The Independent Community Bankers of America
September 12, 2003
Jonathan G. Katz
Re: Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Board of Directors
File No. S7-14-03
Dear Mr. Katz:
The Independent Community Bankers of America (ICBA)1 appreciates the opportunity to offer the following comments to the SEC on proposals to enhance existing disclosure requirements regarding the operation of board nominating committees and on new proposals to improve communications between stockholders and boards of directors.
Enhanced Nominating Committee Disclosure
The SEC is proposing new disclosure requirements that would expand disclosure in company proxy statements regarding the nominating committee and the nominating process. This enhanced disclosure is intended to provide security holders with additional information upon which to evaluate the boards of directors and nominating committees of the companies in which they invest. This additional information will also assist stockholders in understanding the processes and policies of the nominating committees.
While the ICBA generally supports enhanced disclosures regarding nominating committees and the nominating process, we note that both the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) have proposed revised listing standards that would require listed companies to have independent nominating committees. We would suggest that these proposed listing standards be allowed to take effect and operate before the SEC takes any action concerning nominating committees. Public companies and banks are still trying to comply with all the SEC regulations under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the new listing requirements that have been proposed by the stock exchanges. They are still drafting committee charters and reconfiguring their boards and committees to make them independent. These new disclosure requirements will only add to the substantial regulatory burden that public companies are currently experiencing. The SEC should defer action on these proposals for at least two proxy seasons until companies have had a chance comply with the new listing standards and the rules under Sarbanes-Oxley.
As for the proposals themselves, ICBA has a number of recommendations. First, we would suggest that the SEC eliminate the requirement that companies that do not have nominating committees state their basis for not having such a committee in their proxy statements. Many smaller companies, particularly those who have little turnover on their boards, do not have nominating committees but instead rely on their boards to nominate candidates for board membership. This is permissible under the proposed Nasdaq listing standards as long as the nomination is determined by a majority of the independent directors. Smaller companies should not be forced to explain to stockholders why they use their board to nominate a candidate in lieu of using a nominating committee. Furthermore, as long as nominations are made by independent directors, it should not make any difference to the stockholders whether the nomination is made by an independent nominating committee or by a majority of independent directors who serve on the board.
Secondly, ICBA recommends eliminating the requirement that a company disclose the material terms of its nominating committee charter if the nominating committee has a charter. As every stockholder knows, the main purpose of the nominating committee is to nominate candidates for the board. The proposed rules require that the company disclose the nomination process and how the director candidates recommended by stockholders are to be considered. Disclosing the material terms of a nominating committee charter will not add to the investor's overall knowledge of the nominating process and will only lead to boilerplate disclosures about the nominating committee charter and its purpose. In lieu of disclosing the material terms of the nominating committee charter, ICBA recommends that companies be required to disclose where a stockholder can find the nominating committee charter. Nominating committee charters could be included with the proxy statement every three years along with other committee charters.
Thirdly, ICBA recommends parity in treatment between listed and nonlisted companies concerning the requirement that companies disclose the directors on the nominating committee who have lost their independence during the previous fiscal year. As proposed, an unlisted company would have to disclose every year in its proxy statement whether each member of its nominating committee is independent (using a definition of independence of a national securities exchange or a national securities association) whereas listed companies would only disclose the instances during the last fiscal year where any member of the nominating committee did not satisfy the definition of independence in the listing standards of the market on which they are listed or quoted. The ICBA sees no reason why there should be a disparity in treatment between listed and unlisted companies. In both cases, stockholders should be interested in knowingly only whether the directors who nominate board members are independent or have lost their independence.
Lastly, the SEC has proposed that companies provide additional disclosures about the nomination process if a nominating committee receives a recommended nominee from stockholders who, individually or the aggregate, own more than 3% of the company's voting stock and the nominating committee decides not to nominate that candidate. Since in the case of smaller companies, the 3% threshold would be relatively easy to reach, ICBA recommends that the 3% threshold be raised to at least 5%.
Disclosure Requirements Regarding Communications with Board Members
The SEC has also proposed a number of specific disclosure requirements regarding communications by stockholders with the board of directors. These specific disclosures would require companies to disclose in their proxy statement the process by which stockholders can send communications to the board, the identification of those board members who can receive such communications, and if the communications are not sent directly to the board members, the company's process for determining which communications will be relayed to board members. Companies would also be required to describe any material action taken by the board during the preceding year as a result of communications from stockholders. The intent of the disclosures is to give stockholders a better understanding of the manner in which they can communicate directly with the board.
ICBA supports the SEC's efforts to improve communications between shareholders and the board and believes that these disclosures will give stockholders a better picture of how a board interacts with its shareholders. However, we are concerned about the requirement that companies describe any material actions taken by the board during the preceding year as a result of communications from stockholders. We feel that the SEC should more clearly define what communications would be subject to this rule. For instance, banks are required under federal law to have their boards approve insider loans that exceed a certain size. If a bank were to receive a loan request from a director (who is also a stockholder) that resulted in a material action by the board (e.g., an approval of a large loan), a technical interpretation of the proposed rules would require the bank to disclose this action in the proxy statement. ICBA suggests that the SEC define the term "communications" to include only those communications regarding corporate governance matters that would be of general interest to stockholders.
In conclusion, the ICBA urges the SEC to allow a period of time for public companies to digest the numerous regulations that have been issued under Sarbanes-Oxley and for the exchanges to finalize their proposed listing standards requiring independent nominating committees before the SEC takes any action regarding nominating committees. As for the regulations themselves, the ICBA generally supports the enhanced disclosure requirements regarding the operation of nominating committees as long as they incorporate the changes recommended in this letter. If you have questions or need any additional information, please contact Chris Cole, ICBA's regulatory counsel at 202-659-8111 or Chris.Cole@icba.org.