August 28, 2009

More on Shareholder Access Comments

Last Friday I blogged about the “grass roots” letter writing campaign that had been ginned up to oppose the SEC’s access proposals. It being a slow news week in Washington, it seems that reporters have turned to reading some of the more serious comment letters on the proposals, as a number of stories came out this week, mostly covering the level of opposition to the proposals. For example, this WSJ article notes some of the various suggestions for tweaking the proposals both from those for and against the changes, all seemingly made against the backdrop of a strong presumption that something will be adopted in November of this year. (The WSJ article also notes that the US Chamber of Commerce was behind the small town letters expressing concern over adoption of the access proposal, with more efforts expected to be ramped after Labor Day.)

I thought that I would highlight a couple of letters that caught my eye which have very little to do with the particulars of the proposals, but nonetheless make a case that, once again, now might not be the right time to move forward with implementing a new access regime. In this letter from several former SEC Senior Staffers, they credibly note “[w]e are, however, concerned that at this particular juncture in its history, it would be a mistake for the Commission to divert its resources to these matters. Simply put, there are far more important regulatory matters on its agenda.” The letter goes on to point out:

Importantly, each of these subjects is of far more immediate concern to the SEC than proxy access. Proxy access is a regulatory problem that the Commission has labored to address for virtually the entire history of the Commission. As the proposing release notes, the Commission has considered the problem in virtually every decade, in 1942, 1977, 1980, 1992, 2003, 2007, and last year, in 2008. On each occasion the Commission began with bold proposals to fundamentally revamp the process and concluded with modest actions that, frankly, accomplished little. This disappointing history is not a criticism of past Commissions. Rather it demonstrates that the problem is complex and the Commission’s legal authority to act in this area is limited. The substance of corporate governance remains a matter of State, not Federal, law. Absent Congressional action to dramatically alter the Federal / State landscape (which this group does not necessarily endorse), the SEC will never have the ability to change the governance of corporations meaningfully.

Another letter of note is from the Shareholder Communications Coalition, which has been around since 2005 and is made up of The Business Roundtable, The National Association of Corporate Directors, The National Investor Relations Institute, The Securities Transfer Association, and The Society of Corporate Secretaries & Governance Professionals. This group essentially argues that moving forward with access would involve putting the cart before the horse, by making such a significant change to director elections without addressing some real underlying systemic problems with the proxy system. Among the issues noted that need to be addressed were empty voting, hidden ownership, over-voting, the lack of competition with proxy administrative services, the enormous (and growing) influence of proxy advisory firms. These are all hopefully issues that the SEC is currently studying as it has undertaken a review of shareholder communications and the proxy system.

This is a road that we have all been down before, and many of the same arguments for and against are playing out all over again. We should know pretty soon whether history is destined to repeat itself.

SEC Settles Naked Shorting Cases

Earlier this month, the SEC announced that it settled enforcement actions for violations of the rules designed to prevent abusive naked short selling. Charged in the cases were two options traders and their broker-dealers, who were alleged to have violated the locate and close-out requirements of Regulation SHO. These cases involved conduct spanning from 2005-2007. No doubt that more such cases are in the works.

As part of its efforts to stamp out abusive short selling practices, the SEC announced plans for a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures.

The Curious Case of Jaycee James

In his blog, Alan Dye notes that last week the SEC initiated a cease and desist proceeding against a guy by the name of Jaycee James, who allegedly filed 83 Forms 3 and 4 and Schedules 13D, relating to 29 different companies, all to report fictitious transactions and holdings (see In re Jaycee James, Rel. No. 34-60529). No fraud is alleged, just reporting violations. What on earth would make someone feel compelled to file fake Section 16 reports? I am not sure if I want to find out.

Alan also recently blogged about the Staff’s latest Section 16 C&DI, noting:

The staff’s update of its Compliance and Disclosure Interpretations on Friday included a new Section 16 interpretation, applicable to reverse stock splits. CDI 117.03 says that Rule 16a-9(a), which exempts from Section 16 “the increase or decrease in the number of securities held as a result of a stock split or stock dividend applying equally to all securities of a class,” exempts the cashing out of an insider’s fractional interest resulting from a reverse stock split, so long as the cash-out feature of the stock split applies equally to all holders of the class. The availability of Rule 16a-9 to exempt the disposition of fractional interests for cash had been uncertain (as discussed on pages 508-509 of the 2008 edition of the Section 16 Treatise and Reporting Guide). The new CDI means that insiders will not need to file a Form 4 to report the disposition of fractional interests in connection with a typical reverse stock split.

If you don’t have access to, be sure to check out our “Rest of 2009” rates.

– Dave Lynn