October 11, 2010
The rule amendment conflicts with the express provisions of Section 957 of the Dodd-Frank Wall Street Reform and Investor Protection Act. To the extent that the rule exceeds the requirements of Section 957, the Securities and Exchange Commission (the "SEC") has improperly found good cause for accelerated approval of the rule.
Section 957 requires that the rules of each national securities exchange prohibit any member that is not the beneficial owner of a security registered under Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") from granting a proxy without instructions from the beneficial owner. The stockholder votes covered by Section 957 are votes with respect to: (1) the election of board members, (2) executive compensation, and (3) any other significant matter, as determined by the SEC by rule.
The SEC has improperly approved the rule on an accelerated basis for two reasons.
First, the SEC erred in finding that good cause existed for approving the rule as proposed by the New York Stock Exchange. In finding good cause, the SEC noted that Congress did not specify a transition phase with respect to Section 957. Thus, a finding of good cause is permissible only to the extent that the rule implements the express requirements of Section 957. To the extent that the rule exceeds Section 957, the statute cannot be used to establish good cause.
The rule exceeds the requirements of Section 957 in at least two respects. First, Section 957 refers only to securities registered under Section 12 of the Exchange Act while the rule is not so limited. Second, the rule exceeds the express requirements of Section 957 because it purports to cover a vote that "relates to executive compensation". For example, the rule commentary states that a vote on whether to hold an advisory vote every one, two or three years is subject to the rule. Section 957 does not specify votes relating to compensation. Rather, Section 957 refers only to votes with "respect to" executive compensation.
Second, the rule violates the express requirement in Section 957 that other matters be determined by the SEC by rule. Thus, matters that relate to compensation or other significant matters must be specified in a rule adopted by the SEC rather than a rule adopted by a national securities exchange.
By way of background, I previously served as California's Commissioner of Corporations and as a member of the California Senate Commission on Corporate Governance, Shareholder Rights and Securities Transactions.