Statement at Open Meeting on a Universal Proxy System and Exemptions to Facilitate Intrastate and Regional Securities Offerings
Chair Mary Jo White
Oct. 26, 2016
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on October 26, 2016, under the Government in the Sunshine Act. Today, the Commission will consider two recommendations from the Division of Corporation Finance. First, the Commission will consider a recommendation to propose changes to our proxy rules to require the use of universal proxy cards in contested director elections. Second, the Commission will consider recommendations for final rules to further facilitate companies’ access to capital through intrastate and regional securities offerings, with accompanying investor protections provided by state and federal law.
We will take two separate votes on the recommendations following each of the staff’s presentations and Commissioner comments.
Our first agenda item is a recommendation from the Division of Corporation Finance to propose amendments to the federal proxy rules to provide shareholders who vote by proxy in contested elections the ability to more easily pick among all candidates on the ballot, just as shareholders who attend shareholder meetings can do. Today, in furtherance of that objective, we will consider a proposal to require the use of a universal proxy card in all contested director elections.
The right of shareholders to elect directors is a fundamental element of corporate ownership. The right to vote is obviously of particular importance when shareholders are deciding among director candidates in a contested election. Today, few shareholders of public companies attend a registrant’s annual meeting to cast an in-person vote for the election of directors. Instead, the primary means for shareholders to learn about matters to be decided at the meeting, and to vote on the election of directors, is through the proxy process.
Section 14 of the Exchange Act authorizes the Commission to establish rules governing the solicitation of proxies. Congress intended that the Commission’s proxy rules facilitate the “fair corporate suffrage” available to shareholders under state corporate law. The proposal we are considering today is driven by that principle, and by the guiding principle that the proxy voting process should replicate to the greatest extent possible the vote that a shareholder could achieve in person at a shareholder meeting.
Today, in an election contest, because of the way state law and the proxy rules operate, there is a stark difference between voting by proxy and voting in person. Shareholders voting by proxy generally must choose between competing slates of directors presented on either the registrant’s or a dissident’s proxy card, and cannot freely select from among individual nominees from both slates. By contrast, shareholders can choose individual nominees if they vote in person. The proposal before us today would eliminate this disparity in a straightforward, efficient manner.
Specifically, the recommended rule changes would require proxy contestants to provide shareholders with a universal proxy card that includes the names of both registrant and dissident nominees. These changes would allow shareholders to choose individual director nominees whom they believe represent the best mix of skills and qualifications to run their company, without being needlessly confined to an “all or nothing” vote on slates of nominees chosen by management or the dissident.
The recommended amendments would require registrants and dissidents to provide each other with notice of the names of their nominees, establish a filing deadline and a minimum solicitation requirement for dissidents, and prescribe presentation and formatting requirements for universal proxy cards. These amendments, in my view, would strike the appropriate balance to further our goals for improving the proxy voting process, treating registrants and dissidents in an equitable manner while continuing to require dissidents to independently advance their own solicitations.
Consistent with the goal of facilitating shareholder voting in director elections, we are also considering additional proposed amendments to the proxy rules that would apply to all director elections. These changes would ensure that proxy cards clearly specify the applicable shareholder voting options in director elections and that proxy statements disclose the effect of a shareholder decision to withhold their vote.
Taken together, the proposed rule changes will promote fundamental fairness and efficiency in the voting process and support shareholder rights. At the most basic level, these goals mean that the differences between proxy voting and in‑person voting should be minimized for shareholders, both institutional and retail. Of course, doing so requires a number of logistical and technical choices that are part of the proposal. I especially look forward to receiving comments on those aspects of the proposal and whether our regulatory objective can be better met through other choices on how the mechanics of the process are executed.
As always, the list of those I would like to thank for their work on this rule proposal is long and reflects the many staff members who have made contributions to the proposed rulemaking. Specifically, I would like to thank Keith Higgins, our Director of Corporation Finance, Michele Anderson, Christina Chalk, Steve Hearne, Tiffany Posil, David Frederickson, Ted Yu, Laurie Abbott, Ray Be, Raquel Fox, Perry Hindin, David Orlic, Jenny Riegel and Michael Seaman in the Division of Corporation Finance; Annie Small, Bryant Morris, Tracey Hardin, Daniel Matro, Dorothy McCuaig, Connor Raso and Cathy Ahn in the Office of the General Counsel; Mark Flannery, Scott Bauguess, Vanessa Countryman, Hari Phatak, Tara Bhandari, John Cook, Mattias Nilsson, and Sze Wing Wong, in the Division of Economic and Risk Analysis; Eugene Hsia and Sharon Lawson from the Division of Trading and Markets; and David Grim, Diane Blizzard, Doug Scheidt, Sarah ten Siethoff, Jim Curtis, Matthew DeLesDernier, Michael Pawluk and Melissa Roverts from the Division of Investment Management.
I would also like to thank my fellow Commissioners and their counsel for their work on these rule proposals.
I will now turn the meeting over to Keith Higgins, to discuss the staff’s recommendation.
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Facilitating Intrastate and Regional Securities Offerings
Our second agenda item is a recommendation from the Division of Corporation Finance to adopt rules relating to access to capital through intrastate and regional securities offerings.
Over the last few years, the Commission has adopted several important new rules to facilitate capital raising by smaller issuers, including new provisions for federal crowdfunding and enhanced Regulation A offerings. The rules have given companies new options for funding their businesses within a strong framework of investor safeguards. During this time, many state securities regulators have been working to update their regulatory structures to better accommodate how local offerings have evolved, including through crowdfunding and the use of modern information technology. The Commission’s rules related to these intrastate offerings, however, have not been updated for decades, and do not sufficiently take into account how technology and business practices have changed.
Last fall, when the Commission adopted federal crowdfunding rules, we also proposed to modernize our rules for local and regional offerings as well, most prominently Rule 147. Rule 147, which the Commission adopted under the Securities Act in 1974, is a safe harbor for the statutory exemption for intrastate securities offerings that has been part of the Securities Act since its enactment in 1933. Consistent with this long-standing framework for state regulation of intrastate offerings, the proposal sought to amend Rule 147 to establish a new exemption to facilitate local and regional offerings that use modern technology and market practices while retaining their intrastate character.
Under the proposal, this new exemption would have replaced existing Rule 147. Consistent with commenters’ views, today’s recommendation for the final rule would establish the exemption as a new Rule 147A and would continue to make available the current safe harbor under Rule 147, with amendments to update and modernize it. This approach will enable companies to continue to rely on the statutory exemption and safe harbor for offerings pursuant to existing state law exemptions conditioned on compliance with these provisions, while also providing companies with increased flexibility to use the safe harbor.
The proposal received broad support from commenters, including state regulators, and today’s recommendation is to adopt it largely as proposed. Most significantly, the new exemption from registration under the federal securities laws for local and regional offerings eliminates an existing restriction on offers that has been outmoded by the tremendous expansion of internet communications. While previously required to be confined to the state of the issuer, offerings will now be accessible by out-of-state residents through the Internet or otherwise, so long as – and this is a key investor protection – sales are made only to residents of the state or territory of the issuer’s principal place of business. Issuers using the exemption will also need to demonstrate a meaningful presence in the state of the offering, a critical safeguard for ensuring that the offerings are of a local nature. These changes, together with the other refinements in the recommendation, should provide additional investment opportunities for residents within the state of the company’s principal place of business – and provide companies one more option for raising capital under the supervision of state regulators.
Consistent with the state-based character of the exemption and the overwhelming view of commenters, the recommendation would not limit offerings to those that are registered at the state level or that rely on a state exemption that includes an aggregate offering amount limit and/or investment limitations. While the proposal last year provided for such limitations, state regulators, as reflected in their comments, have a significant interest in offerings made to their residents and are uniquely positioned to determine what, if any, additional requirements may be necessary or appropriate for the protection of their residents. For example, most state crowdfunding exemptions contain offering amount or investment limits. Many of these exemptions also have disqualification provisions for bad actors. Other exemptions from registration at the state level also have disqualification provisions, as well as a series of other investor protections. And, while states will play the leading role in overseeing local offerings, such activity will remain subject to the antifraud and civil liability provisions of the federal securities laws.
The strong partnership between the Commission and the state regulators is at the core of today’s recommendation and these modifications to the proposal. Our effort benefitted tremendously from the input of the state regulators, and it marks a great opportunity for us to continue to work together to facilitate capital formation with appropriate investor protections. And I have directed the Commission staff going forward to continue to collaborate with state regulators to consider, among other things, data on the use of the new and amended rules and on the application of state bad actor disqualification provisions in intrastate crowdfunding offerings. Commission staff will also review information about the use of the new and amended rules, repeat use by issuers, offerings made under other federal exemptions concurrently or close in time to offerings made under these rules, fraud or non-compliance with the rules, and the role of intrastate broker-dealers and other intermediaries in offerings conducted under the rules. The staff will use the information obtained from its review to report to the Commission on the impact of the modernization of the intrastate offering framework on capital formation and investor protection.
Finally, in addition new Rule 147A and the modifications to Rule 147 for intrastate offerings, the recommendation before us today also includes several changes to our Regulation D. The recommended amendments would increase the aggregate offering amount in Rule 504 from $1 million to $5 million in any twelve-month period and provide for disqualification of bad actors in a consistent manner across Regulation D. Increasing the offering amount permitted under Rule 504 could further facilitate capital formation by increasing the flexibility that state securities regulators have to implement coordinated review programs for regional offerings. This change will also further reduce the incentive to use the little-used exemption provided in Rule 505, which permits offerings of up to $5 million annually that must be sold solely to accredited investors or no more than 35 non-accredited investors, and the staff thus recommends to repeal Rule 505.
Before turning the proceedings over again to Keith Higgins, I would like to thank the staff for their insightful work in preparing the recommended rule amendments to modernize our rules to promote capital formation throughout the United States, while maintaining strong investor protections.
Specifically, I would like to thank Keith, Betsy Murphy, Sebastian Gomez, Anthony Barone, Jennifer Riegel, Ivan Griswold, Zachary Fallon, David Fredrickson, Jonathan Ingram, Heather Maples, Pearl Crawley, Alyssa Golay and Tahmina Mohammad in the Division of Corporation Finance; Steve Luparello, Gary Goldsholle, Heather Seidel, Joanne Rutkowski, Timothy White and Erin Galipeau in the Division of Trading and Markets; Annie Small, Bryant Morris and Luna Bloom in the Office of the General Counsel; Mark Flannery, Scott Bauguess, Hari Phatak, Rachita Gullapalli, Sam Adams and Jeannette Crawford in the Division of Economic and Risk Analysis; and Doug Scheidt, Sara Crovitz, Holly Hunter-Ceci and Michael Didiuk in the Division of Investment Management.
I also would like to thank my fellow Commissioners and their counsels for their hard and productive work on these rules.
Now, I will turn the meeting over to Keith Higgins to provide an explanation of the staff’s recommendations on new Rule 147A and amended Rules 147 and 504.
 H. R. Rep. No. 73-1383, 2d Sess., at 13-14 (1934).