No Lame-Duck Status for SEC

The Securities and Exchange Commission might be down to only three commissioners of its normal panel of five, but that doesn’t mean it isn’t busy. Recent actions will affect this season’s proxies and naked short sellers. But it is an old rule, Reg FD, that is getting the attention of directors.

In March, the SEC approved plans by several companies to exclude proposals for proxy access from their ballots, which may set up a legal fight in the coming months. In four separate noaction letters, the SEC allowed Bear Stearns, JPMorgan Chase, E-Trade Financial, and Kellwood to exclude proposals by the American Federation of State, County and Municipal Employees (AFSCME).

The proposals sought to require director nominations for company boards by any shareholder who has held more than 3-percent of shares for at least two years.

The letters affirmed the SEC’s earlier vote to bar shareholders from proposing company bylaw changes related to director nominations. The rule, pushed through by the commission’s Republican majority, was denounced by former Commissioner Annette Nazareth, labor investors, and others as a move against shareholder rights. Look for pension funds to test the actions in court.

Meanwhile, the SEC is showing investors some sympathy on another proxy issue, “say on pay.” After issuing a handful of similar no-action letters freeing companies to keep the proposals off the proxy, the SEC ordered XTO to include a proposal from TIAACREF on pay, possibly signaling a change of heart on the issue.

Illegal Gaming

The SEC is accepting public comments on a new rule that would define abusive “naked” short selling as fraud. In such a sale, the seller does not borrow or arrange to borrow securities needed to make delivery to the buyer within the standard threeday settlement period for trades. This “failure to deliver” is sometimes intentional, part of a scheme to manipulate the price of a security, or to avoid borrowing costs associated with the short sales. The SEC wants the practice curtailed.

Listen Up

The effect of the SEC’s Regulation Fair Disclosure (Reg FD), adopted in 2000, is being scrutinized. A policy report from Yale School of Management’s Millstein Center for Corporate Governance examines why “sustained two-way dialogue” between directors and shareholders is still rare in the United States. The silence could be due to directors’ concerns that reaching out to large investors could be considered selective disclosure, the authors contend.

Reg FD is intended to restrict selective disclosure of material information without providing it to the public at the same time. The SEC has launched only a few Reg FD probes so far, but the law is widely considered to have changed the nature of investor relations. Only a select few, including Pfizer, allow directors to hold regular meetings with large shareholders to hear their concerns.