SEC Makes Its Moves On Proxy Access, IFRS

Shareholder access to the proxy statement—an idea anathema to most of Corporate America, but nevertheless one forcing itself upon boardrooms anyway—is back on the agenda for the Securities and Exchange Commission.

The SEC has scheduled a trio of roundtables on shareholder rights and the federal proxy rules, including one to examine the relationship between federal proxy rules and state corporation law. The meetings are open to the public and will be at the SEC offices in Washington, D.C., on May 7, May 24 and May 25.

At the May 7 roundtable, panelists will address the federal role in upholding shareholders’ state law rights; the purpose and effect of the federal proxy rules; and binding and nonbinding proposals under the proxy rules, according to a Commission press release. SEC Chairman Christopher Cox said the May 7 session will pose questions to participants about possible ways to improve the relationship between the federal proxy rules and state corporation law.

So far, little information is available about the two other roundtables on proxy voting. The SEC said a final agenda and list of participants and moderators will be published closer to the dates of the roundtables.

Shareholder access is expected to be the hottest topic at the forums. Already a few companies have had shareholder resolutions come to a vote at annual meetings, including governance bellwether Hewlett-Packard, which defeated its resolution. Comverse Technologies—which had a spate of executives indicted last year for options backdating—agreed last week to allow proxy access for certain shareholders, the first major company to do so voluntarily.

Proxy access aside, observers also expect debate over issues such as proposals to give shareholders an advisory vote on executive compensation packages, or whether companies should be more responsive to nonbinding proposals that have strong shareholder support.

Slutzky

“Two topics likely to result in a lot of discussion are shareholder access to an issuer’s proxy statement and the issues of binding proposals and nonbinding proposals concerning management compensation under the proxy rules,” says Steven Slutzky, of the law firm Debevoise & Plimpton.

Brett Cooper, with the Orrick, Herrington & Sutcliffe law firm, says there could be “an effort to link shareholder access to the proxy to whether an issuer has implemented or been responsive to successful nonbinding proposals.”

In light of the House of Representative’s recent approval of a bill to give shareholders an advisory vote on executive pay and the high number of “yes” votes for shareholder say-on-pay proposals this spring, Cooper says he expects that issue to be “a major area of discussion.”

Proxy access re-emerged as a governance issue last fall, when an appeals court ruled that insurer American International Group had to allow a proxy access proposal to go onto its proxy statement. Until then, it was generally accepted that SEC Rule 14a-8 disallowed such proposals. The Commission has promised repeatedly since December to issue new guidance on the subject, but the commissioners have been unable to reach a consensus on what to do. The SEC has since said that it will take up the issue by November, in time for any changes to be implemented for the 2008 proxy season.

Cooper

Still, Cooper says, “Given the roundtables will not take place until May and the substantial resistance from the business community to the last shareholder access proposal, I would be surprised if the SEC will be able to coordinate a grand plan for changes to the proxy rules before the 2008 proxy season.” Rather, he says he expects the SEC to focus on implementing “some form of shareholder access rule.”

Robert Messineo, a partner at the law firm Weil, Gotshal & Manges says, “It would be hard for the SEC to go another season without addressing the issue of how it will treat access proposals.”

Messineo says the SEC staff could reaffirm their historic position and say they won’t allow access proposals, explaining their reasons. Though that position wasn’t accepted by the 2nd Circuit court, he says, “That was only because the SEC hadn’t explained its reasons.” Alternatively, the SEC could reassess the issue and come up with new a rule or approach, such as allowing advisory access proposals but not mandatory ones.

Whatever the SEC may do on Rule 14a-8 would have to be effective by late October or early November at the latest, says Messineo, since calendar year companies usually have their annual meetings in April or May, with a deadline for submitting proposals in November or December.

SEC Promises Proposals On Choice Of Using GAAP, IFRS

The SEC has taken two giant steps closer to accepting international financial reporting standards, promising that it will reveal two proposals this summer to allow foreign and domestic issuers the choice to file financial statements in IFRS rather than U.S. Generally Accepted Accounting Principles.

The Commission last week promised two concept releases on the ideas by summer, followed by a public comment period. The announcements came seven weeks after the SEC held a roundtable on its push to converge IFRS and GAAP by 2009. At that meeting, a steady stream of critics said the SEC was moving too slowly and that its requirement for foreign issuers to reconcile IFRS statements with GAAP was a waste of time.

The SEC’s moves toward accepting IFRS come at the same time U.S. and European accounting rule makers are forging ahead with efforts to harmonize IFRS and GAAP by the end of the decade. SEC officials have said full convergence isn’t a condition for eliminating reconciliation.

Nearly 100 countries currently use (or have a policy of convergence with) IFRS, including the European Union, where IFRS reporting has been mandatory since 2005.

At an SEC roundtable on March 6, panelists urged the SEC to move quickly to dump the reconciliation requirement. Participants also said that because eliminating the requirement will give some, but not all, registrants a choice between IFRS and GAAP, that raises the question of whether all registrants should be able to report under either IFRS or GAAP.

Cox

SEC Chairman Christopher Cox said in a statement that the concept releases will keep the Commission on pace with its 2009 timetable. John White, director of the SEC’s Division of Corporation Finance, said the actions represent “critical steps toward a future regulatory framework in which IFRS may be used on a stand-alone basis by foreign private issuers and possibly also by U.S. issuers.”

White said the SEC staff will continue its work on IFRS so they will be able to make a recommendation to the SEC on the elimination of the reconciliation requirement in time for annual reports filed by calendar year foreign private issuers in 2009.

In recent public remarks, White suggested that the SEC might consider some sort of phase-in, with certain issuers exempt from the reconciliation requirement on a trial basis before the roadmap’s conditions have been fully met. For example, the Commission could end the requirement to reconcile interim-period financial statements.

One potential issue that must be considered: Most colleges in the United States don’t teach IFRS to accounting students. So even if U.S. companies are given the option to report in IFRS, “There would seem to be a large learning curve before there would be sufficient accountants to prepare those financial statements, or to audit them for that matter,” White noted in a March 23 speech.

Another issue is whether the filing deadline for foreign filers should be accelerated when the requirement is lifted. FPIs currently have until six months after their year-end to file the reconciliation and their Form 20-F with the SEC, presumably because they need extra time to prepare the reconciliation. U.S. issuers must file their annual reports with the SEC within 60 to 90 days of their year-end, depending on their size. And if the FPIs no longer need to prepare a reconciliation statement, the thinking goes, they should follow those same deadlines.