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SEC Proxy Access Vote Delayed Until Early 2010

On Friday, SEC Chair Mary Schapiro announced that the Commission would delay voting on either proxy access or federally mandated standards for shareholder nominated directors, from November 9, 2009 to early 2010. Schapiro indicated the SEC needed more time to evaluate comments, modify the final rule and vote on the proposal. This makes perfect sense as generally it takes four to six months after a comment period closes on an SEC proposal before a vote. The comment period on this proposal closed in mid-August suggesting an early 2010 decision, which is exactly the revised time table. So why did the SEC ever plan to approve the rule so quickly, and what other extenuating circumstances may have come into play at the SEC?

Allow me to speculate – the SEC knew they had the votes to approve and implement proxy access for the 2010 proxy season. With all the work done over the years on proxy access, I suspect there was a feeling that an accelerated date would be easily met. But a few things have happened over the past few months that I believe also entered into their decision:

1. First, many believe the SEC’s legal authority to mandate proxy access is questionable without Congressional authority. Financial reform in Congress has slowed dramatically due to the time it is taking to get healthcare reform passed. Senator Dodd has indicated that final financial reform legislation will not pass the Senate until January 2010. So it makes some sense for the SEC to wait and see what happens in Congress before proceeding. Will Congress give the SEC proxy access authority? The legislation will begin to take form in late November and December so stay tuned.

2. Second, if there are delays beyond early November, and/or depending upon the intricacies of the final rule, could Broadridge implement the desired system changes in time for a 2010 start? It would be disastrous to move forward with a system that wouldn’t necessarily be fully tested by Broadridge in time for proxy season, and that has the potential to make 2010 proxy results questionable.

3. Third, I believe many are worried about the potential combined impact from eliminating NYSE Rule 452 and implementing proxy access. I certainly am. You may recall NIRI’s concerns on these matters in our comment letters on NYSE Rule 452 and proxy access. I think these concerns have grown over the past few months. An adverse outcome for public companies could have raised serious concerns about the SEC’s actions and had serious political ramifications.

4. Fourth (and I would like to think this was a very critical piece of the SEC’s thinking), NIRI and other groups that are a part of the Shareholder Communications Coalition have been pushing hard to shed light on problems with the proxy system, or “proxy plumbing.” I think fixes are needed before the proxy system collapses under its own weight. I believe the SEC realizes this as well, so waiting for some solutions in proxy plumbing along with a decision on proxy access is best for investors, issuers and our capital markets. Just this past week the Coalition spent several hours at the SEC discussing our August draft to improve the system. The SEC has acknowledged the problems and is working on proposals to fix proxy plumbing issues (NOBO/OBO, share lending, accuracy of elections, etc). I believe the SEC is sincere in its desire to improve this system, and will hopefully start to circulate potential solutions in early 2010 as well.

5. The fifth concerns the SEC’s two part proposal – one part would create federally mandated proxy access (14a-11), and the other part would allow shareholders the ability to amend a company’s nominating process using the normal proxy channels (14a-8(i)(8)). If the SEC acted in November, it would have likely only approved the latter ability (14a-8(i)(8)) due to the open questions as just discussed, despite their desire to approve both proposals. I suspect there was a belief that if the SEC only approved one part, it would be very difficult to get the other part approved at a later date. So the delay of a few months and one proxy season may enable the SEC to approve both pieces of the proposal in just a few months.

The bottom line is the delay of a proxy access vote until 2010 – welcome news for issuers (if only for potentially a few months). But this announcement allows everyone to begin planning with certainty for next year’s proxy season. Companies need to focus now on preparing for the upcoming proxy season following the changes to NYSE Rule 452 and the loss of broker voting for directors, and this should include educating investors on the importance of their vote. Hopefully others (exchanges, SEC, broker dealers, etc.) will accept the mandate that they have the responsibility to educate on this point as well.

Other news of interest to investor relations professionals from the past week includes:

• The SEC held two days of meetings on short selling. It looks like the possibility of creating a pre-borrow requirement for short sellers beyond just locating the stock is dead (for now). But regular short position disclosure in a 13F-like filing seems to have gained new life (much like it did in the U.K. with last week’s FSA announcement), along with some type of circuit breaker or uptick mechanism. I am still hopeful the SEC will pass a final rule before the end of 2009.
• Also this past week the SEC and CFTC missed the President’s deadline for a joint report on fixing the regulatory void between derivatives and equities, but announced a date of October 15 for the release of their proposal.

Until next week,

Jeff Morgan, CAE
President & CEO
jmorgan@niri.org
www.twitter.com/jeffreydmorgan

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