Commissioner Nazareth Speaks on Today’s SEC Vote

We have hosted several posts on the SEC’s consideration of shareholder access to the ballot, including this post by Lucian Bebchuk on a comment letter submitted to the SEC by thirty-nine law professors and this post by Lynn Stout on her Wall Street Journal op-ed on the subject.

The SEC today voted 3-1 to adopt a rule permitting companies to exclude from the corporate proxy shareholder proposals on ballot access for director elections. Although the text of the final rule is not yet available, the SEC has released a forceful speech by the lone dissenter, Commissioner Annette Nazareth, expressing her disappointment in the SEC’s decision.

The speech is worthwhile reading for anyone interested in the future of the ballot-access issue. Commissioner Nazareth’s talk concludes:

Shareholder rights face a long uphill battle with this Commission. I hope we have not completely lost the opportunity to address these issues thoughtfully. Given that all 40 of the largest markets outside the U.S. give investors in public companies the ability to nominate and remove directors, this recognition of shareholder rights is long overdue. Chairman Cox has clearly stated his intention to move forward with proxy access in the very near future. I fervently hope that is the case and that this effort succeeds in the coming year.

The full text of Commissioner Nazareth’s speech is available here.

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  1. James McRitchie
    Posted Monday, December 3, 2007 at 8:44 am | Permalink

    Proxy Access: Was Long Island Care a Deception?

    During his testimony before the Senate Banking Committee on Nov. 14, Cox said the AFSCME v AIG decision “applies only in one of the 12 judicial circuits in America. And it has created great uncertainty and danger for every stakeholder in our public markets.” He then led us to believe the AFSCME v AIG decision was in conflict with a more recent Supreme Court decision.

    “This uncertainty is compounded by a recent decision of the U.S. Supreme Court, which creates doubt about the state of affairs even in the Second Circuit. The Supreme Court reversed another panel of the Second Circuit in a similar case of an agency that changed its interpretation of its rules. Just as in the proxy access case, the Second Circuit rejected the agency’s more recent interpretation. Justice Breyer’s opinion for the unanimous Court held that the agency’s interpretation of its own regulations is controlling unless plainly erroneous. As a result of this decision, it is more likely today that even a Second Circuit court would uphold the agency’s longstanding interpretation of our proxy access rule. In this escalating state of confusion, the only rule across America at the moment is every litigant for himself.”

    He wanted the ”legal uncertainty” created by these two apparently contradictory court decisions cleared up before the 2008 proxy season begins next spring. That’s the logic he used to sell to the public on why the SEC needed to adopt a new rule this year. The other primary reason was the need for “important shareholder protections, such as disclosure and antifraud rules” if proxy access were to be implemented.

    As Commissioner Nazareth said in her statement on the day the no access rule was passed, the Long Island Care v Coke Supreme Court case that Cox alluded to was decided “six weeks before our July open meeting. Yet, the Long Island Care decision was not mentioned in any of the discussion at the open meeting nor in the proposing release. I find it striking that so much emphasis is now placed on a case that apparently no one thought worthy of discussing at the proposing stage and that, as far as I am aware, did not appear in any of the literally thousands of comment letters we received on the non-access proposal.”

    Nazareth also noted, the disclosure proposed in the access rule (which I presume was approved by Cox), “would have been more burdensome than in the takeover context.” If additional disclosure requirements were advised, why didn’t the Commission consider options “such as applying existing disclosure requirements and prohibitions on false and misleading statements to nominations done through bylaw procedures. Alternatively, the Commission could have proposed revising Rule 14a-8(i)(8) to allow companies to exclude proposals that do not require a nominating shareholder to comply with the proxy contest disclosure rules.”

    The disclosure requirements Cox apparently wants, especially those that would have been required for simply introducing a proxy access resolution, appear to be were designed not primarily to protect investors but to impose such a burdensome process that it would discourage such filings. (see my comments on the limited access rule)

    The more pressing issue of the two was clearly the “escalating state of confusion” caused by the conflict between Long Island Care and AFSCME v AIG.

    In Long Island Care decision, the Supreme Court reversed a decision by the Second Circuit and concluded that the Department of Labor (DOL) was entitled to deference, since the agency had arrived at its rule through public notice and comment. In the words of the Court, “That the DOL may have interpreted the two regulations differently at different times in their history is not a ground for disregarding the present interpretation, which the DOL reached after proposing a different interpretation through notice-and-comment rulemaking …” (my emphasis)

    In the AFSCME case, the SEC adopted amendments to Rule 14a-8 through notice and comment in 1976, and in a Statement accompanying the adopting release, announced an interpretation that would allow for shareholder access proposals.

    According to the AFSCME ruling, the 1976 Statement clearly reflects the view that the election exclusion is limited to shareholder proposals dealing with identified board seats in an upcoming election not shareholder proposals that would institute procedures making such election contests more likely in future elections.

    As the AFSCME decision notes, SEC staff, changed its interpretation over time, not through notice and comment as was the case in Long Island Care, but inconsistently through no action letters, without “reasoned analysis.” The Second Circuit found that “The SEC fails to so much as acknowledge a changed position, let alone offer a reasoned analysis of the change.”

    Chairman Cox created the impression that Long Island Care resulted in confusion. However, if Long Island Care had any bearing at all on AFSCME, it was that deference must be given to the SEC’s original interpretation and the 1976 Statement that supported the rule. Long Island Care didn’t create confusion, it resulted greater certainty.

    What did he know, and when did he know it?

    Does Cox really believe Long Island Care conflicts with AFSCME or led to created greater confusion? If so, how? If the two decisions are truly in conflict why didn’t the Business Roundtable or other opponents, who can afford the highest paid attorneys in the land, make that argument that during the public comment period?

    If Cox read Long Island Care before the SEC’s July hearing on proxy access, why didn’t he bring it up then? Did he intentionally spring the case on the public just before adoption to reduce the time for analysis.

    Cox clearly appeared to rely on the confusion argument in convincing the public of the need to move forward now, if not the other Republican Commissioners. Is it mere irony that if the rule adoption goes unchallenged, the SEC’s new rule might be protected by the very Long Island Care decision that Cox said created uncertainty? Now, if the no access rule goes to the Supreme Court, the SEC can point to the fact that, like DOL in Long Island Care, the SEC went through public notice and comment and is due the same deference.

    If such a rule had been adopted in California, it might face a serious procedural challenge since agencies are required to include in the original notice “each technical, theoretical, and empirical study, report, or similar document, if any, upon which the agency relies in proposing the adoption…” A California state agency that relied on a decision, such as Long Island Care, as the rationale for enacting a rule would probably have to go out for an additional public comment period if the agency failed to discuss or reference that case in its public notice. If federal rulemakings procedures don’t require something similar, they should.