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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks Before the Willamette Securities Regulation Institute


Commissioner Roel C. Campos

U.S. Securities and Exchange Commission

Salem, Oregon
October 19, 2006

Good Afternoon. I'd like to thank Peter Letsou and the Willamette University College of Law for inviting me to join you today at your first annual securities institute. I'd also like to thank Mike Eisenberg for his invitation. I see his handiwork at play in the many talented and knowledgeable panelists you are hearing from today. I assure you that with Mike on the staff, you will continue to have an insightful, thought-provoking conference for years to come. Who knew securities regulation could be so entertaining?!

Let me turn to the topic of my talk today. Competition in today's marketplace and the fast pace of globalization have upped the ante for the regulator. Each decision that we make has implications for a variety of business interests here and abroad. The interconnections are endless as business borders dissolve and companies strive to expand their reach. Because Willamette has done such a fine job in assembling panels to discuss many of the latest developments in securities law in detail, I am going to focus on two international issues related to our regulation, and, time permitting, I'd like to give you a few of my thoughts on shareholder access.

Before I begin, I must remind you that the comments I make today are my own and do not reflect the opinions of the staff or the other Commissioners.

A. SOX and the U.S. Capital Markets

First, I'd like to spend a little time examining some of the challenges to securities regulation in a globalized marketplace. No longer is nationalism the key consideration to effective regulation. Protecting the U.S. marketplace and all of the advantages it has to offer requires coordination and cooperation on a world-wide basis. Technology, innovation and economic growth around the globe have eliminated the boundaries that once guided the protectionist approach to regulation. As Thomas L. Friedman says, the world is flat. As regulators, we have to recognize and work within this new regime if we want to be effective and not hinder the natural tendencies of the marketplace.

This elimination of borders signals regulatory change on a potentially wide scale in a potentially short timeframe. While many embrace such change in the form of progress and competition, others worry about the rate and degree of regulatory reform and where and whether their markets will be standing when the dust settles. The product of these concerns includes two theories of regulation gone awry: regulatory creep and the regulatory race to the bottom. Proponents of these arguments use the Sarbanes-Oxley Act of 2002 (SOX) as their poster child.

So, let me start there. Despite being the primary target of criticism both for stifling U.S. companies' efforts to compete in the global marketplace and exporting over-burdensome U.S. regulation abroad — quite a feat to be responsible for both of those issues — there has been widespread global adoption of the major provisions of SOX. This would seem to suggest that the underlying goals of the particular provisions are worthy and appropriate, and this is not a case of regulatory creep. One could also argue that the SOX regime itself, with the exception of Section 404 which I will not address today, must be considered effective and also cost-justified to warrant such widespread adoption. Of course, foreign regulatory regimes may have modified the provisions to work within their existing systems altering the measurement of these categories. Regardless, the importance lays in the adoption of similar principles and rules across jurisdictions.

Let's briefly look at two examples of SOX provisions that have been adopted abroad. First, there is the strengthening of auditor independence to reduce conflicts of interest. SOX achieved this goal by: prohibiting the provision of specific non-audit services by a public company's auditor; imposing mandatory audit partner rotation; and imposing temporary restrictions on audit firms from auditing a company whose management includes former employees of the firm. With respect to non-audit services, Mexico, Germany, China and Japan have begun introducing prohibitions on specific services that are akin to SOX's approach. The EU, UK, France, Hong Kong, China, Japan, Australia, Canada and Mexico have all passed reforms requiring mandatory audit partner rotation. And, the UK, Hong Kong and Canada have opted to impose varying time-periods of restriction on the audit firm whose team member has joined the client's management. For each of these categories, other jurisdictions have adopted basic equivalents of rules or principles that hold true to the underlying SOX goal but use various means to get there.

A second example is the requirement to have an independent audit committee. Since the passage of SOX, the EU, Canada, Mexico, Australia, Hong Kong and Brazil all have mandated that public companies have an audit committee or an equivalent body as part of their corporate structure. Tweaking this requirement slightly, the UK and Germany impose an audit committee requirement on a comply-or-explain basis.

The adoption of these and other SOX principals abroad further suggests that they, in and of themselves, have not competitively disadvantaged U.S. capital markets. It goes without saying that capital prefers protection. The U.S. regulatory regime, including SOX, provides a heightened measure of confidence previously lacking in the wake of Enron, Adelphia, WorldCom and the numerous other scandals of the late 1990s. That value of that confidence has been translated into an average of a 30% listing premium for companies listed in the U.S. As time passes, people tend to forget the outrage that such scandals produced. It was more than simply bad conduct. There have always been bad corporate actors or poor corporate practices. The problems that were revealed by these frauds were material weakness in the way the companies were operated and regulated as well as a firm culture that justified and legitimized the conduct.

SOX was the means to reform the corporate governance model and improve financial disclosure in order to better protect our capital markets. As these examples demonstrate, foreign jurisdictions have either seen the value of SOX itself or the value of addressing the issues SOX addressed. In that way, SOX has helped to create a regulatory race to the top, not the bottom. At the same time, the adoption of SOX abroad has started to level the regulatory field. In combination with other efforts, such as reconciliation of U.S. GAAP with IFRS, there will be more leveling on the horizon. Undeniably, these changes in the global regulatory landscape do result in a shift in the competitive environment. But, the global marketplace is here and will only continue to evolve. The U.S. is no longer the only game in town. As regulators, we must adapt to the developments, as must the financial industry. Otherwise, we will be left behind.

Consequently, we cannot simply dismiss the shift in listings to foreign shores. It is a fact that the U.S. accounted for 20% of worldwide IPOs in 2005, down from 35% in 2001, and that 23 of the largest 25 IPOs did not list in the U.S. last year. Further, although $86 billion was raised in 2005 through 224 IPOs for non-U.S. companies in the U.S. capital markets, $80.5 billion of that amount was through private offerings instead of on U.S. exchanges. However, we must recognize all of the factors contributing to this phenomenon and address them as appropriate.

We are all familiar with the numbers game. Numbers can be made to represent whatever position you hold. It is our job as regulators to analyze who is listing. Where are they listing? Why are they listing at one exchange over another? Who is delisting? For example, a percentage of the IPOs listing abroad are secondary listings where the company has already listed in the U.S. As companies expand internationally, it may make more sense for them to offer their stock in foreign markets as well as in the U.S. Another example of the number game: 15 of the 26 foreign delistings last year appear to have been from merger and acquisition activity.

Some companies are turning to financing alternatives that keep them in the U.S. but do not stem from listing, such as crossover funds, PIPEs, second-lien loans and other private offering opportunities. Acquisitions were also popular last year. Plus, the markets did not see the stream of IPOs by tech-related companies, despite the fact that these companies tend to be smaller and less profitable than other IPO companies. In fact, it has been posited that the absence of these IPOs is responsible for the median annual revenue of companies going public in 2005 increasing to $105.9 million from $85.7 million in 2004, and the percentage of profitable IPO issuers increasing from 59% to 62%.

In other words, there are other factors responsible for the shift in the competitive environment. Simply counting listings fails to understand this fact. For example, the cost of underwriting in the U.S. is significantly higher than it is in the UK, Germany and elsewhere.

The litigious environment in the U.S. may also play a role in discouraging listings. This factor is outside of the SEC's bailiwick, but it bears mentioning. The total value of settlements in securities litigation class action lawsuits has continued to increase from $150 million in 1997 to $9.6 billion in 2005. While not determinative, I imagine foreign issuers are factoring the costs of this risk into their decision of where to list.

These factors play an even larger role in an issuer's decision of where to list when combined with the growth in liquidity and depth in foreign markets. The dissolution of the boundaries I mentioned earlier and the advent of exchange mergers (a subject of which I will discuss in a moment) has resulted and is resulting in an increased concentration of capital within a smaller number of more robust international markets. Although fragmentation remains significant with over 60 entities operating equity and/or derivative exchanges, one cannot dismiss the belief that liquidity breeds liquidity.

Plus, the success of the single currency Euro has eliminated a former obstacle to trading — foreign currency risk exposure — helping to concentrate liquidity. So, the need to seek capital abroad is reduced. In addition, as more companies conduct business on a global basis, they aid the maturation and liquidity of the foreign exchanges. This development in turns stimulates investor confidence in foreign markets.

Independent of this development, the growth in certain foreign markets, such as the Asia Pacific countries, has resulted in a spate of home-country listings of noteworthy size. Instead of simply chalking up these listings to SOX, however, one must acknowledge that the companies were not going to list anywhere but in their home country. Several of the large recent Chinese listings, for example, are issuers in which the Chinese government holds a large stake, both financially and in the control and governance of the company. In these instances, one cannot discount the role that nationalism plays in the decision of listing locale.

One must also look at the type of listings that are being counted to support the cry of competitive disadvantage. One segment of so-called "lost listings" has been the small penny-stock company that would not qualify for listing on the NYSE or Nasdaq stock markets — SOX or no SOX. These companies list on London's AIM or Ireland's Irish Enterprise Exchange, among other venues. Such opportunities for listing should be made available to these issuers, whose market capitalization is often less than $100 million, but one must recognize the true value behind these numbers.

The quality of investor protection afforded these listings is significantly lower than on the larger exchanges. For example, unlike the U.S. exchanges, AIM does not require for admission minimum shares in public hands, a trading record, prior shareholder approval for most transactions, admission documents pre-vetted by the Exchange or a minimum market capitalization. It requires semi-annual disclosures (rather than the quarterly and annual filings required for U.S. listing) and the appointment of a nominated adviser to the company.

Independent of the regulatory arbitrage issue, the attraction of AIM for some U.S. companies is that listing companies typically have an international bent to their business in that their customer bases might be abroad or foreign investors might have a greater interest in its particular industry. So, although important in the grand scheme of listing trends, these listings cannot be compared on an apples-to-apples basis. Moreover, for purposes of this discussion, SOX is not the culprit in these foreign listings.

If you add a few of these factors together, suddenly, a foreign issuer may find that the various costs and regulatory hurdles do not outweigh the more limited, but growing, access to capital in their own jurisdiction. This means that things are changing; it does not mean the bottom is falling out of the U.S. capital markets. Some of the issues are at the margins and will self-correct or we will correct them after appropriate discussion and study. Other issues, such as convergence of accounting and auditing standards, are front and center in our regulatory agenda. Importantly, SOX is a factor but it is not the only factor affecting the competitive landscape and it surely is not a deleterious factor of the magnitude many have claimed.

The real issues facing our capital markets are globalization and technology and their impact on the way business is conducted, not SOX. Our challenge is to balance investor protection and global competitiveness in the dynamic world. Issuers have new alternatives to listing in the U.S., but this does not preclude listing in the U.S. The benefits to a U.S. listing remain apparent and evident as demonstrated by the character of companies listing in the U.S.

At the SEC, we saw almost 100 new foreign registrants last year, and the number of overall foreign registrants remained around 1200. As you may have guessed, many of these companies were offshore shipping companies and Chinese-based technology companies. This happenstance illustrates the point that issuers will come to the U.S. because of the benefits they accrue here as a result of our high standards of governance, despite options elsewhere.

And what are the current U.S. IPO numbers? Although the numbers differ depending on where you look, a recent PricewaterhouseCoopers report on IPO listings sheds a little more light on the number game, and should place the numbers in better context. The report notes that 221 IPOs for U.S. exchanges was down from 260 IPOs in 2004, but significantly higher than the 88 in 2003. In addition, the report noted that 2006 has begun strong, "with 38 IPOs raising $8 billion through February, compared with 24 deals netting $4.9 billion in 2005." A report by law firm Wilmer Hale noted that the number of billion-dollar offerings by U.S. issuers fell from five in 2004 to one in 2005 but the size of the median U.S. issuer IPO increased from $85.2 million in 2004 to $99.0 million in 2005.

The decrease in billion-dollar deals was reflected in the drop in U.S. proceeds in 2005. But, again, it is how you slice the numbers. According to Renaissance Capital, absent the five largest IPOs of 2004, volume for U.S. IPOs in 2005 was up slightly. Couple these statistics with the notion that spin-off activity may offer increased IPO activity in 2006 and, suddenly, the picture is not as desperate as some would have you believe.

So, what is the lesson we can take from this discussion? The U.S. markets remain strong and competitive because of their depth and liquidity as evidenced by investor confidence in the regulatory regime governing those markets. In 2005, the U.S. again achieved the highest amount of capital raised in IPOs by any single country in the world. There is no doubt, however, that the IPO market has and is changing, but SOX is not to blame for that transformation. Companies are sophisticated. As we have discussed, there are various reasons to list elsewhere than in the U.S. — reasons that did not exist just a few years ago.

I think it is fair to say that the U.S. market continues to attract foreign companies, from North and South America, Asia and elsewhere. While some of these companies may not be the marquee issuers that get most of the attention, it demonstrates that there are distinct benefits to listing in the United States. Remember, the U.S. continues to offer the deepest and most liquid markets in the world. It accounts for 45% of global equities and more than half of the world's corporate debt securities. This position results in a wider range of investment alternatives, highly efficient pricing, cheaper cost of capital and an increased shareholder base, among other benefits to investors and issuers. Unlike other jurisdictions, the U.S. also has a limitless pool of merger candidates which many issuers find attractive in selecting a listing site. While we cannot close our eyes to growing trends, I want to make it clear that, quite simply, the U.S. market remains robust for those who seek capital here.1

B. Cross Border Mergers

SOX is only a piece of the regulatory regime we must employ to address the dynamic changes attendant to globalization. Gaining momentum in the 1990s and with ever growing participation in the 2000s, regulators have developed a detailed and regular series of coordination, cooperation and dialogues to address the issues presented by the evolution of the global marketplace. This interaction takes place in formal and informal contexts, with respect to information sharing and regulatory initiatives in the form of enforcement efforts, technical assistance, and broad regulatory discussions. In the regulatory arena, for example, we are currently focused on cross-border exchange mergers. This topic too has brought forth cries of regulatory creep.

Stimulated by technology, globalization, and competition, exchanges have been spurred to consider the value of cross-border mergers. Opponents of these mergers argue that such unions will result in the imposition of U.S. regulation, including SOX, on foreign issuers listed on the merged exchanges. Before discussing this issue any further, let's see what deals are on the table.

Unless you are hiding in a vineyard up in Oregon, you know that the NYSE Group has agreed to merge with Euronext. At the end of September, NYSE Euronext filed its Form S-4 registration statement with the SEC detailing the proposed business combination. The filing specifies that there will be separate U.S. and European management entities. Euronext will have a Dutch foundation for its markets and the NYSE will create a three-person Delaware trust. The shareholder vote to approve the merger will not take place until December. This has given the Duetsche Boerse continued hope that it will be able to persuade shareholders to vote in favor of its slightly higher offer (at least, higher for now). The NYSE maintains, however, that this difference in price will have eroded by the time of the vote.

Weighing in shareholders minds is the report commissioned by lobbyist group Paris Europlace, and led by Henri Lachmann, which was tasked with evaluating which proposal is best for the French capital market. Without delving into the numbers, the report claims that neither the NYSE Group nor the Deutsch Boerse deal is beneficial to the French market. Instead, the report suggests that Euronext focus on building a powerful European Union-like equity market by combining with the Borsa Italiana and the equity component of the Deutsch Boerse. You may recall that the Euronext model lists companies according to the national exchange upon which they went public even though shares are then traded across the same order book.

Interestingly, recent press reports issued the day before the Lachmann report suggested that the NYSE would consider offering to bring parts of the Deutsche Boerse into its merger with Euronext as a possible resolution to the three-party issue. Those articles suggested that the combination would involve only the Deutsche equities business, so as to avoid some of the regulatory and anti-trust issues that would arise with the NYSE-Euronext entity owning a derivatives exchange. Hmmm, I wonder if these reporters have the scoop.

Another approach to exchange mergers has been undertaken by OMX AB, the operator of several Scandinavian and Baltic markets. OMX has consolidated all of the companies from its three biggest exchanges, the Stockholm, Helsinki and Copenhagen exchanges, onto one exchange with harmonized listing rules. The national exchanges will continue to exist as the current legal entities on which the companies are listed, and the companies will continue to be beholden to the national regulators. But, it will be easier to compare the region's companies with their peers because they will be listed according to their size and industry sector instead of exchange listing venue. This will also facilitate buying and selling by consolidating trading volume.

And one cannot forget the potential combination of Nasdaq and the LSE. As of October 1, Nasdaq may bid for the remaining 74.7% of the LSE that it hasn't already bought. Interestingly, the press is reporting that hedge funds, which hold at least 20% of the LSE, say they can be swayed at a bid just slightly over Nasdaq's bid of 12.43 pounds. Speculation is that Nasdaq could wait out any merger until next May when its bid price drops away and the hedge fund investors could be faced with a lower bid price.

Each and every exchange is both similar and unique — similar in that they all respond positively to certain fundamentals, but unique in the environment and tradition in which they develop and prosper. Thus, as you may imagine, a transaction between a U.S. market and a foreign market could raise securities law regulatory issues in the U.S., or be subject to Commission review depending on the structure of the transaction. The transaction itself may be subject to issuer registration requirements for the offer and sale of securities in the U.S. In addition, U.S. proxy rules, cross-border tender offer rules, and other applicable rules may apply. If a transaction resulted in changes to the U.S. exchange's existing rules, Commission approval would be needed. However, it is possible — even likely — that a business combination would not result in any such changes.

Yet the opposition to the cross-border combinations have honed in on the fears of extraterritorial application of SOX and raised the flags of nationalism. In today's global marketplace, these fears are short-sighted. Stock exchanges play an important role in the world's capital markets. The fair and efficient function of an exchange provides liquidity to the markets and aids in accurate price discovery. These functions then facilitate efficient raising of capital for public companies to the benefit of the corporate sector, the economy as a whole, and investors.

Why, then, would you deny your companies, investors and economy access to greater capital? Perhaps it is the end game of creating an increasingly deep and liquid EU market to challenge the U.S. market instead of seeking the potentially greater mutual benefits of merging with the U.S. markets. Again, I question whether this is a short-sighted approach in that exchanges' traditional owners are being replaced by a more diversified shareholder base anyhow. Essentially, national regulation remains important but cross-border cooperation is key in a global marketplace.

What is also clear is that the proposed combination of the NYSE and Euronext will produce no exportation of U.S. regulation — SOX, for instance — to Europe. No European issuer will subject itself to U.S. regulation unless it voluntarily chooses to operate directly in America. Moreover, the European and American regulators have set up working groups to assure that the merger process, if it occurs, goes smoothly and without surprises, and that no unintended regulatory creep occurs from the U.S. to Europe.

That is not to say that longer term strategies of integration would not result in a different regulatory outcome. I believe that it is inevitable that a combined trans-Atlantic exchange organization will some day request the regulators on both sides of the Atlantic to cooperate in approving a common set of trading rules. Given the differences in the American and European regulatory models, achieving this will not be easy. I do believe that at some point in the future, some type of regulatory mutual recognition will be negotiated between the SEC and European regulators, assuming of course that the current trends toward the convergence of standards continue.

The real question for those who like to dream big is whether we will end up with one world, one equities market — global exchanges where trading never stops.

C. Shareholder Access

Changing directions completely, I'd like to take a moment to discuss shareholder access, that is, the ability of shareholders to nominate candidates for director. Before I talk about the developments of the last few weeks, let me digress very briefly to provide some history on the subject.

1. Proposed Rule 14a-11

The Commission's most comprehensive foray into shareholder access was our proposal in late 2003 to adopt Rule 14a-11 and amend certain other rules that would have, if adopted, required companies in certain circumstances to include in their proxy materials a shareholder nominee for director. As all of you know, however, proposed Rule 14a-11 set off a firestorm of controversy. We received hundreds of letters on the proposal (actually thousands of letters, if you include the identical form letters that were submitted). In fact, our Division of Corporation Finance put together a summary of comments received — which is available on our public website — and this comment summary is itself over 250 pages long. And I think you know where this chapter ends: proposed Rule 14a-11 was never finalized. This was a disappointment to me and many others, as we had hoped that finally shareholders would have finally been given a relatively modest tool to have some direct say over who runs the corporation that the shareholders own.

Thereafter, things were relatively quiet on the shareholder access for the next couple of years, at least from the standpoint of the Commission. However, shareholders themselves were not content with the Commission's failure to move forward on shareholder access, and they continued to submit proxy proposals to companies seeking to establish a procedure by which shareholders could nominate director candidates. In the immediate aftermath of proposed Rule 14a-11, our Division of Corporation Finance refused to grant no-action relief to companies seeking to exclude these proposals from their proxy materials, provided that the shareholder proposals satisfied the requirements of proposed Rule 14a-11. However, after it became apparent that proposed Rule 14a-11 wasn't going to proceed to final rulemaking, Corp Fin reversed course and informed companies that they could exclude shareholder access proposals under Rule 14a-8(i)(8). This set the stage for the events of the last few months, and the latest chapter in the shareholder access saga.

2. The AFSCME/AIG Proposal

In summary, as many of you know, in early 2005, AFSCME submitted a proposal to AIG seeking to amend AIG's bylaws to permit shareholders to nominate a candidate for director if certain conditions were met. Corp Fin allowed AIG to exclude the proposal; AFSCME sued AIG in federal court seeking to compel AIG to include the proposal; and the case eventually made its way to the Second Circuit, where the court entertained briefing on the suit. After a full round of briefing (including a number of amicus briefs), the Second Circuit heard oral argument on the appeal. During oral argument, the Court focused on the Commission's 2003 rule proposal, and openly questioned the parties as to the SEC's position on the subject. Indeed, at one point, the Court asked — and I'm quoting from the transcript here: "what do you think is more likely to make the SEC get off its duff and do something — if we decide for you or we decide it against you?" Not surprisingly, the Second Circuit asked us to submit an amicus brief shortly thereafter.

Now, here's where things got interesting. Representatives from both AFSCME and AIG sought a meeting with me (and other Commissioners) to present their views on the subject and to persuade us to support their respective positions in a Commission amicus brief. After meeting with the parties and after considering the issue at length, I became opposed to submitting an official amicus brief of the Commission agreeing with Corp Fin's determination that companies could exclude shareholder access proposals of the type AFSCME submitted. My rationale was the Commission should not take an official position of this type because it would be extremely unfriendly to shareholder access, and it would be contrary to the Commission's intent as reflected in the 2003 proposals. That said, I have a great deal of respect for our Division of Corporation Finance, and I wanted to let them defend their rationale before the Court. So, I proposed that the Commission not submit an official amicus brief, but rather that the Division send in a letter brief explaining their rationale to the Court. After much internal discussion, that is exactly what happened.

Interestingly, I've been told that this is one of the only times in recent memory that the Commission has actually declined to file an amicus brief after being asked by a court to do so. Indeed, long-standing attorneys in our appellate group can remember only one other time that the Commission failed to submit an amicus brief when asked — and that was when the Commission was deadlocked 2-2. I should also note that the decision not to submit an amicus brief was not merely a cosmetic or academic determination. An amicus brief filed by the Commission requires an official Commission vote on the brief itself, and any such brief that interprets Commission rules is generally entitled to significant deference by the judiciary. By contrast, staff interpretations of Commission rules are entitled to deference only to the extent that their reasoning is persuasive to the court. Indeed, the Second Circuit actually asked the Commission to address the question of what deference it should give to the SEC's brief. Because the SEC did not issue a brief, however, the letter from Corp Fin did not address this question.

3. The Second Circuit's Decision

Finally, about a month ago, the Second Circuit ruled on the AFSCME v. AIG lawsuit. The Court found in favor of AFSCME, and against the position put forth by AIG and the Division of Corporation Finance. Specifically, the panel held that a shareholder proposal that seeks to amend the corporate bylaws to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot cannot be excluded from corporate proxy materials under Rule 14a-8(i)(8). Curiously, the Court either ignored or overlooked the fact that the Commission did not submit an official amicus brief, and they repeatedly referred to Corp Fin's letter as the SEC's "amicus brief." In any event, and even though Commission interpretations are entitled to significant deference, the Court did not grant the Commission our usual deference on the grounds that we had changed our official position without providing a reasoned analysis for doing so. The end result, however, is the same: as it currently stands, this decision has opened the door wide open, at least in the territory covered by the Second Circuit, for shareholders to submit proposals establishing procedures by which shareholder-nominated candidates can be included on corporate proxy materials.

4. Next Steps — Future Rulemaking

The big question, of course, is what the SEC will do next. In response to the decision, we initially issued a press release stating that we would consider a proposal in response to the Second Circuit's decision at an open meeting on October 18 — that is to say, yesterday. Obviously, that didn't happen, and indeed we've issued another press release stating that we'll consider proposals for revisions to our rule concerning shareholder proxy initiatives at a meeting to be held on December 13. What that proposal will be has not yet been determined. But frankly, I think the decision not to issue a hastily-drafted proposal on October 18th was a good one — particularly if such a proposal was to have in essence reversed the ruling of the Second Circuit. The Commission needs to take this opportunity to fashion a rule that provides for some measure of shareholder access to the proxy ballot.

To this extent, I have met with representatives of various entities that have strong and divergent opinions on this topic, with the hope that these groups could come together and decide to support a compromise proposal on shareholder access. This, unfortunately, may not be possible given the stakes and the passions on this topic. But failure to reach an absolute consensus on shareholder access should not stop the Commission from taking steps to ensure that shareholders have access to the ballot. Simply put, I would be opposed to any Commission action that has the effect of overturning — for lack of a better word — the Second Circuit's decision, without taking a meaningful step in the direction of providing more general and final rules allowing shareholder access. With that said, let me address a few specifics.

Alleged Chaos in the Upcoming Proxy Season. First, a number of commenters have argued that the Commission must act before the upcoming proxy season in order to prevent the chaos. While I generally agree that, if possible, we should act sooner rather than later on this issue, it's more important to do the correct thing rather than the expedient thing. Frankly, while the Second Circuit's decision is likely to lead to an increase in proposals like AFSCME's if the Commission does nothing to change the current status quo, I'm not sure that this will lead to the chaos that some are predicting. If, for example, we see an increase in serious proposals like AFSCME's — which requires, among other things, the nominating stockholder to have owned at least 3% of the company's shares for at least a year — then I don't think this is really a bad thing. On the other hand, it is certainly possible that companies might see proposals that don't have the protections of AFSCME's proposal or our proposed Rule 14a-11 and that would allow, for example, small shareholders who have only recently purchased their shares to include a procedural proposal on a company's proxy statement. If this were to happen, it likely would impose a cost on companies insofar as they would have to take steps to include the proposal in their proxy mailings. However, it seems to me that the likelihood of such a proposal passing or even garnering any significant votes would be slim to none. And if these proposals are soundly defeated every time they are introduced, how long will it be before shareholders abandon them? Frankly, it might be wise not to do anything this proxy season and let the Second Circuit's interpretation stand. Then, after we see what really happens during proxy season, we can act or not act as we see fit, with the benefit of real-world information. Call this a court-imposed pilot program.

Alleged Negative Consequences of Shareholder Access. Second, I think that the negative consequences of adopting a proposal like Rule 14a-11 are overblown. First of all, I don't think, as some have argued, that a shareholder access proposal will permit widespread shareholder access to company proxy statements. Our proposed Rule 14a-11 contained a number of procedural requirements that frankly would have severely limited the occasions when shareholders would have been afforded access to a company's proxy materials. Moreover, I don't buy the argument that, if elected, a shareholder nominee would necessarily be a "special interest" director representing only the interests of the shareholders who nominated him or her and not the interests of all shareholders generally. The fact of the matter is that, once elected, directors have fiduciary duties to the company and its shareholders, and I think it's nothing but speculation to suggest that such a director would ignore these duties. There are other arguments about the alleged negative consequences of shareholder access, but unfortunately, I don't think I have time to touch on them all right now. If you have questions about this, however, I'd be glad to address them if I have time.

Changed Corporate Environment. Finally, I'd like to conclude this topic by addressing the arguments that some have made that the changed corporate environment since late 2003 has lessened the need for shareholder access. In this regard, the most significant argument put forward is that the majority voting initiatives of the last few years have obviated the need for direct shareholder access to a company's proxy statement. While I absolutely applaud the majority voting initiatives and I commend companies that have voluntarily adopted them, some majority voting initiatives are better than others, and even the best ones do not affirmatively allow shareholders to nominating a candidate for director. Thus, there is a clear difference between majority voting and shareholder access.

In summary, shareholder access is a topic whose time has come. It's on the SEC's calendar for December 13, 2006. I hope we do the right thing.

D. Conclusion

I'd like to thank you for your time and attention. I'd be happy to answer any questions.



Modified: 12/04/2006