As part of efforts to reverse a decline in retail voter participation in corporate elections, the Securities and Exchange Commission has approved the proposed amendments to its so-called e-proxy rules and launched an investor education campaign.

The e-proxy amendments, detailed in a 32-page adopting release published Feb. 22, provide more flexibility in the format and content of the Notice sent to shareholders about how to vote and allow issuers to send shareholders materials along with the notice explaining the e-proxy rules and the reasons for the use of notice and access. Materials designed to persuade shareholders to vote a particular way or change the method of the delivery of proxy materials still aren’t allowed.

The final rule takes effect 30 days after publication in the Federal Register.

As previously reported, the changes followed a sharp decline in retail voting at companies that only sent shareholders notices without a full set of paper proxy materials, as permitted under the rule. The decline in retail voting also sharpened quorum fears for some companies, since a rule change took effect this year that eliminated the prior practice of allowing brokers to vote uninstructed retail shares in uncontested director elections.

The final rule requires an issuer or other soliciting person to indicate that the Notice isn’t a form for voting. Under the previous rule, some shareholders attempted to vote by mailing back their notices.

The final rule also confirms guidance provided in the Proposing Release that the Notice doesn’t have to directly mirror the proxy card.

Under the final rule, soliciting persons other than the issuer must file a preliminary proxy statement within 10 calendar days after the issuer files its definitive proxy statement and to send its Notice to shareholders no later than the date on which it files its definitive proxy statement with the Commission.

The adopting release notes that the staff will continue to monitor the effects of the notice-and-access model as part of a broader review underway of proxy mechanics and voting.

“While we are not in this release addressing the broader concerns with the proxy system or the notice-and-access model raised by commenters that went beyond the scope of the proposals, we are continuing to consider these and other concerns relating to the proxy process that have been raised,” the release states. “The staff is conducting a comprehensive review of the mechanics by which proxies are voted and the way in which information is conveyed to shareholders and is preparing a concept release to seek public comment on these issues.”

The Commission also announced educational efforts to increase investor understanding of proxy mechanics and the notice-and-access model, including an Investor Alert, New Shareholder Rules for the 2010 Proxy Season, and new online resources explaining the proxy voting process in plain language.

The Alert provides investors information on the changes to broker voting rules and the impact on proxy voting. A new proxy matters Spotlight page provides information on the mechanics of proxy voting, the e-proxy rules, corporate elections, and proxy matters generally.

Those tasked with drafting proxy disclosures take note: The Securities and Exchange Commission has approved proposed amendments to its proxy disclosure rules, with some notable changes from the July proposing release, that you’ll have to incorporate into your 2010 proxy disclosures.

The SEC, in a 4-1 vote, okayed proposed changes to the disclosures companies are required to make about compensation, risk, and corporate governance. The rules, which will be effective Feb. 28, 2010, aim to provide shareholders with better information to make voting decisions.

However, the rules approved at the Dec. 16 open meeting include some important tweaks from the proposal floated in July to address concerns raised in the more than 130 comment letters submitted to the SEC.

Most notably, the amendments will require companies to address their compensation policies and practices for all employees, not just executive officers, if the compensation policies and practices create risks that are “reasonably likely to have a material adverse affect on a company.”

The higher “reasonably likely” disclosure threshold wasn’t in the original proposal. Those disclosures also won’t be included in the Compensation Discussion and Analysis, and smaller reporting companies aren’t required to provide that disclosure.

Corporation Finance director Meredith Cross noted that the adopting release will include examples where companies might look for those issues and will instruct them to look at offsetting and mitigating factors.

The final rule will also require disclosure about the board’s role in risk oversight, instead of risk management as proposed, that’s focused on how that oversight is administered. For instance, whether that oversight resides with the audit committee or a separate risk committee, or to the extent it’s within different parts of the board, how those parts interact.

Required disclosures about the fees paid to compensation consultants and their affiliates were also modified from the proposing release. Under the final rule, disclosures of the fees paid and related disclosures won’t be required if the amount of additional services provided to the company by the consultant or an affiliate is less than $120,000 during the company’s fiscal year. The requirement also includes an expanded exception for consulting on broad-based plans such as 401(k)s or health insurance plans, and services limited to providing non-customized information such as surveys.

As expected, the rules also revise the reporting of stock and options awards so the full grant date fair value will be reported in the summary and director compensation tables, instead of the annual accounting charge.

For stock and options awards subject to performance conditions, the amount reported in the tables will be the aggregate fair value at grant date, based on the probable outcome of performance conditions. The maximum potential value of the awards will be disclosed in the footnotes to the tables.

The staff noted that, for fiscal years ending on or after Dec. 20 2009, companies will be required to present recomputed disclosure for all fiscal years included in the tables, but won’t be required to include different NEOs from any preceding fiscal years based on the recomputed total compensation.

The rules also expand the disclosure companies have to disclose about the experience, qualifications, and skills of individual directors and nominees and directors’ involvement in legal proceedings, and require companies to disclose whether and why their principle executive officer and chair roles are combined or split, and the role of a lead independent director, if the company has one.

In addition, the rules require disclosure of whether and, if so, how the nominating committee considers diversity in identifying nominees. If the committee or board has a policy for considering diversity in identifying nominees, the company must disclose how that policy is implemented and the effectiveness of that policy is assessed.

The rules also accelerate the reporting of voting results to require results be reported in Form 8-K within four business days of the meeting at which they’re held.

Meanwhile, proposed amendments to various proxy solicitation procedural rules were not included in the final rule. Due to the interrelation of some of those proposals to a pending SEC proposal intended to facilitate shareholder director nominations in company proxy materials, the staff recommended the SEC defer consideration of those proposals until it takes up the other rule.

Commissioner Kathleen Casey was the lone dissent on the rule. Her objections stemmed from the expanded disclosures related to director and nominee qualifications and the board’s consideration of diversity, which she said could undercut investors’ understanding of how companies assemble their boards and would encroach on the board’s decision-making authority.

Compliance Week will provide readers with full details and coverage of the final rule in its Dec. 22 edition.

The Securities and Exchange Commission gave the go-ahead to a number of changes to the NYSE’s corporate governance rules, effective Jan. 1, 2010.

The changes, proposed in August, mostly aim to bring the exchange’s requirements for its listed companies in line with current SEC requirements.

“For the most part, the changes should be welcome and fairly easy to comply with as they largely conform the NYSE corporate governance requirements to those in Item 407 of Regulation S-K,” Ning Chiu and Janice Brunner of the law firm Davis Polk & Wardwell note in a recent client alert.

In many cases, the changes eliminate “yet another set of rules to follow in proxy statements and other corporate governance disclosure,” Chiu, counsel at DPW, tells Compliance Week.

However, she reminds companies that the NYSE “does review proxy statement disclosure and may send comments if they believe companies are not fully compliant.”

Chiu says the most significant change under the amended rules is one that requires the CEO of a listed company to notify the NYSE in writing after any executive officer of the listed company becomes aware of “any non-compliance” with the NYSE corporate governance requirements in Section 303A. Previously, the alert notes, such notification was required only in the event of “any material non-compliance.”

Given the change regarding reporting of all non-compliant matters, Chiu says companies should re-examine their current process and procedures for following listing standards.

They should also review any of their current proxy statement disclosures that were previously made in compliance with the NYSE requirement. “In some cases those requirements were eliminated,” she says. “In other cases, companies can choose to make the disclosure on their Website.”

Among other things, the alert notes that the amended rules maintain a current requirement to assess a director’s independence in light of the NYSE’s general independence definition and bright-line tests, but replace the related disclosure requirements with a requirement to provide the director independence disclosures mandated by Item 407(a) of Regulation S-K. Accordingly, the NYSE rules will no longer refer to categorical standards. However, Chiu and Brunner note that, during a recent NYSE Webcast, a NYSE staff member suggested that companies may continue to find categorical standards useful in assessing director relationships.

Additionally, the amended rules give companies a choice of providing certain currently required disclosures through their corporate Website instead of in their annual proxy statement or annual report, as long as they disclose that fact in their annual report or proxy statement and provide the Website address.

The rules also eliminate a requirement that companies provide paper copies of applicable charters, corporate governance guidelines, and codes of business conduct and ethics upon request, and instead require them only to disclose in their annual proxy statement or Form 10-K that those documents are available on the company’s Website and provide the Website address.

The complete text of the changes can be found in the SEC’s notice of approval.

The Securities and Exchange Commission has okayed a proposed rule change filed by the New York Stock Exchange to lower its public float requirement for initial public offerings.

The amendment lowers the public float requirement for IPOs, spin-offs, and companies listed under the Exchange’s Affiliated Company standard from $60 million to $40 million.

The lower public float requirement applies to real estate investment trusts listed under Section 102.05, but not closed-end funds listed under Section 102.04 (which  continue to be subject to a $60 million public float requirement ) or special purpose acquisition companies listed under Section 102.06 (which are subject to a $200 million public float requirement).

Comments are due 21 days after publication in the Federal Register.

Massachusetts’ Office of Consumer Affairs & Business Regulations has once again delayed the effective date of its identity theft regulations and announced proposed changes to the rules that should make them more consistent with federal law and somewhat more palatable for smaller companies.

Under the latest postponement, the proposed new rules will take effect March 1, 2010, instead of Jan. 1, 2010. As Compliance Week has previously reported, the rules have been in flux for months. They were originally scheduled to take effect on Jan. 1, 2009.

The changes to make the rules more flexible for smaller companies and those that don’t handle much personal information follow the introduction earlier this year of a state senate bill that would curtail the OCABR’s power to enact regulations and significantly limit what the OCABR could require, notes Gabriel Helmer, an associate in the law firm Foley Hoag.

Among the changes: The written information security program required by the regulations should be “appropriate to the size and scope of the business, the resources available to the business, and the need for security.”

Massachusetts Undersecretary of the OCABR Barbara Anthony said the proposed regulations “make clear that their approach to data security is a risk-based approach that is especially important to small businesses that may not handle a lot of personal information about customers” and “feature a fair balance between consumer protections and business realities.”

Under the revised rules, businesses affected by the regulations include anyone that “receives, maintains, or otherwise has access to personal information in connection with the provision of goods or services or in connection with employment.”

That’s new language, though it’s “unclear what precisely that means,” says Helmer.
The revised regulations also now require that businesses enter into written contracts with service providers that require that service providers to adopt appropriate security measures. Under a grandfather provision, any contract entered into before March 1, 2010, would be deemed in compliance with the regulations. That’s in line with federal rules, which Helmer says all require some kind of assurance from service providers.

Also new is language that states that all of the computer security provisions apply to a business if they are “technically feasible.” According to a five-page FAQ issued by the OCABR, “technically feasible” means that if there is “a reasonable means through technology to accomplish a required result, then that reasonable means must be used.”

Helmer suggests businesses covered by the rules assess their own circumstances and consider under the new proposed standards whether a particular provision is technically feasible.

“Under the proposed rules, small businesses with little personal information or limited resources can adopt an information security program without all of the bells and whistles of that of a Fortune 50 company,” he says.

Under the proposed amendments, only portable devices that contain personal information have to be encrypted. Backup tapes must be encrypted on a going-forward basis.

A public hearing on the proposed changes is slated for Sept. 22.

“I expect some vibrant debate at the public hearing, and we may see some additional changes come out of that,” Helmer tells Compliance Week.

One sleeper item that might be of interest to companies and shareholder activists in the Securities and Exchange Commission’s proposing release for its proxy disclosure and solicitation enhancements: An amendment that observers say could potentially facilitate activists’ solicitation activities.

The proposed amendment, which is part of a broad package of reforms proposed at the SEC’s July 1 open meeting and detailed in a 137-page proposing release out for comment until Sept. 15, allow dissidents to send unmarked copies of management’s proxy without triggering the proxy rules.

The proposal would clarify that an unmarked copy of management’s proxy card that’s requested to be returned directly to management isn’t a “form of revocation” under Exchange Act Rule 14a-2(b)(1), so a person furnishing the duplicate proxy card isn’t disqualified from relying on the rule’s exemption.

“This proposed change is significant because it broadens the scope of an exemption that had been effectively limited in 2004 after a decision in the U.S. Court of Appeals for the Second Circuit,” notes Howard Dicker, a partner in the law firm Weil Gotshal & Manges in a July 9 alert.

In MONY Group, Inc. v. Highfields Capital Management, the Second Circuit reversed a district court decision consistent with the staff’s views that the unmarked copy of management’s proxy card wasn’t a “form of revocation” within the meaning of Exchange Act Rule 14a-2(b)(1).

“We propose to clarify the rule to align with our view by amending it to provide expressly that a ‘form of revocation’ does not include an unmarked copy of management’s proxy card that the soliciting shareholder requests be returned directly to management,” the proposing release states, noting that the clarification “is consistent with advice the staff informally has provided in response to related inquiries since the rule was adopted.”

The amendment would “aid efforts by persons not seeking proxy authority to facilitate voting by shareholders sharing their views on matters submitted for shareholder approval—such as in a ‘just vote no’ campaign—without having to incur the costs and efforts of conducting a fully regulated proxy solicitation and provide shareholders a convenient opportunity to indicate their votes after hearing those views without having to request another proxy card from management,” the release states.

Dicker notes that the proposal is expected to “generate some controversy” since shareholders may not have significant information about the soliciting person that might be material to their voting decision.

Likewise, Ronald Mueller, a partner in the law firm Gibson Dunn & Crutcher, says if adopted, the amendment could “become a big issue, because companies could potentially find themselves caught by surprise by a stealth vote no or vote against campaign.”

“It’s something companies may want to focus on in their comments,” he says.

Pages 50-51 of the proposing release seeks comment on several questions related to the proposal, including the appropriateness of the proposed amendment, whether a soliciting person that provides an unmarked copy of management’s proxy card should be required to file a Notice of Exempt Solicitation even if they don’t meet the thresholds under Exchange Act Rule 14a-6(g), and whether such a soliciting person should be required to file and provide to solicited persons other information about itself.

Compliance Week will provide readers with more coverage of the details of the proposing release in an upcoming edition.

In order to prepare for the elimination of broker votes in director elections that takes effect before the upcoming proxy season, companies should take action now, by analyzing historical shareholder trends and monitoring future extraordinary voting patterns, among other things, The Conference Board (TCB) advises.

As Compliance Week reported, the SEC on July 1 approved a NYSE rule change to eliminate broker discretionary voting in director elections, a move that’s expected to increase the power of institutional investors—and activist shareholders, specifically—in influencing corporate affairs through “withhold vote” campaigns, says Matteo Tonello, The Conference Board’s associate director of corporate governance.

Besides concerns about increased activist power, concerns have been raised that eliminating broker discretionary voting will disenfranchise retail investors, making it harder to establish a quorum at annual meetings and potentially raising solicitation costs.

Previously in uncontested director elections, brokers could vote shares for which they hadn’t received voting instructions from beneficial owners, a practice criticized for potentially distorting election outcomes since brokers traditionally followed the recommendations of incumbent boards.

Since uninstructed votes will be counted as “no” votes as a result of the change, Tonello says, “It could become arduous for companies adopting a majority voting standard to attain the vote required to elect a management’s slate of nominees—particularly if there is a large retail investor base or if an activist launches a “just say no” campaign to encourage shareholders to withhold votes for certain directors.”

To address those concerns, The Conference Board recommends that senior executives and board members assess the impact of the rule on future annual meetings, especially in light of factors such as the size of the company’s retail shareholder base, equity holdings by activists, and recent election results.

The rule change is effective for shareholder meetings on or after Jan. 1, 2010. Since the restriction applies to all NYSE-registered brokers, it affects most U.S. public companies, irrespective of the exchange on which they’re listed.

In particular, companies should consider analyzing historical shareholder trends and monitoring future extraordinary voting patterns, possibly with the assistance of specialized services such as securities surveillance reports or Wall Street-perception audits, TCB advises.

That will help to anticipate situations where individual shareholders not voting their shares may magnify the power of short-term, speculative investors and skew election results, says Tonello. If a stock watch service provider is used, he says it’s good practice to research its reputation and ensure its means to gather information are proper, since, in the past, the SEC has probed the ethical standards of securities surveillance analysts, who are often paid on commission.

Second, companies should understand the intentions of their larger investors, especially those with a history of activism, and should investigate voting policies by mutual funds and other more passive mainstream asset managers holding stock of the company, to recognize possible voting alliances with activists, according to TCB.

The Conference Board also urges companies to regularly communicate with their 10 largest institutional shareholders to inform them on the business strategy, including new efforts for improving shareholder value.

“A company should approach each proxy season with a thorough assessment of the real voting power of dissident institutional shareholders,” the TCB press release states. “Such an estimate ultimately allows the company to determine the level of tolerance for inadvertent ‘no’ votes by its retail investors.”

TCB also recommends developing a specific strategy, in collaboration with proxy solicitors and investor relation advisers, to improve external communications on corporate matters, engage retail investors, and ultimately increase voting response. Since that’s likely to significantly increase the costs of uncontested elections, TCB says nominating/governance committees should monitor the use of corporate resources and ensure appropriate safeguards from insider abuses and conflicts of interest.

Finally, companies should ensure that at least one routine matter, such as auditor ratification, is put to a vote at the meeting since brokers can still vote uninstructed shares with respect to “routine” items on the agenda.

The Securities and Exchange Commission voted 3-2 along party lines to approve the New York Stock Exchange rule amendment that effectively ends broker discretionary voting in director elections.

The rule change will be effective for shareholder meetings held on or after Jan. 1, 2010.

At today’s open meeting, Commissioners Elisse Walter and Luis Aguilar voted along with Chairman Mary Schapiro to approve the rule change, which amends NYSE Rule 452 and corresponding Section 402.08 of its Listed Company Manual to eliminate broker discretionary voting for the election of directors, except for companies registered under the Investment Company Act of 1940.

“The most fundamental way shareholders can ensure that directors remain accountable to them is through the director election process,” Schapiro said. “The NYSE rule proposal is designed to help assure that voting rights for matters as critical as the election of directors are exercised by those with economic interests in the company rather than by brokers, thereby improving corporate governance and enhancing accountability.”

Currently, under Rule 452, brokers are allowed to vote in uncontested director elections shares held in street name if they don’t receive instructions from share owners 10 days before the annual meeting. Proponents of the change say the votes distort election outcomes, since brokers tend to vote in line with management. Opponents of the change argue that it will make it harder for some companies to achieve quorum and could raise solicitation costs. The controversial NYSE rule proposal had been sitting in limbo at the SEC since October 2006.

Commissioners Kathleen Casey and Troy Paredes voted against the rule change, largely due to concerns that the change to Rule 452 should be made only as part of a broader reform of the proxy process, and not in isolation.

“Although I agree with the animating principle behind the amendment … that the election of directors is not merely a routine matter, I believe we are doing investors a tremendous disservice by approving this without closely analyzing the effects this action is likely to have in determining what other changes to the proxy voting process should be adopted concurrently with this rule change,” Casey said.

However, Schapiro, noting that the proposal “has essentially been awaiting approval for nearly three years, said, “Keeping our decisions on hold indefinitely doesn’t solve problems. So, I think it is time for us to move forward.”

Still, acknowledging “logistical concerns about the new rule’s implementation,” Schapiro said, “There are related areas of shareholder communication and voting and logistics that the Commission absolutely will be studying this year.”

Commissioners at the meeting also voted to approve publishing for comment proposals to amend its rules to enhance and expand the disclosures that registrants are required to make about the relationship between compensation and material risk, the qualification of director candidates, and why they chose their particular leadership structure, as well as additional information about the board’s use of compensation consultants. The SEC also voted to approve rules clarifying how companies that receive TARP money can comply with the requirement under the Emergency Economic Stabilization Act of 2008 to hold a shareholder advisory vote on executive pay.

Details of the proposals have not yet been posted to the SEC’s Website. Compliance Week will provide readers full coverage of the SEC’s actions at the July 1 meeting in an upcoming edition.

Reminder to NYSE-listed companies: Recent changes to the Exchange’s immediate release policy are now in effect.

Changes to NYSE Rule 202.06 allow companies to disseminate material information by any Regulation Fair Disclosure-compliant method to comply with the immediate release policy, rather than always requiring companies to issue a press release as previously required.

The amended rule also clarifies that timely prior notification to the NYSE regarding such disclosures made shortly before or during market hours is a requirement, not just a recommendation, Tom Shropshire, a partner with the law firm Linklaters notes in a May 12 client alert.

As previously reported, the changes, which bring the NYSE requirement in line with Nasdaq rules, were proposed in an April rule filing. The Securities and Exchange Commission approved the amendments on April 27.

Public disclosure under Reg FD can generally be accomplished by filing or furnishing a Form 8-K with the SEC or through another disclosure method that’s reasonably designed to provide broad, non-exclusionary distribution of the information to the public, such as press releases, conference calls, press conferences, Webcasts, and posting information on corporate Websites or blog posts that meet the Reg FD Website posting requirements, as long as there is adequate notice and access to the public, the alert notes.

While foreign private issuers are exempt from Reg FD, those issuers can now comply with their timely alert policy by any method that constitutes compliance for a U.S. domestic issuer. That means they should be able to satisfy their disclosure obligations by filing a Form 6-K with the SEC, says Shropshire.

“It’s generally a helpful change that recognizes the multitude of forms in which people obtain current information about the companies they invest in,” he tells Compliance Week. “Rather than send everything down the wire to the NYSE … companies can use any number of means they normally have in their arsenal to communicate with investors.”

The final rule also amends Rule 202.06 to clarify that timely notification to the NYSE is required when the announcement of news of a material event or a statement dealing with a rumor which calls for immediate release is made shortly before the opening or during market hours (9:30 a.m. to 5:00 p.m., New York time), the alert states. The purpose of the notification is to allow the Exchange to consider whether trading in the security should be temporarily halted.

Prior to the amendment, the rule recommended, but didn’t require, that the company’s NYSE representative be notified by phone at least 10 minutes prior to release of the announcement.

The notification must inform the NYSE of the substance of the announcement, inform the NYSE of the method by which the company intends to comply with the immediate release policy, and provide the NYSE information to locate the news upon publication. If the announcement is in written form, the company must provide the text of the announcement to the NYSE by e-mail at least 10 minutes prior to its release, Shropshire notes.

The New York Stock Exchange has filed a proposal to amend its listing rules to allow companies to comply with its immediate release policy by disseminating information by any Regulation Fair Disclosure-compliant method, rather than always requiring a press release.

Currently, to comply with the Exchange’s immediate release policy—which calls for companies to quickly release to the public any news or information that might reasonably be expected to materially effect the market for its securities—listed companies must issue a press release.

However, the April 8 rule filing proposes to amend Section 202.6 of its Listed Company Manual to provide that companies may comply with the immediate release policy by disseminating information using any method or combination of methods that constitutes compliance with Reg FD, the rule aimed at curbing the selective disclosure of material non-public information, such as filing a Form 8-K with the Securities and Exchange Commission, conference calls, press conferences, and Webcasts, as long as adequate public notice and access are provided.

The change would also allow NYSE-listed foreign private issuers, who aren’t required to comply with Reg FD, to comply with their timely alert policy by any method that would constitute compliance for a U.S. domestic issuer.

The proposed change would harmonize the NYSE requirement with Nasdaq rules.

In its filing, NYSE says it believes that “many companies will continue to issue press releases in relation to material news events, but also believes that it is appropriate to enable companies to utilize the flexibility and discretion with respect to the method of disclosure provided by Regulation FD.”