The July 22 federal appeals court ruling that struck down the SEC's marketwide proxy access rule, Rule 14a-11, did not affect the SEC's amendments to Rule 14a-8 that would permit shareholders to resume filing proxy access bylaw proposals. Those amendments were placed on hold by the SEC last October after two business groups brought a legal challenge to Rule 14a-11. At that time, the SEC said the 14a-8 changes were "intertwined" with the marketwide access rule.

If the SEC lifts its stay on its Rule 14a-8 amendments, shareholders will be able to submit access bylaw proposals in 2012. Investors would not face any additional ownership hurdles other than the requirements that already apply to proponents--i.e., owning at least $2,000 in company stock for more than a year.

Several investors said this week they are looking into submitting access proposals next season. Investors could file binding or non-binding resolutions, but some states require higher ownership thresholds for binding bylaw proposals. It appears likely that proponents would seek holding periods and ownership thresholds that are more permissive than Rule 14a-11's requirements of a 3 percent stake for at least three years. Labor funds generally prefer a two-year period, and some activists have argued for a lower threshold (such as 1 percent) at large-cap firms.

So far, it appears that the activist investor community is undecided about whether to file access proposals in 2012 and how many companies to target. There is a concern that the filing of dozens of access resolutions next season might bolster corporate arguments that the SEC should refrain from adopting a new marketwide access rule and just allow private ordering to work. There also is a concern that low support levels for poorly targeted proposals would be cited by corporate critics as evidence that most shareholders don't want access. Conversely, some activists argue that strong shareholder votes for access in 2012 could help prod the resource-stretched SEC to prepare a revised access rule. If activists do file access proposals next season, it appears that they may focus on a few high-profile companies with well-known governance issues.

Back in 2007, two well-targeted shareholder access proposals did attract broad investor support, winning at least 43 percent approval at UnitedHealth Group and Hewlett-Packard. There also was majority approval for access at Cryo-Cell International, a small-cap firm. However, the SEC, which then had a Republican majority, approved a rule in late 2007 to stop investors from filing access resolutions.

If shareholders bring access resolutions in 2012, no-action challenges by companies would be inevitable. Some companies may seek to exclude investor access proposals (as firms have done in response to special meeting requests) by offering their own management resolutions with greater hurdles to access--such as a 10 percent (or higher) ownership threshold.

The Securities and Exchange Commission announced today that it has delayed consideration of final proxy vote disclosure rules for institutions that are Form 13F filers. 

The commission had planned to vote on final rules on Tuesday at 11 a.m., but now states this item has been removed from the meeting agenda. The SEC did not explain why this agenda item had been removed, but the agency staff did note that: "At times, changes in Commission priorities require alterations in the scheduling of meeting items."  

The long-awaited rules, which are mandated by Section 951 of the Dodd-Frank Act, will require 13F filers to annually disclose in Form N-PX filings how they cast their ballots on "say on pay" advisory votes, as well as the separate shareholder votes on "golden parachute" arrangements and the frequency of future "say on pay" votes.

As a result of this SEC delay, ISS has postponed its planned Regulatory Briefing on the disclosure rules. A new date for the briefing will be announced once the SEC schedules a new vote on the 13F rules.

In a setback for activist investors, a federal appeals court has struck down the Securities and Exchange Commission’s controversial proxy access rule. 

Today’s decision by the U.S. Court of Appeals for the D.C. Circuit was not a great surprise, given the skepticism that the court’s three-judge panel expressed during oral arguments in April. (For more on those arguments, click here.)

The appeals court's action means that the SEC's proxy access rule won't be in place for the 2012 proxy season. The unavailability of a marketwide access regime could mean a rise in traditional boardroom challenges via proxy fights and a jump in "just vote 'no'" campaigns against directors. In addition, the court decision may inspire activists to file access bylaw proposals at various companies in 2012.

The SEC voted 3-2 last August to adopt Rule 14a-11, which would have allowed long-term shareholders to join together to nominate board candidates to appear on management proxy statements at both operating and investment companies. The SEC also approved amendments to Rule 14a-8 to allow investors to file access bylaw proposals. The SEC put both rule changes on hold in October after the U.S. Chamber of Commerce and the Business Roundtable filed a lawsuit over Rule 14a-11.

The D.C. Circuit panel concluded that the SEC acted “arbitrarily and capriciously” in approving Rule 14a-11 because it failed to properly consider the costs and benefits of the rule. The court also said the SEC contradicted itself when estimating the frequency of potential board election contests under the rule. The panel also faulted the SEC for not addressing corporate concerns about the use of proxy access by labor funds and public employees “to pursue self-interested objectives rather than the goal of maximizing shareholder value.”

“The court’s decision is deeply disappointing to long-term shareowners,” Ann Yerger, executive director of the Council of Institutional Investors, said in a press release. “We think the court got it wrong. We will continue to advocate for proxy access and will encourage the SEC to promptly address the court’s concerns. Proxy access is a core shareowner right that is standard in many countries. It would invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.”

The SEC now has 45 days to decide whether to ask the three-judge panel to reconsider its ruling or seek a rehearing by the full nine-judge D.C. Circuit, agency observers said. If the commission doesn’t seek additional judicial review, it would then have to decide whether to redo its economic analysis and try to revive Rule 14a-11. Given the SEC’s heavy workload of Dodd-Frank Act rulemakings, it appears unlikely that the commission would move quickly to resurrect the rule. 

In the meantime, it appears that investors will be able to take advantage of the SEC’s amendments to Rule 14a-8, which were not challenged by the business groups, and file access bylaw proposals next season. The SEC had issued a stay on the Rule 14a-8 changes, but that likely will be lifted before the filing deadlines for most 2012 meetings.

“We are disappointed by today's decision striking down a rule that made it easier for shareholders to nominate a candidate to a company's board of directors,” Meredith Cross, director of the SEC’s Corporation Finance Division, said in a statement. “We are considering our options going forward. We note that our rule allowing shareholders to submit proposals for proxy access at their companies, which we adopted at the same time, is unaffected by the court's decision."
 

On July 26, the U.S. Securities and Exchange Commission plans to consider a set of final proxy vote disclosure rules for institutions that are Form 13F filers. 

The long-awaited rules, which are mandated by Section 951 of the Dodd-Frank Act, will require these institutional investors to annually disclose in Form N-PX filings how they cast their ballots on "say on pay" advisory votes, as well as the separate shareholder votes on "golden parachute" arrangements and the frequency of future "say on pay" votes.

The details of the final rules have not been released, but SEC observers expect that the proposed filing deadline of Aug. 31 will be extended for first-time Form N-PX filers. Currently, only mutual funds are required to disclose their proxy votes in annual N-PX filings. 

The commission will consider the final rules during an 11 a.m. (EDT) open meeting at SEC headquarters in Washington. The SEC released a set of draft rules last October, but the rules have languished as the commission has dealt with budgetary constraints and many other Dodd-Frank-mandated rulemakings and studies. 

Under the draft rules, an institution would be required to disclose its proxy votes if it is defined as an "institutional investment manager" under Section 13(f)(6)(A) of the Securities Exchange Act of 1934 and has to make quarterly Form 13F filings. An institution generally is subject to Section 13(f) if it exercises investment discretion over accounts with more than $100 million in equities.

The SEC received 26 comment letters on the proposed rules and held seven meetings with investors and market participants. The rules have not encountered significant opposition, but the SEC has sought input on various procedural issues, such as: who should report votes when multiple institutions have shared voting authority; whether the duty to disclose should be triggered by voting authority or investment discretion; and whether there should be a de minimis ownership exception where disclosure would not be required.

ISS plans to hold a regulatory briefing on the final rules on July 27 at 11:30 a.m. (EDT). To register, click here.

The AFL-CIO released a white paper on Monday that defends a Dodd-Frank Act provision that would require companies to report the ratio between their CEO’s total compensation and the median pay received by other employees. 

This requirement, which is detailed in Section 953(b) of the law, has been criticized by corporate advocates who assert that compliance would be costly and burdensome and that such information would not be useful for investors. The Securities and Exchange Commission, which is behind on other Dodd-Frank rulemakings, has yet to issue draft rules to implement Section 953(b), so it appears quite unlikely that this disclosure would be required during the 2012 proxy season.
 
The labor federation’s paper argues that Section 953(b) would help discourage boards from increasing executive compensation each year in response to pay increases at peer companies. The AFL-CIO estimates that a chief executive at an average large-cap company now makes 343 times the pay of an average worker, up from 42 times in 1980.

While most U.S. companies have accepted shareholders’ views on the frequency of future “say on pay” votes, there are at least two exceptions. Annaly Capital Management, a New York-based real estate investment trust, and American Reprographics, a California-based document-management firm, both have said they will hold triennial votes, even though investors gave majority support for annual votes. 

Under the Dodd-Frank Act, shareholder votes on pay vote frequency--like the advisory votes themselves--are non-binding, but most boards have quickly acceded to investors’ wishes on this issue, even at companies where management strongly preferred less frequent votes.

“It’s a bad precedent to ignore a majority of shareholders,” noted Lisa Lindsley of the American Federation of State, County, and Municipal Employees, a long-time advocate of annual pay votes. “Companies that choose to ignore their shareowners are inviting additional scrutiny of their board and pay practices.”

Tim Smith of Walden Asset Management, another proponent of annual “say on pay” votes, expressed a similar view. “Clearly, companies disregarding shareholder input without an extensive and extraordinary explanation risk real push back from share owners,” he said. 

The vote wasn’t close at either firm. There was 70 percent support at both Annaly and American Reprographics for an annual frequency. So far, 608 companies made recommendations for triennial or biennial votes that were not followed by their investors, according to ISS data.

Annaly justified its decision by citing the non-binding nature of the frequency vote.

“The Board has considered the appropriate frequency of future non-binding advisory votes regarding compensation awarded to its named executive officers. Among other factors, the Board considered the voting results at the Company’s 2011 Annual Meeting with respect to the non-binding advisory vote regarding the frequency of non-binding advisory votes regarding compensation awarded to its named executive officers. The Board has determined that future non-binding advisory votes regarding compensation awarded to its named executive officers will be submitted to shareholders of the Company every three years. The Board will continue to evaluate this decision annually,” the company said in a May 20 filing.  

American Reprographics argued that a triennial frequency was appropriate given the three-year employment contracts that it recently reached with its named executive officers. 

“The Company believes that any attempt to modify the terms of those contracts prior to expiration could pose an executive retention risk to the Company. In addition, the Company has not historically engaged in problematic pay practices. Rather, compensation paid to the Company’s named executive officers in prior years reveals a practice of curtailing executive compensation in response to a challenging economic environment. A three-year frequency cycle will also allow stockholders to continue to evaluate the effectiveness of the Company’s executive compensation program on long-term performance of the Company. For these reasons, and those set forth in the Company’s 2011 proxy statement, the Company has decided to conduct future stockholder advisory votes on executive compensation every three years until the next required advisory vote on frequency of stockholder advisory votes on executive compensation,” American Reprographics said in a May 3 filing.

While companies are required to hold frequency votes just once every six years, Annaly and American Reprographics could face shareholder proposals on this matter in 2012. Under the final SEC’s “say on pay” rules, companies may omit shareholder proposals that seek a different frequency if they adopt a frequency that is supported by a majority shareholder vote. 

It remains to be seen whether investors will oppose these firms’ directors in the absence of a pay vote. Annaly received 75.1 percent support for its pay practices this year, while American Reprographics earned 99 percent approval.

A hat tip to the Davis Polk corporate governance blog for pointing out these filings. 
 

Four Senate Democrats said they would oppose the repeal of a Dodd-Frank Act provision that would require companies to disclose the ratio between their CEO's total compensation and the median total pay of all other employees.

In a letter on Wednesday, Senators Robert Menendez of New Jersey, Tom Harkin of Iowa, Sherrod Brown of Ohio, and Carl Levin of Michigan defended Section 953(b) of the Dodd-Frank legislation and urged a corporate lobbying group to drop its opposition to this provision. Menendez and Brown are members of the Senate Banking Committee, which has jurisdiction over corporate disclosure issues; Menendez was the original author of Section 953(b).

“If we are to generate a long-lasting recovery, we need to ensure that hard-working middle class families are once again able to share in their company’s successes through rising wages and benefits, just like CEOs have done for decades,” the four senators wrote. “Section 953(b) of the [Dodd-Frank] Wall Street Reform Act will help to further this important goal by increasing transparency, encouraging firms to take a harder look at the rising pay discrepancies between CEOs and their workers, and providing investors and policymakers with a better understanding of pay.”

The senators’ letter specifically cited the $12 million pay package received in 2010 by Lowe’s CEO Robert Niblock, which the lawmakers said was “380 times the $31,637 pay of department managers” at the retailer. The letter also pointed out that some companies, such as Whole Foods Market and MBIA, have disclosed pay ratio information voluntarily in their most recent proxy statements. 

Section 953(b) has not taken effect, and the SEC plans to issue proposed rules to implement this provision later this year. Companies and their advocates have complained that Section 953(b) would impose a significant compliance burden, especially on large multinational companies that have employees around the world. However, the AFL-CIO labor federation has argued that this provision would prod boards to set executive compensation based on a company's own organizational needs, rather than based on executive pay at other firms.

On June 22, the House Financial Services Committee voted 33-21 to approve HR 1062, the Burdensome Data Collection Relief Act, which would repeal Section 953(b). It appears likely that HR 1062 will win approval from the Republican-controlled House of Representatives. The legislation's prospects are less certain in the Senate, where Democrats still have a majority. 

Meanwhile, the Senate Banking Committee plans to hold a hearing on investor protection issues on July 12 at 10 a.m. Among the invited witnesses are Thomas F. Brier, director of corporate governance for the Pennsylvania State Employees' Retirement System.