The Securities and Exchange Commission may have caught some by surprise earlier this month when it proposed amendments to its so-called “e-proxy” rules aimed at making the rules more user friendly for retail investors. That’s not to say the changes are unwelcome.

The proposals, posted to the SEC’s Website on Oct. 14 with little advance notice they were coming, would give companies more flexibility regarding the format of the notice they must send to shareholders alerting them that proxy materials are available online. They would also allow issuers and soliciting shareholders to include materials with the notice to better explain the process to shareholders.

The proposing release also includes guidance about the SEC requirement that notices sent to shareholders identify matters to be acted on at the shareholder meeting, and changes to when a notice must be delivered to shareholders if a soliciting person (other than the company itself) is relying on the notice-only option.

The amendments come in response to a worrying drop in participation among retail shareholders since the SEC adopted the e-proxy rules in 2007—which allow companies to mail only a short notice to shareholders explaining where they can access proxy materials online, unless the shareholder requests a full set of proxy materials in the mail. Experts say the proposals are welcome, but may not go far enough to address all the concerns issuers have about the e-proxy process.

Diamond

“The changes as proposed are definitely positive and non-controversial,” says Colin Diamond, a partner in the law firm White & Case. “The only question is whether they go far enough.”

As Compliance Week has previously reported, statistics tracked by Broadridge show that at companies using the notice-only option to distribute proxy materials, the response rate from retail voters is only 28 percent. Among companies that exclusively use the full-set delivery option, the response rate is 32 percent.

An even wider gap emerges when looking at companies that use both methods to reach shareholders. At those issuers, 29 percent of retail voters responded when they received the full set of materials, but among shareholders who received the notice only, the response rate was 13 percent.

“The changes as proposed are positive and non-controversial. The only question is whether they go far enough.”

—Colin Diamond,

Partner,

White & Case

And at least some shareholders are still confused about how notice and access works. For example, the SEC noted, some shareholders attempted to indicate their voting instructions by returning a marked copy of the notice.

“During the first year of notice and access there were clearly some problems with the process that needed to be fixed. There was a real educational void,” says Jeff Morgan, president and chief executive of the National Investor Relation Institute. “This proposal starts to go down the path to fix that by allowing issuers to include explanatory materials and having the SEC staff put together an education program.”

According to the release, the SEC’s Office of Investor Education and Advocacy has been directed to develop a program to educate shareholders—individual shareholders in particular—about the notice-and-access model, how they can participate, and what their rights are. Morgan hopes that effort will include information companies can use on their Websites and elsewhere to educate investors about the proxy process.

Improving the e-Proxy Process

The e-proxy amendments come on the heels of the SEC’s approval of a New York Stock Exchange rule change that eliminates broker-dealer voting in all director elections, effective Jan. 1, 2010. That change has sharpened fears that companies will need to round up more retail voters to get a quorum.

REQUEST FOR COMMENT

Below are some of the questions the SEC has asked as it plans to amend its notice-and-access rules:

Has use of the notice and access model made proxy materials more or less accessible to shareholders? The Commission is concerned by reports that indicate there has been a drop in shareholder response rates to proxy solicitations by individual shareholders under the notice and access model, especially when the notice-only option has been used. We are proposing changes to the Notice requirements intended to make the Notice clearer and encourage efforts to better inform shareholders about participation under the notice and access model. Do the proposed changes help in enabling issuers and other soliciting persons to make the Notice clearer? Will these changes help address concerns about confusion and other factors that may be reducing shareholder participation? What other changes to the notice and access model should we consider to address these concerns?

What factors have caused the lower shareholder response rates by individual shareholders to proxy solicitations when the notice-only option is used under the notice and access model? If the lower shareholder response rates result primarily from the notice and access model itself, would requiring issuers to deliver paper copies of proxy materials to some subset of individual shareholders, such as shareholders that own over a certain threshold of shares or that have received paper copies of proxy materials and voted in the past, affect voting rates? Does permitting issuers to choose to which shareholders to provide notice-only and full set delivery affect voting rates? If so, how are issuers exercising their discretion over full set delivery and are they doing so appropriately? Would additional requirements affect an issuer’s ability to implement the notice and access model? Are there other alternatives that would increase the voting rates under the notice and access model?

Should we consider adding requirements that would limit an issuer’s ability to use the notice-only option where the issuer has experienced a decrease in shareholder participation as a result of using the notice-only option for distribution to some portion of its shareholders? For example, should we only allow an issuer to continue to use the notice-only option if the shares voted or the voting response rate has not decreased from the most recent issuer’s meeting when they provided all of their shareholders with full set delivery? Would some decrease, such as 10% or 20% be acceptable? Should we instead consider requiring shareholder participation to increase from prior years in order for an issuer to continue to use the notice-only option? Are there other participation-level conditions that we should consider?

Will shareholders find the Notice more confusing if we do not prescribe how to describe the matters to be acted on at the meeting? Should we prescribe minimum standards for formatting? Should we instead require a legend to the effect that the Notice should not be used for voting on matters, and that a separate proxy card or Vote Instruction Form should be used for voting?

Should we permit the Notice to be accompanied by materials to explain the process of receiving and reviewing the proxy materials and voting as proposed? Should we require that explanatory materials be included? Should we allow these explanatory materials to include any additional information? For example, should an issuer or other soliciting person be permitted to explain what the benefits of using the notice and access model would be? Should we specify by rule the topics that cannot be included? Should we include the level of detail in the explanation in this section in the text of the rule? For example, should the rule specifically provide that the explanation in the Notice may not contain materials designed to persuade shareholders to vote in a particular manner, change the methods of delivery or explain the basis for sending the Notice? Should a soliciting person be permitted to explain why it has decided to use the notice-only option?

Has the notice and access model lowered costs for issuers and other soliciting persons resulting from the proxy solicitation process? Have any costs increased? In your response, please quantify the costs and savings of using the notice and access model, and provide supporting data where possible.

It is our understanding from informal conversations our staff has had with issuers and proxy distribution service providers that a number of issuers were discouraged from using the notice and access model due to the difficulty of meeting the 40-day Notice mailing requirement. Would a 30day

deadline for delivery of the Notice still allow sufficient time for shareholders who prefer paper proxy materials to request and receive them through the mail? Would changing to a 30-day deadline encourage use and improve implementation of the notice and access model? If the Notice mailing requirement for the issuer were shortened, would any changes be necessary to the filing and mailing requirements for soliciting persons other than the issuer?

Some issuers have expressed concern regarding the fees charged by proxy distribution service providers. Have the fees charged by proxy distribution service providers affected use rates of the notice and access model? Should the Commission address fees charged by service providers relating to the implementation of the notice and access model? If so, how?

Should the Commission consider proposing suspension of the notice and access rules until a later date to provide more time for shareholders to understand and be better prepared for the notice and access model? If so, how much time would be appropriate? Would additional educational efforts be sufficient to inform shareholders about the notice and access model, or would other efforts, such as development of an on-line disclosure and voting infrastructure, be needed? If so, why?

Source

SEC Proposing Release on Notice and Access (Oct. 14, 2009).

“A lot of companies are already concerned they’re going to experience a drop in retail shareholder voting,” Diamond says. “Any companies using e-proxy will be grateful for these changes, but for a company deliberating using e-proxy, this is unlikely to tip the balance.”

If approved, he adds, the changes should help issuers maintain or slightly increase their retail shareholder participation because they’ll be able to make the instructions clearer. But because the proposing release arrives so late in the year—comments on the 42-page proposal are due by Nov. 20—the SEC might not issue final rules soon enough to help companies decide how to handle their 2010 annual meeting, he says.

Among other things, the release seeks comment on how the mechanics of the notice-and-access model can be improved to increase shareholder participation.

For instance, the SEC asks whether it should consider limits on a company’s ability to use notice and access where the issuer has seen a drop in shareholder participation as a result of using the notice-only option for distribution to some shareholders. The SEC also wants to know how the notice-and-access model has affected costs.

While the SEC didn’t propose reducing the 40-day timeline that applies for the notice to be sent by issuers, it does ask whether a 30-day deadline for delivery would improve implementation of the notice-and-access model—which raises the possibility that the SEC might shorten the deadline in any final rule it adopts.

Morgan

Diamond and Morgan say companies are likely to press for that change during the comment period, so they can send out materials later in the meeting season. “One challenge of adopting notice and access is finding the extra days to fit into a timeline that’s already very tight for many companies,” Diamond says.

The release also asks whether the SEC should consider suspending the notice-and-access rules until a later date, to provide more time for shareholders to understand and be better prepared for the notice-and-access model.

Diamond say one telling sign is a question the SEC didn’t ask: whether it should allow issuers to send the notice with a proxy card, which would be a fundamental change in how e-proxy works.

“That says the SEC isn’t looking to fundamentally change the e-proxy regime it created,” he says. “They believe it can be sufficiently improved by making minor changes to the form of the notice.”

Explaining the Issue

The SEC proposals would only permit, rather than require, issuers and other soliciting persons to include explanatory information about the notice. Still, the SEC said it “strongly encourages issuers and other soliciting persons who use the notice-only option to better inform shareholders about the notice-and-access model.”

Morgan isn’t sure how much that specific step will help. The decline of the retail vote, he says, “is a larger problem that goes well beyond notice and access. This is just one step in an overall look at how the proxy process works.”

Diamond agrees. The SEC “is right to go about fixing the non-controversial areas it can fix,” but the proposals at hand don’t address fundamental changes in how shares are voted, he says. Larger problems of over-voting, under-voting, and disclosure of beneficial ownership all influence voting patterns, and have been raised in the broader discussion of who should have access to the proxy statement.

That discussion is flummoxing the SEC. Commissioners have vowed to undertake a review of the “proxy plumbing” this year, but exactly when that will happen and what reforms might be proposed are still anyone’s guess.

Observers say the proposal to allow greater flexibility regarding the form of the notice essentially codifies a change the SEC informally approved earlier this year, when it gave its blessing to a more user-friendly notice designed by Broadridge.

“Until now, the notice has been formulaic, the content was specified, and it couldn’t be accompanied by any other material,” Diamond says. “It will be helpful for companies to be able to include the additional information to explain what notice-and-access is.”

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