February 23, 2009

No-Action Letters for Shareholder Proposals: The Challenge of Reading the Tea Leaves

One of the toughest jobs that Corp Fin faces ahead of every proxy season is making hundreds of no-action determinations related to Rule 14a-8 exclusion requests. These requests from companies seek to exclude shareholder proposals from their proxy statements.

The number of Staffers processing these requests is surprisingly small (i.e. slightly less than two dozen) and they take their job seriously, creating lots of internal documentation to back up the ultimate decision on a particular request. As a result, these Staffers work very hard over a three-month period. Each decision of the Staff hinges on the specific facts and circumstances related to the proposal and supporting statement – and it is not unusual for the Staff to conduct its own research beyond the arguments provided by the company and the proponent.

Since each response is so fact-specific, the response letter often is quite brief and doesn’t get into the specifics of “why” a proposal was allowed to be excluded or vice versa. The Staff simply doesn’t have the resources to take their responses this extra step. Due to this process, it’s not uncommon for folks to detect a new trend in the Staff’s thinking that might not really be there – some of the close calls that the Staff is required to make is akin to splitting hairs. If the Staff reverses course on a particular line of responses, it typically signals such a change in a speech or other communication (or at least, this is something that it should do).

What is the Meaning of Regions Financial?

That’s why it’s my hunch that the Staff’s recent Regions Financial response on a TARP-related proposal was not a reversal of an earlier response provided to SunTrust, as each response was based on the facts unique to each request. I can understand why RiskMetrics could have interpreted it otherwise (as others have done), because the proposals themselves are very similar. Plus, there is the backdrop of institutional investor clamoring for Presidential pressure on the SEC to overturn its exclusion of a variety of meltdown/risk related proposals (eg. December letter from 60 institutional investors to Obama).

As noted in the SunTrust response, the Staff explained that exclusion was permitted in that case under Rule 14a-8(i)(3) because the proposal was deemed vague and indefinite since it failed to “impose a limit on the duration of the specified reforms.” The Regions Financial proposal seemingly could have been permitted to be excluded due to the same rationale.

But it wasn’t. I think the reason for that is based on the different arguments set forth by the respective proponents in their correspondence. Note how the Staff took extra efforts in its response to note this quote from the proponent’s own argument: the “intent of the proposal is that the…reforms…remain in effect so long as the company participates in the TARP.” In comparison, the proponent in Regions Financial provided arguments about why such a duration limit is unnecessary and perhaps won the day based on that. Perhaps this is hair-splitting, but my hunch is that this indeed was going the other way on a close call – and not really a more formal Staff reversal of position. But I could be wrong…

By the way, I keep getting asked which Staffers are heading up the “Shareholder Proposal Task Force” this season. We always list who is heading up the Task Force at the bottom of our “Corp Fin Organization Chart.”

SEC Commissioner Walter: A Noteworthy Speech

A few weeks ago, SEC Commissioner Elisse Walter delivered this speech entitled “Restoring Investor Trust through Corporate Governance.” Under the new Chair’s reign, it appears that Elisse will have more influence than a typical Commissioner due to her long-standing relationship with Mary Schapiro, as well as the fact that Elisse had spent considerable time working in high-level Staff positions at the SEC earlier in her career (including Corp Fin Deputy Director).

Here are the main points from Elisse’s speech:

– Supports shareholder access – not only indicated support for access but she’s open to new approaches other than the ones that the SEC proposed in ’07 (which she is troubled by), even wants to reconsider original ’03 access proposal

– Supports enhanced disclosure about director nominees – this falls in line with what SEC Chair Schapiro mentions in this Washington Post article from Friday

– Wants to fix e-proxy to improve shareholder participation – agrees with Commissioner Aguilar on this one

– Wants to consider NYSE’s proposal to eliminate broker non-votes from director elections

– Believes “tone at the top” can be improved through “say-on-pay” when it comes to executive compensation

“Say-on-Pay”: SEC Guidance Coming Soon?

Section 7001 of Title VII of Division B of the “American Recovery and Reinvestment Act” – which amends 111 of EESA – requires TARP recipients to permit a non-binding say-on-pay vote. It also requires the SEC to issue rules to govern this requirement within one year. We have received many questions from members seeking input into how this should be accomplished during this proxy season in the absence of SEC guidance.

Well, we might get guidance from the SEC soon enough. On Friday, Senator Dodd sent this letter to the SEC sharing his views on the intent and application of the say-on-pay provisions in ARRA and asking the Staff to provide guidance “as soon as practicable.” Senator Dodd stated that:

– “Say-on-pay” voting applies to preliminary and definitive proxy statements filed after February 17th except for definitive proxy statements regarding preliminary proxy statements filed on or before February 17th

– CEO/CFO certification requirement is not effective until Treasury releases its upcoming guidance the FSP’s executive compensation restrictions

In “The Advisors’ Blog” on, I identify a few of the issues that the SEC hopefully will address in their guidance…

– Broc Romanek