Most activist investors are urging the U.S. Securities and Exchange Commission to proceed with its proposed proxy access rule, although some have called for revisions, such as dropping a "first-in" provision or lengthening the minimum holding period to two years.

"The proposed rule is a historically significant reform that will enable investors to hold corporate boards accountable and restore investor confidence in the capital markets," Joseph Dear, chief investment officer at the California Public Employees' Retirement System, the nation's largest state pension fund, wrote in the pension system's comment letter to the SEC.

Meanwhile, corporate advocates have asked the SEC to refrain from adopting marketwide access standards or at least delay adoption until 2011. In contrast to their position in 2007 when the agency last considered the issue, most issuer representatives now are arguing that shareholders should have the ability to file resolutions that seek company-specific access provisions.

The question of giving investors the ability to nominate directors to appear on management proxy statements has been debated by the commission since the 1940s. In May, the SEC voted 3-to-2 to propose a marketwide access rule over objections from the agency's two Republican commissioners. The proposed Rule 14a-11 would require all public companies and registered investment companies to permit qualifying shareholder groups to offer nominees for up to 25 percent of the board.

The draft rule requires a one-year holding period and includes tiered ownership thresholds based on market capitalization (or net assets for investment firms). For issuers, the minimum holding would be 1 percent at "large accelerated" filers (those with more than $750 million in publicly traded securities; 3 percent at "accelerated" filers ($75 million to $750 million in traded securities); and 5 percent at "non-accelerated" filers (less than $75 million in traded securities). The agency rulemaking release also includes a proposal to amend Rule 14a-8(i)(8) to permit investors to file bylaw proposals that seek more permissive access provisions.

The agency received more than 450 comment letters from investors, issuers, proxy solicitors, academics, and individuals by the Aug. 17 deadline. SEC officials have said they hope to have a final rule in place before the 2010 proxy season.

The SEC also received comments from various international institutions, which observed that proxy access provisions in the United Kingdom and other markets have led to more board accountability and better communication with investors. "Our experience in markets like the Britain, Australia, and the Netherlands is that these rights are rarely used. Instead, because of greater accountability to the shareholders whom they represent, boards tend to put forward qualified candidates that are more responsive to shareholder interests," wrote Daniel Summerfield, co-head for responsible investment at the U.K.'s Universities Superannuation Scheme.

While most public pension funds and labor investors generally support the rule, other investors raised concerns or expressed opposition. Although Barclays Global Investors said it supported the principle of allowing long-term investors to propose board nominees, the investment firm called for a "narrowly tailored" approach with a triggering requirement (such as a 50 percent withhold vote) for access rights.

The United Brotherhood of Carpenters said it opposes a federal uniform access rule and urged the SEC to amend Rule 14a-8 to enable investors to file access proposals in 2010. The union noted that other reforms, such as better disclosure rules and the widespread adoption of majority voting in director elections, have made boards more accountable.

Corporate advocates, including the National Association of Corporate Directors and the Society of Corporate Secretaries & Governance Professionals, generally opposed a marketwide rule, calling instead for the SEC to permit "private ordering" by allowing investors and companies to devise their own access rules. The proposed Rule 14a-11 "would deprive stockholders of their ability to exercise their rights under enabling state laws to implement the specific form of proxy access that they believe best fits their particular company and fellow stockholders, or alternatively to choose to forego entirely the costs and burdens of proxy access," Cravath, Swaine & Moore and six other corporate law firms argued in a joint comment letter.

In response, CalPERS argues that forcing investors to seek proxy access on a company-by-company basis "will cost shareowners and companies significant time, and unnecessary expense." Based on the SEC's 1997 data on the costs for shareholders to offer proposals and for companies to respond to them, the pension system estimates that it would cost $351 million to attempt to put proxy access in place at Russell 3000 companies.

In the SEC adopts a marketwide rule, the corporate law firms have asked the agency to delay the effective date until 2011 to give issuers and shareholders time to address the complex issues raised by access. The firms also noted that it would be difficult for investors to meet the proposed 120-day deadline for nominations at firms with early 2010 annual meetings. The corporate lawyers also said the commission should give investors the right to opt out of a uniform rule by either a stockholder vote or ratification of board action.

The Altman Group, a proxy solicitation firm, said it would be a "serious mistake" for the SEC to adopt a marketwide access rule soon after approving the New York Stock Exchange's ban on broker votes in uncontested board elections. Instead, Altman said the SEC needs to first address "important" issues, such as the rules on issuer-shareholder communications and other "proxy plumbing" issues.

Many commenters, including the Council of Institutional Investors (CII), CalPERS, and the AFL-CIO, urged the SEC to drop its proposal to use a "first-in" standard to determine priority if multiple groups seek to nominate board candidates who exceed the 25 percent limit. Instead, the investors called for giving preference to the investor group with the largest shareholding. "What matters most is not who is the fastest to nominate but what investor or group has the greatest stake in the director election and ultimately, the long term performance of the company," CII stated in its comment letter.

The Calvert Group disagreed, arguing that a "first-in" approach would be fairer. "Allowing the largest shareholder group to essentially 'trump' the first smaller, but no less committed or relevant shareholder submission, is not good governance," according to Calvert, an investment firm that offers socially responsible investment funds.

Alternatively, the Ohio Public Employees Retirement System (OPERS) called for a two-fold approach based on the length of ownership and the largest beneficial ownership. The pension fund also said a 25 percent cap on nominees was too restrictive and should be closer to 50 percent. OPERS and other investors said the limit on nominees should be based on the total number of board seats, not simply those up for election, as the later approach would reward firms with classified boards. CalPERS and many investors called for allowing at least two shareholder nominees, regardless of board size, pointing out that a single dissident director can be more easily shunned by a recalcitrant board.

There were a variety of opinions expressed by investors and issuers over the economic stake required to nominate directors. T. Rowe Price and TIAA-CREF asked the SEC to set a 5 percent ownership requirement at all companies, rather than permitting lower thresholds at larger companies. "[I]n order to use the company's resources to nominate a director, a significant amount of capital must be represented and 5 percent is an acceptable threshold," TIAA-CREF wrote in its comment letter.

In its letter, the Australian Council of Superannuation Investors (ASCI) said a 3 percent threshold should be sufficient to deter "frivolous or vexatious nominations." Barclays called for a sliding scale of 5 to 15 percent based on market capitalization to "protect shareholders and the companies they own from the unnecessary distraction and expense of including director nominees for whom support is limited and whose likelihood of election is low."

The coalition of seven corporate law firms suggested that the SEC impose a 5 percent threshold for a single investor and a higher threshold (7-to-10 percent) for investor groups. The National Association of Corporate Directors endorsed a 5 percent threshold (with no aggregation of holdings), and a 10 percent standard for micro-cap firms.

There also were disagreements over the required ownership duration to submit a nomination. The Change to Win (CtW) Investment Group, the AFL-CIO, the union-affiliated Amalgamated Bank, and TIAA-CREF all asked the SEC to increase the minimum time period for offering nominees from one year to two years. "A two-year holding period requirement would better ensure that shareholder-nominated directors are properly focused on long-term value creation for the company's investors," CtW wrote in its letter.

Some corporate advocates also endorsed a longer holding period. A group of corporate governance officers from Intel, Microsoft, Pfizer, and more than 20 other issuers said a "two- or three-year holding period would be more appropriate."

However, T. Rowe Price said it did not object to a one-year holding requirement, and CII agreed that such a standard "should be sufficient to limit the access mechanism to long-term shareowners." The Association of British Insurers and ASCI argued that there should be no minimum time period. "It is a core principle that the holders of the same capital instruments must have the same rights regardless of the period they have held them," the British group wrote.

For a copy of RiskMetrics Group's comment letter, please click here.

U.S. Sen. Arlen Specter of Pennsylvania has introduced legislation that would overturn Supreme Court decisions that limited the ability of investors to sue investment bankers, vendors, and other "secondary actors" who participate in securities fraud.

The bill, S. 1551, the "Liability for Aiding and Abetting Securities Violations Act of 2009," would amend the Securities Exchange Act of 1934 to authorize investors to sue bankers and other secondary actors who provide "substantial assistance'" to corporate officials who engage in securities fraud. In its Central Bank (1994) and Stoneridge (2008) decisions, the Supreme Court significantly curtailed the ability of investors to bring class-action claims against bankers, suppliers, and others.

"The massive frauds involving Enron, Refco, Tyco, Worldcom, and countless other lesser-known companies during the last decade have taught us that a stock issuer's auditors, bankers, business affiliates, and lawyers . . . all too often actively participate in and enable the issuer's fraud," Specter said in a July 30 floor statement when he introduced the bill.

While the Securities and Exchange Commission now has the authority to sue secondary actors, Specter said, "the SEC's litigating resources are too limited for the SEC to bring suit except in a small number of cases."

The prospects for the bill are uncertain. S. 1551 now has three co-sponsors, including Sen. Jack Reed of Rhode Island, who chairs the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investment. Specter, a long-time Republican, switched parties earlier this year to help the Democrats reach a filibuster-proof, 60-seat majority in the Senate.

J. Robert Brown, a securities law professor at the University of Denver, said the bill reflects a significant shift in the views of lawmakers, who acted to limit shareholder lawsuits in 1995 and 1998. "While the [b]ill may never become law, it is, if nothing else, a symbol of the changed attitudes and atmosphere in connection with securities regulation," Brown said in an Aug. 14 posting on his "The Race to the Bottom" blog.

In a recent editorial, The Wall Street Journal criticized Specter's bill, warning that it would create a "new lawsuit bonanza." Noting that the SEC "has the authority to punish fraud and distribute fines to victims," the Journal wrote: "Private lawsuits are about trying to use expansive liability claims that distort justice and harm the shareholders of innocent but deep-pocketed companies."

Britain's Financial Services Authority this week published new rules to strengthen links between pay and risk taking at U.K. banks, though opted against mandatory deferrals on bonuses as provided for under earlier draft rules.

In another departure from the draft rules, the FSA code now applies to just 27, rather than 47, institutions, exempting many smaller banks and international groups with London-based branches.

The reversal has sparked concern in some quarters, with critics charging the government with watering-down the rules and thus failing to adequately address concerns over poor pay practices. Supporters of the reversal, however, say the changes will help ensure London's continued place as a premier financial center.

According to the FSA, the code, released Aug. 12, is designed to force boards to focus more closely on ensuring that pay is consistent with good risk management and sustainability, and that individual compensation practices provide the right incentives.

"The FSA is determined that banks' remuneration policies should be consistent with, and promote, effective risk management," FSA head Hector Sants said in an Aug. 12 statement. "The new rules and code of practice … are aimed at achieving this."

The code will take effect Jan. 1, 2010, and represents the first set of major market rules to reform pay in the wake of the global financial crisis. The code may also help U.S. lawmakers and others address ways and means to reform and measure links between compensation and risk at companies receiving aid under the Troubled Asset Relief Program.

Eight principles, including one to address deferrals on bonus pay, were added to the FSA code to provide institutions with a better understanding of the yardstick the agency will use when measuring compliance.

The principles include: remuneration committees should have a majority of non-executives; risk managers and compliance officers should be involved in setting bankers' pay; bonuses available to risk managers and compliance officers should be proportionally lower than for bankers; the calculation of bonus pools should be based principally on profits; when performance related pay accounts for a large share of overall remuneration, there should be a bias towards longer-term performance; non-financial criteria should be part of bonus calculations; long-term bonuses should take account of future risks; and at least two-thirds of bonuses should be deferred for at least three years and they should reflect group-wide and divisional, as well as personal, performance.

According to the FSA, affected financial services companies will be expected to provide a remuneration policy statement by the end of October. The statement must be sanctioned by the remuneration committee and will be used by the FSA to check compliance with the code. Non-compliance could mean enforcement action or a mandate to hold additional capital, should, agency officials warn, companies pursue risky processes.

Meanwhile, the Swiss Financial Market Supervisory Authority's deadline for feedback on its own proposed new compensation guidelines for financial services companies is Aug. 14. Like the FSA's code, the draft guidelines aim to align pay policies better with long-term profitability and take into account risks, according to Bloomberg News. Final guidelines are expected next month.

Also this week, Swiss lawmakers on Aug. 11 rejected proposed caps on executive pay at banking giant UBS. The Swiss government owns just under 10 percent of the company.

Recently released vote results indicate that investors at two more U.S. companies gave majority support to shareholder proposals seeking annual advisory votes on executive compensation. So far this year, there have been 20 majority votes for "say on pay" proposals, according to RiskMetrics Group data.

According to an Aug. 5 quarterly filing, a "say on pay" proposal received 56.9 percent support at Plum Creek Timber's May 6 annual meeting. That figure is based on the votes cast "for" and "against" the resolution. The company earlier reported a significantly lower percentage that apparently included 42 million "broker votes," advisory vote proponents said.

"Say on pay" also received 50.2 percent support (based on "for" and "against" votes) at ConocoPhillips' May 13 meeting, according to the oil company's Aug. 4 quarterly filing.

Both companies indicate that the advisory vote resolutions failed to pass based on the vote requirements in their bylaws.

In the future, investors may not have to wait until August to receive vote results from annual meetings held in April and May. As part of a series of draft proxy disclosure rules, the Securities and Exchange Commission is proposing to require companies to report their full vote results within four business days. The deadline for comments on the proposed rules is Sept. 15.

A federal judge has put a settlement between financial services giant Bank of America and the Securities and Exchange Commission on hold, pending a future hearing on the matter.

The Charlotte, N.C.-based bank had, on Aug. 3, agreed to settle SEC charges that disclosures in its proxy statement to approve its acquisition of Merrill Lynch were "rendered materially false and misleading" by the existence of a prior undisclosed agreement allowing Merrill to pay $5.8 billion in bonuses at the time of its acquisition.

According to the SEC, under the merger agreement, Merrill Lynch agreed not to pay any bonuses to its executives before the deal closed, except as set forth in a schedule. However, "unbeknownst to shareholders, the schedule was already in place weeks before the proxy statement was filed with the SEC and disseminated to shareholders. Under the schedule, Bank of America had agreed that Merrill could pay up to $5.8 billion … in discretionary bonuses to its executives," the SEC complaint alleged.

Bank of America agreed to pay a $33 million penalty without admitting or denying wrongdoing, leaving open the question of whether or not the settlement was fair to investors and the wider public.

"Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint," Federal District Court Judge Jed S. Rakoff wrote in his Aug. 5 order, according to Reuters. "The proposed consent judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its," bailout under the federal Troubled Asset Relief Program.

Meanwhile, General Electric settled SEC charges of accounting fraud and agreed to pay $50 million in penalties on Aug. 4. The commission said it had uncovered the accounting violations in a risk-based investigation of GE's accounting practices. In its complaint, the SEC alleged that, "on four separate occasions in 2002 and 2003, high-level GE accounting executives or other finance personnel approved accounting that was not in compliance with Generally Accepted Accounting Principles (GAAP). In one instance, the improper accounting allowed GE to avoid missing analysts' final consensus EPS expectations."

The company has a "clawback" provision in place, according to its 2009 proxy statement, whereby executives could be forced to reimburse the company for any portion of performance-based or incentive compensation paid or awarded that is deemed unearned under a restatement.

Also this week, former American International Group chairman and CEO Maurice "Hank" Greenberg and former vice chairman and CFO Howard Smith settled charges over their involvement in numerous improper accounting transactions that inflated AIG's reported financial results between 2000 and 2005, the SEC said.

The commission alleged in an Aug. 6 complaint that Greenberg and Smith were responsible for material misstatements that enabled the company "to create the false impression that the company consistently met or exceeded key earnings and growth targets."

Greenberg and Smith agreed to settle the charges and pay disgorgement and penalties totaling $15 million and $1.5 million, respectively.