On July 1, 2009, the U.S. Securities and Exchange Commission held an open meeting to consider three proposals related to proxy statement disclosure enhancements and shareholder voting. The proposals regarding "say on pay" and enhanced proxy statement disclosures were approved unanimously by the Commissioners. The vote to approve revisions to NYSE Rule 452 on broker discretionary voting was passed, three to two. The proposed rule changes are:

  • "Say on Pay" The SEC will add new Rule 14a-20 to the proxy statement disclosure requirements to effectuate Section 111(e) of the Emergency Economic Stabilization Act of 2008, which requires each recipient of Troubled Asset Relief Program (TARP) funds to include a "say on pay" shareholder proposal in the matters presented in the proxy materials for each annual meeting (or special meeting in lieu of an annual meeting) for the election of directors. The requirement to include a "say on pay" proposal applies to a TARP recipient as long as it holds the TARP funds or owes any obligations related to such funds. The proposed new rule does not provide any specific disclosure requirements related to such "say on pay" proposals to allow greater flexibility to applicable companies.

  • Enhanced Proxy Statement Disclosure The SEC proposes amendments to the existing proxy statement disclosure requirements to:

          • Improve disclosure and analysis in Compensation Discussion and Analysis of a company's policies as they relate to compensation below the level of the five most highly compensated officers. Companies will also be required to identify and discuss the impact of risk on executive compensation policies and the role of the Board of Directors in the risk management process.
        • Require disclosure in the Summary Compensation Table of the full grant date value of equity-based awards, as calculated under FAS 123(R). This represents a return to the initially proposed disclosure requirements and replaces the current requirement to provide the FAS 123(R) value for all existing outstanding awards in the Summary Compensation Table.

      • Expand the disclosure regarding the qualifications of directors and director‑nominees to include more information about the experience, qualities, attributes, and skills that make each individual qualified to serve as a director of the company and a member of the committees on which he or she serves. In addition, the SEC proposes expanding the disclosure requirement regarding board service to include not only current board assignments but also a five-year history of board service on public company boards. Finally, disclosure about involvement in certain types of legal proceedings would be required for 10 years, rather than the current five years.

      • Include a discussion of why the company's particular leadership structure was selected. Such discussion would include a description of whether the Chair and CEO positions are combined and, if so, why, and whether the Board has identified a Lead Independent Director.

      • Provide disclosure regarding fees and services provided to the company by compensation consultants and their affiliates. Such discussion would include disclosure of any additional services provided, an aggregate of all fees paid for all such services and fees specifically paid for compensation consulting services, and information regarding how a compensation consultant was retained and whether the Board or the Compensation Committee approved the retention.

      • Accelerate the public disclosure of the results of any shareholder vote. The proposed rule would add a new item to the Current Report on Form 8-K that would require disclosure of any shareholder vote within four days after the shareholders' meeting.

      • Revise the proxy solicitation rules to provide new rights and requirements related to such solicitations by proponents other than the issuer.

  • Broker Non-Votes The SEC approved an amendment to NYSE Rule 452 to eliminate broker discretionary voting for any election of directors, with a narrow exception for registered investment companies. This proposed change has been pending approval for three years and has had fervent supporters and critics. The election of directors is vested in shareholders, and proponents of the rule change have argued that discretionary voting by brokers and other securities intermediaries provides this right to an individual with no economic interest in the subject company. In addition, the distinction between contested and uncontested elections for directors has blurred in recent years with "just say no" and "withhold your vote" campaigns. Many companies objected to this rule change, citing concerns over the ability to obtain a quorum for meetings without broker voting participation, the potential negative impact the change could have on the switch to majority voting requirements for directors, and the potential to further disenfranchise retail shareholders. The dissenting Commissioners expressed concern over a piecemeal approach to rule changes regarding shareholder voting. All Commissioners strongly encouraged the SEC staff to focus on investor education activities surrounding this rule change. Chairman Mary L. Schapiro noted that the Commission would consider shareholder voting initiatives this year.

The first two proposed rules, once finalized, would become effective for the 2010 proxy season. There will be a 60-day comment period after the proposed rules are published in the Federal Register. The order approving the NYSE Rule 452 amendment will apply to shareholder meetings held on or after January 1, 2010. Ballard Spahr's Securities Group will continue to monitor these and other SEC proposals and are available to assist clients as they prepare to address the new requirements. Please feel free to contact Justin P. Klein (215.864.8606, kleinj@ballardspahr.com), Gerald J. Guarcini (215.864.8625, guarcini@ballardspahr.com), or Mary J. Mullany (215.864.8631, mullany@ballardspahr.com).

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