SEC Adopts Tougher Proxy Access Proposal

A ruling by the Securities and Exchange Commission to allow public companies to block investors from putting director candidates on corporate ballots passed along party lines by a 3-to-1 vote.

The three Republican members, including Chairman Christopher Cox, supported giving corporations the right to bar director candidates nominated by shareholders from proxy ballots. The lone Democrat, Annette L. Nazareth, voted against the measure, saying it “stands in the way of shareholders’ rights to elect directors.” The vote was somewhat controversial, since the resignation of Roel Campos, a Democrat, this past summer ensured a lopsided commission. But since Cox threw his vote behind the togher proxy-access proposal, the void on the commission proved to be a moot point.

"The decision today maintains the status quo of the past decade, preserving every right that shareholders presently enjoy, while ensuring there is no unintended breach in the disclosure and antifraud protections applicable to proxy contests." -- Christopher Cox, SEC

The Commission voted  yesterday to allow public companies to adopt an amendment to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934 to codify the Commission's longstanding interpretation of that rule. SEC Chairman Christopher Cox said the action was taken to provide certainty to shareholders and companies following a 2006 decision by the U.S. Court of Appeals for the Second Circuit which did not defer to the Commission's interpretation of the rule. It will also ensure that current disclosure requirements and antifraud protections aren't upended.

"The decision today maintains the status quo of the past decade, preserving every right that shareholders presently enjoy, while ensuring there is no unintended breach in the disclosure and antifraud protections applicable to proxy contests," Cox said. "If the Commission did nothing, then there would be no clear and authoritative interpretation of our rules. And there would be an easy end run around the Commission's required disclosures and our antifraud rules in proxy contests. We owe it to investors and the markets to at least ensure that this does not happen. Now that we have accomplished our investor protection objectives, I believe we can move forward and re-open this discussion in 2008 to consider how to strengthen the proxy rules to better vindicate the fundamental state law rights of shareholders to elect directors."

Rob Feckner, president of the California Public Employees’ Retirement System (CalPERS) expressed “deep disappointment that the SEC took away the right of shareowners to use company ballots to seek approval of director election procedures” in a statement issued shortly after the SEC vote. "This is a serious wrong turn from the Commission’s duty to adopt regulations that ‘do no harm’ to investors," Feckner said.

Chairman Cox said this rollback is needed to clarify legal uncertainty about shareowners’ ability to propose by-law changes. He said the SEC will revisit the issue when it has a full complement of commissioners next year.

"However, proxy access has created no uncertainty in the market this year," said CalPERS Chief Executive Officer Fred Buenrostro. "There have been no related legal challenges because of this illusory uncertainty. Instead of acting responsibly on this issue with a full Commission, the SEC has adopted a flawed measure that is contrary to the very purpose for which it was established."