SEC Plays King Solomon: Divides Proposal-Baby In Half

It is obvious from a first glance that shareowners whose broker or bank isn't a DTC participant just got screwed.

SEC Staff Legal Bulletin No. 14F (CF) finally addresses the issues of what is needed to evidence stock ownership for the purpose of filing a shareowner proposal. It is obvious from a first glance that shareowners whose broker or bank isn’t a DTC participant just got screwed.

We will take the view going forward that, for Rule 14a-8(b)(2)(i) purposes, only DTC participants should be viewed as “record” holders of securities that are deposited at DTC. As a result, we will no longer follow Hain Celestial.

On the other hand, we are still left with half the baby.

Companies have occasionally expressed the view that, because DTC’s nominee, Cede & Co., appears on the shareholder list as the sole registered owner of securities deposited with DTC by the DTC participants, only DTC or Cede & Co. should be viewed as the “record” holder of the securities held on deposit at DTC for purposes of Rule 14a-8(b)(2)(i). We have never interpreted the rule to require a shareholder to obtain a proof of ownership letter from DTC or Cede & Co., and nothing in this guidance should be construed as changing that view.

How can a shareowner determine whether his or her broker or bank is a DTC participant? Shareowners and companies can confirm whether a particular broker or bank is a DTC participant by checking DTC’s participant list.

If your broker or bank isn’t on the list:

A shareholder could satisfy Rule 14a-8(b)(2)(i) by obtaining and submitting two proof of ownership statements verifying that, at the time the proposal was submitted, the required amount of securities were continuously held for at least one year – one from the shareholder’s broker or bank confirming the shareholder’s ownership, and the other from the DTC participant confirming the broker or bank’s ownership.

The list of participants is quite extensive, so most activists won’t be effected. In fact, the only one I personally know who may be impacted is John Chevedden. Draw your own conclusion. My advice: If your broker or bank isn’t on the list, move your account.

The Bulletin also provides advice on avoiding common errors when submitting proof of ownership, on how to submit revised proposals, and on how to withdraw no-action requests when there are multiple proponents.

The SEC will now be e-mailing no-action responses. Personally, I do it all by e-mail and scanning, if needed. Never use snail mail or a fax… so much quicker and easier to keep track of files.

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One Response to SEC Plays King Solomon: Divides Proposal-Baby In Half

  1. Glyn A. Holton October 19, 2011 at 2:31 pm #

    Your advice—that if shareowners’ hold shares with a firm that is not a DTC participant, they should move their accounts—is good. The fact that such onerous advice is good speaks volumes about how misguided the SEC’s decision is. Another alternative, which would avoid the whole issue of proving ownership, would be to directly register shares.

    Did the SEC give even a moment’s thought to what an imposition this would be? Getting a letter from a bank or broker of whom one is a client has always been hard enough. How are shareowners now going to get a second letter from some third-party financial institution with whom they have no relationship? I suppose banks or brokers who don’t want to lose clients over this may take it upon themselves to obtain those additional letters for their clients. Or maybe they won’t consider it worth the bother.

    Shareowners who move their accounts or directly register their shares in response to this will have to wait a full year after making the switch before they can submit proposals again … just another form of regulatory disenfranchisement.

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