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Revisions of Proxy Resolution Guidelines to Take Shape Before Start of 2016 Proxy Season

A team of staffers in the SEC’s Corporation Finance Division has spent much of the year reviewing the agency’s application of a key proxy access rule, which lets companies exclude shareholder resolutions from the proxy filing if they are considered in conflict with management proposals. Now the review is winding down, and the staff may work with the commissioners on a rule amendment or the release of interpretive guidance to clarify the agency’s position. The review began after the agency suspended a process it had used for years to grant companies the regulatory exemptions to exclude shareholder proposals.

The SEC’s Division of Corporation Finance may issue interpretive guidance in the form of a Staff Legal Bulletin by October 2015 to update regulators’ views on a key aspect of the proxy access rule.

SEC Chair Mary Jo White instructed the staff in January 2015 to set aside the regulatory exemptions issued via so-called no-action letters to companies seeking to exclude shareholder proposals until the agency completes its review of Rule 14a-8(i)(9) of the Securities Exchange Act of 1934. (See Shareholders May Get a Bigger Say in Proxy Votes in the January 21, 2015, edition of Accounting & Compliance Alert .)

“We hope to resolve the matter before the start of next proxy season, very cognizant of deadlines,” said Jonathan Ingram, deputy chief counsel in the SEC’s Division of Corporation Finance during a meeting of the agency’s Investor Advisory Committee in Washington on July 16. “I think October… if we can get something done by then, I don’t think it will be too late.”

For the majority of public companies with fiscal years that end on December 31, the proxy season typically stretches in roughly three phases from late September through June. Companies and their directors use the fall to work out which board members with terms about to expire will run for reelection. At roughly the same time, shareholders will approach companies with board candidates they want to nominate or resolutions they want in the proxy. By the early weeks of the new year, the companies have decided what will be in the proxy statements, which are distributed to shareholders in February or March. Votes are tallied in the run up to the annual meetings, which typically take place in the spring.

The SEC would like to have its decision in place before the 2016 proxy season starts.

Ingram did not indicate whether there will be a change in Rule 14a-8(i)(9) or the staff’s interpretation of it, but he said the staff has completed its research and is now “down to thinking and writing it.”

“I anticipate that the staff will probably formulate several recommendations,” Ingram said. “There probably will be alternatives and embedded in those alternatives will be how we think those changes could be effectuated.”

A formal rule would have to go through the SEC’s regulatory process, which would include a public review and comment period of two to three months of a draft version of the rule.

White’s decision to review the rule came after investors complained that Whole Foods Market Inc. unfairly blocked them from inserting independent resolutions in its proxy statement by countering with a management proposal designed to allow it to refer to Rule 14a-8(i)(9), which permits companies to exclude shareholder-sponsored proposals that are judged to be in conflict with a similar proposal from management.

In the Whole Foods case, shareholders said investors with a 3 percent stake for three years should be allowed to nominate board candidates. The company countered by proposing a 9 percent threshold for five years. No outside investor owns more than 6 percent of the company’s stock.

Investors have been pushing for proxy access using the 3 percent threshold with individual companies after a federal appeals court overturned the SEC’s proxy access rule in Release No. 33-9136, Facilitating Shareholder Director Nominations , in July 2011. The court ruled that the SEC did not adequately assess the rule’s costs before finalizing it.

The SEC has received 18 comment letters advising it how to interpret Rule 14a-8(i)(9).

The Business Roundtable wrote that the staff should not reinterpret the rule and maintain its “longstanding, balanced approach” to the rule.

A key purpose of the rule is to minimize the potential for confusion when shareholders are asked to vote simultaneously on two conflicting proposals, the business lobby wrote in June.

Moreover, the group believes the SEC does not need to reinterpret the rule because there is a continued emphasis by boards on responding to shareholders.

Others, especially investor advocates, wrote that companies have been playing “gamesmanship” to cleverly block shareholder resolutions, and they want to see the SEC change its interpretation of the rule.

New York’s state comptroller’s office wrote in June to limit the interpretation of “direct conflict” to situations in which neither the shareholder’s nor management’s proposal is nonbinding.

“By their nature, they do not conflict with binding proposals that direct particular corporate action, nor need they cause inconsistency or ambiguity,” Patrick Doherty, director of corporate governance for the state comptroller’s office, said. “An interpretation of direct conflict based on whether a shareholder proposal is binding or precatory would permit shareholders to continue submitting their proposals.”

In the meantime, Ingram said 17 staff attorneys processed 316 no-action letters related to Rule 14a-8 this past proxy season, an uptick of about 10 percent from previous years.

“Our best guess is that that was attributable to the rise in proxy access proposal requests that we received during the year,” he said.

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