"Critically Important Issue"
Former SEC Commissioner Harvey Goldschmid said he is not surprised by the number of comment letters on proxy access submitted by investors. "It's a critically important issue," he told Governance Weekly, "and everyone understands that."

What Goldschmid and many investor advocates do not want to see happen is for the commissioners to explicitly reaffirm recent SEC staff determinations that companies may exclude access proposals. The appeals court faulted the agency for failing to explain why it changed its interpretation of Rule 14a-8(i)(8) in the 1990s to allow the exclusion of shareholder proposals that relate to proxy access and other director election procedures. "It would be a tragic mistake to simply turn the clock back," Goldschmid said.

Most of the correspondence by investors echoes that point. For example, Gerald McEntee, international president of AFSCME, wrote in a Sept. 28 letter: "Any attempt by the commission to preclude proxy access bylaw proposals would seriously undermine investor rights at a critical time for our markets."

Likewise, Teamsters President James P. Hoffa, warned in a Sept. 27 letter that, "any effort to weaken access to the proxy would represent a sea change by the commission in its mission to defend investors' rights." Similarly, Jon Walters, trustee of the International Brotherhood of Electrical Workers Pension Benefit Fund noted in a Sept. 25 letter, "Shareowner access to the corporate proxy remains a critical issue, especially in light of the ongoing stock option backdating scandal and other serious questions regarding board oversight and accountability."

A number of public fund representatives also urged the commission to allow proxy access proposals to go forward. Sean Harrigan, president of the Los Angeles Police and Fire Pension Board, recently told The Nation, "In light of the corporate fraud, deception, and abuse that has become so pervasive among corporate boards in recent years, access to the proxy is the most effective vehicle which would align the interest of the corporate board with that of corporate owners, rather than that of corporate CEOs."

Perhaps the most strongly worded letter was from Coleman Stipanovich, executive director of Florida's State Board of Administration, who warned that "any action by the commission to reverse the decision of the court in AFSCME will be perceived by the investing public as decidedly anti-shareowner."

In his Sept. 28 letter, Stipanovich said there is no need for the SEC to revise Rule 14a-8(i)(8) after the court's ruling. He noted that the SEC's announcement of a hearing on the issue within 24 hours of the appeals court decision "has given rise to widespread belief that ...the commission will be considering a [rule change] that would deprive shareholders of their existing rights as recognized by the court."

The Council of Institutional Investors (CII) called on the SEC to "clarify the current rule to permit carefully crafted resolutions on proxy access to be presented to shareholders." In a Sept. 28 letter, the group stated: "The issue at this point is not whether the concept is a good idea. Rather, the issue is whether the commission should construe the securities laws to deprive shareowners of an opportunity to discuss with their fellow shareholders how they want candidates for the board to be presented to shareholders in the proxy."

Corporations Argue for Exclusion of Proposals
The Business Roundtable (BRT) is urging the SEC to reaffirm its view that companies may exclude access proposals and other resolutions that relate to the process of elections. As Office Depot CEO Steve Odland, who chairs the BRT's corporate governance task force, wrote in a Sept. 29 letter, "There is nothing in the AFSCME decision that requires the SEC to engages in a notice-and-comment rulemaking to maintain its current interpretation of Rule 14a-8(i)(8), and we encourage the SEC not to do so."

Thomas Lehner, director of public policy at the BRT, believes that the appeals court's decision requires an explanation of the current standard, but not a change from it. "The court basically pointed out to the SEC that the commission used one standard in the [1970s] and a different standard for the past ten years. We're asking the SEC to reaffirm its current standard," he told Governance Weekly.

One critical issue for companies and investors is how the SEC will treat access proposals filed for the 2007 proxy season. In his letter, Odland encourages the SEC to issue guidance "that takes effect immediately," rather than undertake a lengthy administrative rulemaking. "If the SEC nevertheless determines to engage in notice-and-comment rulemaking--which we do not believe is necessary--it also should adopt a temporary rule or issue a statement reaffirming its current interpretation," Odland wrote. Lehner echoed the point, "A rulemaking now would lead to absolute chaos going into next proxy season, and that would just not be a very wise thing to do."

Goldschmid, now a law professor at Columbia University, suggests that the SEC revive part of its 2003 draft rule and set a 1 percent minimum ownership requirement for shareholders to submit proxy access proposals. He said access opponents might accept this compromise because "it would put some constraints on the process."

In AFSCME's letter, McEntee concludes by urging the commission "to craft a solution that clarifies the process, empowers shareholders, and opens up the proxy to shareholders in a sensible way, thereby creating a fair process that protects the investor and enhanced board accountability."

December Meeting
The agenda for the SEC's Dec. 13 open meeting also includes a final rule to allow companies to use the Internet for proxy communications, according to an agency press release. That rule change would reduce proxy solicitation costs for management, as well as for investors who decide to launch proxy contests. The commission is also slated to consider a proposal to make it easier for foreign firms to deregister and avoid U.S. regulatory requirements. The agenda also includes a proposed guidance to management on compliance with the financial reporting requirements of Section 404 of the Sarbanes-Oxley Act.