Speech by SEC Chairman:
Address to the Practising Law Institute's 41st Annual Institute on Securities Regulation
Chairman Mary Schapiro
U.S. Securities and Exchange Commission
New York, New York
November 4, 2009
Thank you for that kind introduction. And thank you for inviting me here today.
PLI seminars are always so useful — both to regulators shaping the securities laws and to lawyers helping their clients follow them.
These sessions are a way for all of us to keep abreast of developments in the regulatory arena. And, now perhaps more than ever before, keeping up has been a challenging endeavor.
That's because there are so many moving variables. The Administration has been working diligently to fill gaps in the regulatory landscape that were exposed by the financial crisis. Congress has been grappling over how best to draw the lines and set new standards. The SEC has been engaging in one of the most significant regulatory agendas in decades. And, as Chairman, I've been doing what I can to reform our internal operations and refocus our efforts on our core mission — protecting investors.
So that means there's a lot to keep up with.
But, I believe the change and the pace of the change are needed, if we want to restore confidence in our markets. A reinvigorated agency, a set of strong investor-centric rules, and a robust regulatory regime are essential parts of the equation.
I know that we might sit on opposite sides of the table in any given matter, but I believe that all of us — regulators, attorneys, and business people alike — all share the common goal of ensuring that our capital markets work — and work fairly and effectively.
The recent financial crisis has highlighted the importance of healthy capital markets to the business community. Without ready access to capital, business slows. Without investor confidence, capital dries up.
So, we are all working towards getting back to a place where investors have faith that the markets are operating efficiently and effectively. Where investors have the tools and honest information they need to responsibly allocate their investing dollars and make informed decisions. Where investors have the confidence that there's an agency dedicated and able to look out for their needs.
In the last nine months at the SEC, I believe we've made significant progress on that front. As many of you know:
- We have been revitalizing our Enforcement Division, redeploying dozens of superbly qualified attorneys back to the front lines and creating specialized units where attorneys can concentrate their expertise in a particular area of law.
- We are revamping the way we handle the tips we receive each year, and have advocated for expanded authority from Congress to reward those who bring forward substantial evidence of significant wrongdoing.
- And, we created a new Division of Risk, Strategy and Financial Innovation to serve as a knowledge-based center of expertise within the agency. The new Division helps link existing know-how from one segment of the agency to the needs of another. And, it is being staffed by people with current street experience in derivatives, hedge funds, trading and risk.
- And, we've brought on board new leadership across the agency — including two people you will hear from later — Rob Khuzami who heads our Enforcement Division and Meredith Cross who heads our Corporation Finance Division.
These are just some of the internal reforms underway.
But, during the past nine months, we also have pursued a meaningful, investor-focused rulemaking agenda.
- We've proposed measures designed to create a stronger, more robust regulatory framework for credit rating agencies.
- We've proposed rules that would better protect clients of investment advisers from theft and abuse — which is crucial in the wake of Madoff.
- We've proposed rules to provide investors more meaningful, ongoing information regarding municipal securities.
- We've proposed measures designed to curtail abusive pay-to-play practices by advisers to public pension plans and other governmental clients.
- To address the serious problems in the money market fund industry that were exposed last year, we've proposed strengthening credit quality, liquidity and maturity standards of money market funds.
- And, finally, we've adopted rules to address the potentially harmful effects of naked short selling, significantly reducing the number of times short sellers failed to deliver securities. And we've also issued proposals to address short selling in a downward market, as well as proposals that seek to limit the inequities of flash trading and dark pools.
I care deeply about all of these efforts, and am grateful for the thoughtful and constructive comments that we have been receiving and, I trust, will continue to receive.
But this morning, I want to focus on one specific area of reform — shareholder voting. It is an area I know is particularly relevant to those of you who represent public companies. I focus on this not just because you are all at the beginning stages of planning for the 2010 proxy season, but because I want to encourage you to work with us to achieve effective reform.
Regulation of the proxy process and disclosure is a core function of the SEC, and is one of the original responsibilities that Congress assigned to the Commission in 1934.
The proxy statement is crucial to our system of corporate governance. It is the only communication a company makes that is specifically addressed to, and intended for, shareholders.
It is where shareholders discover who the nominees are for board elections.
It is where shareholders can submit proposals on important company matters, including governance, for consideration by their fellow shareholders.
In other words, it is where shareholders can formally and regularly participate in the governance of the corporation they own.
With over 800 billion shares being voted every year at over 7,000 company meetings, it is imperative that our proxy voting process work — starting with the quality of proxy disclosure and continuing through to the accuracy of the annual meeting voting results.
That is why we are undertaking a series of initiatives related to the fundamental goal of enhancing the system through which shareholders exercise their franchise.
Many of these are admittedly controversial. In fact, they raise difficult legal, philosophical and logistical issues that have derailed previous efforts at reform. But, time has not made these issues go away, and the failure to reform the shareholder voting process in the past has, in my view, affected company and board responsiveness to shareholder concerns.
We are committed to accomplishing reform in this area by tackling these issues in a thoughtful and thorough manner. And we look forward to your being a constructive partner in these efforts.
Shareholder Director Nominations
The first reform initiative relates to what has become known as proxy access. It's our proposal to facilitate the effective exercise of the rights of shareholders to nominate directors. And, it goes to the heart of good corporate governance.
Corporate governance, after all, is about maintaining an appropriate level of accountability — accountability to shareholders by directors whom shareholders elect, and by managers whom directors select. But accountability requires both transparency and an effective means to take action for poor performance or bad decisions.
I believe that the most effective means of promoting accountability in corporations is to make the shareholders' vote both meaningful and freely exercised. One of the most important matters presented for a shareholder vote is the election of the board of directors. However, in most cases today, shareholders have no choice in who to vote for.
They get a ballot in the mail or electronically. And they are presented with a slate of nominees. Most of the time, it's as many nominees as there are positions to fill. And, the nominees are the individuals whom the board itself has chosen.
Unless someone has launched their own proxy contest, the shareholders' only way to voice opposition to a director nominee is to withhold their votes for that nominee.
Under our proposal, shareholders who satisfy certain eligibility and procedural requirements would be able to have a limited number of nominees included in the company's proxy materials.
The proposed new rules would also allow shareholders of a company to submit their own proposals to create an alternative proxy access process for disclosing shareholder — nominated candidates — provided this different process doesn't conflict with Commission rules.
We received considerable comment about this aspect of the proposal — and in particular whether shareholders should be given a choice to approve a proxy access standard that conflicts with the rule — and we are evaluating these comments carefully.
To date, we have received more than 500 letters. We take the comment process very seriously and I believe the final product resulting from that process will be better as a result of the comments that we receive.
I am committed to bringing final rules to the full Commission for consideration early in 2010. We recognize that this timing means that any new rules will not be in effect for the 2010 proxy season, but we think it's far more important that we adopt the right rules — rules that make sense and are workable — than it is for us to act rashly.
Our second area of reform involves enhancing the information provided to shareholders who are making voting and investment decisions. In developing our proposal, we reexamined our proxy disclosure rules, repeatedly asking: are investors being provided with the right information? Based on our re-examination, we have proposed rules that would require shareholders to be given more information:
- about the qualification of directors and nominees,
- about the structure of board governance,
- about compensation consultant fees and conflicts , and
- about the relationship between a company's overall compensation policies and its risk profile.
In addition, we are also looking for more timely disclosure of annual meeting voting results. In each of these areas, we have stressed the concept of better or more timely disclosure — and not simply additional disclosure. We are sensitive to the fact that investors are not well-served by a proxy statement that is too long to digest.
We're not interested in lots of information; we're interested in meaningful information.
A third area of reform we are reconsidering involves e-proxies. This is a good example of where the SEC's advocacy for investors aligns with your advocacy for your clients and employers.
As you may recall, in 2007, the SEC adopted a notice and access model for proxy materials. Over time, it required all issuers and other soliciting persons to post their proxy materials on an Internet Web site and let shareholders know those materials were there. This so-called "notice and access" model was intended to promote the use of the Internet as a reliable and cost-efficient means of making proxy materials available.
Since these rules were adopted, we have seen how e-proxy has significantly reduced issuers' costs. But, at the same time, there has been a reduction in retail voting participation under the notice and access model. There may be other reasons why shareholder participation is lower, so we have sought public comment on why this may be the case — and what we can do to increase participation.
Three weeks ago, we proposed rules to improve the notice and access model by, among other things, giving companies more flexibility about the format of the notice they send to shareholders about the availability of proxy materials on the Internet. Our proposed revisions are intended to permit issuers and other soliciting persons to more effectively use the notice and access model.
Discretionary Voting by Brokers — Rule 452
A fourth area of reform involves the elimination of broker discretionary voting for uncontested elections of directors at shareholder meetings.
The rule change adopted by the NYSE and approved by the Commission is designed to help assure that voting rights for matters as critical as the election of directors are exercised by those with an economic interest in the company, rather than by brokers. I believe this will improve corporate governance and enhance accountability.
We understand that the implementation of the revised rule heightens concerns about shareholder participation and education, which need to be addressed. Our staff is working hard on these education efforts, and I believe this is an area where we can continue to work together to develop pragmatic solutions to these challenges.
Excludable Issues from Shareholder Proposals — Staff Legal Bulletin 14E
Changes in the proxy rules have not only been happening at the Commission level. At the staff level, the Division of Corporation Finance provided further guidance last week on the types of issues that can and cannot be excluded from the shareholder proposal process. I believe their guidance will help promote better proxy disclosure and reflects the staff's willingness to engage in a dialogue with investors and companies.
As you know, companies can exclude shareholder proposals that relate to things deemed to be "ordinary business" by a company.
In last week's staff legal bulletin, the Division announced changes to two positions it had previously taken under the shareholder proposal rules — in particular Rule 14a-8.
In one area, the staff said that shareholder proposals that focus on CEO succession planning are no longer deemed to be "ordinary business" and therefore generally may not be excluded from a company's proxy materials.
And, in another area, the staff revised the framework it uses to evaluate whether a proposal relating to the subject of risk can be excluded under the ordinary business exclusion. Previously, the staff would agree that a company could exclude a shareholder proposal that focused on the company engaging in an internal assessment of its risks or liabilities. That's because the staff deemed the evaluation of risk, in and of itself, to be a matter of ordinary business.
Going forward, the new staff bulletin explains that the staff will instead focus on the subject matter to which the risk pertains or that gives rise to the risk, and on whether that subject matter involves a matter of ordinary business to the company.
Recent events demonstrate that the adequacy of risk management and oversight can have major consequences for a company. This change in staff position should make it easier for investors to engage companies on these issues through the shareholder proposal process.
In addition to all these reforms, I have asked the staff to conduct a comprehensive review of the mechanics by which proxies are voted and the way in which information to shareholders is conveyed.
We're not just looking into the disclosures that make it into a company's proxy materials — we're also looking at the entire process through which proxies are distributed and votes are tabulated. And, I have asked the staff to draft a "concept release" in the coming months through which we would seek public comment on areas of interest to us.
We want to ensure that the U.S. proxy voting system as a whole operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect.
The review, which is well underway, is being conducted by staff throughout the agency — and involves outreach to market participants to ensure that a broad range of views is considered. As a result, the concept release to be voted on by the Commission is expected to probe a variety of areas:
We'll be asking about ways to ensure accuracy in vote tabulation, given that voting results on many items are becoming increasingly close and many companies have adopted majority voting for directors.
We'll be asking about whether our rules adequately address whether votes are cast by those with an economic interest in the securities. In some cases, for instance, a broker's customers may cast more votes than the broker is actually entitled to vote on their behalf — something called "overvoting". And in other cases, individuals are able to vote shares even though they lack the full economic interest that goes along with share ownership — known as "empty voting."
We'll also be asking about ways to address the voting rate by retail investors. Retail investors have a history of low participation rates, but notice and access distribution of proxy materials may contribute to a further reduction in participation rates. This poses a special challenge for companies with broad retail investor bases. That is why some have proposed client-directed voting — where brokers would be allowed to solicit voting instructions from their shareholder clients in advance of the company proxy materials.
Additionally, the concept release will ask about the need to allow beneficial owners of a company's securities to object to having their names and addresses disclosed to the company. Some have advocated that we abolish this system and instead permit companies to learn the identities of all of their shareholders so that companies can communicate more directly and cost-effectively with them.
Further, we'll be asking about the role of proxy advisory firms in corporate voting. Given the influence that these firms' recommendations have on corporate voting outcomes, we'll probe the need for rules to ensure that advisory firms are basing their research and recommendations on accurate and reliable information. And, that they are providing adequate disclosure of any conflicts of interest they may have in providing voting recommendations.
We'll be asking about whether shareholders should be more easily able to communicate with one another.
And, finally, we'll be asking whether any rule amendments are necessary to ensure that our federal proxy rules are flexible enough to adapt to changing legal developments at the state level, such as dual record dates for annual meetings.
Disclosure Requirement Update
Finally, in the coming year, we expect to begin a comprehensive review of our line item disclosure requirements for companies in their quarterly and annual filings. Our goal is to determine if some information we already require should be omitted — and if some information we don't require should be added. Again, our efforts will be targeted at making sure that investors are receiving the right information, and not just more information.
I strongly believe that proxy voting is an important tool for facilitating corporate accountability and, through that, improving investor confidence in the integrity of the equity markets. Although we have much work to do to increase the participation of all investors, these votes matter. They have legal and economic significance.
As we move forward with our ambitious agenda, I again ask you to help us improve the system. Your willingness to share your expertise and ideas is key to successful reform, and to continuing our progress in stabilizing our capital markets and making them stronger for both investors and companies.