Investment Company Institute
June 13, 2003
Mr. Jonathan G. Katz
Re: Solicitation of Public Views Regarding Possible Changes to the Proxy Rules (File No. S7-10-03)
Dear Mr. Katz:
The Investment Company Institute1 appreciates the opportunity to express its views in response to the Securities and Exchange Commission's solicitation of comments regarding possible changes to the proxy rules under the Securities Exchange Act of 1934. As directed by the Commission, the Division of Corporation Finance is reviewing several topics, including: shareholder proposals; the corporate director nomination process; election of directors; and the disclosure and other requirements imposed on large shareholders and groups of shareholders.2
Rule 14a-8 under the Exchange Act currently provides a framework for formal communications between companies and their shareholders. It balances the right of shareholders to influence the important decisions that affect them as owners of a company with the responsibility of a company's directors and officers to manage the daily business of the company. Investment companies are both shareholders of the companies in which they invest and issuers with respect to their own shareholders, directors and management. Accordingly, the Institute has a keen interest in ensuring that any requirements applicable to the shareholder proposal process strike an appropriate balance between protecting the rights of shareholders and avoiding undue interference with director and management responsibilities (and the attendant costs and burdens).
For the reasons discussed below, the Institute does not believe that it is necessary, at this time, to revise Rule 14a-8. Instead, we recommend that the Commission defer deciding whether to undertake a comprehensive review of Rule 14a-8 until the many proposed improvements to the corporate governance structure of public companies have been implemented and their consequences made clear to regulators, shareholders, issuers and the marketplace.
Our comments focus on the issue of shareholder nomination of directors. Rule 14a-8 currently permits a company to exclude a shareholder proposal that "relates to an election for membership on the company's board of directors."3 The Commission staff is now revisiting this provision in response to concerns that director nominations are under too much control or influence by management.4 Facilitating the ability of shareholders to nominate directors is seen as one way of alleviating this concern.
The Institute agrees that it is critically important that the nomination of directors - particularly independent directors - not be under the control or undue influence of management. This is necessary in order to ensure that independent directors truly have the requisite degree of independence from management.
Shareholder nomination of directors, however, is not the only way to ensure director independence. Investment company boards long have consisted of a majority of independent directors, and their independent directors have controlled the selection and nomination process for other independent directors.5 A senior member of the Commission's staff explained the importance of independent directors choosing and nominating other independent directors, stating that:
I believe that the self-selection and self-nomination of independent directors works to create a greater sense of autonomy from management on the part of independent board members. Directors who are selected and nominated by other directors are unlikely to feel beholden to fund management for their positions and therefore are free to speak their minds, question management and represent investors as their sole concern.6
Subsequently, the Commission essentially codified these common industry practices when it adopted rule amendments that provide that investment companies may not rely on any of ten key exemptive rules under the Investment Company Act of 1940 unless (1) they have a majority of independent directors and (2) independent directors select and nominate other independent directors.7
We believe that these requirements effectively address concerns over director independence in the investment company context. Indeed, independent directors are uniquely qualified to evaluate whether a prospective director is likely to contribute to the continuing independence and effectiveness of the independent directors as a group.
Other corporations likely will be subject to similar requirements soon. The New York Stock Exchange, Nasdaq and the American Stock Exchange all have proposed (or will soon propose) rule changes that will require their listed companies to have a majority of independent directors and to have independent directors select, or recommend that the board select, director nominees.8 The Institute has strongly supported these proposals, which, in effect, would extend requirements presently applicable to investment companies to listed companies. Moreover, all of the Exchange Proposals contain numerous other changes designed to enhance the accountability and oversight of corporate management. 9
In light of these current requirements and pending proposals designed to enhance director independence,10 the Institute does not believe that it is necessary, at this time, to revise Rule 14a-8. Instead, we recommend that the Commission defer deciding whether to undertake a comprehensive review of Rule 14a-8 until the numerous improvements to the corporate governance structure of public companies have been implemented and their consequences made clear to the Commission, shareholders, issuers and the marketplace.
* * * *
We appreciate the Commission's consideration of our comments on this important matter. If you have any questions or need additional information, please contact me at (202) 326-5815 or Dorothy Donohue at (202) 218-3563.
cc: Alan L. Beller, Director
Paul F. Roye, Director