United States: SEC Issues Release Adopting Proxy Rule Changes to Permit Delivery of Proxy Materials Via Website
(Financial Services Alert – Developments of Note)

Developments of Note

1. SEC Issues Release Adopting Proxy Rule Changes to Permit Delivery of Proxy Materials Via Website
2. SEC Issues Release Proposing Proxy Rule Changes Mandating Internet Availability of Proxy Materials
3. FDIC Issues Supervisory Policy on Predatory Lending

4. Division of Investment Management Posts Notices of Exemptive Applications and Exemptive Orders on SEC Website

The SEC issued a formal release (the "Release") adopting amendments to the proxy rules (the "Proxy Rules") under Section 14 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), that allow persons soliciting proxies, including persons other than an issuer, to satisfy the requirement to furnish proxy materials imposed by Rule 14a-3 under the 1934 Act by using a "notice and access" model for the delivery of proxy material. Under this model, proxy materials are posted on a website, and a "Notice of Electronic Proxy Materials" ("Notice") is sent to shareholders alerting them to the materials’ availability there. The SEC adopted the amendments substantially as proposed but with some changes in response to public comment. In connection with adopting the notice and access model as a voluntary means of providing proxy materials, the SEC also took separate action to propose that the model be made mandatory (as discussed in the next article of this issue).

General Features. Proxy materials deliverable under the notice and access model include proxy statements, proxy cards, information statements, additional soliciting materials and any amendments to the foregoing required to be furnished to shareholders. The amendments will also allow use of the notice and access model to deliver (i) annual reports required under the Proxy Rules (which do not include the shareholder reports required of registered investment companies under the Investment Company Act of 1940, as amended), and (ii) shareholder meeting notices, so long as reliance on the notice and access model for delivery of a notice of meeting is consistent with applicable state law. The amendments do not permit the use of the notice and access model for business combination transactions as defined in Rule 165 under the Securities Exchange Act of 1933, as amended (the "1933 Act"), which transactions include registered investment company reorganizations and exchange offers involving the use of Form N-14 under the 1933 Act. The amendments do not affect the availability of other methods of delivering proxy materials nor will reliance on the notice and access model for any one solicitation require that it be used for any future solicitations.

Notice of Electronic Proxy Materials. An issuer must send a Notice to shareholders at least 40 days (rather than 30 days as proposed) prior to the shareholder meeting date or the date votes, consents or authorizations are to be used to effect corporate action. An issuer may "household" the Notice and need not resolicit specific consent from shareholders who have previously consented to householding of proxy materials. A Notice must be in plain English and include (a) a specified legend in bold-face type, (b) information relating to the meeting and the availability of proxy materials on a specified website and in e-mail and paper form; (c) a clear and impartial description of the matters to be considered at the meeting along with the issuer’s recommendation regarding those matters and (d) information on the proxy materials, how to access a proxy card and how to attend the meeting and vote in person. A Notice may also incorporate the notice of meeting typically included by issuers in proxy materials consistent with applicable state law requirements. (The Release indicates that the amendments do not alter any requirements of state law regarding the manner in which a shareholder meeting notice must be delivered.) No other shareholder communications may accompany the Notice, except for a reply card used to request a paper or e-mail copy of proxy materials and a shareholder meeting notice required under state law (if not incorporated into the Notice). In contrast to the SEC’s original proposal, the notice and access model, as adopted, does not permit a proxy card to accompany a Notice. In fact, the Notice may not include a means to execute a proxy (e.g., instructions for accessing telephonic voting) without having access to the proxy materials. A proxy card may be sent only 10 calendar days or more after the Notice is sent and must be accompanied by the Notice unless the issuer has already provided proxy materials through the same delivery medium or does so with the proxy card.

Website Access to Proxy Materials. The website address for proxy materials must be specific enough to lead shareholders directly to those materials, rather than to a homepage or other section of a website where the materials may be accessed. The EDGAR website may not be used to provide website access to proxy materials under the notice and access model. The proxy materials presented on the website must be in a format that is convenient for both on-line reading and printing. The format used should provide a version of those materials, including all charts, tables, graphics and similarly formatted information, that is substantially identical to the paper version of the proxy materials. Materials must also be in a readily searchable format such as HTML and may incorporate features such as hyperlinks from a table of contents to aid navigation. An issuer must post proxy materials (including the proxy card) on the website by the time it sends shareholders the related Notice, and the proxy materials should remain available through the time of the shareholder meeting at no charge. By the time it sends the Notice, the issuer must provide a means for any shareholder viewing proxy materials on the designated website to execute a proxy vote, e.g., through a linked electronic voting platform or telephonic voting information. Any additional soliciting materials must be posted on the same website no later than the date on which the additional soliciting materials are first sent to shareholders or made public.

Shareholder Anonymity/Privacy. In response to concerns expressed by commenters, the SEC revised the notice and access model to clarify that the issuer (or its agent) must maintain the website on which it posts proxy materials in a manner that does not infringe on the anonymity of shareholders accessing the website. The issuer may not track the identity of persons viewing the proxy materials on the website or use "cookies" or software to collect information on those persons. An issuer and its agents may not use an e-mail address obtained from a shareholder requesting proxy materials for any purpose other than honoring the request, and the issuer may not transfer the e-mail address to other persons without the shareholder’s express consent except as necessary to honor the request.

Shareholder Requests for Paper/E-Mail Copies of Proxy Materials. The notice and access model allows a shareholder that receives a Notice to request a paper or e-mail copy of the proxy materials. The issuer must send a copy of proxy materials (in the form requested) within three business days of the shareholder request for those materials. This obligation on the issuer’s part continues for one year after the date of the shareholder meeting or corporate action in question. Under the notice and access model, a shareholder may also make a standing revocable election to receive proxy materials in paper or e-mail form. (The Release indicates that despite such an election an issuer may continue to request that a shareholder accept electronic delivery or rely on the notice and access model and may structure incentives to encourage shareholders to do so. The Release also notes that a communication to shareholders that only explains the notice and access model generally and seeks to determine whether a shareholder wants future proxy materials in paper or e-mail form would not be associated with a particular solicitation, and therefore would not be a Notice under the amendments.)

Intermediaries. Under the amendments, brokers, banks, or other intermediaries that are recordholders of an issuer’s shares must use the notice and access model at the issuer’s request, but may not elect to do so otherwise. An intermediary requested to use the notice and access model must prepare its own Notice for distribution to its beneficial owners at least 40 days prior to the date of the shareholder meeting or corporate action, while the issuer or other soliciting person must provide the necessary information for the intermediary’s notice in sufficient time for the intermediary to meet the deadline. The intermediary’s Notice will generally contain the same kind of information as an issuer’s and will be subject to similar limitations, e.g., it cannot provide a means for a beneficial owner to provide voting instructions without first having access to the necessary proxy materials. An intermediary may choose to direct beneficial owners to proxy materials on its website or those on the issuer’s, but must in all events establish a website at which beneficial owners may access the intermediary’s request for voting instructions. An intermediary’s website posting of proxy materials must meet the same requirements as those of an issuer with respect to access, protection of user anonymity and privacy and the availability of a means to provide voting instructions. If an intermediary’s Notice directs its beneficial owners to the issuer’s website to view proxy materials, the intermediary must tell beneficial owners that they can submit voting instructions to the intermediary, but cannot execute a proxy directly through the voting mechanisms made available by the issuer (unless the intermediary has executed a proxy with the issuer in the shareholder’s favor). Beneficial owners may request paper or e-mail copies of proxy materials only from their intermediary (and not the issuer, as originally proposed). Like issuers, intermediaries must allow beneficial owners to make a standing revocable election to receive paper or e-mail copies of proxy materials; however, in the case of intermediaries, such a request will apply with respect to all securities held in a beneficial owner’s account.

Use of the Notice and Access Model By Persons Other than an Issuer. Persons other than an issuer soliciting proxies will be able to rely on the notice and access model in much the same way as an issuer, with appropriate changes to the information required in the Notice. For a non-issuer soliciting person, the deadline for sending a Notice is the later of (i) 40 days before the meeting or (ii) 10 days after the issuer sends out its proxy statement or Notice to shareholders. Under the notice and access model, a non-issuer soliciting person may limit its solicitation to particular shareholders. However, unlike the SEC’s original proposal, the amendments do not allow a non-issuer soliciting person to condition its Notice on the recipient shareholder’s agreement to access the non-issuer soliciting person’s proxy materials on a website. Instead, the amendments require a non-issuer soliciting person to send a paper or e-mail copy of its proxy materials if so requested. The amendments also include modifications to the obligations of issuers pursuant to Rule 14a-7 under the 1934 Act, which requires an issuer to provide a shareholder list to a requesting shareholder or send the materials itself.

Earliest Availability of the Notice and Access Model. The earliest date on which a Notice may be sent is July 1, 2007. Because a Notice must be sent at least 40 days prior to a shareholder meeting or proposed corporate action is, the earliest date of a shareholder meeting or corporate action using the notice and access model is August 10, 2007.

Additional Comment on Costs. In the Release, the SEC discussed revisions it proposes to make to its burden estimate pursuant to the Paperwork Reduction Act of 1995 based on changes in requirements from the amendments as originally proposed. Comments on the proposed changes should be received not later than March 30, 2007.

In conjunction with issuing a formal release adopting amendments to its proxy rules (the "Proxy Rules") under Section 14 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), that will allow persons soliciting proxies to satisfy the requirement to deliver proxy materials by posting them on a website and providing notice of such posting ("Voluntary Notice and Internet Access"), the SEC published a release (the "Release") proposing amendments to the Proxy Rules that would require issuers and other persons soliciting proxies to use notice and Internet access to delivery proxy materials (except in solicitations with respect to business combination transactions) ("Mandatory Notice and Internet Access"). The features of Mandatory Notice and Internet Access are substantially similar to those of Voluntary Notice and Internet Access, which are discussed in some detail in the preceding article. The Release indicates that if the SEC adopts the proposed requirements, it is considering a compliance date of January 1, 2008 for large accelerated filers as defined under the 1934 Act (generally issuers with an aggregate worldwide market value of $700 million or more), not including registered investment companies, and a compliance date of January 1, 2009 for all other issuers, including registered investment companies.

Under the SEC’s proposal, Mandatory Notice and Internet Access would apply to issuers (including intermediaries involved in the proxy solicitation process) and other persons conducting proxy solicitations. Shareholders would retain the ability to request paper or e-mail copies of proxy materials for a particular meeting or make a standing revocable request that they be sent proxy materials relating to all shareholder meetings. In contrast to Voluntary Notice and Internet Access, Mandatory Notice and Internet Access would allow a full set of proxy materials (including a proxy statement, annual report (if required under the Proxy Rules) and proxy card or request for voting instructions) to accompany the required notice of proxy materials’ availability on the Internet sent to shareholders and beneficial owners (the "Notice"). In addition, an issuer or other soliciting person that sent a full set of proxy materials with the Notice would not need to comply with the requirement that a Notice be sent 40 calendar days or more prior to the date of the shareholder meeting. The SEC also proposes to permit a registered investment company to send its prospectus and/or a shareholder report along with the Notice, with or without a proxy statement and form of proxy.

Comments on the SEC’s proposal must be received on or before March 30, 2007.

The FDIC issued a supervisory policy (the "Policy", FIL-6-2007), which describes certain characteristics of predatory lending and FDIC supervision of predatory lending. The FDIC distinguishes predatory lending from safe and sound, legitimate forms of subprime lending and notes that signs of predatory lending include "the lack of a fair exchange of value or loan pricing that reaches beyond the risk that a borrower represents or other customary standards." Furthermore, the Policy states that predatory lending involves at least one, and sometimes more, of the following: (1) making an unaffordable loan based upon the borrower’s assets rather than the borrower’s ability to repay; (2) inducing a borrower to refinance an obligation repeatedly in order to charge high points and/or fees; and (3) fraudulently or deceptively concealing the true nature of the loan (or ancillary products) from "an unsuspecting or unsophisticated borrower."

The Policy states that the FDIC combats predatory lending through the examination process and supervisory actions, encouraging banks to serve all members of and areas within their communities in a fair manner, and providing information and financial education to consumers. The FDIC reminds banks that predatory loans can adversely affect a bank’s CRA rating, can violate fair lending and other consumer protection laws, leading to legal or regulatory action, and can raise related safety and soundness concerns. The FDIC concludes by stressing its commitment to address predatory lending through "vigorous safety and soundness and compliance examinations and enforcement," outreach to the banking industry and consumer education programs.

The SEC website now includes a page that provides hyperlinks to notices of the filing of applications seeking exemptive relief under the Investment Company Act of 1940, as amended, and notices of the issuance of orders granting exemptive relief under the Act. The website listing reflects notices issued after January 1, 2007. This measure addresses one of the recommendations made by the SEC’s Office of the Inspector General following its audit of the Division of Investment Management’s exemptive application process (as discussed in the October 17, 2006 Alert).

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