SEC proposes changes in proxy rules

July 23rd, 2009

The SEC has released the text of its controversial proposed rules on proxy access and disclosures. These rules are designed to help restore investor confidence by providing better information and greater rights for shareholders. Both directors and shareholders should plan to monitor the issues closely because there is a good likelihood of final rules in these areas in time for the 2010 proxy season.

A brief overview:

  • Proxy access. The proposed proxy access rules would allow shareholders to nominate directors (provided the shareholders meet certain ownership requirements), and companies would need to include the names of the candidates nominated by the shareholders in the company’s proxy materials (subject to certain state law prohibitions).
  • Proxy disclosures. The proposed proxy disclosure rules would require that companies make disclosures about the qualifications of directors (both incumbent and nominated) and executives, about how their compensation polices relate to risk, and about any potential conflicts of interest involving compensation consultants.

Pros, Cons, and Prognosis

The main supporters of the proposed rules are corporate governance activists, including labor unions, institutional investors, and pension funds, as well as proxy advisory firms. SEC Chair Mary Schapiro also appears to be a supporter. She has explained that the United States is an outlier in this area. Most other developed countries do permit some level of shareholder proxy access with minimal if any ill effects.

In contrast, the business community has traditionally been opposed to shareholder proxy access. Some feel strongly that this subject should be regulated by the states, rather than a federal agency. But several recent actions appear designed to counter any concerns of this nature:

  1. To avoid any legal challenges based on territorial disputes, Senator Charles Schumer introduced S.1074 on May 19, 2009. The bill is known as the “Shareholder Bill of Rights Act of 2009.” Among other things, this bill would confirm the SEC’s authority to issue a proxy access rule, and it would require that the SEC adopt rules to regulate proxy access (rather than deferring to state law).
  2. The state legislature in Delaware, where many public companies are incorporated, made amendments in April to the applicable state laws so that Delaware corporations will be permitted to adopt the necessary bylaw provisions to accommodate the SEC’s proposed rules.

On balance, the prognosis for passage of a final rule in time for the 2010 proxy seasons appears good, perhaps with some minor changes from the proposed rules. Importantly, these are multi-faceted issues that will require monitoring of not only the SEC’s proposed rules, but also of any expected changes in state and federal laws, and any issues that may be brewing in terms of each company’s unique situation and investor base.

The Bottom Line

Will the rules help or hurt? It seems reasonable to expect that the proxy access rules will be of some help in restoring investor confidence. Even if they are not widely used, they will be seen as a safety net. The value of the proxy disclosure rules is less clear and will likely depend on whether companies respond with meaningful disclosures or boilerplate. Meaningful disclosures will likely take time to prepare, and companies are advised to plan ahead and start now to consider how they would respond to the requirements in the SEC’s proposed rules.

Copyright © 2009 Center for Financial and Accounting Literacy


Entry Filed under: Governance

Leave a Comment

You must be logged in to post a comment.

Trackback this post  |  Subscribe to the comments via RSS Feed


March 2018
« Sep    

Most Recent Posts