e-Proxy Rule Complete; Calif. Stock Options; More

The Securities and Exchange Commission has posted the 72-page adopting release for its mandatory e-proxy rule, Shareholder Choice Regarding Proxy Materials, which takes effect for the largest companies next year.

The rule, which lets shareholders choose the way they access proxy materials, requires issuers and other soliciting persons to post proxy materials online and provide shareholders a notice of the Internet availability. Issuers or other soliciting persons can choose to furnish paper copies of proxy materials along with the notice. If a paper copy isn’t sent with the notice, shareholders can request a free hard copy.

Large accelerated filers, excluding registered investment companies, must comply with the amendments for proxy solicitations commencing on or after Jan. 1, 2008. Registered investment companies, persons other than issuers, and issuers that aren’t LAFs must comply with the amendments for proxy solicitations commencing on or after Jan. 1, 2009, but may opt to comply with the deadline for LAFs.

The adopting release answers some lingering questions issuers may have had. For instance, notes Laura Richman, of the law firm Mayer, Brown, Rowe & Maw, until the final rule was released, “There had been some confusion as to whether the mandatory nature of e-proxy required all issuers to have their proxy materials completed 40 days before the meeting date.”

Richman

Companies who choose to use e-proxy’s “notice only” option must meet the 40-day deadline, notes Richman. “However, if a company elects to fulfill its proxy requirements exclusively by the full set delivery option, the final release clarifies that the 40-day deadline does not apply.”

While the rule has been hailed for its potentially tremendous cost savings and modernization of the proxy dissemination process, issuers and others have raised concerns about the timing of its implementation. As Compliance Week reported, when the SEC proposed the mandatory rule in January, it simultaneously adopted a voluntary “notice and access” model that became effective July 1. Commenters, to no avail, had urged the SEC to delay the implementation date of the mandatory rule until they had more experience with the voluntary rule, so they could determine—among other things—how notice and access might impact participation by retail investors and how the fulfillment process would work.

Still, Richman notes that companies can elect to continue delivery of full paper copies of the proxy materials to all shareholders under the mandatory rule. Those companies will need to prepare the notice or incorporate the notice requirements into its proxy statement or card, and post its materials on a publicly accessible Web site, she says—but otherwise “it will not find its proxy delivery routine very different from what has been the traditional method of proxy delivery.”

Further, she notes that companies can choose to use different methods to disseminate proxy materials for the same meeting. For example, they can use the notice-only option for institutional shareholders and the full set delivery option for individual shareholders.

While companies may not realize the full cost savings in their first year using the mandatory rule, since they may order an initial print run far in excess of what they need to avoid fulfillment problems, Richman says, “In subsequent years, as a company develops its own e-proxy history, it will be able to more comfortably estimate its needs for paper proxy materials and achieve the savings that e-proxy was designed to permit.”

California Changes Stock Option Rule For OTC, Other Companies

Changes to a cumbersome California regulation related to stock option plans hold welcome news for some public companies, experts say.

Earlier this month, the California Department of Corporations amended its regulations concerning the permissible provisions of stock option plans of publicly traded companies whose securities aren’t traded on a national securities exchange.

Bishop

Keith Bishop, a partner at the law firm Buchalter Nemer, says those changes will be of interest to public companies not listed on the NYSE or Nasdaq Global or Global Select Market—such as those listed on Nasdaq Capital Market, OTC Bulletin Board, and Pink Sheets, and foreign public issuers not listed in the United States, as well as private companies.

Currently, out-of-state companies whose securities aren’t traded on a national exchange are required to obtain a permit from California in order to offer stock options to employees in California, says Tahir Naim, a senior associate at the law firm Fenwick & West. For California-based companies, the permit is necessary to grant stock options to employees anywhere.

“California’s permit regulations have been the most-detailed in the nation and frequently required amendment of plans to conform with these requirements,” says Naim. While it was possible to request an exception, the burden was on the company to justify why an exception should be made and the granting of an exception “was by no means routine,” says Naim.

CALIF. CORPORATION RULES

Effects of the changes to California Department of Corporations’ rules concerning stock option plans for public companies not traded on a national exchange

NOW

BEFORE

Non-voting common stock can be used.

Common stock of the class with the most favorable voting rights had to be used.

Option granted to a 10% shareholder can have an exercise price equal to 100% of fair market value on the date of grant.

Option exercise price had to be at least 110% of fair market value on date of grant.

Source:

Fenwick & West.

As a result, Bishop says that in the past, out-of-state companies with plans that didn’t meet the requirements often either didn’t offer options to their California employees or created a separate plan for those employees.

Naim

Naim says the most significant effect of the amendments, which took effect July 9, is that performance-based vesting, which has become increasingly popular in recent years, can now be extended to options granted to non-officer employees. Previously, California required vesting for non-officer employees based solely on length of service and at a rate of no less than 20 percent of the shares per year.

“The bottom line is that the likelihood for companies of having problems with their option plans in California is far less,” says Bishop. However, he adds, “It’s not eliminated altogether.”

What’s In A Name? SEC Approves SRO Merger

The deal is sealed. The Securities and Exchange Commission gave its final regulatory approval to the merger of the regulatory arms of the National Association of Securities Dealers and NYSE Regulation into a single, consolidated self-regulatory organization known as the Financial Industry Regulatory Authority, or FINRA.

Schapiro

The combination is expected to eliminate duplication and streamline regulation for the roughly 200 U.S. securities firms, which account for some 80 percent of industry revenues that now are dually regulated by both SROs. Mary Schapiro, who serves as NASD chairman and CEO, will serve as CEO.

The new regulatory body had struggled with some naming issues. FINRA was originally going to be called the Securities Industry Regulatory Authority, or SIRA. However, according to a Wall Street Journal article earlier this month, the acronym sounded too much like the Arabic term sirah, which refers to the biographies of the Prophet Muhammed. Complaints from individuals who found the acronym offensive forced a name change.

Taub

However, the new acronym, FINRA, comes with its own headaches. The name and even the Internet address, finra.com, are already in use by a company in the securities industry, Financial Reporting Advisors. Coincidentally, Compliance Week columnist and former SEC Acting Chief Accountant Scott Taub joined that firm earlier this year.

In addition, the National Association of Personal Financial Advisors (NAPFA) is complaining that the new combined regulatory bodies’ name “does more to mystify investors than help them.” That’s because the group believes that “Financial Industry Regulatory Authority” implies authority over every professional offering financial products or services. “In actuality, FINRA only has oversight over those selling financial products and investments,” noted a NAPFA press release. “This group does not include many financial planners and Registered Investment Advisers.”

FINRA, assuming that’s what it’s going to be called, will operate under SEC oversight. For a link to SEC’s July 26 order approving the amendments to NASD’s bylaws, and other related resources and coverage, see box above right.