This post is by Annette L. Nazareth’s colleagues John H. Butler, Ning Chiu, Nora M. Jordan, Louis L. Goldberg, Kyoko Takahashi Lin, Barbara Nims and Mutya Fonte Harsch.
The SEC recently voted (3-2) to eliminate broker discretionary voting in director elections for meetings held on or after January 1, 2010. Previously, brokers were permitted to vote uninstructed shares in uncontested director elections, which were classified as “routine” under NYSE Rule 452. The rule change, which was adopted as proposed, could make it more difficult for directors to be elected under a majority voting standard, as we discussed in our previous newsflash, SEC Proposes Elimination of Broker Discretionary Vote in Director Elections for 2010.
As a result of this change, the number of votes in favor of board-nominated directors will be reduced, since brokers have typically followed the recommendations of incumbent boards in casting their discretionary votes. Other notable implications include:
• Brokers are and will remain unable to vote uninstructed shares in contested elections.
The rule change does not apply to registered investment companies. However, the new rule codifies two previously published interpretations relating to investment companies that do not permit broker discretionary votes (i) for material amendments to investment advisory contracts and (ii) on any proposal to obtain shareholder approval of an investment company’s investment advisory contract with a new investment adviser.
In addition to the discretionary voting changes, the SEC voted unanimously to publish proposals that would require what the SEC considers “better” disclosure of certain compensation- and corporate governance-related matters and would establish rules related to the obligations of TARP recipients to implement say on pay.
• New Disclosure on Board Leadership Structure. Proposed amendments to Item 407 of Regulation S-K and Schedule 14A will require disclosure of a company’s board leadership structure and require a discussion of why the company believes that this board leadership structure is the best structure for the company, including a discussion of whether and why the company has chosen to combine or separate the CEO and board chairperson positions and whether the company has a lead independent director. Further, the proposed amendments will require disclosure about the board’s role in the company’s risk management process and the effect, if any, that this has on the way the company has organized its board leadership structure.
• Expanded CD&A to Include Disclosure of Material Risks Arising from Any Compensation Policy. A proposed amendment to Item 402 of Regulation S-K will broaden the scope of the CD&A to require a discussion and analysis of any compensation policy and overall actual compensation practices for employees generally (not limited to those which pertain to named executive officers), if the risks arising from such policies or practices may have a material effect on the company. The Staff emphasized that this is targeted to elicit information on material risks and does not seek general information on all compensation policies and practices.
• Additional Disclosure on Compensation Consultants. A proposed amendment will require additional disclosure on the fees and services of compensation consultants and their affiliates if they provide both consulting services relating to executive or director compensation and additional services. Disclosure that will be required includes: (i) the additional services provided, (ii) the aggregate fees paid for all additional services, (iii) the aggregate fees paid for work relating to executive and director compensation consulting, (iv) whether the decision to engage the consultant or its affiliates for any other services was recommended or made by management and (v) whether the board or compensation committee has approved these other services.
• Accelerated Reporting of Annual Meeting Voting Results. A proposed amendment adding a new item to Form 8-K will require that annual meeting voting results be reported within four business days of a company’s annual meeting, instead of on Form 10-Q for the quarter.
• Clarifications to Proxy Solicitation Rules. Amendments to the following Exchange Act Rules were also proposed to clarify rules already in place regarding proxy solicitations:
• Solicitation Prior to Furnishing a Proxy Statement (14a-12). Proposed amendments will clarify that information regarding the identity and interests of participants in a solicitation must be available and on file no later than the time shareholders are first solicited.
• Say on Pay for TARP Companies. The SEC will essentially codify the requirements to which most TARP companies were already subject this year. A proposed new Rule 14a-20 and an amendment to Item 20 of Schedule 14A together will clarify how U.S. companies that have received financial assistance under TARP are required to implement their statutory obligations to have an advisory shareholder vote on executive compensation. There were no statements on changing the requirement to file a preliminary proxy statement, as discussed in our newsflash, “Say on Pay” Now a Reality for TARP Participants.
The proposed rules are subject to a 60-day public comment period after their publication in the Federal Register, which is expected shortly. We based this summary on oral discussions at the SEC’s recent open meeting.