United States: SEC Approves Amendment To Eliminate Discretionary Voting By Brokers In Uncontested Elections Of Directors And Proposes New Disclosure Rules

On July 1, the Securities and Exchange Commission (the "Commission") held an open meeting to consider three proposals that will likely have a significant impact on the 2010 proxy season.

Broker Non-Votes

In a 3-2 vote, the Commission approved a change to Rule 452 of the New York Stock Exchange to eliminate discretionary voting by brokers in uncontested director elections. The current rule allows brokers to vote on behalf of their clients in uncontested elections unless instructed otherwise. Based on historical voting tendencies, the change may result in the loss of a significant source of support for management nominees. When combined with other recent developments, including majority voting policies and electronic delivery of proxy materials (which has resulted in decreased voting by retail shareholders), the change could make the election of management nominees in uncontested elections considerably more difficult. Accordingly, the change raises several concerns, including:

• Greater difficulty in achieving a quorum in the absence of so-called "broker non-votes";

• Increased solicitation costs may be particularly significant for small and mid-sized companies; and
• The rule change may amplify the influence of institutional holders, activists, short-term investors, and special interest groups at the expense of retail shareholders, who historically vote with management when they do vote.

The amendment will be applicable for any shareholder meeting held on or after January 1, 2010. The amendment will affect all public companies, including those listed on Nasdaq, as NYSE Rule 452 applies to brokers, rather than to specific companies. In light of the new rule, companies should begin planning early for the 2010 proxy season. In addition to other actions, companies may want to consider (a) adjusting annual meeting schedules to increase the days available for proxy solicitations; (b) working with outside proxy solicitors to develop a strategy for getting the vote in, and (c) reviewing majority voting policies to assess contingencies associated with a failed vote.

Enhanced Proxy Disclosure

The Commission also proposed changes to the rules governing proxy solicitations and disclosure requirements related to executive compensation, qualifications of director nominees, board governance, and shareholder voting results. A summary of the proposed changes, based on the discussion at yesterday's meeting, is set forth below:

Executive Compensation. The proposed rules would require:

• A discussion in Compensation Discussion and Analysis of any compensation policies or programs for employees generally, including those not applicable to named executive officers, in circumstances where the risk arising from the policies may have a material effect on the company.
• Enhanced disclosure regarding a company's potential conflicts of interest with executive compensation consultants, including disclosure of other services provided by the consultant or its affiliates, whether the board approved the additional services, and the amount of fees related to the additional services and aggregate fees paid to the consultant and its affiliates.
• Reporting of compensation related to stock option awards based on the aggregate grant-date fair value of the awards (the current rule requires disclosure based on the amount expensed under FAS 123R).

Director Nominee Qualifications. The proposed rules would require more in-depth disclosure of a nominee's prior experience and qualifications, including the attributes and skills that qualify the nominee to be a member of the board or any particular committee of the board. The proposal would also extend the required look-back period for disclosure of legal proceedings (e.g., bankruptcy) from five years to 10 years. In addition, SEC Commissioner Luis A. Aguilar indicated that disclosure requirements related to board diversity will be included in the proposed rules.

Board Governance. Companies would be required to disclose their board leadership structure and explain the reasoning behind that structure. Specifically, the proposed rules would require a discussion of whether a company combines or splits the chairman and CEO positions and whether its board of directors has an independent lead director. The proposed rules would also require a discussion of the role of a company's board of directors in risk management.

Voting Results. Companies would be required to disclose the results of any shareholder vote within four business days on Form 8-K. Currently, the disclosure is required in a company's Form 10-K or Form 10-Q for the period in which the vote occurred.

Given the Commission's unanimous vote to propose the rules and the supportive statements made at yesterday's meeting, it is possible that some form of these proposed rules will be adopted prior to the 2010 proxy season. Accordingly, companies should begin reviewing their disclosure controls and procedures, including updating D&O questionnaires, and board policies in the context of the proposed new disclosures.

Say-on-Pay for TARP Recipients

The Commission also proposed rules implementing the "say-on-pay" requirement established by the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act. The proposed rules would apply only to companies having received and not repaid funds under the Troubled Asset Relief Program ("TARP"). Any company subject to the proposed rules would need to seek a separate shareholder vote on executive compensation in its proxy statement for any annual meeting of shareholders and provide a brief explanation of the general effect of the vote (e.g., such as the advisory nonbinding effect of the vote). As currently proposed, the inclusion of the say-on-pay vote in the proxy statement will require TARP recipients to file a preliminary proxy giving the staff the opportunity to comment on the disclosure before a final proxy is mailed to shareholders. The proposed rules would mirror the requirements of the TARP legislation and would not include any substantive changes to the current compensation disclosure requirements.

This alert is based on the Commission's open meeting yesterday. As appropriate, we will provide additional commentary at a later date.

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