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December 22, 2003

Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street N.W.

Washington, DC 20549-0609

Re: File No. S7-19-03
Security Holder Director Nominations

Dear Mr. Katz,

I am writing to you on behalf of the Pennsylvania State Employees' Retirement System (SERS). SERS is the one of the largest public pension systems in the U.S., with over $23 billion in assets. SERS manages retirement, disability and death benefits on behalf of more than 200,000 active members, retirees and their families.

SERS strongly supports the Commission's proposed rule allowing major long-term shareholders access to company proxy materials to nominate directors. Corporate management currently dominates the corporate election process. Shareholder access to the proxy to nominate directors will enable the shareholders, the true owners of the corporation, to hold boards of directors and management more responsive and accountable.

While SERS believes that the proposal is an important first step in the process of making boards and managers more responsive to shareholders, SERS would also like to offer some additional recommendations to further enhance its effectiveness:

SERS would prefer that the final rule not include triggers. As the SEC rule is currently proposed, it would take two years for shareowners to be able to nominate corporate directors. In troubled companies where shareholder access is potentially the most critical and valuable, requiring shareholders to wait two years to get access to the proxy to nominate directors may well diminish the ability to preserve shareholder value.

If the SEC rule does include triggers,

It should include "immediate triggers" to enable shareowners immediate access in instances where corporate boards demonstrate obvious and serious management oversight problems. This would include situations where companies:

(1) fail to adopt shareholder resolutions receiving majority votes;

(2) release material financial restatements;

(3) are the target of SEC enforcement actions; and,

(4) significantly under-perform relative to its industry and peer groups.

The proposed SEC rule proposes two triggers. The following suggestions would significantly enhance their effectiveness:

First, the "withhold vote" trigger is designed to provide shareholders access to the proxy if shareholders withhold 35% of votes for a director or group of directors in a proxy election. SERS recommends that the withhold vote threshold for this trigger should be lowered to 20% of votes cast. The 20% level of disapproval has traditionally been recognized as a significant threshold indication of owner discontent among shareowners and the corporate community.

Second, under the current SEC proposal the "shareholder-sponsored access resolution" trigger would need to be sponsored by a 1% holder or group. SERS believes that the 1% ownership requirement is unnecessary. Instead, the shareholder-sponsored access resolution should be broadened to include all shareowners eligible under the current 14-8 rules. The primary issue here is whether a resolution eventually garners a majority vote, and not a proponent's ownership level.

With respect to the proposed rules on shareholder nominee independence, shareholder nominees should be held to the same independence standards as corporate nominees in terms of their relationship to the corporation and the corporation's management. The SEC's proposed disclosure requirements that would require a shareholder nominee to disclose their holdings, qualifications and affiliation with the nominating holder will provide enough information for shareowners to decide if a shareholder nominated candidate should be elected to the board. On the other hand, shareholder nominees must be qualified to represent the interests of shareowners and win a contested election to be able to serve on a board. There is no reason to require shareowner nominees to be independent from the shareowner nominee group. It doesn't make sense.

The shareholder nomination rule, once triggered, should remain operative for a period of five years. The proposed two year time period is simply too short to permit owners the ability to monitor performance and responsiveness in a problematic situation. This is especially relevant when regulations create a two-year delay in addressing the problem.

SERS supports an SEC mandate requiring prompt 8-K disclosure of any amendments to company charters or bylaws — including the adoption of any procedural requirements subsequent to October 14, 2003 of state law changes since October 14, 2003 affecting the applicability of the access mechanism. Although this disclosure requirement will not stop efforts to restrict shareowner rights, it would ensure shareowner awareness of any efforts to limit shareholder rights.

Companies and investors have historically evaluated the significance of director votes based on votes cast — not votes outstanding. SERS believes that a withhold vote trigger should be based on votes cast, not votes outstanding. The vote tallies should exclude broker votes, which are almost always cast for management and usually in support of management-sanctioned candidates rather than an objective evaluation of the substance.

The current rules allow companies to delay reporting of shareholder meeting election results until the filing of their next quarterly report. The SEC should mandate accurate real-time disclosure of election results.

SERS congratulates the SEC for its efforts to reform corporate boardrooms with these proposed shareholder access rules. The SEC message must continue to go forth that there is real shareowner driven accountability in American boardrooms.

SERS urges the SEC to promulgate these needed governance reforms to help restore investor confidence in the U.S. capital markets. The boardroom failures at companies exemplified by Enron and WorldCom may be transformed into a positive force for change in America's corporate boardrooms by finalizing these important shareholder access rules.


Peter M. Gilbert
Chief Investment Officer

cc: William H. Donaldson, Chair
Paul S. Atkins, Commissioner
Roel C. Campos, Commissioner
Cynthia A. Glassman, Commissioner
Harvey J. Goldschmid, Commissioner