Against Backdrop of Pending Legislation, SEC Chair Pledges Adoption of Shareholder Access Early Next Year

Against the backdrop of draft House legislation designed to provide authorization cover to the SEC’s adoption of shareholder access rules, SEC Chair Mary Schapiro said that she would bring final shareholder access rules to the full Commission for consideration early in 2010. While recognizing that this means that any new rules will not be in effect for the 2010 proxy season, the Chair emphasized that it is far more important that the SEC adopt rules that make sense and are workable than it is for the Commission to act rashly.

In remarks at a recent PLI seminar, she also noted that the SEC wants to enhance the information provided to shareholders who are making voting and investment decisions. The SEC has proposed rules requiring shareholders to be given more information about the qualification of directors and nominees, the structure of board governance, compensation consultant fees and conflicts , and the relationship between a company's overall compensation policies and its risk profile. In addition, the SEC is looking for more timely disclosure of annual meeting voting results. In each of these areas, emphasized the Chair, the goal is better or more timely disclosure, not simply additional disclosure. The Commission believes that investors are not well-served by a proxy statement that is too long to digest.

Recently, the SEC approved changes to NYSE Rule 452 eliminating broker discretionary voting for uncontested elections of directors at shareholder meetings. Previously, Rule 452 had allowed brokers to vote on behalf of their beneficial owner customers in uncontested elections of directors if the customers have not returned voting instructions. The change was designed to enhance corporate governance and accountability by helping assure that investors with an economic interest in the company vote on the election of directors.

In her remarks, the SEC Chair noted that implementation of the revised rule has heightened concerns about shareholder participation and education, which need to be addressed. The SEC staff is working hard on these educational efforts in order to develop pragmatic solutions to these challenges.

The Chair noted that the SEC staff is drafting a concept release on the mechanics by which proxies are voted and the way in which information to shareholders is conveyed. The SEC is looking at the entire process through which proxies are distributed and votes are tabulated in order that the proxy voting system as a whole operates with the degree of reliability, accuracy, and transparency that shareholders and companies have a right to expect.

The staff will be examining whether current SEC regulations adequately address whether votes are cast by those with an economic interest in the securities. In some cases, for instance, brokerage firm customers may cast more votes than the broker is actually entitled to vote on their behalf, something called "overvoting". In other cases, individuals are able to vote shares even though they lack the full economic interest that goes along with share ownership, a process known as "empty voting."

The staff will also examine ways to address the voting rate by retail investors. Retail investors have a history of low participation rates, the Chair noted, but notice and access distribution of proxy materials may contribute to a further reduction in participation rates. This poses a special challenge for companies with broad retail investor bases, she observed, which has fueled a call for client-directed voting under which brokers would be allowed to solicit voting instructions from their shareholder clients in advance of the company proxy materials.

Finally, the concept release will ask about the need to allow beneficial owners of a company's securities to object to having their names and addresses disclosed to the company. Some have urged the SEC to abolish this system and instead permit companies to learn the identities of all of their shareholders so that companies can communicate more directly and cost-effectively with them.

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