November 15, 2007

Shareholder Access: Cox Testifies Before the Senate Banking Committee

Yesterday, the Senate Committee on Banking, Housing and Urban Affairs conducted a hearing on shareholder rights and proxy access. SEC Chairman Cox testified at the hearing, as did representatives of business and shareholder groups.

In his testimony, Chairman Cox indicated that while the SEC would go back to the drawing board on the broader question of establishing a means for shareholders to nominate directors and get them on the company’s ballot, action was still needed before the upcoming proxy season to deal with the uncertainty arising from last year’s AIG v. AFSCME decision. Based on these remarks (and similar remarks over the past few months), it now appears likely that the proposed amendments to Rule 14a-8(i)(8) seeking to clarify the SEC’s interpretation of that rule will be adopted in the coming weeks, probably during the week after Thanksgiving. If adopted, then the Staff could again express the view during the proxy season that shareholder proposals seeking to establish an access procedure are excludable from the proxy statement under Rule 14a-8(i)(8). As noted in the Bloomberg article, “Democrats on the banking panel criticized Cox for saying the agency might pass a rule this year and revise it in 2008. Senator Robert Menendez, a New Jersey Democrat, said he was ‘perplexed and deeply disturbed’ by that possibility.”

Chairman Cox noted in his testimony that “there is a widespread assumption that having published the two proposals, the Commission has only a binary choice — that we must adopt one of them, or do nothing. But in fact we may also adopt a rule that is different than either of those proposed. The only requirement is that the proposed rule, and the questions the agency has asked, provide fair notice to the public of what the Commission is contemplating and the issues involved. So long as the final rule or rules are a logical outgrowth of what was proposed, we are free to amend the proposals and to consider improvements that the public comment process has brought to our attention.” That is true enough, but it raises the question of whether there is really that much wiggle room with the access proposals to address all of the concerns coming from the shareholder and business groups sitting at opposite ends of the spectrum. Cox told reporters after the hearing that the much-maligned 5% threshold contemplated in the proposal was one of the “fundamental” areas that needed to be addressed.

Interestingly, at the end of his prepared testimony, Chairman Cox noted that “none of the 22 SEC Chairmen since the agency first looked at this issue in 1942 has successfully taken this step” of going back to the drawing board and taking a fresh look. That is an awful lot of history to overcome.

And Now We Are Off to See the Wizard

At last week’s PLI Annual Institute on Securities Regulation, Professor Joseph Grundfest gave this entertaining speech advocating for majority voting over shareholder access. Just as Dorothy learned from Glinda the Good Witch of the North, the solution to our governance problems may already be in our own backyard. Grundfest notes that at least 63% of the S&P 500 have already adopted bylaws or board guidelines that either implement or come reasonably close to implementing what is effectively the same as the “advice and consent” model for appointments under Article II, Section 2 of the US Constitution. [For the 63% figure, Grundfest cites the RiskMetrics Group 2007 Postseason Report at 17.] Under Grundfest’s analogy to the federal government system, shareholders can be cast in the role of the Senate and the incumbent board can be cast in the role of the Executive. The resulting set of checks and balances “forces incumbent boards to pay careful attention to shareholder concerns, and induces incumbent directors to reflect the shareholder sensitivities as the price of re-election.”

Grundfest argues that we should give majority voting a chance before going down the road of shareholder access. He notes that if there are recalcitrant companies out there that do not voluntarily adopt majority voting, then the SEC could adopt regulations that impose additional disclosure requirements and filing liabilities on corporations that fail to implement effective advice and consent regimes – and these regulations could replace the flawed shareholder access proposals that are currently pending.

In the immortal words of the melting Wicked Witch of the West: “Ohhhhh… What a world! What a world!”

Market Reg Goes Retro: Re-Introducing the Division of Trading and Markets

The SEC announced that it has changed the name of the Division of Market Regulation to the Division of Trading and Markets, in an effort to “better reflect the Division’s full range of responsibilities.” This “new” name is actually the Division’s old name, which was changed in connection with a restructuring back in 1972.

Floyd Norris of the NY Times notes in his blog that it is odd how the word “regulation” is being removed from the Division’s title, amidst the announcements of huge losses at major broker-dealers that the Division regulates and at a time when the bond rating agencies that the Division oversees are being blamed for the collapse of some securitization markets.

Will Corp Fin be next? Perhaps in the near future your 10-K might be reviewed by the Division of Registration, which was Corp Fin’s name from 1935 to 1941.

– Dave Lynn