After back-and-forth negotiations and new offers from both sides, House and Senate negotiators finally reached a compromise Thursday night on the contentious proxy access language in the financial reform bill, according to news reports. The deal was struck after House members repeatedly resisted the Senate's efforts to impose minimum ownership thresholds and holding periods on investors who would seek to nominate board candidates under a proposed SEC access rule.
In the end, conference committee members settled on a modified version of the non-prescriptive text in the bills passed by both chambers that simply affirm the SEC's authority to issue an access rule. The conferees set no specific ownership thresholds or holding periods, but they did agree to Senator Mike Crapo's amendment to authorize the commission to exempt small issuers, according to news reports.
The House and Senate bills had similar access provisions, so activist investors were stunned on June 16 when the chief Senate negotiator, Senator Christopher Dodd, sought to add a minimum 5 percent threshold and a two-year holding period to the legislation. Dodd's offer reportedly was requested by White House officials to meet the concerns of the Business Roundtable.
In rejecting the Senate's request, Rep. Barney Frank, leader of the House delegation, pointed out that the California Public Employees' Retirement System and other pension funds had strenuously objected to a 5 percent requirement. Instead of specific numbers, the House offered to insert instructions in the bill to direct the SEC to consider the need for a holding period and a minimum stake.
The Senate responded with a new offer crafted by Senator Charles Schumer of New York. He said several of his Democratic colleagues, including Senator Mark Warner of Virginia, were insisting on a minimum stake so the SEC wouldn't set the threshold at just "one share." He called for a 3 percent stake, a three-year holding period, and a novel "tail" provision suggested by Senator Evan Bayh of Indiana to require nominators of successful board candidates to hold their shares for another two years after the board election. Schumer asserted there was a "broad consensus" within the investor community in support of his offer.
House members didn't like Schumer's proposal either. Frank questioned how the SEC could possibly enforce a post-election holding requirement, while Republican Rep. Spencer Bachus questioned the constitutionality of such a provision. Schumer noted that investors do reach agreements with companies to refrain from selling shares, and he said the SEC would be able to work out the details on a tail provision.
Rep. Maxine Waters, a Democrat from California, argued that a 3 percent threshold was still too onerous and that a three-year period was too long. She pointed out that her state's two large public pension funds--CalPERS and CalSTRS--each own less than 0.5 percent of any Russell 3000 firm.
Dodd, like he often has done when confronted with a difficult issue in the financial regulatory bill, called for an SEC study on a potential tail requirement. However, Waters said the SEC has been working on a proxy access rule since 2003 and shouldn't be forced to reopen the rulemaking process again.
In the end, the lawmakers essentially went back to where they started and will allow the SEC to hash out the many thorny issues related to proxy access. After watching the televised legislative wrangling over the past two weeks, including the arguments from some lawmakers who are not fully knowledgeable about access mechanics, most activist investors presumably will be relieved that the details will be left to the SEC.
The SEC's current draft rule, which was issued last June, calls for a sliding ownership threshold for investor groups that ranges from 1 to 5 percent depending on a company's market cap, and would impose a one-year holding period. The commission may consider a final rule as early as next month.