believes the cost savings associated with the notice and access proposal will increase over time. He suggested that the listing markets should take a look at their fee schedules to address this new reality. Atkins inquired whether the Division has plans to move the SEC's EDGAR system to a different format. Beller said the Division has plans, but not within the next year, to develop a more flexible, robust EDGAR system. Interactive data will be embraced, he added.

Commissioner Roel Campos said he was concerned about control over shareholder lists and whether companies would have more control under the proposal. He is also concerned about sending proxy cards through the mail, which may result in shareholders voting without reading the proxy statement. Beller said he suspects that a nontrivial number of shareholders now vote without reading the proxy statement, but the proposal seeks comment on whether the proxy card should remain with the proxy material.

The commissioners voted unanimously to seek comments on the proposal for a period of 60 days. Beller said it was not practical to aim for it to be effective for the 2006 proxy season, but it could be operational in 2007.