Speech by SEC Chairman:
Opening Statement at the SEC Open Meeting
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
August 25, 2010
Good Morning. This is an open meeting of the U.S. Securities and Exchange Commission on August 25, 2010.
Today, we consider adopting rules that would allow shareholders access to a company's proxy materials to include their nominees to the corporate board of directors.
As we discussed when the Commission proposed these rules last year, the concept that shareholders can directly participate in the director nomination process — without having to mount a proxy contest — has been debated for over 30 years. In fact, this is the fourth time in recent memory that the Commission has considered the question of amending our proxy rules to address so-called "proxy access."
Some of the debate during the past has concerned whether the Commission has the authority to adopt these rules. That question was resolved last month, when Congress adopted and the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law confirms the Commission's authority to act in this regard. Now it is time to resolve the issue of under what circumstances the Commission should adopt proxy access.
This question can be answered by considering the following principles — principles that have become clear to me after considering the many insightful and constructive comments submitted in response to our proposal.
First, as a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own — candidates that all shareholder-voters may then consider alongside those who are nominated by the incumbent board.
Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. To me, the critical point is that shareholders have the ability to make this choice.
Second, the company's proxy materials offer the best, readily available tool for ensuring that the nominees of long-term and significant shareholders are presented to the electorate in a way that facilitates shareholders' traditional state law voting and nomination rights.
Lastly, the process by which shareholders access the corporate proxy should be predictable and clear to all parties. We will not have served investors well if our rules cause uncertainty about the process through which our corporate leaders are elected.
The remaining issues for me were to define what it means to be a "long-term significant" shareholder, and to prescribe a process for access that works logistically.
The rules that are before us today address each of these issues.
More specifically, under the new rules, "proxy access" will be available to a shareholder, or group of shareholders, who own — and have owned continually for at least the prior 3 years — at least 3 percent of the company's voting stock. In order to reduce uncertainty, the final rule includes detailed provisions on how to calculate this amount.
Further, in order to limit this rule to shareholders that have a genuine commitment to the company, shareholders cannot borrow stock to achieve these thresholds — although stock that they own, but have lent to others, may be counted, so long as the nominating shareholder has the right to recall the stock and will do so if the company includes the shareholders' nominee in its proxy under the new rules.
As we proposed, the total number of nominees available to qualifying shareholders under this new process will be one — or 25 percent of the board — whichever number is greater. Shareholders will not be able to use the new rules if they hold their stock with the intent of changing control of the company or gaining more seats on the board than is permitted under this new process.
Nominating shareholders will be subject to certain procedural and other requirements, including disclosure.
A company's shareholders may opt to adopt, through either a management recommendation or Rule 14a-8 shareholder proposal, access rules that provide for greater access — but they cannot limit the availability of our new proxy access rule.
Lastly, application of the new access rules to the smallest public companies — those that are defined as "smaller reporting companies" under our rules — will be deferred for three years. During that period, the Commission will monitor how these rules have been implemented for larger companies and will continue to assess the distribution of stock among holders of smaller company shares. We will be prepared to make changes, if necessary, before the access rules become fully applicable to these smaller reporting companies.
These rules are the result of long and careful consideration of the often widely divergent views expressed by commenters, as well as constructive debate within the Commission and among its staff. These rules are stronger and will be more effective because of our concerted effort to balance competing interests. As the public reviews the changes that we have made from our proposal, it will see dozens of instances of "give and take."
While we have decreased the ownership thresholds from what was proposed for the smallest companies — from 5 percent to 3 percent — we have deferred implementation for these companies for three years. We have also increased the ownership thresholds for the largest companies — from 1 percent to 3 percent — and have increased the period of required ownership for companies of all sizes from 1 to 3 years.
We have also clarified the disclosure obligations of nominating shareholders, and made many other modifications to address issues raised by commenters.
These rules reflect compromise and weighing competing interests. As with all compromises, they do not reflect all the views of any one person or group. They are, I firmly believe, rational, balanced and necessary to enhance investor confidence in the integrity of our system of corporate governance.
Because the process created by these rules will represent a marked change to the status quo, I am committed to closely monitoring how these new rules are implemented. We will monitor not only in the context of future application to smaller companies, as I mentioned, but also so that we can make prompt changes for all companies, if practice demonstrates the need to do so.
Perhaps because this proposal has been such a long time coming, I have a very long list of staff to thank.
From our colleagues in the Office of the General Counsel, thanks to David Becker, Meridith Mitchell, Rich Levine, David Fredrickson, Bryant Morris, Dorothy McCuaig, Michael Conley, Randy Quinn, and Tracy Hardin.
Thanks also to the Division of Risk, Strategy and Financial Innovation, specifically, Henry Hu, Josh White, Bruce Kraus, Cindy Alexander, Ayla Kayhan, and Alex Lee.
From the Division of Investment Management, thanks to Buddy Donohue, Susan Nash, Mark Uyeda, and Kieran Brown.
Thank you also to our colleagues in the Division of Trading and Markets, specifically Robert Cook, Josephine Tao, Victoria Crane, Thomas McGowan, Mark Attar, Nancy Sanow, Sharon Lawson, and Randall Roy.
I would also like to thank each of the Commissioners and their counsel for their tireless review and important comments.
Lastly, a huge thank you goes to the Division of Corporation Finance, especially Meredith Cross, Brian Breheny, Lily Brown, Tamara Brightwell, Larry Hamermesh, Ted Yu, Blair Petrillo, Eddie Aleman, Tom Kim, Jonathan Ingram, Heather Maples, Anne Krauskopf, Michele Anderson, Nicholas Panos, Will Hines, Carmen Moncada-Terry, Mike Reedich, Damon Colbert, and Alexandra Ledbetter.
I know how many weekends and long nights that you worked on this proposal, and again all I can say is "thank you."
Now I'll turn the meeting over to Meredith Cross, Director of the Division of Corporation Finance, to hear more about the Division's recommendation.