Corporate America get ready: Like it or not, proxy access has finally arrived.

In a 3-2 vote, the Securities and Exchange Commission adopted a 451-page rule to allow shareholders access to a company’s proxy materials to include their nominees to the corporate board of directors.

Under the new rules, a qualifying shareholder or group of shareholders who have continually owned at least 3 percent of the company’s voting stock for at least 3 years will have access to the company’s proxy to nominate one candidate or 25 percent of the board, whichever number is greater.

The previous proposal floated by the SEC last year would’ve required ownership of 5 percent at the smallest companies and 1 percent for the largest companies and would’ve required shares to be held for just one year.

Under the rule, while shareholders may opt to adopt access rules that provide for greater access, either through a management recommendation or Rule 14a-8 shareholder proposal, they can’t limit the availability of the new proxy access rule. That “one-way flexibility” was one of the major criticisms by the two dissenting commissioners, Kathleen Casey and Troy Paredes.

Corporation Finance Division Director Meredith Cross noted that there will be a no-action letter process for issuers to get informal staff advice on whether a nominee must be included.

The new rules are deferred for “smaller reporting companies” for three years to allow the Commission to monitor implementation of the rules at larger companies and make changes, if necessary. The previous proposal didn’t include any delay.

The rules will become effective 60 days after publication in the Federal Register.

Under the rule, nominating shareholders must provide notice to the company of intent to use new rule 14-a-8 no earlier than 150 days prior to the anniversary of the mailing of the prior year’s proxy statement and no later than 120 days prior to that date.

Shareholders can’t borrow stock to achieve the 3 percent threshold. However, stock lent may be counted, if the nominating shareholder can recall the stock if the company includes the shareholders’ nominee in its proxy.

Today’s vote marked the agency’s fourth attempt since 2003 to address the contentious issue of proxy access. The move follows last month’s passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which affirmed the SEC’s authority to adopt an access rule.

SEC Chairman Mary Schapiro said the agency will closely monitor how the new rules are implemented.
“We will monitor not only in the context of future application to smaller companies … but also so that we can make prompt changes for all companies, if practice demonstrates the need to do so,” she said in her opening remarks.

Compliance Week will provide readers with detailed coverage of the new rules in its Aug. 31 edition.

Confirming the recent rumors, the Securities and Exchange Commission has officially posted notice that it will finally hold a vote next week on a proposal to give shareholders access to corporate proxies for nominating directors.

According to the Aug. 18 Sunshine Act Meeting Notice, the SEC will hold an open meeting on Aug. 25 to consider whether to adopt changes to the federal proxy and other rules to facilitate director nominations by shareholders.

The divisive issue has dogged the agency for years. It has tried unsuccessfully to craft rules for proxy access multiple times since 2003. The SEC’s five commissioners have themselves been split on the issue, as witnessed by last year’s 3-2 SEC vote to publish a rulemaking proposal.

Critics of the concept, including most companies, say it will lead to battles over board seats and will give special interests too much power. Supporters, including public pension funds and others activists, argue  that making it easier and less costly for shareholders to nominate directors will help make boards more accountable to a company’s investors.

Beyond the debate about whether or not allowing shareholders to place nominations for directors in corporate proxies is a good idea, issues such as how a federal rule would operate, how it would interact with state law, and the Commission’s authority to adopt it have been sticking points in the past.

This time, however, the SEC has something it previously didn’t—explicit backing from Congress. The Dodd-Frank Act signed into law in July includes language authorizing the Commission to let investors nominate directors on corporate proxies. Section 971 of the bill gives the SEC wide latitude to decide the details of a proxy access rule, including the ability to exempt smaller issuers from complying with it.

The details of the proposal to be voted on next week remain to be seen. The proposal floated by the Commission last summer would allow shareholder access on a sliding scale, where shareholders could gain nomination rights if they hold anywhere from 1 to 5 percent of outstanding shares for at least a year. It would also give shareholders the right to submit proposals related to director elections or the nomination process—including proxy access.

However, given the debate during the congressional conference and the flood of comments the SEC has gathered since that plan was unveiled, it’s likely some of the details will look different.

Stayed tuned. Compliance Week will provide readers with complete coverage of next week’s meeting.

As expected, the Securities and Exchange Commission’s five commissioners voted unanimously to publish its long-awaited Concept Release on the U.S. Proxy System.

The so-called “proxy plumbing” concept release, which is expected to include a 90-day comment period when published, is part of the first comprehensive SEC review of the infrastructure of the U.S. proxy voting system in nearly 30 years. [Update: the 151-page Concept Release has been posted to the SEC Web site].

The SEC is seeking input on whether changes to the current system might be needed in light of developments during that time in shareholder demographics, the structure of share holdings, technology, and the potential economic significance of each proxy vote.

“With all of these changes, it is time to once again ask the fundamental policy questions that led to the development of the current infrastructure, as well as to examine issues that, three decades ago, either did not exist or were not considered significant,” SEC chairman Mary Schapiro said in remarks during the July 14 open meeting.

Schapiro noted that more than 600 billion shares are voted annually at more than 13,000 shareholder meetings each year.

The concept release focuses on three major issues: the accuracy and transparency of the voting process, the manner in which shareholders and corporations communicate, and the relationship between voting power and economic interest.

“While we believe the system overall is working, it is certainly reasonable that it can work better,” Meredith Cross, director of the SEC’s Division of Corporation Finance, noted. Cross added that the issuance of the concept release “is not the end of our review of the U.S. proxy system.”

“After we receive public input, we expect to bring to recommendations to the commission for changes to the rules if it appears the changes would help investors and improve the proxy system,” she said.

SEC staff members detailed nine major issues to be addressed in the release:

Over-voting and under-voting, which can occur when there’s a mismatch between the number of shares held by a broker-dealer and the number of shares credited to the broker-dealer’s customers’ accounts. SEC staffer Ray Be noted that one of the methods used by some broker-dealers to reconcile their records and allocate votes in order to avoid over voting may result in under voting. He said the release will seek comment on whether the method used by broker-dealers to allocate votes should be disclosed, and whether the SEC should require a particular method be used.

Vote confirmation that votes cast were received and recorded properly—which Schapiro noted “currently only exists in limited circumstances.”

Proxy voting in the context of securities lending. Rather than passing judgment on the merits of securities lending, Schapiro said the release will examine whether investors who lend securities need information sooner about the content of shareholder meetings so they can decide whether to recall their shares and regain their right to vote them. The release will also ask whether mutual funds and closed-end funds should be required to disclose the number of shares that a fund votes at a particular meeting, in addition to how they vote.

Proxy distribution fees. The release will ask for input on the fees charged to issuers to reimburse broker-dealers for the costs of forwarding proxy materials. Maximum fees, which are set by stock exchange rules, haven’t been revised since 2002. Be said potential actions could include having the stock exchanges revise the fee schedule or eliminating it and allowing market forces to determine the appropriate fees.

Issuers’ ability to communicate with beneficial owners. The release will seek input on whether the 25 year-old “OBO/NOBO” system, which allows shareholders to keep their identities confidential from issuers, is still the “most appropriate regulatory response to the competing interests of privacy versus effective shareholder-corporation communications.” Be said the release will seek comment on whether to eliminate limit, or discourage use of “OBO” status.

Removing barriers/disincentives to retail investor voting participation. The release will seek comment on ideas for improving investor education; enhancing brokers’ Internet platforms; permitting advance voting instructions for retail investors (known as client-directed voting), and enhancing investor-to-investor communications.

Data-tagging proxy-related materials. In response to a February recommendation by the SEC Investor Advisory Committee, the concept release seeks comment on whether data-tagging proxy-related data, such as information relating to executive compensation and director qualifications, might enhance shareholders’ ability to analyze issuer disclosures and to make informed voting decisions, and what it might cost.

“Empty voting”—where the right to vote is disconnected from the economic interest in the outcome of the vote—as a result of certain hedging strategies; the sale of shares after the record date but before the annual meeting; voting unallocated shares in an ESOP, and certain stock lending. The release will seek input on the scope and significance of “empty voting”; the costs versus benefits; whether certain issuers are more vulnerable to “empty voting” than others; and whether regulatory responses are warranted, such as requiring the disclosure of decoupling activities.

The role of proxy advisory firms. The SEC will seek input about concerns that proxy advisory firms may be subject to undisclosed conflicts of interest, may fail to conduct adequate research, or may base recommendations on erroneous or incomplete facts. The release will ask whether firms should be subject to increased SEC oversight.

Compliance Week will providers subscribers with complete details in an upcoming edition.

The long-awaited Securities and Exchange Commission “proxy plumbing” concept release to seek input on how to modernize the voting infrastructure is officially on the agency’s agenda.

The SEC has scheduled an open meeting for July 14 to consider whether to issue a concept release to solicit public comment on whether the agency should consider revisions to its rules to promote greater efficiency and transparency in the U.S. proxy system and enhance the accuracy and integrity of the shareholder vote, according to the July 7 Sunshine Act Meeting notice.

Various constituents in the proxy voting arena have been anxiously awaiting the concept release, which is part of a broader review of the federal proxy rules.

In remarks last November, SEC Chairman Mary Schapiro noted that SEC staffers were already looking at how corporate proxies are distributed and votes are tabulated.

Concerns about voting accuracy and shareholder communications aren’t new. The Business Roundtable first sent a rulemaking petition to the SEC raising such issues back in 2004, and they were a topic of conversation during a 2007 SEC forum. Efforts to alter the system have proven complicated however, because of the intricacies of the existing system—even those who think an overhaul is needed admit that tinkering with any part of it could have unintended consequences.

However, recent developments, such as the adoption of majority-voting standards by many companies, the elimination of broker votes in uncontested director elections, a steepening decline in retail voting, and increasingly close voting results, have made the accuracy of proxy voting a bigger concern.

At the same time, action is expected on a pending SEC proposal to enable shareholders to place nominations for directors in corporate proxy statements. The proposal floated for comment by the Commission last year has been sidelined, awaiting Congressional action to affirm the SEC’s authority to promulgate proxy access rules. The financial regulation reform bill reported by the conference committee and passed by the House included language that does that. However, the bill must still be approved by the Senate and signed by the president.

Among other things, the concept release is expected ask questions about whether proxy advisory firms should be subject to greater Commission oversight, whether there ought to be checks on the accuracy of the information provided by proxy advisers, whether advisers who provide services to both corporations and investors are managing and disclosing conflicts of interest appropriately.

Other topics the SEC is expected to seek input on include ways to ensure accuracy in vote tabulation; whether current rules adequately address threats such as “over-voting” or “empty-voting,” where investors lending shares to others might distort the true count of a vote; how to address the abysmal voting rate among retail investors; and whether the current beneficial-owner system should be changed so companies can communicate with their shareholders more easily.

As previously reported, anticipation of the release has already spawned discussion papers, including one by the National Investor Relations Institute and the Society of Corporate Secretaries & Governance Professionals making recommendations related to proxy advisory firms, and one commissioned by the Council Of Institutional Investors opining on possible changes to the OBO/NOBO system.

The Securities and Exchange Commission voted unanimously today to publish a statement updating its position on the possible adoption by U.S. companies of International Financial Reporting Standards that keeps a 2011 deadline for making a final decision on whether or not to make the move, but would delay adoption until at least 2015.

Under the statement approved at a Feb. 24 open meeting, if ongoing convergence projects are successfully completed and a forthcoming SEC staff work plan is executed, the Commission would still make a decision in 2011 on whether to adopt IFRS for all U.S. companies.

However, based on views by commenters on its 2008 proposed roadmap for IFRS adoption that companies would need a four- to five-year timeframe to make the change in their financial reporting systems to incorporate IFRS, SEC officials said if they decide to move forward with IFRS adoption, U.S. companies wouldn’t report under IFRS any earlier than 2015.

The 2008 proposed roadmap for IFRS adoption contemplated letting some U.S. companies use IFRS as soon as filings for fiscal years ending on or after Dec. 15, 2009, and would’ve mandated adoption on a phased-in schedule starting in 2014.

Under today’s statement, the SEC isn’t pursuing the early use option at this time, but said it may consider it later. It also left open the question as to how issuers would adopt IFRS—for instance whether it would be mandated or voluntary and phased-in or all at once.

The statement directs the SEC staff to gather information to help the Commission evaluate the impact that the use of IFRS by domestic companies would have on the U.S. securities market, with public progress reports beginning by October 2010 on a staff work plan and on the status of convergence efforts by U.S. and international standard setters.

The Financial Accounting Standards Board, which oversees U.S. Generally Accepted Accounting Principles, and the International Accounting Standards Board, which sets IFRS, set a 2011 target date for a completion of their current convergence projects. The Commission said it will continue to monitor the progress of those efforts.

According to an SEC fact sheet, the staff work plan will focus on concerns raised by commenters including:

• Determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the U.S. reporting system.
• Ensuring that accounting standards are set by an independent standard-setter and for the benefit of investors.
• Investor understanding of and education about IFRS, and how it differs from U.S. GAAP.
  Understanding whether U.S. laws or regulations beyond the securities laws, such as tax laws and regulatory reporting, would be affected by a change in accounting standards.
• Understanding the impact on large and small companies, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies.
• Determining whether the people that prepare and audit financial statements are sufficiently prepared, through education and experience, to make the conversion to IFRS.

Roughly a third of the capital markets outside of the United States use IFRS, according to the SEC. Foreign private issuers have been permitted since 2008 to file financial statements with the SEC prepared in accordance with IFRS without reconciling to U.S. GAAP.

“Incorporating IFRS into our financial reporting system would involve a significant undertaking,” SEC Chairman Mary Schapiro said in remarks during the meeting. “We must carefully consider and deliberate whether such a change is in the best interest of U.S. investors and markets.”

At the same meeting, the SEC voted 3-2 to adopt an alternative uptick rule, which amends Rules 201 and 200(g) of Regulation SHO to impose short sale restrictions.

Under the rule, which was opposed by Republican Commissioners Kathleen Casey and Troy Paredes, a circuit breaker would be triggered for a stock any time its price drops 10 percent or more from the prior day’s closing price in one day, and short selling in that security would only be allowed if the price is above the current national best bid.

The alternative uptick rule would apply to short sale orders in that stock for the remainder of the day and the following day. The SEC said the rule generally would apply to equity securities listed on a national securities exchange, whether traded on an exchange or in the over-the-counter market.

The topic of International Financial Reporting Standards for domestic companies is back on the Securities and Exchange Commission’s agenda.

At an Open Meeting on Feb. 24, the Commission will consider “whether to publish a statement regarding its continued support for a single-set of high-quality globally accepted accounting standards and its ongoing consideration of incorporating International Financial Reporting Standards into the financial reporting system for U.S. issuers,” according to a Sunshine Act Meeting Notice posted Feb. 19.

At the same meeting, the SEC will also consider whether to adopt amendments to Rules 201 and 200(g) of Regulation SHO relating to short-sale restrictions.

The SEC published its proposed roadmap on the adoption of IFRS for U.S. companies for comment in November 2008, as the economic crisis was deepening. Under that proposal, a small group of public companies would be able to  start filing using IFRS voluntarily as early as 2010, and others would be required to adopt the standards on a phased-in scheduled, starting with fiscal years ending on or after Dec. 15, 2014, if certain milestones were met. A final decision on whether to move ahead with mandatory adoption would be made in 2011.

While the 200-plus comment letters were generally supportive of the pursuit of a single set of global accounting standards, they were sharply divided on how best to get there.

The proposed roadmap was put on the back burner last winter as the SEC dealt with the financial crisis, the Madoff fraud debacle, and a change in its leadership when the new administration took over last year.

After remaining mum on the issue for months, SEC officials in public remarks last fall said that converging U.S. Generally Accepted Accounting Principles and IFRS would be a high priority for the agency. The U.S. accounting standards setters, the Financial Accounting Standards Board and the International Accounting Standards Board, which sets IFRS, are working on several major joints projects to bring their standards closer.

As previously reported, at a conference in December, SEC Commissioner Elisse Walter said the SEC wouldn’t move forward with any plan until it was satisfied that concerns about IASB’s susceptibility to political pressure and independence were resolved.

Back in 2007, the SEC abolished a long-standing requirement that overseas companies listed on U.S. exchanges reconcile their financial statements to U.S. Generally Accepted Accounting Principles if they file using IFRS as promulgated by IASB.

—by Jaclyn Jaeger. E-mail Jaclyn at jjaeger@complianceweek.com.

It’s official: The Securities and Exchange Commission voted 3-2 today to publish an interpretive release, providing guidance to companies on its current disclosure requirements concerning climate change.

Chairman Mary Schapiro stressed that the SEC is not commenting or opining on the issue of climate change; rather the guidance is intend to “provide clarity and enhance consistency” to help companies decide what does and does not need to be disclosed.

Not all agreed with the release of the guidance. SEC Commissioner Kathleen Casey expressed particular concern about its timing with all the issues in the market today, and commented that it “sends a curious signal about the most pressing issues facing shareholders.”

In addition, Casey said the guide “falls outside our expertise and beyond our investor protection,” at a time when science and policy are increasingly in flux over the effects of climate change. “This guidance is premature at best,” she said.

Investor groups have long been pushing the SEC to issue guidance requiring companies to assess and disclose the risks they face from climate change. Casey argued, however, the interpretive release would, in fact, only cause more harm to investors by increasing their regulatory burdens.

SEC Commissioner Troy Paredes expressed all the same concerns as Casey. “Now is not the time to support climate change disclosure,” he concluded.

SEC Commissioners Luis Aguilar, Elisse Walter, and Schapiro strongly spoke in support of the interpretive release. Aguilar further noted that the guidance is only a “first step in where the Commission will begin to play a more proactive role.”

Compliance Week will have full coverage of the SEC’s decision on climate change in its Feb. 2 edition.

Get ready for new guidance on climate change disclosure. The Securities and Exchange Commission plans to vote next week on an interpretive release to provide guidance to companies on its current disclosure requirements.

According to a Sunshine Act notice posted Jan. 20, the SEC has scheduled an Open Meeting on Jan. 27, where it will consider a recommendation to publish an interpretive release to “provide guidance to public companies regarding the Commission’s current disclosure requirements concerning matters relating to climate change.”

Investor groups have long been pushing the SEC to issue guidance requiring companies to assess and disclose the risks they face from climate change.

If the Commission votes to publish the interpretive release, SEC spokesman John Nester clarified that it would be effective immediately upon publication, since it’s guidance, not a rule change.

Nester says the guidance is a response to “many factors, including that current guidance was written more than 25 years ago and much has changed since then.”

Also on the agenda is consideration of a recommendation to adopt new rules, rule amendments, and a new form under the Investment Company Act of 1940 governing money market funds.

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.

As anticipated, the Securities and Exchange Commission has scheduled an open meeting for Dec. 16 to consider whether to adopt amendments to its rules to enhance the disclosures companies are required to make about compensation and other corporate governance matters.

While the form and effective date of any final rule the Commission might adopt remains to be seen, SEC officials have repeatedly said they want to have the rules in place in time for the 2010 proxy season.

The proposals, detailed in a 137-page proposing release published in July, call for greater disclosure of risks, executive compensation, or risks stemming from executive compensation. Most notably, as proposed, the rules would require companies be required to discuss and analyze compensation policies for all employees, including non-executive officers, if risks arising from those compensation policies or practices may have a material effect on the company.

The proposals would also require more disclosure about director nominees’ experience, and an explanation of whether companies separate their chairman and CEO roles and any possible compensation consultant conflicts of interests. Other proposed amendments would change how companies report the value of the stock and option awards granted to executives and directors and require disclosure much sooner of shareholder voting results. Comments on those proposals closed in September.

Also on the agenda for the meeting is consideration of amendments to the investment adviser custody rule (rule 206(4)-2) under the Investment Advisers Act of 1940) and related forms and rules.

Compliance Week will provide readers with full coverage of the SEC’s actions at the meeting in an upcoming edition.