July 2, 2009

The Big Kahuna: SEC Approves NYSE’s Elimination of Broker Discretionary Voting

Yesterday, the SEC voted 3-2 to approve the NYSE’s proposal to amend Rule 452 (and Listed Company Manual Section 402.08) to eliminate broker discretionary voting for director elections. The amendment to Rule 452 will be applicable to meetings held after January 1, 2010 (but won’t apply to a meeting that was originally scheduled to be held in 2009 if adjourned to a date after January 1st).

As I’ve mentioned before, in my opinion, this change is the biggest of the reforms that companies face – bigger than proxy access, say-on-pay, etc. Here is the SEC’s press release addressing all of its actions yesterday – and here is Chair Schapiro’s opening remarks (and Commissioners Walter’s statement and Aguilar’s statement).

Commissioners Casey and Paredes opposed the proposal, both stating that the broker nonvote issue should be considered in the broader context of rejiggering the proxy process (read “proxy access”) as well as examining more completely the impact of this change on companies. In his opening remarks, Commissioner Paredes noted they weren’t alone – 93 comment letters (out of a total of 136) also urged a comprehensive review of the proxy system. They also expressed concerns that the change would disenfranchise retail holders at the expense of more control by institutional investors.

Since all the other Commissioners agreed with the importance of studying the proxy system’s “plumbing,” near the end of the meeting, Chair Schapiro stated that the SEC would conduct this type of review later this year. I see roundtables in our future. If interested in reviewing “live tweets” that occurred during the meeting, see @footnoted and @simonbillenness.

Oh, boy! Check out today’s front-page article from the Washington Post about how the SEC was warned in ’04 by a SEC Staffer about Madoff – but yet the SEC didn’t follow up. And that Staffer’s boss ended up marrying Madoff’s niece. The article is quite in-depth and is likely to result in more headaches for the SEC. I’ll cover this more extensively next week.

The Surprise: SEC Proposes Expedited Disclosure of Voting Results

Although most of the SEC’s big open Commission meeting went as telegraphed by earlier statements by the SEC Chair, there was one big surprise. The SEC proposed a new Form 8-K requirement for companies to disclose the results of a shareholder vote within four business days after the end of the meeting at which the vote was held (in contested elections, the final results would be permitted to be delayed under certain circumstances).

As I’ve complained before, the current disclosure standard doesn’t elicit voting results for weeks – or sometimes months – after the vote, which doesn’t really work in today’s more competitive annual meeting environment.

Not a Surprise: SEC Proposes Say-on-Pay for TARP Recipients

Not surprisingly, the SEC also proposed rules – by a 5-0 vote – that would help implement Section 111(e) of EESA to permit an annual advisory non-binding shareholder vote on executive compensation. The SEC’s proposal clarifies how these requirements apply to TARP recipients in the form of new Rule 14A-20. The SEC has already posted the proposing release for this one; could be record time for that. Here is Corp Fin’s opening statement.

During the open Meeting, it was pointed out that – outside of the EESA mandate – the SEC Staff has allowed the inclusion of say-on-pay proposals. Commissioner Casey note that she only supported this proposal because it was required under EESA.

SEC Proposes Changes to Executive Compensation Disclosure Rules

No surprises here either. As expected, the SEC proposed amending Item 402 of Regulation S-K as follows (here is Corp Fin’s opening statement):

– Broader CD&AS to cover risk – provide information about how a company’s overall compensation policies create incentives that can affect the company’s risk – and the management of that risk, including policies for employees generally, including non-executive officers. Such disclosure would only be required if the risks arising from those compensation policies may have a material effect on the company. The SEC did not propose any requirement that would not require the disclosure of specific salaries of any individuals beyond those already required.

– Improved reporting of stock and option awards – revise way in which stock and option awards are reported in the Summary Compensation Table and Director Compensation Table so that it’s based on the award’s fair value on the grant date. This would reverse the December ’06 “surprise.”

– More disclosure about compensation consultants – in an effort to allow shareholders to evaluate potential conflicts, require disclosure about compensation consultant fees and services (and their affiliates) when they play any role in determining the amount or form of compensation for executives and directors, but only if those consultants (or their affiliates) also provide other services to the company.

In his “Proxy Disclosure Blog,” Mark Borges provided in-depth analysis of the proposals yesterday.

SEC Proposes More Corporate Governance Disclosures

Finally, the SEC proposed a few governance disclosure enhancements, including revising Item 401 of Regulation S-K to require more disclosure about each director’s particular experience, attributes and skills that are appropriate for the person to serve as a director and as a member of any committee to which the person is appointed; extend the disclosure of the director’s board memberships to the past 5 years; and expand disclosure of legal proceedings to the prior 10 years.

In addition, the SEC proposed requiring disclosure of why the board selected a particular management/leadership structure, particularly why the board chose to combine or separate the board chair and CEO positions. Although not proposed, the SEC’s proposing release will solicit comments about whether the SEC should require disclosure about director diversity, including whether diversity is a factor considered when nominating director candidates.

– Broc Romanek