From: Donald J. Stoecklein [firstname.lastname@example.org]
Stoecklein Law Group, a Professional Corporation
Practice Limited to Federal Securities
August 28, 2003
VIA EMAIL: email@example.com
Mr. Jonathan G. Katz
Dear Mr. Katz:
We are responding to your request for comments on the Commission's proposal pertaining to the "Disclosure Regarding Nominating Committee Functions and Communications between Security Holders and Board of Directors."
Disclosure Regarding Nominating Committee Functions
Our representation of issuers includes the preparation of Exchange Act Schedule 14A and Schedule 14C filings. As a result of the preparation of these filings we are aware of the effects that the proposed disclosure requirements may have on issuers. Although we generally believe that the proposed increased disclosure requirements will have a long-term beneficial impact, we concurrently believe there will be some adverse effects on both the companies and the nominating process.
The proposed disclosure requirements do not have current provisions to discriminate between small business issuers (SBIs), 15(d) companies, (collectively "small business issuers"), issuers required to file reports under the Exchange Act of 1934 (the "34 Act"), and those companies subject to listing or quotation medias.
We believe that the proposed disclosure requirements will have a chilling effect on the small business issuers, which have voluntarily subjected themselves to the reporting requirements of the 34 Act. Your proposals provide for an issuer to state "whether or not the company has a standing nominating committee or a committee performing similar functions and, if the company does not have such a committee, a statement of the specific basis for the view of the board of directors that it is appropriate for the company not to have such a committee and the names of those directors who participate in the consideration of director nominees." It is unclear to us, as proposed, if a company does not have a nominating committee, and only the board of directors nominates, whether there is a requirement to comply with the disclosure relating to the nominating process. We recognize the disclosure required under Paragraph (d)(1) of Item 7 of Exchange Act Schedule 14A, which requires a disclosure of a nominating committee if one exists. As we understand the current proposal, if there is no nominating committee, the disclosure mandated by your proposal is that no such committee exists and a statement as referenced above.
We believe that as a result of the in depth disclosure for the small business issuers, who typically do not have independent directors, that such small business issuers will opt to eliminate the nominating committee as opposed to providing the disclosure mandated by the proposal. We would propose that the voluntarily registered small business issuers not be subjected to the rules as proposed unless required to file Exchange Act reports.
We believe that maximum flexibility is required of these small business issuers to avoid any impediments to their capital formation. We do not believe that the increased disclosures for these issuers outweighs their need to reduce expenses while at the same time providing a quality board of directors.
As proposed, the new rules as to all issuers would require disclosure regarding candidates that were recommended by certain security holders and rejected by the nominating committee. We believe this disclosure would raise privacy issues for the rejected candidates, even if the candidates were not specifically named in the company's disclosure. We believe this would have a dilatory impact on those individuals being nominated, as companies who choose not accept disclosure of the nominations by minority shareholders would possibly utilize the negative comments of such non-nominated directors to chill other such nominations.
As proposed, the new rules would require "disclosure of any instances where a member of a company's nominating committee did not satisfy the applicable listing requirements for independence." In addition, you propose to require similar disclosure for unlisted companies. We do not believe that companies whose securities are not listed on an exchange or quoted in the Nasdaq Stock Market should be required to disclose whether the members of their nominating committee, if any, meet any of the independence definitions of the listing standards. We believe the Commission should fashion a definition independent of the listing standards.
Disclosure Regarding the Ability of Security Holders to Communicate with the Board of Directors
We believe that a mechanism whereby providing security holders with disclosure about the process for communicating with board members would improve the transparency of board operations by providing board members with un-edited direct communications from security holders. A communication methodology similar to the method created by the NYSE listing standards for audit committees; ie ". . .establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters," may be the appropriate analogous remedy. However; overburdening the filing with the disclosure suggested in the proposal may in fact have a negative impact upon its various purpose in that too much boiler plate disclosure will cause most investors not to read any, or at least the majority of the disclosure, defeating its very purpose.
Commission Cost Analysis
As we understand your proposals and the costs analysis, you estimate an average time burden of 3 hours per year and that 75% of the burden would be carried by the company internally and 25% would be carried by outside professionals retained by the company. We believe that a greater percentage of burden would be carried by outside professionals in the small entities in that such entities have a tendency to not have sophisticated staff sufficient to provide for the disclosure mandated. We believe your percentages should be 75% burden carried by outside professionals and 25% internally for small business issuers. Additionally, we believe the burden of disclosure in the first year may be as high as 12 hours and assuming the disclosure is not mere boiler-plate recitations, approximately 4 hours per year thereafter.
In conclusion, although we believe more disclosure provides for a more efficacious market, we further believe aspects of the proposed disclosure requirements may have the unintended adverse effects of causing some small business issuers to opt out of disclosure, and too much boiler plate disclosure may have little practical utility in that it will be utilized by only a small number of investors who will actually take the time to read and digest the information provided.
At least one of our clients, a venture capital fund, has indicated that the market should determine the efficacy of the type of disclosure being mandated under the above proposal. This statement is more in line with the Wall Street Rule summarized as follows: "When we buy into a corporation we buy management. We therefore support management as long as we are in a corporation. If we don't like management, we sell." If a company's stock price is in direct relation to how management operates, at least one theory of thinking is if enough of the market shows a dislike for the corporate governance, or lack thereof, of companies, then this negative attitude should be displayed in the price of their securities.
Stoecklein Law Group
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