SEC Strives for Investor-Friendly E-Proxies

October 21st, 2009

Concerns about possible shareholder confusion have prompted the US Securities and Exchange Commission (SEC) to propose a number of changes designed to make the e-proxy process more investor-friendly. First adopted in 2007, the SEC’s “notice and access” model for furnishing proxy materials requires that issuers and other soliciting persons post their proxy materials on an Internet web site and also furnish notices of the materials’ availability to shareholders. Under the SEC’s rules, issuers are permitted to provide a full set of proxy materials in addition to the ones accessible via the web site. As a practical matter, though, many companies prefer to provide only a notice that refers investors to the web site because of the resulting cost savings. It is the use of this “notice-only” method that seems to be causing the confusion.

Murphy’s Law

As proof that even a long-overdue and seemingly win-win solution like e-proxies can have unintended consequences consistent with Murphy’s Law (“anything that can go wrong will go wrong”), early experiences indicate the following unexpected problems may have resulted from the use of the notice-only method for-e-proxies:

  • Statistics show that the shareholder response (meaning the percentage of shareholders who voted) was lower for issuers who chose the notice-only model, compared with those who distributed a full set of proxy materials. It is not clear at this time whether this is a coincidence or a matter of cause and effect.
  • There are also reports that some shareholders mistakenly attempted to indicate their voting instructions by returning a marked copy of the notice, rather than using the Internet site or requesting a paper copy of the proxy materials.

The SEC is requesting comments from shareholders on the prevalence of these problems.

Proposed remedies

As potential steps to address the problems described above, the SEC is proposing the following changes to the e-proxy process:

  1. The existing rules would be clarified to provide added flexibility in formatting and wording the notices that identify the matters to be acted upon at the shareholders’ meeting, (e.g., election of directors, ratification of auditors, or approval of a stock option plan). Current rules impose restrictions on the format and language, resulting in “boilerplate” language that may be confusing to shareholders. Even with the added flexibility, the intent remains the same. Issuers should “stick to the facts,” provide a clear and impartial identification of each matter up for a vote and describe each matter that is up for consideration, but they should not try to persuade shareholders how to vote on the matter.
  2. A new rule would permit issuers and soliciting shareholders to include supplemental explanatory materials with the notice. These materials would be permitted for purposes of explaining the procedures for receiving and reviewing the proxy materials and for casting one’s vote. Materials designed to persuade shareholders to vote in a particular manner, change the method of delivery, or explain the basis for sending only a notice to shareholders would not be permitted.
  3. The timeframe would be modified for delivering a notice to shareholders when a soliciting person other than the issuer relies on the notice-only option. The SEC’s proposal is that the soliciting shareholder would be required to file a preliminary proxy statement within 10 days after the issuer files its definitive proxy statement and to send the notice no later than the date on which it files its definitive proxy statement with the Commission. This timeline is expected to provide sufficient time for the soliciting person to prepare its proxy statement, respond to any staff comments, and then use the notice and access model.

In addition, the SEC’s Office of Investor Education and Advocacy, together with the Division of Corporation Finance, will be developing a program to educate and inform shareholders, especially individual shareholders, about the notice and access model. The program will include explanations of how shareholders can participate through this model and explain shareholders’ rights under the model.

Comments on the proposed rule changes are due by November 20, 2009. For helpful links and additional information about other SEC initiatives related to proxies, see

Entry Filed under: Governance

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