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Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on
August 25, 2010.
Today, we consider adopting rules that would allow shareholders access to a company's proxy
materials to include their nominees to the corporate board of directors.
As we discussed when the Commission proposed these rules last year, the concept that shareholders
can directly participate in the director nomination process — without having to mount a proxy
contest — has been debated for over 30 years. In fact, this is the fourth time in recent
memory that the Commission has considered the question of amending our proxy rules to
address so-called "proxy access."
Some of the debate during the past has concerned whether the Commission has the authority to
adopt these rules. That question was resolved last month, when Congress adopted and the
President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law
confirms the Commission's authority to act in this regard. Now it is time to resolve
the issue of under what circumstances the Commission should adopt proxy access.
This question can be answered by considering the following principles — principles that
have become clear to me after considering the many insightful and constructive comments
submitted in response to our proposal.
First, 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 who are nominated
by the incumbent board.
Nominating a director candidate is not the same as electing a candidate to the board.
I have great faith in the collective wisdom of shareholders to determine which competing
candidates will best fulfill the responsibilities of serving as a director. To me, the critical
point is that shareholders have the ability to make this choice.
Second, the company's proxy materials offer the best, readily available tool for ensuring
that the nominees of long-term and significant shareholders are presented to the electorate
in a way that facilitates shareholders' traditional state law voting and nomination rights.
Lastly, the process by which shareholders access the corporate proxy should be predictable
and clear to all parties. We will not have served investors well if our rules cause uncertainty
about the process through which our corporate leaders are elected.
The remaining issues for me were to define what it means to be a "long-term significant"
shareholder, and to prescribe a process for access that works logistically.
The rules that are before us today address each of these issues.
More specifically, under the new rules, "proxy access" will be available to a shareholder,
or group of shareholders, who own — and have owned continually for at least the prior
3 years — at least 3 percent of the company's voting stock. In order to reduce uncertainty,
the final rule includes detailed provisions on how to calculate this amount.
Further, in order to limit this rule to shareholders that have a genuine commitment to the company,
shareholders cannot borrow stock to achieve these thresholds — although stock that they
own, but have lent to others, may be counted, so long as the nominating shareholder has
the right to recall the stock and will do so if the company includes the shareholders'
nominee in its proxy under the new rules.
As we proposed, the total number of nominees available to qualifying shareholders under
this new process will be one — or 25 percent of the board — whichever number is greater.
Shareholders will not be able to use the new rules if they hold their stock with the intent
of changing control of the company or gaining more seats on the board than is permitted
under this new process.
Nominating shareholders will be subject to certain procedural and other requirements,
including disclosure.
A company's shareholders may opt to adopt, through either a management recommendation
or Rule 14a-8 shareholder proposal, access rules that provide for greater access —
but they cannot limit the availability of our new proxy access rule.
Lastly, application of the new access rules to the smallest public companies — those
that are defined as "smaller reporting companies" under our rules — will be deferred for three
years. During that period, the Commission will monitor how these rules have been implemented
for larger companies and will continue to assess the distribution of stock among holders
of smaller company shares. We will be prepared to make changes, if necessary, before the
access rules become fully applicable to these smaller reporting companies.
These rules are the result of long and careful consideration of the often widely divergent
views expressed by commenters, as well as constructive debate within the Commission
and among its staff. These rules are stronger and will be more effective because of our
concerted effort to balance competing interests. As the public reviews the changes that we
have made from our proposal, it will see dozens of instances of "give and take."
While we have decreased the ownership thresholds from what was proposed for the smallest companies
— from 5 percent to 3 percent — we have deferred implementation for these companies
for three years. We have also increased the ownership thresholds for the largest companies
— from 1 percent to 3 percent — and have increased the period of required ownership
for companies of all sizes from 1 to 3 years.
We have also clarified the disclosure obligations of nominating shareholders, and made many
other modifications to address issues raised by commenters.
These rules reflect compromise and weighing competing interests. As with all compromises,
they do not reflect all the views of any one person or group. They are, I firmly believe,
rational, balanced and necessary to enhance investor confidence in the integrity of our
system of corporate governance.
Because the process created by these rules will represent a marked change to the status
quo, I am committed to closely monitoring how these new rules are implemented. We will
monitor not only in the context of future application to smaller companies, as I mentioned,
but also so that we can make prompt changes for all companies, if practice demonstrates
the need to do so.
Perhaps because this proposal has been such a long time coming, I have a very long list
of staff to thank.
From our colleagues in the Office of the General Counsel, thanks to David Becker, Meridith
Mitchell, Rich Levine, David Fredrickson, Bryant Morris, Dorothy McCuaig, Michael Conley,
Randy Quinn, and Tracy Hardin.
Thanks also to the Division of Risk, Strategy and Financial Innovation, specifically, Henry
Hu, Josh White, Bruce Kraus, Cindy Alexander, Ayla Kayhan, and Alex Lee.
From the Division of Investment Management, thanks to Buddy Donohue, Susan Nash, Mark
Uyeda, and Kieran Brown.
Thank you also to our colleagues in the Division of Trading and Markets, specifically Robert
Cook, Josephine Tao, Victoria Crane, Thomas McGowan, Mark Attar, Nancy Sanow, Sharon Lawson,
and Randall Roy.
I would also like to thank each of the Commissioners and their counsel for their tireless review
and important comments.
Lastly, a huge thank you goes to the Division of Corporation Finance, especially Meredith
Cross, Brian Breheny, Lily Brown, Tamara Brightwell, Larry Hamermesh, Ted Yu, Blair Petrillo, Eddie
Aleman, Tom Kim, Jonathan Ingram, Heather Maples, Anne Krauskopf, Michele Anderson,
Nicholas Panos, Will Hines, Carmen Moncada-Terry, Mike Reedich, Damon Colbert, and Alexandra
Ledbetter.
I know how many weekends and long nights that you worked on this proposal, and again all
I can say is "thank you."
Now I'll turn the meeting over to Meredith Cross, Director of the Division of Corporation
Finance, to hear more about the Division's recommendation.