The Council of Institutional Investors, which represents public pension funds and other institutions with more than $3 trillion under management, is urging its members to ask the U.S. Securities and Exchange Commission not to allow companies to opt out of a proposed proxy access rule.

The SEC surprised access supporters in mid-December when it reopened the comment period on proxy access for another 30 days. Comments now are due by Jan. 19. Based on the SEC's rulemaking notice, it appears that the agency wants more input on the potential costs and benefits of the rule and whether to permit issuers to opt out of federal access standards.

Corporate advocates and the SEC's two Republican commissioners have urged the commission to refrain from imposing marketwide access requirements and instead allow "private ordering" by permitting shareholders and companies to work out their own access procedures through the corporate bylaw process. For investors to nominate board candidates, the SEC's proposed Rule 14a-11 would impose a one-year holding period and minimum ownership thresholds that range from 1 to 5 percent based on an issuer's market capitalization. The draft rule already has generated more than 500 comment letters. Many investors support the concept of access, but some institutions have called for higher ownership thresholds or a longer holding period.

The council and other long-time access supporters assert that a uniform, federalized approach to proxy access is preferable and is consistent with the uniform disclosure standards that have been in place for 75 years. In a Dec. 28 memorandum, the council outlined its arguments against permitting companies to opt out of the proposed access rule. Those points include:

* The need for a [SEC] proxy access rule to facilitate the exercise of shareowner rights has not been diminished by recent changes to state corporate law. While Delaware recently adopted a change to its corporation statute that allows companies or shareowners to adopt a proxy access rule, that change is unlikely to result in any significant proxy access reform for shareowners.

* The costs of addressing proxy access via individual company petitions would be prohibitive.

* The 500-word limit for shareowner proposals severely constrains an investors' ability to draft and discuss a proxy access bylaw provision.

* Many companies have supermajority voting requirements to amend the bylaws. These supermajority requirements would make shareowner-proposed bylaw amendments nearly impossible to implement.

* Leaving proxy access reform to Delaware and other states could result in a hodge-podge of standards that would differ from company to company and from state to state. This would be burdensome, costly, and unnecessarily complex to shareowners, particularly those . . . with diversified portfolios of thousands of companies.

* Companies most in need of corporate governance improvements are those most likely to opt out of a proxy access rule. Even if individual companies were to adopt a proxy access bylaw, the ownership threshold may be set so high that proxy access could rarely, if ever, be exercised, even by long-term institutional investors.

* A rule that provides for a proxy access opt-out is hardly an "investor choice" model, but rather a "management choice" model that permits public companies to continue to deny their shareowners the fundamental right to nominate and elect directors.

"Say on pay" proponents are hopeful that the U.S. House of Representatives' approval of an annual advisory vote requirement and Goldman Sachs Group's agreement to hold a shareholder pay vote will prompt more companies to follow suit.

"There will be an increase, as the waiters jump on board to try to get credit for doing it before being 'forced' to," said John Keenan of the American Federation of State, County, and Municipal Employees, an advisory vote proponent. "Goldman did this to try and get away from being 'public pay enemy number one,' and this move only hastens the tipping point for other companies."

Some of these voluntary adoptions likely will occur during the next three months before the proxy statement filing deadlines for companies with spring 2010 meetings. Once again, proponents plan to submit about 100 proposals seeking annual advisory votes on compensation. Those proposals averaged 45.6 percent support at 76 meetings in 2009, up from 41.5 percent in 2008, according to RiskMetrics Group's proxy season scorecard.

Another pay vote proponent, Tim Smith, a senior vice president with Walden Asset Management, observes that some companies still are reluctant to take action because they don't know whether the Senate will also approve advisory vote legislation. "It's hard to predict the trends here, though we obviously feel the Goldman Sachs decision sets a significant precedent and adds pressure, especially on financial companies," Smith said.

So far, at least 38 U.S. companies have pledged to hold voluntary "say on pay" votes, according to data collected by proponents, RiskMetrics, and the law firm of Cleary Gottlieb Steen & Hamilton.

Among the other issuers to take this step recently are Yum Brands, which agreed to provide a pay vote in 2011 if not mandated by federal law by then, and Mobile Mini, which said Dec. 14 that it will hold a triennial vote starting in 2010. Bank of New York Mellon plans to hold a pay vote in 2010, Keenan said. Intuit also has agreed to conduct an advisory vote in 2010; Hill-Rom Holdings and Bed Bath & Beyond plan to do so in 2011. According to proponents, 17 issuers (including Yum Brands) have taken action after shareholder "say on pay" resolutions received majority support.

It's rare for the Securities and Exchange Commission staff to reverse itself on a no-action ruling allowing a company to omit a social policy shareholder resolution from its proxy statement. That happened Dec. 15, however, when the SEC staff told Tyson Foods that it would have to allow investors at its February annual meeting to vote on a proposal on antibiotics in hog feed.

The resolution, co-sponsored by the Adrian Dominican Sisters and Christus Health, asks Tyson's board to adopt a policy to phase out the routine use of animal feeds that contain certain antibiotics for both the company's own hog production and its contract suppliers of hogs. The proposal requested a report on the timetable and measures for implementing the policy, as well as the annual publication of data on antibiotics in the feed given to Tyson livestock.

On Nov. 25, the SEC staff issued a no-action letter concluding that Tyson could omit the resolution because it dealt with an "ordinary business" matter that should be up to management to decide. The ordinary business exclusion in SEC Rule 14a-8(i)(7) is the one used most frequently by companies to exclude social issues resolutions. In this case, the staff defined the ordinary business element as "the choice of production methods and decisions relating to supplier relationships."

Paul Neuhauser, a long-time lawyer for church groups affiliated with the Interfaith Center on Corporate Responsibility, told RiskMetrics at the time that he was "flabbergasted" by the ruling. While appeals of staff rulings usually come to naught, he sent a Dec. 7 letter to the SEC protesting that the staff had failed to "discern a significant policy issue" that clearly exists. He argued that antibiotic-fed hogs posed a serious public health threat, not an ordinary business matter, noting that the "threat may primarily be in the future, but that does not make the threat any less grave, or less real." Neuhauser also pointed out that the U.S. Food and Drug Administration "already has criteria for denying applications by drug makers for the use of new drugs in animals, but unfortunately these rules were not applied retroactively when the FDA adopted them in 2003."

In its Dec. 15 reversal, the staff noted that there had been precedent for the original judgment in the exclusion of resolutions in 2002 and 2003. But it added, "At this time, in view of the widespread public debate concerning antimicrobial resistance and the increasing recognition that the use of antibiotics in raising livestock raises significant policy issues, it is our view that proposals relating to the use of antibiotics in raising livestock cannot be considered matters relating to a meat producer's ordinary business operations." The SEC noted that the European Union has banned the use of most antibiotics as feed additives, and that legislation had been introduced in Congress to limit the non-therapeutic use of antibiotics in animals.

The Tyson decision is latest indication that the SEC staff is taking a harder look at omission requests on ordinary business grounds. In late October, the staff issued a Staff Legal Bulletin indicating that shareholder resolutions that relate to a company's internal assessment of business risk would not be routinely excluded.

The Singapore Exchange Ltd. (SGX) on Dec. 9 proposed 36 changes to the market's corporate governance regime in Singapore in a wide-ranging review of its Listing Rules.

Among the changes proposed, the SGX proposes:

* to require the audit committee's assessments of company's internal controls and risk management policies and systems to be disclosed in the annual report (currently, guideline 12.2 of the Code of Corporate Governance requires that the "board should comment on the adequacy of the internal controls, including financial, operational and compliance controls, and risk management systems in the company's annual report");

* that newly listed companies appoint a governance adviser to assist in ensuring that they have the "framework and practices of good corporate governance as befits a listed company." The SGX proposes that areas of governance that the advisor weigh in on include internal controls, risk management processes, board practices, and accounting and reporting;

* that the SGX be permitted in certain circumstances to review and approve the appointments of directors, CEOs and CFOs (for example, where the company is the subject of a regulatory enquiry);

* that there at least one independent director serve on the board of a company at all times; and

* that where both the company and its auditor are based in a foreign jurisdiction, a joint sign-off of the company's audited accounts with a Singapore-based accounting firm be required.

Noting that "…there may be instances where controlling shareholders dispose of their interests when trading in the shares is suspended, particularly when the trading halt or suspension is due to investigations of irregularities or corporate failures," the SGX has also proposed that controlling shareholders be required to custodise their shares with either the Central Depository (CDP), or an agency with an agreement with SGX preventing trading of shares during a trading suspension.

The SGX also proposes that shareholders notify the listed company when pledging shares or entering into a derivative agreement where the delivery of shares in the company to the counterparty might "…result in a possible change in control in the issuer or may cause the issuer to breach its loan covenant." The listed company in turn would be required to inform the market.

The closing date for comments on the proposed changes is Jan. 15.

The SEC today voted 4-1 to finalize a new set of proxy disclosure rules on compensation risks and director qualifications with a few minor revisions.

Among the changes to the proposed rule is a new requirement that nominating committees disclose whether they consider diversity as a factor in reviewing potential nominees, and to assess the implementation of any diversity policies. The rule does not define what constitutes diversity; SEC staffers said they thought it was appropriate for companies to decide how they define that term.

The agency staff also tweaked new provisions on compensation risk to require disclosure only of those risks that are "reasonably likely to have a material adverse effect" on companies. This provision is not limited to the compensation received by named executive officers and would encompass the pay incentives for other employees.

The agency also revised a new mandate on disclosure of other services performed by compensation consultants to include a $120,000 minimum threshold to trigger disclosure. The final rule did not include various proxy solicitation rule changes that were in the original rulemaking release issued in July; the staff recommended deferring those changes until consideration of the SEC's proposed proxy access rule. The new disclosure rules will apply to companies with fiscal years ending on or after Dec. 20, 2009, so they will be effect for virtually all issuers during the 2010 proxy season.

The rules require more disclosure on the qualifications of director nominees and how their skills would help them to serve on the board and perform their specific committee assignments. In addition, companies would have to provide details on outside directorships held during the past five years, instead of only current board memberships. Board nominees also would have to disclose all the legal proceedings they have been a party to over the past 10 years (except for private litigation), instead of the current requirement of five years.

Companies would have to explain why they decided to appoint a non-executive chairman or chose to combine the roles of board chair and CEO, but the new rules do not favor one leadership structure over another.

The new rules also include a change on the disclosure of equity compensation. In their summary compensation tables, companies would be required to report the aggregate grant date fair value of equity granted during the previous year, instead of the current accounting value of previous grants.

The rules include a new requirement for companies to disclose proxy voting results in a Form 8-K filing within four business days after a shareholder meeting, instead of several months later in a 10-Q filing. If final results are not available, companies would have to disclose preliminary results and then disclose final results within four business days once those are ready.

Commissioner Kathleen Casey voted against the rulemaking release. While she said she supported most of the new rules, she expressed concern about mandated disclosure on a "person-by-person basis" on the board's selection of particular nominees. She said such an approach would unduly intrude on board decisions and would undercut the whole-board approach that many boards take to select their nominees. She also objected to the new diversity provision's mandate that a board assess how it has implemented any diversity policy.

In a move that surprised some observers, the Securities and Exchange Commission announced Dec. 14 that it would reopen the comment period on its controversial proxy access rule.

The extension of the comment period suggests that the SEC's five commissioners may be giving greater consideration to permitting companies to seek shareholder approval to opt out of federal access standards.

Commissioner Elisse Walter, who was part of the 3-2 majority who voted in May to propose the access rule, said in October that she was giving "careful consideration" to adjusting the rule to allow shareholders to approved restrictive access provisions. Corporate advocates and the SEC's two Republican commissioners, who oppose the proposed rule, have urged the commission to refrain from adopting marketwide requirements and instead allow companies and shareholders the flexibility to craft their own rules. In response, access supporters have argued that federal minimum standards are necessary because many issuers impose barriers to shareholder-initiated access bylaws through supermajority requirements or dual-class share structures.

In a rulemaking notice, the SEC said it was allowing 30 days for additional input because it had received materials and analyses on or after the original Aug. 17 deadline for comments.
The SEC notice specifically mentioned four submissions that it had received:

* "Report on Effects of Proposed SEC Rule 14a-11 on Efficiency, Competitiveness, and Capital Formation, in Support of Comments by Business Roundtable," NERA Economic Consulting, submitted Aug. 17 by the Business Roundtable;

* "Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation, Andrea Beltratti and Rene M. Stulz, submitted Sept. 11 by the Business Roundtable;

* "The Limits of Private Ordering: Restrictions on Shareholders' Ability to Initiate Governance Change and Distortions of the Shareholder Voting Process," submitted Nov. 18 by the Shareowner Education Network and the Council of Institutional Investors; and

* Supplemental analysis of share ownership and holding period patterns from Form 13F data by the SEC's Division of Risk, Strategy, and Financial Innovation, Nov. 24, 2009.

The SEC already has received more than 500 comments on the access rulemaking. In early October, SEC officials said the agency staff needed more time to review all the comments, but said that they still hoped to bring a final rule to a vote in early 2010. With this additional comment period, it appears unlikely that the SEC staff would have time to review all the new submissions and prepare a final rule for a commission vote before March or April, SEC observers said.

The U.S. House of Representatives voted 223-202 today to approve the "The Wall Street Reform and Consumer Protection Act of 2009." The wide-ranging bill includes an annual "say on pay" mandate and authorization for the SEC to issue a proxy access rule.

The bill would authorize the SEC to exempt small companies from the advisory vote requirement while calling for separate shareholder votes on "golden parachute" arrangements. The bill would authorize regulators to ban inappropriate or imprudently risky compensation practices, and it would require financial firms to disclose incentive-based compensation structures.

The legislation also would increase the resources for the SEC, regulate derivatives, and require hedge fund advisers to register with the SEC. The bill creates a new Consumer Financial Protection Agency as well as a Financial Stability Council to identify large, interconnected firms that could put the financial system at risk.

The bill was carried to passage by the House's Democratic majority; 175 House Republicans and 27 Democrats voted against the bill.

However, the bill includes a permanent exemption for small issuers (those with less than $75 million in market cap) from the outside auditor attestation requirements of the Sarbanes-Oxley Act. SEC officials and investor advocates have opposed this exemption. The House voted 271-153 against an amendment offered by Rep. Paul Kanjorski to remove that provision.

The House bill will have to be reconciled with any financial reform legislation that emerges from the U.S. Senate. Senator Christopher Dodd has introduced a reform bill, which includes an advisory vote on compensation mandate, proxy access, and more far-reaching governance provisions, but his legislation encountered opposition and remains in the Banking Committee.

The Securities and Exchange Commission has scheduled a Dec. 16 open meeting where it will consider whether to finalize a new set of proxy disclosure rules.

The final regulations have not been released, but the rules have not generated significant controversy since the five-member commission unanimously voted in July to propose them. The SEC has not disclosed the effective date for these requirements, but agency officials have said they hope to approve the rules in time for the 2010 proxy season. The proposed rules include the following:

* The relationship of a company's overall compensation policies to risk. SEC officials said companies would only be required to address "material" risks.

* The qualifications of director nominees and how their skills would help them to serve on the board and perform their specific committee assignments. In addition, companies would have to provide details on outside directorships held during the past five years, instead of only current board memberships. SEC staffers have said that issuers should welcome a chance to expound on the qualifications of their nominees.

* Board leadership structure. Companies would have to explain why they decided to appoint a non-executive chairman or chose to combine the roles of board chair and CEO.

* Potential conflicts of interests of compensation consultants. Companies would have to provide details on other services performed by pay advisers and the fees paid for that work.
The proposals also included a revised proxy solicitation rule to allow short-slate dissident groups to round out their slates with candidates from other dissident groups. Under current rules, dissidents may only supplement short slates with management nominees.

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