On July 15, 2003, the Securities and Exchange Commission (SEC) released a report prepared by its Division of Corporation Finance recommending major changes to SEC proxy rules relating to the nomination and election of directors. For the first time, Corporation Finance is recommending that shareholders be provided access to company proxy materials to nominate directors. Any proposed rule will also focus attention in proxy statements on companies' Nominating Committees and nominating processes, akin to the reports now submitted by Audit and Compensation Committees. We will further update our readers on this preliminary but potentially troubling proposal as rules are proposed and after a scheduled discussion of this report with Alan Beller of the SEC at an American Bar Association meeting in August.

Background

The SEC asked Corporation Finance to report on this topic in April, continuing SEC attention on the nominating process that began in 1942 or earlier. The current corporate governance environment has brought new focus to the topic, and 690 commenters, including the ABA and ASCS, submitted comments.

The Division's Recommendations

The Division discusses five alternatives for increasing such shareholder participation and poses a list of questions for each alternative that the SEC could consider or submit for public comment if the SEC were to propose such alternative. The report recommends that the SEC publish rule proposals and solicit public comment on three changes that would enhance shareholder participation:

1. Permit, for the first time, shareholder access--in certain circumstances --to a company's proxy materials for purposes of nominating candidates for election as director. Triggering events that would allow shareholder access may include a company's failure to act on shareholder proposals that receive majority votes, receipt of significant percentages of "withhold" votes in director elections, or approval of a shareholder proposal to activate the shareholder access rule;
2. Increase proxy statement description of the Nominating Committees and the nomination process; and
3. Require specific disclosure regarding shareholder communications with board members.

(The Division chose not to recommend two other possible proposals, for distribution of nomination cards with proxy materials, or for revision of Rule 14a-8 to ease shareholder proposals on the nominating process.)

Timing of Proposals

SEC Chairman William H. Donaldson has directed the SEC staff to prepare rule proposals that would effect each of the recommendations in the report for the SEC's consideration as early as August, other than the proxy access recommendation, which he has requested to be prepared as early as September.

Additional Information

You can find the full text of the Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors at www.sec.gov/news/studies/proxyreport.pdf. You can find discussion of other recent laws, regulations, rule proposals of interest to public companies on our website.