SEC Finalizes New Proxy Access Rule

Posted on August 27, 2010 by Jack J. Gravelle

Earlier this week, the SEC finalized a new proxy access rule for 3% shareholders (or larger) that was first proposed over a year ago. Proxy access refers to the right of a shareholder to use the company’s proxy statement to solicit votes for a nominee for the board of directors. Prior to the new rule, a shareholder that wanted to solicit votes for a nominee had to prepare its own proxy statement at significant cost. Now 3% shareholders (or larger) can use the company proxy statement to nominate directors.

In general, if a shareholder (or group of shareholders) holds at least 3% of the voting power of a company for at least three years, among other requirements, it can include nominees in the company proxy statement for as many as 25% of the seats on the board.

The new rule is in effect for the 2011 proxy season, except it will not apply to smaller reporting companies for three years.

The new rule has considerably more potential to affect smaller reporting companies because it is easier to obtain 3% of a smaller reporting company than a larger company. And, three years is a long time to tie up the estimated $3.5 billion needed to reach the 3% threshold at any of the 20 largest U.S. corporations by market cap. The 3% threshold may ensure that only significant long-term shareholders at large companies will be granted access, which was a stated goal of the Commission, but it could prove more likely to affect smaller reporting companies.
 

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SEC Keeps Proxy Access Discretion in Current Draft of Financial Reform Bill

Posted on June 28, 2010 by Jack J. Gravelle

The financial reform bill calls for the SEC to write proxy access rules that would give shareholders the ability to use the company’s proxy statement to nominate candidates for the board of directors.  Currently, shareholders who wish to solicit votes for nominees must prepare and send their own proxy statement, which is expensive and rarely attempted.  Some senators had proposed only allowing proxy access for shareholders holding 5% or greater of a company's shares, but it appears negotiations have reverted to the original language of the bill, which does not specify a minimum holding requirement.  When the SEC last proposed proxy access rules in 2009, the language contained minimum holding requirements of between one and five percent depending on the size of the company.

In the midst of financial reform negotiations in Congress, several questions remain about proxy access, which is not a focus of the bill:

  • What should be the minimum holding period to allow shareholders proxy access?
  • What should be the minimum ownership requirement?
  • Should directors elected via proxy access rules be required to own stock in the company?
  • Should long-term investors with small holdings be treated the same as large investors?

The financial reform bill will likely answer the question of whether the SEC has authority to create proxy access rules with a resounding yes, but the specifics of proxy access will likely be at the discretion of the Commission.

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SEC Investor Protection Measures

Posted on June 4, 2009 by Jack J. Gravelle

The SEC is pursuing a slew of investor protection measures:

  • In public remarks earlier this year, SEC Commissioner Elisse Walter and Chairman Schapiro expressed support for say-on-pay proposals. Officially, the Staff does not object to say-on-pay resolutions in proxy materials if non-binding and advisory.
  • On May 20, 2009, the SEC voted to solicit public comment on proposed rules that will allow shareholders to nominate directors for election by using the company proxy materials. Depending on market capitalization, shareholders of 1-5% could nominate up to a quarter of board seats.
  • On June 3, 2009, the SEC announced the creation of an Investor Advisory Committee “to give investors a greater voice in the Commission’s work.”
  • Finally, also on June 3, 2009, Commissioner Luis A. Aguilar gave a speech at the Compliance Week Annual Conference calling for a shift in regulatory focus from financial institutions to “what is best for investors.” As examples of investors, Aguilar evokes individuals feeling pain “in their retirement nest eggs, their college savings plans and in their brokerage accounts.”

While there is no doubt that institutional investors are in favor of initiatives like say-on-pay and proxy access (perhaps as a tool to pressure boards) and the Investor Advisory Committee (numerous institutional investors are represented on the Committee), it remains to be seen whether such initiatives will provide any real benefits to retail investors like the individuals Commissioner Aguilar mentions.  As Commissioner Aguilar pointed out in a speech earlier this year, the percentage of retail investors who read proxy materials and vote has significantly declined in the past two years, which is perhaps attributable to e-proxy.  In any event, retail investors are either apathetic about their investments (unlikely) or attribute less value to increased shareholder power than the institutional investors.  
 

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