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Aug 25, 2010

SEC adopts proxy access rules

Change allows shareholders to name directors on management’s proxy statement

On Wednesday, the SEC adopted proxy access rules that will allow shareholders to include their own director nominations on company proxy materials.

The five-person commission, led by chairman Mary Schapiro, passed the vote 3-2 in favor of the changes.

The new rules are planned to come into effect for the 2011 proxy season, although they could be delayed by legal challenges from opponents of the changes.

‘As a matter of fairness and accountability, long-term, significant shareholders should have a means of nominating candidates to the boards of the companies that they own, candidates that all shareholder voters may then consider, alongside those that are nominated by the incumbent board,’ said Schapiro at Wednesday’s SEC open meeting.

Under the existing system, shareholders who want to nominate their own directors usually have to send out their own ballot papers to shareholders, which can be prohibitively costly and time-consuming.

The SEC set a minimum ownership level of 3 percent for shareholders that want to add directors to company proxy materials, and a minimum ownership period of three years.

Shareholders will be able to nominate 25 percent of the board or one director, whichever is greater.

Smaller companies will be exempt from the new rules for three periods, so they can see how the changes affect larger corporations.

‘This will give smaller companies the opportunity to see how the rule works in practice at larger companies and prepare for when it becomes applicable to them,’ said Meredith Cross, director of the SEC division of corporation finance, at the meeting. Cross’s team developed the proxy access recommendations that were voted on.

‘As importantly, this will give us all a chance to see how the rule works in practice and see whether changes are needed before the rule becomes applicable to smaller companies,’ Cross continued.

As expected, two commissioners voted against the changes. One of those commissioners, Kathleen Casey, called the new rules ‘fundamentally and fatally flawed’.

In a wide-ranging attack, Casey said the rules empower institutional shareholders to the detriment of individual shareholders, break with traditional securities and state law, and arbitrarily decide ownership and holding thresholds.

The vote marks a victory for shareholder groups that have pushed for proxy access for several years. Their cause received new impetus after the financial crisis of 2008, which some blame on a lack of oversight by shareholders.

The California Public Employees’ Retirement System (CalPERS), calls proxy access the ‘single most powerful tool to improve corporate governance in America’s boardrooms’.

Opponents of the changes, such as the US Chamber of Commerce, argue that they will be costly and disruptive, and will make it harder for boards to function properly.

Some critics also say the SEC is overstepping its jurisdiction by passing rules on proxy access. The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in July explicitly authorized the SEC to adopt proxy access rules, however.

Tim Human

Tim Human is an international correspondent for IR magazine based in the UK Tim has been editor of IR Magazine, the global publication for investor relations professionals, since January 2013. Prior to becoming editor, he held various roles at IR...