TheCorporateCounsel.net

September 28, 2011

Proxy Plumbing & Proxy Advisor Regulation: What is the Latest Timetable?

With the fate of mandatory proxy access behind us, the latest common question I have been hearing from members is: “what is the timing of Corp Fin’s proxy plumbing project?” On a recent Glass Lewis webcast, Skadden Arps’ Brian Breheny noted that rulemakings emanating from the proxy plumbing project will likely come in waves, with greater regulation of proxy advisory firms being one of the first. But Brian noted that even this was not likely to be proposed this year given so many Dodd-Frank rulemakings still to come. Brian thought it was likely to happen in ’12 – but even then the timing is uncertain. So nothing will likely be in place until the proxy season in ’13 at the earliest here.

As for what the SEC might propose, Brian believes companies may be disappointed if they are waiting for the SEC to change the relationship between proxy advisors and their investor clients. Rather, the SEC could modernize Rule14a-2(b)(3) by:

– Requiring more disclosure regarding potential conflicts of interest
– Requiring proxy advisor recommendations to be filed with the SEC, but on a delayed basis so as not to harm any competitive advantage for the proxy advisors
– Requiring proxy advisory firms to describe their review processes in filed reports

The SEC also could amend the investment advisor rules to remove a barrier to registration so that proxy advisory firms can – or are required to – register regardless if they have the requisite amount of assets under management that the rules currently require. So far, a number of commenters asked the SEC to consider requiring proxy advisors to provide a draft of their recommendations to issuers before publication. Brian thinks it’s unlikely that the SEC would propose such a rule, if only because it would be difficult to craft and police.

Finally, Brian surmised that because Rule 14a-9 already applies to proxy advisors, the SEC could possibly bring actions for fraud under 14a-9 if solicitation material was deemed to be false or misleading – however, such actions are difficult to bring because the question as to whether proxy materials are false or misleading is dictated by the facts and circumstances of the matter. Here’s the comment letters submitted to the SEC on proxy plumbing so far. Thanks to Darla Stuckey of the Society of Corporate Secretaries for taking notes on Brian’s thoughts!

DOL to Repropose Changes to Its Fiduciary Definition Rule

Last week, the DOL announced that it will re-propose its rule on the definition of a fiduciary to collect more feedback from the public – and Congress. Given some of the language in the press release about giving folks time to comment on the agency’s “updated economic analysis,” it appears this extension was related to the recent proxy access court decision – particularly since the DOL already has received ample feedback. The press release notes: “This extended input will supplement more than 260 written public comments already received, as well as two days of open hearings and more than three dozen individual meetings with interested parties held by the agency.” Anyways, this rulemaking has bearing on whether proxy advisors are considered fiduciaries. The new timing is that a new proposal is expected in early ’12.

Changing Due Diligence Practices

In this DealLawyers.com podcast, Andrew Sherman of Jones Day – and co-author of a new book, “The AMA Handbook of Due Diligence” – provides some insight into how due diligence practices are changing, including:

– How do the deal markets look these days?
– How have due diligence practices changed over the past few years?
– What practices do practitioners often overlook?
– What is the best way to determine if someone doing diligence knows what they are doing?

– Broc Romanek