[Federal Register: August 3, 2007 (Volume 72, Number 149)]
[Proposed Rules]
[Page 43488-43496]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03au07-29]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-56161; IC-27914; File No. S7-17-07]
RIN 3235-AJ95
Shareholder Proposals Relating to the Election of Directors
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is publishing this
[[Page 43489]]
interpretive and proposing release to clarify the meaning of the
exclusion for shareholder proposals related to the election of
directors that is contained in Rule 14a-8(i)(8) under the Securities
Exchange Act of 1934. Rule 14a-8 is the Commission rule that provides
shareholders with an opportunity to place a proposal in a company's
proxy materials for a vote at an annual or special meeting of
shareholders. The Commission is publishing its interpretation of and
proposing amendments to Rule 14a-8(i)(8) to provide certainty regarding
the meaning of the exclusion in that Rule.
DATES: Comments should be received by October 2, 2007.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
); Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-17-07 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-17-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
also are available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Lillian Brown, Steven Hearne, or
Tamara Brightwell, at (202) 551-3700, in the Division of Corporation
Finance, U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-3010.
SUPPLEMENTARY INFORMATION: We are publishing our interpretation of Rule
14a-8(i)(8) \1\ under the Securities Exchange Act of 1934.\2\ We also
are proposing amendments to Rule 14a-8(i)(8).
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\1\ 17 CFR 240.14a-8(i)(8).
\2\ 15 U.S.C. 78a et seq.
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I. Overview
A. Federal Regulation of the Proxy Process
Regulation of the proxy process is a core function of the
Commission and is one of the original responsibilities that Congress
assigned to the agency in 1934. Section 14(a) of the Exchange Act \3\
stemmed from a Congressional belief that ``fair corporate suffrage is
an important right that should attach to every equity security bought
on a public exchange.'' \4\ The Congressional committees recommending
passage of Section 14(a) proposed that ``the solicitation and issuance
of proxies be left to regulation by the Commission.'' \5\ Congress
intended that Section 14(a) give the Commission the ``power to control
the conditions under which proxies may be solicited'' \6\ and that this
power would be exercised ``as necessary or appropriate in the public
interest or for the protection of investors.'' \7\ Because the
Commission's authority under Section 14(a) encompasses both disclosure
and proxy mechanics,\8\ the proxy rules have long governed not only the
information required to be disclosed to ensure that shareholders
receive full disclosure of all information that is material to the
exercise of their voting rights under state law and the corporation's
charter, but also the procedure for soliciting proxies.\9\
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\3\ 15 U.S.C. 78n(a).
\4\ Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381 (1970),
quoting H.R. Rep. No. 1383, 73d Cong., 2d Sess., at 13 (1934). See
also J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964).
\5\ S. Rep. No. 792, 73d Cong., 2d Sess., at 12 (1934).
\6\ H.R. Rep. No. 1383, 73d Cong., 2d Sess., at 14 (1934). The
same report demonstrated a congressional intent to prevent
frustration of the ``free exercise of the voting rights of
stockholders.'' Id.
\7\ 15 U.S.C. 78n(a).
\8\ See Business Roundtable v. SEC, 905 F.2d 406, 411 (D.C. Cir.
1990) (``We do not mean to be taken as saying that disclosure is
necessarily the sole subject of Sec. 14''); Roosevelt v. E.I. du
Pont de Nemours & Co., 958 F.2d 416, 421-22 (D.C. Cir. 1992)
(Congress ``did not narrowly train section 14(a) on the interest of
stockholders in receiving information necessary to the intelligent
exercise of their'' state law rights); SEC v. Transamerica Corp.,
163 F.2d 511, 518 (3d Cir. 1947) (in which the Commission's
authority to promulgate Exchange Act Rule 14a-8 was upheld), cert.
denied, 332 U.S. 847 (1948). See also John C. Coffee Jr., Federalism
and the SEC's Proxy Proposals, New York Law Journal 5 (March 18,
2004) (Section 14(a) ``does not focus exclusively on disclosure;
rather, it contemplates SEC rules regulating procedure in order to
grant shareholders a `fair' right of corporate suffrage''); Louis
Loss & Joel Seligman, Securities Regulation 1936-37 (3d ed. 1990)
(The Commission's ``power under Sec. 14(a) is not necessarily
limited to ensuring full disclosure. The statutory language is
considerably more general than it is under the specific disclosure
philosophy of the [Securities Act of 1933].'')
\9\ E.g., Exchange Act Rule 14a-4 (17 CFR 240.14a-4), Exchange
Act Rule 14a-7 (17 CFR 240.14a-7), and Exchange Act Rule 14a-8 (17
CFR 240.14a-8). Each specifies procedural requirements that
companies must observe in soliciting proxies. Exchange Act Rule 14a-
4(b)(2) requires that the form of proxy furnish the security holder
with the means to withhold approval for the election of a director.
Exchange Act Rule 14a-7 provides a procedure under which a security
holder may be able to obtain a list of security holders. Exchange
Rule 14a-8 provides a procedure under which a qualifying security
holder can obligate the company to include certain types of
proposals, along with statements in support of those proposals, in
the company's proxy statement.
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B. Exchange Act Disclosure Requirements for Contested Elections
Several Commission rules, including Exchange Act Rule 14a-12,\10\
regulate contested proxy solicitations to assure that investors receive
adequate disclosure to enable them to make informed voting decisions in
elections. The requirements to provide these disclosures to
shareholders from whom proxy authority is sought are grounded in Rule
14a-3,\11\ which requires that any party conducting a proxy
solicitation file with the Commission, and furnish to each person
solicited, a proxy statement containing the information in Schedule
14A.\12\ Items 4(b) and 5(b) of Schedule 14A require numerous specified
disclosures if the solicitation is subject to Rule 14a-12(c). A
solicitation is subject to Rule 14a-12(c) if it is made ``for the
purpose of opposing'' a solicitation by any other person ``with respect
to the election or removal of directors. * * * '' \13\ Thus, the result
of Schedule 14A's cross-referencing of Rule 14a-12(c) is to trigger,
when a solicitation with respect to the election of directors is
conducted in opposition to another solicitation, a number of
disclosures relevant in proxy contests, including disclosure of: \14\
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\10\ 17 CFR 240.14a-12.
\11\ 17 CFR 240.14a-3.
\12\ Rule 14a-3 provides, in pertinent part, that ``[n]o
solicitation subject to this regulation shall be made unless each
person solicited is concurrently furnished or has previously been
furnished with a publicly-filed preliminary or definitive written
proxy statement containing the information specified in Schedule
14A. * * *''
\13\ Because numerous protections of the federal proxy rules are
triggered only by the presence of a solicitation made in opposition
to another solicitation, the requirements regarding disclosures and
procedures in contested elections do not contemplate the presence of
nominees from different vying factions in the same proxy materials.
\14\ See 17 CFR 240.14a-101, Items 4(b) and 5(b).
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[[Page 43490]]
By whom the solicitation is made;
The methods to be employed to solicit;
Total expenditures to date and anticipated in connection
with the solicitation;
By whom the cost of the solicitation will be borne;
Any substantial interest of each participant in the
solicitation;
The name, address, and principal occupation or principal
business of each participant;
Whether any participant has been convicted in a criminal
proceeding within the past 10 years;
The amount of each class of securities of the company
owned by the participant and the participant's associates;
Information concerning purchases and sales of the
company's securities by each participant within the past two years;
Whether any part of the purchase price or market value of
such securities is represented by funds borrowed;
Whether a participant is a party to any contract,
arrangements or understandings with any person with respect to
securities of the company;
Certain related party transactions between the participant
or its associates and the company;
Whether the participant or any of its associates have any
arrangement or understanding with any person with respect to any future
employment with the company or its affiliates, or with respect to any
future transactions to which the company or its affiliates will or may
be a party; and
With respect to any person who is a party to an
arrangement or understanding pursuant to which a nominee is proposed to
be elected, any substantial interest that such person has in any matter
to be acted upon at the meeting.\15\
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\15\ For purposes of Items 4 and 5, a ``participant'' in the
solicitation includes: (i) Any person who solicits proxies; (ii) any
director nominee for whose election proxies are being solicited; and
(iii) any committee or group, any member of a committee or group,
and other persons involved in specified ways in the financing of the
solicitation. See Item 4, Instruction 3. Thus, for each of the
numerous disclosures required as to a ``participant,'' the
information must be disclosed as to all of such persons.
In addition, Item 7 of Schedule 14A requires the furnishing of
additional information as to nominees for director, including nominees
of ``persons other than the [company]'' (e.g., shareholders),
including: \16\
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\16\ See 17 CFR 240.14a-101, Item 7. See also 17 CFR 240.14a-
101, Item 22(b).
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Any arrangement or understanding between the nominee and
any other person(s) (naming such person(s)) pursuant to which the
nominee was or is selected as a nominee; \17\
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\17\ See Item 401(a) of Regulation S-K [17 CFR 229.401(a)],
which is referenced in Item 7 of Schedule 14A.
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Business experience of the nominee; \18\
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\18\ See Item 401(e)(1) of Regulation S-K [17 CFR
229.401(e)(1)], which is referenced in Item 7 of Schedule 14A.
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Any other directorships held by the nominee in an Exchange
Act reporting company; \19\
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\19\ See Item 401(e)(2) of Regulation S-K [17 CFR
229.401(e)(2)], which is referenced in Item 7 of Schedule 14A.
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The nominee's involvement in certain legal proceedings;
\20\
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\20\ See Items 103 and 401(f) of Regulation S-K [17 CFR 229.103
and 17 CFR 229.401(f)], which are referenced in Item 7 of Schedule
14A.
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Certain transactions between the nominee and the company;
\21\ and
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\21\ See Item 404 of Regulation S-K [17 CFR 229.404], which is
referenced in Item 7 of Schedule 14A.
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Whether the nominee complies with independence
requirements.\22\
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\22\ See Item 407(a) of Regulation S-K [17 CFR 229.407(a)],
which is referenced in Item 7 of Schedule 14A.
Finally, and of critical importance, all of these disclosures are
covered by the prohibition on the making of a solicitation containing
false or misleading statements or omissions that is found in Rule 14a-
9.\23\
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\23\ See 17 CFR 240.14a-9.
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C. The Shareholder Proposal Process
Rule 14a-8 creates a procedure under which shareholders, subject to
certain requirements, may present in the company's proxy materials a
broad range of binding and non-binding proposals. The rule permits a
shareholder owning a relatively small amount of the company's shares
\24\ to submit his or her proposal to the company, and requires the
company to include the proposal alongside management's proposals in the
company's proxy materials. In all cases, the proposal may be excluded
by the company if it fails to satisfy the rule's procedural
requirements or falls within one of the rule's thirteen substantive
categories of proposals that may be excluded.\25\
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\24\ Exchange Act Rule 14a-8(b)(1) (17 CFR 240.14a-8(b)(1))
provides that a holder of at least $2,000 in market value, or 1% of
the company's securities entitled to be voted, may submit a
shareholder proposal subject to other procedural requirements and
substantive bases for exclusion under the rule.
\25\ With respect to subjects and procedures for shareholder
votes that are specified by the corporation's governing documents,
most state corporation laws provide that a corporation's charter or
bylaws can specify the types of proposals that are permitted to be
brought before the shareholders for a vote at an annual or special
meeting. Rule 14a-8(i)(1) supports these determinations by providing
that a proposal that is violative of the corporation's governing
documents may be excluded from the corporation's proxy materials.
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Rule 14a-8 specifies that companies must notify the Commission when
they intend to exclude a shareholder's proposal from their proxy
materials. This notice goes to the staff of the Division of Corporation
Finance or the Division of Investment Management. In the notice, the
company provides the staff with a discussion of the basis or bases upon
which the company intends to exclude the proposal and requests that the
staff not recommend enforcement action if the company excludes the
proposal. A shareholder proponent may respond to the company's notice,
but is not required to do so. Generally, the staff responds to each
notice with a ``no-action'' letter to the company, a copy of which is
provided to the shareholder, in which the staff either concurs or
declines to concur with the company's view that there is a basis for
excluding the proposal.\26\
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\26\ The staff's response is an informal expression of its
views, and does not necessarily reflect the view of the Commission.
Either the shareholder proponent or the company may obtain a
decision on the excludability of a challenged proposal from a
federal court.
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II. The Election Exclusion in Rule 14a-8(i)(8)
A. Introduction
Rule 14a-8(i)(8) sets forth one of several substantive bases upon
which a company may exclude a shareholder proposal from its proxy
materials. Specifically, it provides that a company need not include a
proposal that ``relates to an election for membership on the company's
board of directors or analogous governing body.'' The purpose of this
provision is to prevent the circumvention of other proxy rules that are
carefully crafted to ensure that investors receive adequate disclosure
and an opportunity to make informed voting decisions in election
contests.
In administering Rule 14a-8(i)(8), the staff has applied the
following explanation of the election exclusion that the Commission
gave in 1976 when it proposed the exclusion:
[T]he principal purpose of [Rule 14a-8(i)(8)] is to make clear,
with respect to corporate elections, that Rule 14a-8 is not the
proper means for conducting campaigns or effecting reforms in
elections of that nature, since other proxy rules, including Rule
14a-11, are applicable thereto.\27\
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\27\ Exchange Act Release No. 34-12598 (July 7, 1976) [41 FR
29982].
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[[Page 43491]]
In its application of the Commission's explanation, the staff
has permitted companies to exclude any shareholder proposal that may
result in a contested election. For purposes of Rule 14a-8, the
staff has expressed the position that a proposal may result in a
contested election if it is a means either to campaign for or
against a director nominee or to require a company to include
shareholder-nominated candidates in the company's proxy materials.
The staff's position is consistent with the explanation that the
Commission gave in 1976, and with the Commission's interpretation of
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the election exclusion.
A recent decision by the U.S. Court of Appeals for the Second
Circuit in American Federation of State, County & Municipal Employees,
Employees Pension Plan v. American International Group, Inc.,\28\
addressed the application of the election exclusion. In that decision,
the Second Circuit held that AIG could not rely on Rule 14a-8(i)(8) to
exclude a shareholder proposal seeking to amend a company's bylaws to
establish a procedure under which a company would be required, in
specified circumstances, to include shareholder nominees for director
in the company's proxy materials. The Second Circuit interpreted the
Commission's statement in 1976 as limiting the election exclusion ``to
shareholder proposals used to oppose solicitations dealing with an
identified board seat in an upcoming election and reject[ing] the
somewhat broader interpretation that the election exclusion applies to
shareholder proposals that would institute procedures making such
election contests more likely.'' \29\ It is the Commission's position
that the election exclusion should not be limited in this way.\30\
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\28\ American Federation of State, County & Municipal Employees,
Employees Pension Plan v. American International Group, Inc., 462
F.3d 121 (2d Cir. 2006) (AFSCME v. AIG).
\29\ Id. at 128.
\30\ In this regard, we note that the Second Circuit noted in
its decision that ``* * * if the SEC determines that the
interpretation of the election exclusion embodied in its 1976
Statement would result in a decrease in necessary disclosures or any
other undesirable outcome, it can certainly change its
interpretation of the election exclusion, provided that it explains
its reasons for doing so.'' Id. at 130.
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We are concerned that the Second Circuit's decision has resulted in
uncertainty and confusion with respect to the appropriate application
of Rule 14a-8(i)(8) and may lead to contested elections for directors
without adequate disclosure. In this regard, not only are shareholders
and companies unable to know with certainty whether a proposal that
could result in an election contest may be excluded under Rule 14a-
8(i)(8), but the staff also is severely limited in their ability to
interpret Rule 14a-8 in responding to companies' notices of intent to
exclude shareholder proposals. Therefore, to eliminate any uncertainty
and confusion arising from the Second Circuit's decision, we are
issuing this release to confirm the Commission's position that
shareholder proposals that could result in an election contest may be
excluded under Rule 14a-8(i)(8). We also are soliciting comment as to
whether we should adopt proposed changes to Rule 14a-8(i)(8) to further
clarify the rule's application. If clarification of the text of Rule
14a-8(i)(8) would be helpful, we are seeking input as to whether the
text of the proposed amendment provides adequate clarity.
B. The Purpose of the Election Exclusion
The proper functioning of the election exclusion is critical to
prevent the circumvention of other proxy rules that are carefully
crafted to ensure that investors receive adequate disclosure in
election contests. Because the board of directors of a company most
often will include its own director nominees in its proxy materials,
allowing shareholders to include their nominees in company proxy
materials would create what is, in fact, a contested election of
directors, without the shareholders conducting a separate proxy
solicitation.
The detailed and carefully crafted regulatory regime governing
contested elections does not contemplate the presence of nominees from
different vying factions in the same proxy materials. As explained
above, numerous protections of the federal proxy rules are triggered
only by the presence of a solicitation made in opposition to another
solicitation. Accordingly, were the election exclusion to be applied as
contemplated in the Second Circuit's decision in AFSCME v. AIG, it
would be possible for a person to wage an election contest without
conducting a separate proxy solicitation, and thus without providing
the disclosures required by the Commission's present rules governing
such contests, and potentially without liability under Rule 14a-9 for
misrepresentations made by that person in its proxy solicitations. Such
a result would be inconsistent with the Commission's 1976 statement
regarding Rule 14a-8(i)(8) and the staff's application of that
statement in responding to Rule 14a-8 notices of companies' intent to
exclude proposals.
C. Application of the Election Exclusion Since 1976
Since the Commission made its original statement regarding the
intended purpose of the election exclusion in 1976, the Commission has
made few statements regarding the exclusion, instead leaving
application of the exclusion to the staff to implement in accordance
with its stated intent at adoption. When the Commission has had
occasion to comment on the exclusion or to review staff positions in
applying the exclusion, however, it has done so in a manner that is
consistent with its longstanding view of the exclusion's purpose.
The Division issued a series of letters in 1990 that addressed
nomination proposals similar to that presented in the AFSCME v. AIG
matter. In those letters, the Division set forth its framework for
applying Rule 14a-8(i)(8) to nomination proposals:
There appears to be some basis for [the company's] view that the
proposal may be omitted pursuant to rule 14a-8[(i)](8). That
provision allows the omission of a proposal that ``relates to an
election to office.'' In this regard, the staff particularly notes
that the Commission has indicated that the ``principal purposes of
[rule 14a-8(i)(8)] is to make clear [that] with respect to corporate
elections, that [r]ule 14a-8 is not the proper means for conducting
campaigns * * * since other proxy rules, including rule [14a-12] are
applicable thereto.'' Securities Exchange Act Release No. 12598
(July 7, 1976). Insofar as it seeks to implement a common ballot
procedure, it appears that this proposal * * * would establish a
procedure that may result in contested elections to the board which
is a matter more appropriately addressed under Rule 14a-12.
Accordingly, this Division will not recommend enforcement action to
the Commission if the Company excludes the proposal from its proxy
materials.\31\
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\31\ See Division letter to Amoco (Feb. 14, 1990).
In 1992, in proposing reforms to the proxy rules, the Commission
acknowledged the ``difficulty experienced by shareholders in gaining a
voice in determining the composition of the board of directors'' but
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noted further that:
Proposals to require the company to include shareholder nominees
in the company's proxy statement [rather than in the dissident's own
proxy statement] would represent a substantial change in the
Commission's proxy rules. This would essentially mandate a universal
ballot including both management nominees and independent candidates
for board seats.\32\ (emphasis added).
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\32\ See Exchange Act Release No. 34-31326 (Oct. 16, 1992) [57
FR 48276].
The Division continued to include the ``may result in contested
elections'' language in its letters regarding shareholder nomination
proposals and Rule 14a-8(i)(8) for 10 years.\33\ In 1998,
[[Page 43492]]
the Division included this language in its letter to Storage Technology
Corporation.\34\ In that letter, the Division agreed that there was a
basis for the company's view that it could exclude, under Rule 14a-
8(i)(8), a proposal that sought to amend the company's governing
instruments to provide that any three shareholders who owned a combined
minimum of 3,000 shares could include a director nominee in the
company's proxy materials.\35\ The shareholder sought Commission review
of this Division position, but the Commission declined to review the
no-action determination.\36\
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\33\ In each of 1993 and 1995, the Division issued one letter
that took a view that was counter to existing precedent and its own
statements with regard to similar proposals. See Dravo Corp. (Feb.
21, 1995); and Pinnacle West Capital Corp. (Mar. 26, 1993) (not
permitting exclusion under Rule 14a-8(i)(8) of proposals seeking to
include qualified nominees in the company's proxy statement). The
staff issued these letters in error, as they clearly are
inconsistent with the Commission statement in the 1976 release
proposing Rule 14a-8(i)(8) and numerous Division statements before
and after. Further, these letters are inconsistent with later
Commission statements, as described below.
\34\ See Division letter to Storage Technology Corporation (Mar.
11, 1998) (``There appears to be some basis for your view that the
first proposal may be omitted under rule 14a-8[(i)](8). It appears
that the first proposal, rather than establishing procedures for
nomination or qualification generally, would establish a procedure
that may result in contested elections of directors, which is a
matter more appropriately addressed under Rule [14a-12].
Accordingly, the Division will not recommend enforcement action to
the Commission if the Company excludes the first proposal from its
proxy materials in reliance upon Rule 14a-8[(i)](8)'').
\35\ See id.
\36\ Letter of Jonathan Katz, Secretary of the Commission, to
Dr. Seymour Licht P.E. (Apr. 6, 1998).
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As noted above, the Division continued to include the ``contested
elections'' language in its Rule 14a-8(i)(8) no-action letters through
and beyond the Commission's 1998 letter to Storage Technology
Corporation. While the Division has continued to follow this analysis
in past seasons, it ceased repeating this language in its letters
during the 2000 proxy season, as the analysis had been established
definitively through 10 years of Division positions and the
Commission's letter to Storage Technology.
In 2003, the Division agreed that there was a basis for the view of
Citigroup Inc. that it could exclude, under Rule 14a-8(i)(8), a
proposal that was substantially similar to the proposal that was
submitted to AIG by AFSCME and that was the subject of the Second
Circuit's recent opinion. In its letter to Citigroup Inc. (Jan. 31,
2003), the Division agreed that there was a basis for the Citigroup's
view that the company could exclude a proposal because the proposal,
``rather than establishing procedures for nomination or qualification
generally, would establish a procedure that may result in contested
elections of directors.'' The shareholder proposal at issue in
Citigroup was submitted by AFSCME and, similar to the proposal
submitted to AIG, would have amended the company's bylaws to require
the company to include the name, along with certain disclosures and
statements, of any person nominated for election to the board by a 3%
or greater stockholder.
The shareholder sought Commission review of the Division's position
in its 2003 letter to Citigroup. The Commission declined to review the
staff's determination, stating:
[t]he Commission has determined not to review the Division's no-
action position under Rule 14a-8(i)(8). The Division's current no-
action position is consistent with Division positions taken in
recent years. Any change in the Division's current interpretation
would require other significant adjustments in the system of proxy
regulation under Section 14(a) of the Securities Exchange Act of
1934.\37\
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\37\ See letter from Jonathan Katz, Secretary of the Commission,
to Gerald W. McEntee (Apr. 14, 2003). In that letter, the Commission
directed the Division to review the proxy rules and regulations, as
well as the Division's interpretations, regarding procedures for the
election of corporate directors. This review resulted in the
Commission's proposal of revisions to the proxy rules in October
2003.
While the Commission determined not to review the staff's position,
it directed the Division of Corporation Finance to review the proxy
rules regarding procedures for the election of corporate directors and
provide the Commission with recommendations regarding possible changes
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to the proxy rules.
Following the Division's review of the proxy rules, in 2003 the
Commission proposed a comprehensive new set of rules, based on the
Division's recommendations, which would govern shareholder director
nominations that are not control-related.\38\ The Commission would not
have taken such action had it believed that Rule 14a-8 provided an
appropriate avenue for shareholder director nominations. In fact, in
discussing alternatives considered but not chosen in proposing the
rules, the Commission specifically noted the alternative of revising
Rule 14a-8(i)(8) to enable shareholders to use the shareholder proposal
rule to participate more fully in the director nomination process.\39\
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\38\ Exchange Act Release No. 34-48626 (Oct. 14, 2003) [68 FR
60784].
\39\ Id. See also AFSCME at 130, n. 8 (stating that, because of
the court's determination, ``there might very well be no reason for
a rule based on Proposed Rule 14a-11 to co-exist with the procedure
that our holding makes available to shareholders'').
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D. Commission Interpretation of Rule 14a-8(i)(8)
As noted previously, the Commission stated clearly when it proposed
amendments to Rule 14a-8 in 1976 that ``Rule 14a-8 is not the proper
means for conducting campaigns or effecting reforms in elections of
that nature, since other proxy rules, including Rule 14a-11, are
applicable thereto.'' \40\ Thus, Rule 14a-8 expressly was not intended
to be a substitute, or additional, mechanism for conducting contested
elections (the type of elections that would involve the ``conducting
[of] campaigns''), or for effecting reforms in contested elections
(elections whose ``nature'' involves campaigns). Based on the
foregoing, it is the Commission's view that a proposal may be excluded
under Rule 14a-8(i)(8) if it would result in an immediate election
contest (e.g., by making or opposing a director nomination for a
particular meeting) or would set up a process for shareholders to
conduct an election contest in the future by requiring the company to
include shareholders' director nominees in the company's proxy
materials for subsequent meetings.
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\40\ Exchange Act Release No. 34-12598 (July 7, 1976). The
Commission's reference in its 1976 statement to ``other proxy rules,
including Rule 14a-11,'' reflects the fact that, in 1976, Rule 14a-
11 was the Commission proxy rule governing election contests. As
part of a series of rule changes in 1999, the Commission rescinded
Rule 14a-11 and moved many of the requirements of prior Rule 14a-11
to the current Rule 14a-12. [17 CFR 240.14a-12] See Securities Act
Release No. 33-7760 (Oct. 22, 1999) [64 FR 61408]. Accordingly, the
Commission's reference to Rule 14a-11 in 1976 was to the rules
governing election contests, which now may be found generally
elsewhere in the proxy rules and, in particular, in Rule 14a-12.
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In the AFSCME opinion, the Second Circuit agreed with the
Commission's view that shareholder proposals can be excluded under Rule
14a-8(i)(8) if they would result in an immediate election contest. The
court, however, disagreed with the view that a proposal can be excluded
under Rule 14a-8(i)(8) if it ``establish[es] a process for shareholders
to wage a future election contest.''
We believe that the fact a proposal relates to the process for
future elections rather than an immediate election is not dispositive
in determining whether the election exclusion applies to the proposal.
As the Commission stated in 1976, the express purpose of the election
exclusion is to make clear that Rule 14a-8 is not a proper ``means'' to
achieve election contests because ``other proxy rules'' are applicable
to such contests. The use of Rule 14a-8 to require companies to include
proposals that would require election contests to be conducted without
compliance with
[[Page 43493]]
the specific rules governing such contests would be contrary to the
intent of the Commission's 1976 statement.
For these reasons, and to avoid such circumvention, the phrase
``relates to an election'' in the election exclusion cannot be read so
narrowly as to refer only to a proposal that ``relates to the current
election,'' or a particular election, but rather must be read to refer
to a proposal that ``relates to an election'' in subsequent years as
well. In this regard, if one looked only to what a proposal
accomplished in the current year, and not to its effect in subsequent
years, the purpose of the exclusion could be evaded easily. For
example, such a reading might permit a company to exclude a shareholder
proposal that nominated a candidate for election as director for the
upcoming meeting of shareholders but not exclude a proposal that
required the company to include the same shareholder-nominated
candidate in the company's proxy materials for the following year's
meeting.
In implementing the Commission's intended meaning, the staff has
taken care not to adopt an inappropriately broad reading of whether a
proposal ``relates to an election,'' as such a reading would permit the
exclusion of all proposals regarding the qualifications of directors,
the composition of the board, shareholder voting procedures, and board
nomination procedures. We agree with the staff's application of the
exclusion in this regard, as an inappropriately broad reading of the
exclusion would deny shareholder access to the company proxy materials
under Rule 14a-8 with respect to a vast category of election matters of
importance to shareholders that would not result in an election contest
between management and shareholder nominees, and that do not present
significant conflicts with the Commission's other proxy rules.\41\
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\41\ In this regard, the staff has taken the position that a
proposal relates to ``an election for membership on the company's
board of directors or analogous governing body'' and, as such, may
be excluded under Rule 14a-8(i)(8) if it could have the effect of,
or proposes a procedure that could have the effect of, any of the
following:
Disqualifying board nominees who are standing for
election;
Removing a director from office before his or her term
expired;
Questioning the competence or business judgment of one
or more directors; or
Requiring companies to include shareholder nominees for
director in the companies' proxy materials or otherwise resulting in
a solicitation on behalf of shareholder nominees in opposition to
management-chosen nominees.
Conversely, the staff has taken the position that a proposal may
not be excluded under Rule 14a-8(i)(8) if it relates to any of the
following:
Qualifications of directors or board structure (as long
as the proposal will not remove current directors or not disqualify
current nominees);
Voting procedures (such as majority or cumulative
voting);
Nominating procedures; or
Reimbursement of shareholder expenses in contested
elections.
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Our interpretation of the election exclusion is fully consistent
with the Commission's statement in 1976, that the rule was not intended
``to cover proposals dealing with matters previously not held not
excludable by the Commission, such as cumulative voting rights, general
qualifications for directors * * * '' In the AFSCME v. AIG opinion, the
Second Circuit inferred from this Commission statement that the
Commission ``reject[ed] the somewhat broader interpretation that the
election exclusion applies to shareholder proposals that would
institute procedures for making election contests more likely.'' Our
view that Rule 14a-8(i)(8) allows companies to exclude shareholder
proposals that could result in election contests without compliance
with the contested election proxy rules is consistent with the
Commission's statement in 1976. As explained above, the analysis under
Rule 14a-8(i)(8) does not focus on whether the proposal would make
election contests more likely, but whether the resulting contests would
be governed by the Commission's proxy rules for contested elections.
The Commission's references in 1976 to proposals relating to
``cumulative voting rights'' and ``general qualifications for
directors'' simply reflect the long-held belief that these proposals
generally do not trigger the contested elections proxy rules and
therefore are not excludable under Rule 14a-8(i)(8). Accordingly, the
Commission's 1976 statement should not be interpreted to mean that Rule
14a-8(i)(8) is inapplicable to proposals establishing procedures for
elections generally.
III. Proposed Amendments to Rule 14a-8(i)(8)
In addition to the guidance provided in this release regarding our
interpretation of Rule 14a-8(i)(8), we are considering whether it would
be appropriate to amend that rule to further clarify the meaning of its
exclusion. The text of Rule 14a-8(i)(8) currently specifies only that a
proposal may be excluded ``[i]f the proposal relates to an election for
membership on the company's board of directors or analogous governing
body.'' To clarify the meaning of the exclusion, consistent with the
Commission's interpretation of that exclusion, we are proposing to
revise the exclusion to read:
If the proposal relates to a nomination or an election for
membership on the company's board of directors or analogous
governing body or a procedure for such nomination or election.
We believe that the added references to ``nomination'' and
``procedure'' in the rule text will reflect more appropriately the
purpose of the election exclusion. Further, if adopted, we would
indicate clearly that the term ``procedures'' referenced in the
election exclusion relates to procedures that would result in a
contested election, either in the year in which the proposal is
submitted or in subsequent years, consistent with the Commission's
interpretation of the exclusion.
As discussed above, we are proposing amendments to Rule 14a-8 that
would clarify the operation of the exclusion in Rule 14a-8(i)(8) in a
manner that is consistent with the Commission's interpretation of that
exclusion. With regard to this proposed amendment, we are soliciting
comment as to the following:
Would the proposed amendments to Rule 14a-8(i)(8) provide
sufficient certainty regarding the scope of the exclusion? If not, what
additional amendments are necessary?
Should the exclusion specify those procedures that the
staff historically has found to fall within the exclusion?
What additional clarification would be helpful and/or
appropriate?
For further clarity, should the proposed amendments include a specific
reference to the interpretation of the exclusion with respect to
procedures that could not result in a contested election? An example of
such a further clarification would be:
In this regard, a proposal relates to ``a nomination or an
election for membership on the company's board of directors or
analogous governing body or a procedure for such nomination or
election'' if it could have the effect of, or proposes a procedure
that could have the effect of, any of the following: (A)
Disqualifying board nominees who are standing for election; (B)
removing a director from office before his or her term expired; (C)
questioning the competence or business judgment of one or more
directors; or (D) requiring companies to include shareholder
nominees for director in the companies' proxy materials or otherwise
resulting in a solicitation on behalf of shareholder nominees in
opposition to management-chosen nominees.
IV. General Request for Comment
We request and encourage any interested person to submit comments
regarding:
[[Page 43494]]
The proposed amendments that are the subject of this
release;
Additional or different changes; or
Other matters that may have an effect on the proposals
contained in this release.
We request comment from the point of view of companies, investors,
and other market participants. With regard to any comments, we note
that such comments are of great assistance to our rulemaking initiative
if accompanied by supporting data and analysis of the issues addressed
in those comments. We will consider all comments responsive to this
inquiry in complying with our responsibilities under Section 23(a) of
the Exchange Act.\42\
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\42\ 15 U.S.C. 78w(a).
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V. Paperwork Reduction Act
A. Background
The proposed amendments affect ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995,
the PRA.\43\ The title for the affected collection of information is
``Proxy Statements--Regulation 14A (Commission Rules 14a-1 through 14a-
16 and Schedule 14A)'' (OMB Control No. 3235-0059). This regulation was
adopted pursuant to the Exchange Act and sets forth the disclosure
requirements for proxy statements filed by companies to help investors
make informed voting decisions.
---------------------------------------------------------------------------
\43\ 44 U.S.C. 3501 et seq.
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The hours and costs associated with preparing and filing the
disclosure, filing the forms and schedules and retaining records
required by these regulations constitute reporting and cost burdens
imposed by each collection of information. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
B. Summary of Proposals
Rule 14a-8 is the Commission rule that provides shareholders with
an opportunity to place a proposal in a company's proxy materials for a
vote at an annual or special meeting of shareholders. The proposed
amendments to that rule are intended to clarify the scope of the
exclusion in Rule 14a-8(i)(8), consistent with the Commission's
interpretation of the exclusion. The amendments would provide certainty
regarding the meaning of the exclusion in that rule.
C. Paperwork Reduction Act Burden Estimates
Adoption of the Rule 14a-8(i)(8) amendments would merely revise the
text of the rule in a manner that is consistent with the Commission's
interpretation of the rule. As such, the amendments proposed today
would not change the information that companies are required to provide
on Schedule 14A; the same information will be required if the proposed
amendments are adopted.
D. Solicitation of Comments
We request comment on this Paperwork Reduction Act Analysis.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
to:
Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
Evaluate the accuracy of the Commission's estimate of
burden of the proposed collection of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
Evaluate whether there are ways to minimize the burden of
the collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy to Nancy M. Morris, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-1090, with reference to File No. S7-17-07. Requests for materials
submitted to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-17-07, and be
submitted to the Securities and Exchange Commission, Office of Investor
Education and Assistance, Washington, DC 20549.
VI. Cost-Benefit Analysis
We propose amendments that would clarify existing rules. The
opinion in American Federation of State, County & Municipal Employees,
Employees Pension Plan v. American International Group, Inc.\44\ has
created uncertainty regarding the Commission staff's longstanding
administration of Rule 14a-8(i)(8), making it difficult for
shareholders and companies to assess the operation of that rule. The
proposed amendments to that rule are intended to clarify the scope of
the exclusion in Rule 14a-8(i)(8), consistent with the Commission's
interpretation of the rule. Without such clarification, shareholders
and companies may be uncertain as to the range of shareholder proposals
that are required to be included in company proxy materials and may be
uncertain as to the proper range of proposals that shareholders may
submit to companies for inclusion in those proxy materials. For
example, without clarification of the exclusion in Rule 14a-8(i)(8),
shareholders may incur costs in preparing and submitting proposals that
a company may properly exclude from its proxy materials.
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\44\ 462 F.3d 121 (2d Cir. 2006) (AFSCME).
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Because the proposed amendments would clarify that the scope of the
exclusion in Rule 14a-8(i)(8) is consistent with the Commission's
interpretation of that exclusion, shareholders and companies would not
incur additional costs to determine the appropriate scope of that
exclusion. Further, companies would not incur additional costs with
regard to the inclusion of shareholder proposals in proxy materials.
The proposed amendments should improve the ability of shareholders
to prepare and submit proposals that will be required to be included in
a company's proxy materials, as those shareholders will have a clear
understanding of the scope of the Rule 14a-8(i)(8) exemption. Further,
without the clarification of the proper scope of the Rule 14a-8(i)(8)
exclusion that would be provided by the amendments, shareholders and
companies may incur substantial expense in litigating disputes
regarding that exclusion.
Request for Comment
We are sensitive to the costs and benefits imposed by our rules. We
have identified no costs and certain benefits related to these
proposals. We request comment on all aspects of this cost-benefit
analysis, including identification of any costs and additional
benefits. We encourage commenters to identify and supply relevant data
concerning the costs and benefits of the proposed amendments.
[[Page 43495]]
VII. Consideration of Burden on Competition and Promotion of
Efficiency, Competition and Capital Formation
Section 23(a)(2) of the Exchange Act \45\ requires us, when
adopting rules under the Exchange Act, to consider the impact that any
new rule would have on competition. In addition, Section 23(a)(2)
prohibits us from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act. Section 3(f) of the Exchange Act \46\ and Section
2(c) of the Investment Company Act of 1940 \47\ requires us, when
engaging in rulemaking that requires us to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition and capital formation.
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\45\ 15 U.S.C. 78w(a)(2).
\46\ 15 U.S.C. 78c(f).
\47\ 15 U.S.C. 80a-2(c).
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The AFSCME opinion has created uncertainty regarding the Commission
staff's longstanding administration of Rule 14a-8(i)(8), making it
difficult for companies and shareholders to assess the operation of
that rule. This has resulted in uncertainty regarding whether Rule 14a-
8 requires companies to include in their proxy materials shareholder
proposals that would establish procedures under which shareholder
nominees for director, despite the exclusion provided by Rule 14a-
8(i)(8). This uncertainty has made it difficult for shareholders and
companies to assess the proper operation of the shareholder proposal
rule and has generated economic inefficiency by introducing potential
litigation costs, and costs incurred to prepare and respond to
shareholder proposals.
The proposed amendments are intended to clarify the scope of the
exclusion in Rule 14a-8(i)(8), consistent with the Commission's
interpretation of the rule. This should improve shareholders' and
companies' ability to assess shareholder proposals with a clear
understanding whether Rule 14a-8 will require inclusion of the
proposal. Informed decisions in this regard generally promote market
efficiency and capital formation. We believe the proposed amendments to
Rule 14a-8 would not impose a burden on competition.
We request comment on whether the proposed amendments, if adopted,
would impose a burden on competition. We also request comment on
whether the proposed amendments, if adopted, would promote efficiency,
competition and capital formation. Finally, we request commenters to
provide empirical data and other factual support for their views if
possible.
VIII. Initial Regulatory Flexibility Act Analysis
This Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603. It relates to proposed amendments to Rule
14a-8 that would clarify the application of the exclusion provided by
paragraph (i)(8) of that rule.
A. Reasons for, and Objectives of, Proposed Action
The purpose of the proposed amendments is to clarify the
requirements of companies to include in their proxy materials
shareholder proposals relating to procedures for the inclusion of
shareholder nominees for directors in company proxy materials. The
proposed amendments would clarify the scope of Rule 14a-8(i)(8), which
permits companies to omit certain such proposals from their proxy
materials.
The proposals, if adopted, should improve shareholders' and
companies' ability to assess shareholder proposals with a clear
understanding whether Rule 14a-8 will require inclusion of the
proposal.
B. Legal Basis
We are proposing amendments to the rules under the authority set
forth in Sections 14 and 23(a) of the Exchange Act, as amended, and
Sections 20(a) and 38 of the Investment Company Act of 1940, as
amended.
C. Small Entities Subject to the Proposed Rules
The Regulatory Flexibility Act defines ``small entity'' to mean
``small business,'' ``small organization,'' or ``small governmental
jurisdiction.'' \48\ The Commission's rules define ``small business''
and ``small organization'' for purposes of the Regulatory Flexibility
Act for each of the types of entities regulated by the Commission.\49\
A ``small business'' and ``small organization,'' when used with
reference to a company other than an investment company, generally
means an company with total assets of $5 million or less on the last
day of its most recent fiscal year. We estimate that there are
approximately 1,100 companies, other than investment companies, that
may be considered reporting small entities.\50\ The proposed rules may
affect each of the approximately 1,315 small entities that are subject
to the Exchange Act reporting requirements.
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\48\ 5 U.S.C. 601(6).
\49\ Securities Act Rule 157 (17 CFR 230.157), Exchange Act Rule
0-10 (17 CFR 240.0-10) and Investment Company Act Rule 0-10 (17 CFR
270.0-10) contain the applicable definitions.
\50\ The estimated number of reporting small entities is based
on 2007 data, including the Commission's EDGAR database and Thomson
Financial's Worldscope database. Approximately 215 investment
companies meet this definition.
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We request comment on the number of small entities that would be
impacted by our proposals, including any available empirical data.
D. Reporting, Recordkeeping and Other Compliance
Requirements
The proposed amendments would impose no new reporting,
recordkeeping, or compliance requirements. The impact of these
proposals relates to clarifying the scope of the requirement to include
shareholder proposals in company proxy materials.
E. Duplicative, Overlapping or Conflicting Federal Rules
We believe that there are no rules that conflict with or duplicate
the proposed rules.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objective of our
proposals, while minimizing any significant adverse impact on small
entities. In connection with the proposed amendments and rules, we
considered the following alternatives:
The existence or nature of the potential impact of the
proposals on small entities discussed in the analysis; and
How to quantify the impact of the proposed rules.
Commenters are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Such
comments will be considered in the preparation of the final regulatory
flexibility analysis, if the proposals are adopted, and will be placed
in the same public file as comments on the proposed amendments
themselves.
IX. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of
[[Page 43496]]
1996,\51\ a rule is ``major'' if it has resulted, or is likely to
result in:
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\51\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 50 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. Sec. 601).
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An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
We request comment on whether our proposals would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment or
innovation.
X. Statutory Basis and Text of Proposed Amendments
We are proposing amendments to rules pursuant to Sections 14, and
23(a) of the Exchange Act, as amended, and Sections 20(a) and 38 of the
Investment Company Act of 1940, as amended.
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, Securities.
In accordance with the foregoing, the Securities and Exchange
Commission proposes to amend Title 17, chapter II of the Code of
Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for part 24 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *
2. Amend Sec. 240.14a-8 by revising paragraph (i)(8) to read as
follows:
Sec. 240.14a-8 Shareholder proposals.
* * * * *
(i) * * *
(8) Relates to election: If the proposal relates to a nomination or
an election for membership on the company's board of directors or
analogous governing body or a procedure for such nomination or
election;
* * * * *
By the Commission.
Dated: July 27, 2007.
Nancy M. Morris,
Secretary.
[FR Doc. E7-14955 Filed 8-2-07; 8:45 am]
BILLING CODE 8010-01-P