Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

Last month the SEC issued Staff Legal Bulletin No. 14E, which among other things amends the Commission’s policy regarding risk-based shareholder proposals. The new policy may make it harder for a company to ignore a proposed shareholder resolution concerning climate change.

Under SEC Rule 14a-8(i)(7), companies are permitted to exclude shareholder proposals from the company proxy statement dealing with a matter relating to the company's ordinary business operations. Previously, the SEC permitted companies to exclude a proposal under this rule to the extent the proposal focused on a company engaging in an internal assessment of risk the company faces as a result of operations. The SEC has now clarified that the fact that a proposal requires an evaluation of risk does not mean it may be automatically excluded.

This change in analysis could be an opening for shareholder proposals regarding climate change risks for which the underlying subject matter of the proposal “transcends the day-to-day business maters of the company.” Such proposals may be more likely to gain entrance to the company proxy.
 

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Last month the SEC voted to issue rules to increase transparency of “dark pools” of liquidity.  Dark pools are a way of trading securities without publicly displaying quotes or orders.

Dark pools exist because many securities traders do not want to publicly display their desire to sell or purchase large amounts of shares for fear of significantly moving stock prices before being able to execute the order.  When an order is placed on an exchange, the exchange makes the order publicly available.  Historically, sophisticated traders could avoid public disclosure by enlisting a broker-dealer to inquire among other traders, or on the floor of an exchange, about taking a large order (without disclosing enough information to move the market).  Dark pools offer a modern, computerized way to confidentially search for a complementary trading interest.

Investors using a dark pool have access to information about potential trades that investors using public quotations do not, even though dark pools use the information from public markets to determine price.  Dark pools also network with each other to execute trades.  There are approximately 30 dark pools that transact in stock that trades on major US markets.

Dark pools raise the following concerns:

1. Dark pools hide the true value of securities traded on public exchanges by siphoning significant orders from public markets (the so-called “two-tiered market” in which the public does not have fair access to the best prices);
2. Dark pools create an information advantage for their operators and participants.  This information could potentially be misused to trade securities in public markets to the detriment of other investors not privy to the information;
3. An unmonitored market is a target for market manipulation; and
4. The phrase "dark pool" just sounds nefarious.

The SEC solution would seek to alleviate these concerns by:

1. Requiring that information about an investor’s interest in buying or selling a stock be made publicly available, instead of just to participants in a dark pool; and
2. Requiring that dark pools identify the trades for which they are responsible.

The next step is for the Commission to seek public comment.
 

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Following a change to New York Stock Exchange Rule 452 in July, brokers for investors who do not provide voting instructions will no longer be able to cast discretionary votes in uncontested director elections. Prior to the change, uncontested director elections were considered “routine” matters, and shares held in street name could be voted by brokers, at their discretion, if the beneficial owners failed to instruct the brokers how to vote. The new rule characterizes all director elections, including uncontested elections, as “non-routine” and applies to all annual meetings held after January 1, 2010. The rule affects all public companies because it applies to all brokers regulated by the NYSE.

One significant effect of the rule change will be increased difficulty in obtaining a quorum. If uninstructed brokers do not vote because all matters presented to the shareholders are non-routine, shares held in street name will not be treated as present for quorum purposes. Broker non-votes are only counted toward a quorum if stockholders will be voting on a routine matter.

The solution to the quorum problem appears to be including at least one routine matter on the proxy to ensure brokers vote. The most routine of all routine matters is auditor ratification, a proposal that many companies have abandoned but will likely revive.
 

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