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SEC’s IAC Seeks Input for Agenda

September 19, 2012 in General

The Dodd-Frank Act established the Investor Advisory Committee (IAC) to advise the Securities and Exchange Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The IAC met for the first time on June 12, 2012 and the next full committee meeting is scheduled for September 28, 2012. Additional information on the committee.

At its inaugural meeting, the IAC agreed to create the following Subcommittees to carry out its responsibilities.

  • Market Structure
  • Financial Literacy
  • Retail Investor Issues
  • Investor as Owner

I’ll be primarily focusing on the Investor as Owner subcommittee. That subcommittee is charged with deliberating, considering and making recommendations on issues that directly impact investors as owners of the companies in which they invest. These topics range from corporate governance and “proxy plumbing” issues to matters of greater transparency and disclosure.

All committees seek public input and suggestions on these and other topics as the subcommittees begin to put their work plans and agendas together. IAC recommendations to the SEC, both short and longer term will be based on the priorities established by the subcommittees. Comments to date.

The subcommittees would appreciate receiving constructive comments. Those submitted by September 21, 2012 may be used to help set the agenda for the September 28, 2012 meeting. Send your comments to If this iteration of the IAC is anything like the last one, it will provide investors with a real opportunity to make a difference… if we can provide them with carefully conceived recommendations. Below are some of my initial thoughts, which I hope to tighten up and expand upon by the end of the week.

Members of the new Investor Advisory Committee

  • Chairman Joseph Dear, Chief Investment Officer, California Public Employees’ Retirement System
  • Vice Chairman, Craig Goettsch, Director of Investor Education and Consumer Outreach, Iowa Insurance Division
  • Secretary, J. Robert Brown, Jr., Law Professor, University of Denver
  • Darcy Bradbury, Managing Director and Director of External Affairs, D.E. Shaw & Co., L.P.
  • Eugene Duffy, Partner and Principal, Paradigm Asset Management Co. LLC
  • Roger Ganser, Chairman of the Board of Directors of BetterInvesting
  • James Glassman, Executive Director, George W. Bush Institute
  • Joseph Grundfest, William A. Franke Professor of Law and Business, Stanford Law School
  • Mellody Hobson, President and Director of Ariel Investments, LLC
  • Stephen Holmes, General Partner and Chief Operating Officer, InterWest Partners
  • Adam Kanzer, Managing Director and General Counsel of Domini Social Investments and Chief Legal Officer of the Domini Funds
  • Roy Katzovicz, Partner, Investment Team Member and Chief Legal Officer, Pershing Square Capital Management, L.P.
  • Barbara Roper, Director of Investor Protection, Consumer Federation of America
  • Kurt Schacht, Managing Director, CFA Institute
  • Alan Schnitzer, Vice Chairman and Chief Legal Officer, The Travelers Companies, Inc.
  • Jean Setzfand, Director of Financial Security for the AARP
  • Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System
  • Damon Silvers, Associate General Counsel for the AFL-CIO
  • Mark Tresnowski, Managing Director and General Counsel, Madison Dearborn Partners, LLC
  • Steven Wallman, Founder and Chief Executive Officer, Foliofn, Inc.
  • Ann Yerger, Executive Director, Council of Institutional Investors

Concentrate Efforts on Retail Investors

The IAC would do well to recommend leveling the playing field between retail and institutional investors and between investors of all types and corporate management. Retail investors are more likely to return to the market if the scales aren’t so often tipped against them. It appears there may be agreement by Committee members to first concentrate their efforts on retail investors. Commissioner Luis A. Aguilar in his remarks to Committee members, noted:

According to a recent survey, only 15% of Americans trust the stock market. Investors continued to withdraw cash from U.S. equity funds in 2011, continuing a trend that has seen a total outflow of a half a trillion dollars from domestic equity funds since 2006. Some of this shift may be a natural result of the aging population of baby boomers. But research suggests there may also be a decline in the willingness of even younger investors to invest in the stock market.

SEC Chairman Mary L. Schapiro’s remarks noted the work of the Committee will be supplemented by the addition of the SEC’s new Office of the Investor Advocate,  also established by the Dodd-Frank Act and indicated they are in the process of receiving applications for the new Investor Advocate, “who will lead that office and by statute work with you as a member of this Committee.” She reminded members the Dodd-Frank Act stated the purpose of the Committee is to advise and consult with the Commission on

  • Regulatory priorities;
  • Issues relating to the regulation of securities products, trading strategies, fee structures and the effectiveness of disclosure;
  • Initiatives to protect investor interest; and
  • Initiatives to promote

According to New SEC Investor Advisory Committee to Put Retail Investors First (, 6/12/2012) Committee member James Glassman, executive director of the George W. Bush Institute, told newly appointed Committee Chairman Joe Dear that he wanted to be “assured” that the committee’s agenda would focus on retail investors. “Yes,” Dear replied. Barbara Roper, director of investor protection for the Consumer Federation of America, told AdvisorOne that most committee members expressed a desire to focus on the needs of retail investors-

there is no issue of higher importance for retail investors than how we regulate the intermediaries [such as the advisors and broker-dealers] they rely on.

The Importance of Retail Investors 
Too many, including those at the SEC, view individual investors as irrelevant, uninformed and incompetent, not to be trusted with tools like proxy access. Institutional investors will look out for our interests.

Many have written about inherent conflicts of interests faced by institutional investors. One recent example is Simon Wong’s How Conflicts of Interest Thwart Institutional Investor Stewardship. Funds hope to run 401(k) plans for companies, so don’t want to be seen as biting the hand that feeds them. All funds are under pressure to keep expenses down. Active monitoring and engagement costs money and creates a collective action problem because the benefits of engagement go to all, not just those who expend resources. Although we would like to work closely with institutional investors, individual investors can’t rely on them to speak on our behalf, since we have different interests.

One example of the dismissive atmosphere is the treatment of retail investors submitting proxy proposals. As you can see from the table below from John Laide at, individuals submit a substantial proportion of such proposals. Yet, when the SEC convenes its post-season roundtable to review how the process can be improved, it typically does not invite retail investors

Top Sponsors of Shareholder Proxy Proposals
2011 2010
Proponent Type Rank # Proposals Rank # Proposals
Individuals 1 358 1 494
Religious Groups 2 194 2 223
Labor Unions 3 130 3 161
Public Pension Funds 4 96 4 116
Investment Advisers 5 68 5 76
Other Stake Holders/Activist Groups 6 59 6 60
Other Institutions 7 26 7 21
Hedge Fund Companies 8 3 8 11
Most at the SEC will say the individual retail investor is key but let’s see them put it to practice. Where to begin?
The IAC should recommend the Commission to include representatives of retail investors in roundtable and other events typically attended by institutional investors. Since the cost of attending such meeting may be burdensome, the Commission should endeavor to facilitate participation through electronic means when possible.  
Additional recommendations discussed below are aimed at helping to reduce the unnecessary paperwork burden around shareowner proposals, get the SEC to apply the rules governing proxies to voter information forms, eliminate blank votes going to management and creating a framework that will encourage open systems of client directed voting.

Broker Letters

The process to obtain proof of ownership from retail investors should be less onerous. What real problem did Staff Legal Bulletin No. 14F (CF) address?  Many retail shareowner proposal proponents viewed this SLB as a complicated labor intensive answer seeking a problem. Had introducing brokers provided false evidence of ownership letters for retail investors holding shares in street name?

I have never heard of any brokerage providing a letter saying one of their clients owned shares when he or she did not. If such cases exist, why aren’t these incidents brought to the attention of prosecutors for criminal violation? Wouldn’t that be a much simpler process unless such practices are rampant? If such practices are rampant, where is the evidence?

SLB 14F(CF) sets up a process whereby proponents may be required to obtain a letter from a clearing bank verifying their broker or bank held specified shares, even though the proponent may have no relationship with such a bank and the bank has no legal obligation to provide a letter.

The IAC should ask staff for examples of fraudulent broker letters. If there were no fraudulent letters, the IAC should recommend that a letter from the proponent’s broker or bank is sufficient and their is no need to get a letter from the clearing bank. 

SEC rules require that proponents affirm their intention to continue holding at least the minimum amount of shares necessary to submit a proposal through the date of the annual meeting. Companies typically do not seek reconfirmation of share ownership once the proposal has gone through no-action review. In some sense, they are trusting that shareowners haven’t sold their shares during the several months between submission and the annual meeting. However, when it comes to a day or two around the submission, companies typically play “gotcha.” See page 6 of Council of Institutional Investors guide, Everything you wanted to know about Filing a Shareholder Proposal but were afraid to ask.

To prove ownership, a proponent needs to get a letter from a bank or broker confirming that he or she owned the requisite number of shares on the date the proposal was sent to the company. Ideally, the broker letter should be submitted along with the shareowner proposal.

This can get tricky. As a practical matter, however, the broker may prepare the broker letter a day or two in advance of the date the proponent submits it. Thus, when it is sent in, it will have a different date than the date of the letter. The company may argue that the submission is insufficient because the broker letter is dated November 15, whereas the submission is dated November 17 and it is conceivable that all of the proponent’s (shares) were sold on November 16.

The IAC should recommend to the Commission that two or three days between the submission date of a proposal and the date of a letter evidencing ownership is imaterial. Let’s stop playing games. 

Voter Information Forms 

Retail investors should be entitled to the same protections as shareowners holding actual proxies. Retail investors typically hold their shares in “street name” and receive voter instruction forms (VIFs) from Broadridge, rather than actual proxies. Broadridge claims (in correspondence and conversations) the rules that apply to proxies don’t apply to VIFs.

If VIFs go out to about 1/3 of the total number of shareowners and the rules don’t apply to them, then the SEC appears to sanction the treatment of retail shareowners as second class citizens, in comparison to those who receive actual proxies.  (I don’t know the actual proportion going out as VIFs, but 1/3 seems like a reasonable guess.) SEC Rule 14a-4(a)(3) states the proxy

shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.

Broadridge claims the rules for proxies don’t apply to voter information forms (VIFs), since they are not legal proxies. It may be helpful here to provide an example. John Chevedden submitted a proposal to Altera, asking them to end supermajority voting requirements. His resolved language read as follows:

Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against the proposal in compliance with applicable laws. This includes each 80% supermajority provision in our charter and bylaws.

Broadridge identified the item to be voted on the VIF, which most retail shareowners got, as follows:


In an April 1, 2010, letter to the SEC and Altera, Chevedden complained that voting would not be accurate with such a description of his resolution. On April 2nd, I posted an article entitled Abusive Practices Continue as VIFs Tilt Voting in Favor of Management and urged readers to bring this abusive practice to the attention of the former SEC Investor Advisory Committee through use of their online comment form. On April 9, 2010 Broadridge had acknowledged the error and “corrected” ballot language so that it read as follows:


I was told by a Broadridge representative that they “try” to summarize the issues but if that can’t be done easily, they put a general statement on the VIF, referring the shareowner to the proxy materials, such as that used at Altera.  It is difficult for me to understand why Broadridge claimed to not be able to summarize this proposal as “end supermajority voting requirements,” or something similar. It certainly was not a unique or hard to understand proposal. Many, many such proposals had gone before.

This “corrected” ballot language certainly does not meet the requirements of SEC Rule 14a-4(a)(3). I asked the SEC for clarification on whether or not proxy rules apply to VIFs but received no response. If the SEC is trying to set up a system of rules that will persuade retail investors to come back into the market, why does it allow VIFs to obfuscate the issues?

See also, Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration and Ross Kerber’s piece for Reuters on zombie voting (Top U.S. proxy vote site favors boards, critics say, 5/29/2012) that might be addressed if VIFs have to meet the same standards as proxies.

The IAC should ask staff for a legal opinion discussing what legal requirements apply to VIFs and how, if at all, do they differ from those that apply to proxies. The IAC should recommended changes necessary so the same protections are afforded to retail investors as are afforded to shareowners with direct registration.  

Blank Votes 

If the SEC ever gets around to determining their rules do apply to VIFs, that may take care of the issue of the including a “clear and impartial” description, required by Rule 14a-4(a)(3) and as discussed above. Additionally, such a finding might also somewhat address another issue — votes left blank that turn, almost magically, into votes for management. At least more voters would be alerted to the fact that blank votes will be counted as votes in favor of the position taken by the company’s soliciting committee because warnings would then have to be in bold-type, instead of in micro-type footnotes, as Broadridge now uses.

However, I would argue that Rule 14a-4(b)(1) still needs to be changed. See my post on the HLS Forum at Don’t Let Companies Change Shareholders’ Blank Votes and my petition to the SEC 4-583. Just as the SEC finally agreed to abolish the practice of “broker voting” in most instances because a non-vote isn’t necessarily intended to be a vote for management, the SEC should also amend 14a-4(b)(1) so that blank votes are counted as blank votes, not as votes in favor of the position taken by the company’s soliciting committee.

The IAC should try to level the playing field by recommending the Commission take action on my rulemaking petition to eliminate blank votes from automatically going to management.

Client Directed Voting

Historically, most retail shareowners toss their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, I understand that less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so.

“Client directed voting” (CDV), a term coined by Stephen Norman, is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture a good portion of the broker-votes cast in their favor that evaporated with recent reforms. I viewed Norman’s initial proposal as an extension of the “Vote with the Board’s Recommendations” button seen on VIFs.  An open form of CDV could create much more thoughtful and robust corporate elections.

The key issue in any open CDV system is to let shareowners control where their electronic ballots are delivered. Just as there is no question shareowners can control where hardcopy ballots are delivered, there should be no question they can direct where their electronic ballots are delivered. This simple requirement would insure third-party content providers, like the late effort at, an opportunity to compete and improve the quality of voting advice.

Additional elements for a more effective CDV system include:

  • A wide range of voting opinion sources that will eventually cover all issues;
  • Open access for any new opinion sources to publish their opinions;
  • Open access for shareowners to choose any opinion source for our standing instructions on voting;
  • Sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote (or by beneficial owners of funds that may choose to “pass through” their votes).

Under an open system for of CDV, feeds would offer the ability for retail shareowners to essentially build a “voting policy,” just as institutional voters are now able to do. That model will increase participation and voting quality. We shouldn’t ask shareowners to affirm every single pre-filled ballot. That could be a deal breaker for people with stock in many different companies who would rather spend their time on other activities.

Third-party CDV systems, like the former Moxy Vote, could allow investors to create hierarchies of voting instructions. (Vote like X. If X hasn’t voted the item, vote per Y. If Y hasn’t voted, vote per Z, etc. Eventually, these systems could become very complex. Vote like X on issue A; vote like Y on issue B, also specifying defaults if either X or Y don’t have votes recorded.) See Client Directed Voting Q&A on the site.

If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around “proxy assignments.” Proxies assigned to organizations or individuals, for example, could give annual meetings a new meaning. See Investor Suffrage Movement by Glyn A. Holton.

The IAC should ask staff what rulemaking changes would be needed to create an open and robust form of client directed voting and should then recommend such changes to the Commission.

Proxy Advisors Obstruct Proxy Access

August 9, 2012 in General

The good news is that, on the second round of submissions of the USPX model proxy access proposal, the SEC rejected all no-action requests. We now have votes coming up in the next couple months at Forest Labs ($FRX), Medtronic ($MDT) and H&R Block ($HRB). All three were submtted by individual shareowner Kenneth Steiner.

The bad news is that the proxy advisory firms ISS and Glass Lewis are now standing in the way. Jim McRitchie, John Chevedden and Glyn Holton have been doing outreach to the proxy advisors and institutional investors … but we pretty much have to get support from influential ISS, or we won’t receive majority votes.

A couple weeks ago, USPX members finalized a slide presentation on the USPX Model Proxy Access Proposal. We forwarded it to ISS, and they agreed to have a conference call. It was a cordial conversation. We walked them through the careful logic behind the model proposal, as described in the release document. They listened and asked questions … and several times made a disturbing protest to the effect that some of their clients disagreed with our position that proxy access should be open to smaller investors, including individual shareowners. They didn’t exactly explain why those clients disagreed. All that mattered was that … they disagreed.

Through back channels, we later heard:

ISS is not recommending a yes vote. They said their clients are expressing support for a higher threshold of stock ownership than ISS expected. Plus their clients wanted more change in control safeguards.

ISS has come out against our proposal at Forest Labs and Medtronics. They haven’t yet taken a position on the H&R Block proposal, which is slightly different from the other two. it blocks takeover attempts by capping the number of shareowner nominees at 48% of the board—precisely the sort of change in control safeguard ISS found lacking in the other two proposals. We will wait and see what they decide.

The response from Glass Lewis has been even worse: they refused to even speak to us. Proxy access is the biggest issue in shareowner proposals this year, and our model proposal has been submitted to more companies than all other proxy access proposals combined, and they wouldn’t even speak to us …

SEC Delivers for Shareowners on Proxy Access

June 29, 2012 in General

USPX members’ efforts to advance proxy access got a boost today from SEC staff. Two companies, Forest Labs ($FRX) and Medtronic ($MDT), had sought no-action letters from Commission staff to allow them to exclude from their proxy materials the USPX model proxy access proposal. Both requests have been denied. 

These decisions come on the heals of much criticized no-action decisions by SEC staff that allowed six companies to exclude an earlier version of the USPX model proposal (see Pushback From SEC Staff, March 9, 2012). In response to those decisions, USPX members immediately redrafted the USPX model proposal and resubmitted it to Forest Labs, Medtronic and H&R Block ($HRB). Commission staff have not yet made a decision on an H&R Block no-action request.

All three of the most recent proposal submissions were made by shareowner Kenneth Steiner with help from John Chevedden. Various members of the USPX have also pitched in. In particular, Glyn Holton, Jim McRitchie and Dan Rudewicz helped organize responses to the three most recent no-action requests.

We now have a version of the USPX model proxy access proposal that we know can pass muster with the SEC. But we still have plenty of work ahead of us. Proxy access doesn’t become real until shareowners approve it at a company’s annual meeting, and even then, the board has discretion over whether or not to actually implement it (because the USPX model proposal is precatory). Our immediate next steps are to reach out to proxy advisory services and encourage them to support the USPX model proposal in their voting recommendations.

Updated Model Proxy Access Proposal

March 23, 2012 in Standards

Two weeks after SEC lawyers granted six corporations approval to exclude “proxy access” proposals from their proxy materials, USPX members are already submitting an updated version of that same proposal to other corporations. Updated language addresses the flimsy pretexts for the lawyers’ decision, as well as implementing improvements to the proposal language that shareowners have recommended.

The original proposals were based on a USPX model proxy access proposal released on November 10, 2011. Today, the USPX announces an update to that model proposal, which shareowners can submit to corporations. Shareowner Kenneth Steiner received an advance copy of the update, and he has already submitted proposals based on the new language to Medtronics (MDT) and Forest Labs (FRX).

The purpose of the model proposal is to facilitate board nominations, not only by the largest institutional shareowners, but by all shareowners, including individual investors. The updated model proposal has two alternative versions. Version A is a direct evolution of the original model. Version B is based on a customization of the model, developed by shareowners Jim McRitchie and Glyn Holton for submission to Dell Corporation (DELL).

By limiting the number of proxy access nominations to less than a majority of board seats, the second version provides a strong safeguard against proxy access being used to pursue a change in control at a corporation. While Version A also seeks to avoid change in control issues, it does so primarily by prohibiting coordination of nominating groups, not by restricting the total number of shareowner nominees.

A 16 page release document presents the text of both versions followed by instructions for submission, background information and the history of proxy access. A section provides a detailed explanation of Version A. A shorter section follows that to explain how Version B differs from Version A.

Shareowners are encouraged to submit a version of the model proposal to corporations they think would benefit from it. We also encourage shareowners to experiment with modifications and/or to submit entirely different proxy access proposals of their own design and to let us know of those modifications or different proposals.

We welcome feedback, which can be posted directly on this page (log-in as a USPX member to do so) or send an e-mail at

Pushback From SEC Staff

March 9, 2012 in General

“Stunning”, “arbitrary”, “unjustifiied” … “questionable”: these are some of the words individual shareowners are using to describe the SEC handling of six corporations’ requests to be allowed to exclude the USPX model proxy access proposal from their 2012 proxy materials.[1] This week, the Commission’s staff approved every one of those requests.

Corporate executives routinely solicit SEC staff no-action letters indicating staff will recommend no enforcement action should a company exclude a proposal from its proxy materials. Grounds for excluding proposals are spelled out in Rule 14a-8(i)(9) and include cases where proposals might violate state law, address personal grievances, relate to routine business decisions, etc. Corporations’ in-house counsel often draft no-action requests. If executives really want to block a proposal, they spend shareowner money on outside law firms to write the requests. In response to the USPX model proxy access proposal, executives went all-out, hiring outside law firms to draft lengthy no-action requests floating numerous possible reasons for exclusion.

The high-priced law firm Gibson Dunn wrote an October 23, 2011 no-action request for Textron (TXT) proposing that the USPX model proposal, which shareowner Kenneth Steiner had submitted to the company, might be excluded because it dealt “with matters relating to the Company’s ordinary business”; was actually multiple proposals posing as one; was “impermissibly vague and indefinite so as to be inherently misleading”; and was “beyond the Company’s power to implement.” The letter goes on for 19 pages, not including 18 pages of exhibits. Gibson Dunn recycled essentially the same letter for another client, Bank of America (BAC). The law firm Stinson Morrison Hecker wrote a staggering 27 page letter for their client, Sprint (S), arguing that the USPX model proposal would violate Kansas law, was “impermissibly vague and indefinite so as to be inherently misleading”; was beyond the Company’s power to implement; and dealt “with matters relating to the Company’s ordinary business.”

Law firms take a “throw things at the wall and see what sticks” approach to the no-action process. No argument seems too far fetched. The corporations are footing the legal bills, and, who knows, Commission staff only have to accept one contrived argument for a proposal to be excluded—might as well offer them plenty to choose from. With corporations recycling each others’ arguments, it turns out that Commission staff only had to accept two arguments in order to allow exclusion of every single contested submission of the USPX model proxy access proposal.

The first of those arguments—among those raised by Textron, Bank of America and Goldman Sachs (GS)—was that the USPX model proxy access proposal was actually two proposals disguised as one! The proposal’s item 6 provided a common-sense safeguard against executives exploiting proxy access as a means of enriching themselves:

Any election resulting in a majority of board seats being filled by individuals nominated by the board and/or by parties nominating under these provisions shall be considered to not be a change in control by the Company, its board and officers.

In the past, the Commission allowed shareowners to submit as many proposals to a corporation as they liked. In 1976, they limited shareowners to two proposals a year, which they further reduced to one a year in 1983. Common sense would suggest that a single proposal would be whatever a shareowner submitted for a single up or down vote, but it has been many decades since anyone accused the SEC of having common sense. No. The Commission’s lawyer-bureaucrats set themselves the task of deciphering shareowner proposals to see if, in their opinion, they address multiple issues. Rarely is this clear, so decisions tend to be … nuanced. Commission staff didn’t have to decide against shareowners on this one, but they did. It doesn’t mean anything—just lawyers mentally masturbating—but the consequences are real. Shareowners of Textron, Bank of America and Goldman Sachs almost had a chance to vote on proxy access this year, but Commission staff decided otherwise.

The second argument Commission staff accepted—among those advanced by Sprint, MEMC Electronic Materials (WFR) and Chiquita (CQB)—was that, because the proposal cited the Commission’s own Rule 14a-8, it was impermissibly vague or misleading. Specifically, Commission staff noted that the USPX model proxy access proposal asked that companies’ proxy materials

… include the director nominees of shareholders who satisfy the “SEC Rule 14a-8(b) eligibility requirements.” The proposal, however, does not describe the specific eligibility requirements. In our view, the specific eligibility requirements represent a central aspect of the proposal. While we recognize that some shareholders voting on the proposal may be familiar with the eligibility requirements of rule 14a-8(b), many other shareholders may not be familiar with the requirements and would not be able to determine the requirements based on the language of the proposal. As such, neither shareholders nor [the Company] would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.

The SEC’s own Rule 14a-8(b) is easily accessible with a web search. It explains in a half page of plain English what the eligibility requirements are, so how does Commission staff conclude that “neither shareholders nor [the Company] would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires”???

The SEC is a giant revolving door for lawyers. Almost the entire senior staff is lawyers who work at the Commission for a few years and can then look around for high-paying jobs at law firms. Recently, one such departure was Greg Belliston, who left the Commission for—where else!—Gibson Dunn.

In commenting on Commission staff’s treatment of the USPX model proposal, the Blog offers shareowners some comfort:

As is usually the case with the type of exclusions that we see here … the proponents will no doubt get smarter next year and try to correct the language which led to exclusion this year, so the landscape might be quite different in 2013.

Actually, shareowners won’t be waiting for 2013. USPX members are already redrafting the USPX model proxy access proposal. Expect new submissions in the next few weeks.

Footnotes    (↵ returns to text)
  1. Shareowner David Monier submitted a proxy access proposal based on the USPX language to the Princeton National Bancorp, Inc (PNBC). The bank did not challenge the proposal, so it will appear in their proxy materials. Jim McRitchie submitted a proposal based in part on the USPX language to Dell, which has requested an SEC no -action letter. Based on their other responses, we expect Commission staff will grant that request.

It’s Working!!!

January 19, 2012 in General

Eleven weeks ago, we launched the new USPX social networking website. The goal was to create an on-line community for our members to self-organize around issues. Guess what? It is working!!! Already, members Jim McRitchie, Steven Towns and myself have transfered exiting blogs to the USPX website. Members Krassimir Kostadinov, Marko Robinson and Daniel Rudewicz have launched new blogs.

We are at that time of year when most shareowner proposals for the spring have been submitted. Companies are responding with no-action requests to the SEC, and shareowner-proponents are submitting rebuttals. Just this week, I noticed how several members were simultaneously blogging about the process and what they were experiencing with their own proposals. What is more, they were reading each others’ blogs and responding. Nowhere else on the web will you find an active discussion between individual shareowners about their Rule 14a-8 proposals. We’re creating something new!

Just this morning, member John Chevedden copied me on an e-mail to member Steven Towns. Steven had just blogged about his success overcoming a no-action request against his proposal for GE. John had just overcome a no-action request made by GE against one of his proposals. Both no-action requests had been filed by a single law firm, Gibson Dunn, on GE’s behalf. John’s e-mail communicated that sense of comeraderie that comes from overcoming shared adversity. He proposed to Steven that they coordinate their efforts to find someone to attend the GE annual meeting to move both proposals for them.

When I read John’s e-mail, I knew the website was working!

Not all features of the website have been as successful as member blogs. For example, the website’s groups functionality is languishing. I think it will be more effective once we implement automated e-mails to notify group members of group activity.

Upgrades to the website are planned. Because we are an all-volunteer movement operating on a shoestring budget, those upgrades will take time. That doesn’t matter. Communities aren’t about the latest technology. They are about the enthusiasm and commitment of members. We have plenty of both!

Thank you bloggers. If any of you have questions about the blogging technology or would like help customizing the appearance of your blog, let me know. I will be glad to help. For everyone else, enjoy the blogs …. and think about launching you own. Join the conversation!

Reform Proposals Delayed But Not Blocked by Apache and KBR.

December 1, 2011 in General

After two years or legal wrangling, the charade is up. A reform proposal Apache Corp. (APA) has tried to keep from a shareowner vote was resubmitted on Wednesday. It is a fairly benign proposal that, if passed, will ask the board to:

… take the steps necessary so that each shareholder voting requirement in our charter and bylaws that calls for a greater than simple majority vote be changed to require a majority of the votes cast for and against the proposal, or a simple majority in compliance with applicable laws.

This same proposal has been submitted to various corporations by a number of shareowners. It has won from 74% to 88% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. Supermajority voting requirements have been found to be one of six entrenching mechanisms that are negatively related to company performance.[1] The proposal is “precatory”—if passed, it merely asks the board to consider the reform. It does not compel them to implement it.

Apache appears to object not so much to the proposal itself as to the fact that a shareowner had the teremerity to submit it in the first place. That shareowner is John Chevedden, a champion of shareowners across the country who has submitted numerous reform-minded proposals to corporations, winning majority votes for many of them.

Apache’s CEO, Stephen Farris, argued in a 2007 comment letter to the SEC that precatory proposals should be banned. In 2009, when Chevedden first submitted this precatory proposal to Apache, Farris hired an expensive Houston lawyer, Geoffrey L. Harrison of law firm Susman Godfrey, to sue Chevedden in federal court. The law firm cobbled together a case based on an absurd reinterpretation of an SEC regulation related to how proposal proponents demonstrate that they own shares in a targeted corporation. The issues were highly technical, and Chevedden was defending himself. The USPX stepped in with a amicus curiae brief that sorted out the technicalities, laying bare how rediculous Apache’s claims were. The presiding judge, Lee Rosenthal, rejected those claims out of hand, but she found a contrived excuse to rule in Apache’s favor, so Apache could exclude Chevedden’s proposal from their proxy materials on that one occasion. (See Apache v. Chevedden, April 9, 2010)

Apache’s reinterpretation of the SEC regulation was rejected, but lawyers and other corporate enablers ignored that detail, treating the decision in Apache’s favor as an acceptance of that reinterpretation. That was the spin given in legal blogs and newsletters. How many people were going to wade through the technicalities of the lawsuit to discover that the blogs and newsletters were implying a falsehood? Based on the decision, Apache appeared intent on ignoring future proposals from Chevedden. That position was indefensible, but who was going to compel them to do otherwise?

It would be eighteen months before the SEC clarified its regulation. In the mean time, the same Houston lawyer, Harrison, brought another lawsuit against the same shareowner, Chevedden, before the same Houston judge, Rosenthal. This time, the client wasn’t Houston based Apache Corp. It was Houston based KBR Corp. (KBR). The issue was the same contrived reinterpretation of an SEC regulation, this time challenging a proposal Chevedden had submitted to KBR. (See KBR Bellies Up To The Bar, January 11, 2011)

Suspecting that Rosenthal was the sort of judge who made up her mind first and then bent the law to suit her decision, Chevedden approached the second lawsuit diferently. He challenged the judge’s authority, arguing that KBR had no grounds to sue Chevedden over SEC regulations. They should have sued the SEC! Chevedden found a lawyer who, while insisting on anonymity, informally helped Chevedden prepare this response. It was good law. The strategy was to ignore the Rosenthal court but to appeal whatever decision she made. District judges don’t like having their decisions appealed, especially if they will be overturned.

On April 4, 2011, Rosenthal made a preliminary ruling in KBR’s favor. Taking a swipe at Chevedden, she also required him to cover KBR’s legal costs. She had declined to do that in Apache v. Chevedden. Based on her preliminary ruling, KBR excluded Chevedden’s proposal from their proxy materials. But until Rosethal produced a final ruling, the case would remain open. Chevedden could not appeal and, of course, KBR could not collect their court costs. Months passed, and Rosenthal did not act. It started to appear that, having enabled KBR to exclude Chevedden’s proposal, she would avoid an appeal by simply never finishing the case. It has been eight months. Chevedden has petitioned the court for a final ruling. Rosenthal is silent.

On October 18, 2011, the SEC released Staff Legal Bulletin 14F to clarify the regulation at issue in the Apache and KBR lawsuits. This rejected much of Apache’s convoluted reinterpretation of the regulation, but not all of it. Throwing a bone to corporate interests, the SEC made it more dificult for shareowners to prove their ownership of shares for the purpose of submitting shareowner proposals. In many cases, proponents will have to obtain evidentiary letters from two different financial institutions. (See SEC Plays King Solomon: Divides Proposal-Baby In Half, October 19, 2011).

The good news is that Staff Legal Bulletin 14F supersedes Judge Rosenthal’s decisions. Under its provisions, Chevedden has resubmitted his Apache proposal. For good measure, he has also resubmitted his KBR proposal. What are Apache and KBR going to do now? The next move is theirs.

Footnotes    (↵ returns to text)
  1. Source: “What Matters in Corporate Governance?” by Lucien Bebchuk, Alma Cohen and Allen Ferrell, Harvard Law School, Discussion Paper No. 491 (September 2004, revised March 2005)

Model Shareowner Proposal for Proxy Access

November 10, 2011 in Standards


Today, the United States Proxy Exchange (USPX) released a Model Proxy Access Proposal that can be presented to corporations for a shareowner vote under SEC Rule 14a-8 to ensure that long-term shareowners have a reasonable, but not necessarily easy, means for including board nominations in the proxy materials those corporations distribute—so called “proxy access”.

The Model Proposal is designed to achieve legitimate purposes of proxy access without including anti-democratic provisions that have marred other approaches—most notably the SEC’s vacated Rule 14a-11. It provides two alternative ways parties may qualify to nominate: one is mostly suited for large shareowners, and the other is mostly suited for small shareowners. The Model Proposal imposes no hard cap on the total number of shareowner nominations, although it provides safeguards that obstruct parties from seeking a change in control through proxy access.

The Model Proposal is released with thirteen pages of accompanying discussion. This explains how to submit the Model Proposal to corporations. It describes the history of proxy access, dating to the 1970s. It details the legitimate goals of proxy access and explains how the Model Proposal achieves these without disenfranchising the majority of shareowners.

The USPX has developed the Model Proposal as a means of stimulating debate and experimentation with alternative approaches to proxy access. Implemented as-is, it will provide a reasonable means for most long-term shareowners to participate in nominating directors.

We encourage shareowners to submit the Model Proposal or to use it as a starting point in developing their own proposals. We hope that shareowners will also submit completely different proposals of their own design. Our discussion of issues should assist shareowners in that process.

The success of proxy access depends on experimentation to find what works. The USPX is committed to supporting such experimentation. Releasing the Model Proposal is a part of our support.

An Open Letter to Institutional Shareholder Services (ISS)

November 4, 2011 in General

November 4, 2011



Global Policy Board
Institutional Shareholder Services Inc.
2099 Gaither Road
Rockville, Maryland 20850

Re: ISS 2012 Proxy Voting Policies – Proxy Access Proposals (US)

Dear Sir or Madam:

Thank you for this opportunity to comment as you develop policies for making shareowner voting recommendations in 2012. This letter addresses policies with regard to Rule 14a-8 proxy access proposals.

After twenty years of obstructing shareowner efforts to achieve proxy access, the SEC finally released Rule 14a-11. While ostensibly providing proxy access at public corporations, it was anti-democratic. Two particularly objectionable aspects of the rule were:

  1. A high ownership threshold of 3% of a corporation’s outstanding stock in order to nominate. This disenfranchised all individual shareowners and all but the very largest of institutional shareowners, at least at medium or large corporations.
  2. A hard cap on the total number of shareowner nominations was set equal to 25% of the number of board members, which ensured Rule 14a-11 would never have more than token impact.

The courts may have their own reasons for vacating Rule 14a-11, but we agree with their conclusion that the rule could be seen as “arbitrary and capricious.”

While we object to Rule 14a-11, we applaud the SEC for amendments to Rule 14a-8 to allow shareowners to submit their own proposals for alternative—and presumably better—forms of proxy access at individual corporations. This “private ordering” approach to proxy access would allow shareowners to experiment with different approaches to proxy access at individual firms, to see what worked.

Now that Rule 14a-11 has been vacated, prospects for private ordering experimentation are dimming. Large institutional investors that intend to submit proxy access proposals appear poised to base those proposals on Rule 14a-11, incorporating the two anti-democratic aspect of that rule, which I have already mentioned.

In formulating a policy for making voting recommendations with regard to proxy access, we encourage you to make voting recommendations as if Rule 14a-11 were never vacated. If that were the case, Rule 14a-11 would be a minimal baseline already applicable at all corporations, and the purpose of proxy access proposals would be to experiment with innovative alternatives. We see no reason that should change just because Rule 14a-11 was vacated. Vacated or not, Rule 14a-11 was a bad rule, and shareowners need to innovate and experiment with alternatives, implemented through the Rule 14a-8 proposal process, to find a means of proxy access that works.

The United States Proxy Exchange (USPX) is developing a model proxy access proposal. This will provide a reasonable—but not necessarily easy—means for most long-term shareowners to participate in nominating directors. It will impose no hard cap on the total number of shareowner proposals, although it will provide safeguards that obstruct parties seeking a change of control through proxy access.

We will encourage shareowners to submit our model proposal or to use it as a starting point to develop their own proposals. We hope that shareowners will also submit completely different proposals of their own design. The success of proxy access depends on experimentation to find what works. This entails risk, of course. Democracy always does. The USPX intends to fully support the process, and we hope ISS will too.

We will forward our model proxy access proposal to you when it is complete.


Glyn A. Holton
Executive Director

cc:  Laura Berry, ICCR
Michael Garland, Change To Win
Brandon Rees, AFL-CIO
Michael Ring, SEIU
Anne Sheehan, CalSTRS
Anne Simpson, CalPERS
Ann Yerger, CII
Michael Zucker, AFSCME

Proxy Access for the 99% – USPX Members Organize

October 25, 2011 in General

The time has come for shareowners to be allowed to include their own nominees for corporate boards in the proxy materials their corporations send out every year—so-called “ballot access.”

The current system—that only allows shareowners to vote for candidates nominated by the current board—is absurd. The SEC has finally reaffirmed shareowners’ right to submit proposals to corporations that, if adopted, would allow proxy access for those corporations’ shareowners.

A number of such proposals will be submitted for votes at 2012 annual meetings, but the wording is important. Some of the largest institutional investors plan to submit proposals to grant proxy access but I anticipate they will require high thresholds of ownership that will be difficult for even large investors to meet. What about the rest of us?

If individual investors—not to mention small and medium sized institutional investors—want ballot access for ourselves, we are going to have to submit our own proposals. Let’s take the lead and make it happen.

I’ve written a draft proxy access proposal (see below). I have also formed a members group on the United States Proxy Exchange website, where we can discuss the draft, make changes, and agree on a final version. Then we can each submit that proposal to corporations we own. To get involved, visit the Proxy Access Group to sign up for membership. Also, send me your e-mail address at, so I can distribute a complete e-mail list to group members. If you are not yet a member of the USPX, join now.

Proxy access will allow shareowners to nominate and elect directors with new perspectives and skills. This will move us from corporate governance version 1.0, where shareowners beg for changes through advisory proposals, to version 2.0 where we can count on board members to represent our interests. Help us design the framework so that we can hit the install button during the 2012 season.

Below, I give background information, present my draft, and provide more information on the new members group.


Proxy statements are by law company documents, not management documents. As such, access to the proxy for the purpose of listing director nominees should be available to all shareowners, not just the board’s nominating committee.

In 1977 the SEC held a number of hearings to address corporate scandals. At that time, the Business Roundtable (BRT) recommended amendments to Rule 14a-8 that would allow access proposals, noting such amendments

… would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.

Soon, we saw several proposals. In 1980 Unicare Services included a proposal to allow any three shareowners to nominate and place candidates on the proxy. Shareowners at Mobil proposed a “reasonable number,” while those at Union Oil proposed a threshold of “500 or more shareholders” to place nominees on corporate proxies.

One company argued that placing a minimum threshold on access would discriminate “in favor of large stockholders and to the detriment of small stockholders,” violating equal treatment principles. CalPERS participated in the movement, submitting a proposal in 1988 but withdrawing it when Texaco agreed to include their nominee.

These early attempts to win proxy access through shareowner resolutions met with the same fate as most resolutions in those days. As of 1986, only two proposals of the thousands submitted had ever been approved—but the tides of change were turning. A 1987 proposal by Lewis Gilbert to allow shareowners to ratify the choice of auditors won a majority vote at Chock Full of O’Nuts Corporation and in 1988 Richard Foley’s proposal to redeem a poison pill won a majority vote at the Santa Fe Southern Pacific Corporation.

In 1990, without public discussion or a rule change, the SEC began issuing a series of no-action letters on access proposals. The SEC’s about-face may have been prompted by fear that “private ordering,” through shareowner proposals, was about to begin in earnest.

Tensions over this giant leap backward rose until AFSCME v AIG (2006). That case involved a 2004 bylaw proposal submitted by the American Federation of State, County & Municipal Employees (AFSCME) to the American International Group (AIG) requiring that specified nominees be included in the proxy.  AIG excluded the proposal after receiving a no-action letter from the SEC and AFSCME filed suit.

The court ruled the prohibition on shareowner elections contained in Rule 14a-8 applied only to proposals “used to oppose solicitations dealing with an identified board seat in an upcoming election” (also known as contested elections).

The SEC subsequently adopted a rule banning proposals aimed at prospective elections. But in 2010, the commission adopted both a new Rule 14a-11, specifying a minimum proxy access requirement for all public corporations, and amendments to Rule 14a-8(i)(8) to allow shareowners to submit proposals for more robust proxy access at corporations they own share in.

The US Court of Appeals for the DC Circuit found the new Rule 14a-11 “arbitrary and capricious.” This means our only current option for achieving proxy access is through shareowner proposals filed on a company by company basis under the amended Rule 14a-8.

Shape the Future

The USPX members group I am forming will

  1. refine a draft model proposal,
  2. identify possible target companies,
  3. tailor submissions to those companies, and
  4. defend against no-action requests by companies to the SEC.

I welcome participation. If you are not already a USPX member, hit the join now button. Once you sign up you will be able to see and join groups. We will be communicating with various web-based tools, e-mail and by phone.

While any actual shareowner proposal will contain a statement demonstrating the need for proxy access and company specific arguments, we will first concentrate on the “resolved” language and point-by-point justification. Below is my draft “resolved” language. I am sure group members will offer plenty of improvements.

Draft Resolved Language

RESOLVED, Shareowners ask our board, to the fullest extent permitted by law, to amend our bylaws and each appropriate governing document to:

  1. Disclose, in our proxy statement, properly nominated and vetted “qualifying” director candidates, regardless of whether the nomination is made by the nominating committee or shareowners.
  2. Define “qualifying” candidates as those nominated by the board and nominees who have legally consented to nominations submitted by shareowners meeting the minimum requirements of stock ownership to submit proposals under SEC Rule 14a-8.
  3. Develop fair and objective standards to reduce the number of “qualifying” candidates nominated by shareowners to a number equal to one quarter the number of board nominated candidates in such instances where the number of qualifying candidates nominated by shareowners would otherwise exceed such number.
  4. Ensure all nominees meet federal, state and corporate requirements.
  5. Ensure eligible shareowners can nominate only one “qualifying” candidate each during each election cycle.
  6. Ensure director qualifications do not vary depending on the source of the nominee and there is no prior agreement with the company or its representatives regarding shareowner nominations.
  7. Provide for comparable disclosures regarding director nominees and nominators, regardless of the source of the nomination.
  8. Ensure the proxy statement lists the source of nomination for each “qualifying” candidate.
  9. Ensure the company’s proxy card gives eligible shareowners the opportunity to vote for any “qualifying” candidates included in the proxy statement.

Explanation of Provisions

  1. Direct access to the company proxy has long been considered the most direct and cost effective method of allowing shareowners a meaningful role in the nomination and election process. As Les Greenberg and I argued in our petition to the SEC for proxy access more than ten years ago, “entrenched managers and directors will only improve corporate governance when they can be held accountable, e.g., voted out of office and replaced with directors chosen by shareholders.”
  2. SEC Rule 14a-4(d)(4) prohibits a nominee from being listed unless they have consented to being named in the proxy statement and to serve if elected. I set the bar for nominating directors at the same level as for submitting proposals under SEC Rule 14a-8, since this time-honored standard is surrounded by court decisions, SEC guidance, and no-action letters.
  3. The aim here is to go with the same 1/4 limit as the overturned Rule 14a-11, making a substantial change in board composition without triggering a change-in-control. The language also gives the current Board flexibility in arriving at a fair and objective standard as to which nominees get on the proxy when more are nominated than the 25% standard. The chances of winning a change-in-control fight through proxy access would be minimal, since other shareowners usually expect to be paid a change-in-control premium by a controlling acquirer. Obtaining approval from ISS, Glass-Lewis and other proxy advisors is considerably harder for a change-in-control slate than from a short slate. Change-in-control could also trigger provisions in debt instruments, employee agreements, severance agreements and other contracts resulting in costly disruptions. Yes, we can expect some boards to game the system with unfair standards. Hopefully, ISS, Glass-Lewis and others will call them on it and recommend voting against directors that play such games.
  4. Since the company would be listing shareowner nominees in their proxy, they will need to ensure they meet all legal requirements. Otherwise they may face liabilities and shareowners would be voting for ineligible candidates. Legal standards are generally minimal, like not having declared personal bankruptcy or not having been found legally insane, so the cost of such an exercise should be minimal.
  5. Limiting shareowners to one nominee is an attempt to address concerns that “special interests” would take over boards. These concerns have been overblown, since directors have a fiduciary duty to the company and must win by a majority of all shares voted. However, it is a way of reassuring groups like the US Chamber of Commerce and Business Roundtable that no shareowner gains what these special interest groups would consider “undue” influence through the proxy access process.
  6. This provision is designed to ensure the company does not apply more stringent standards for shareowner nominees or short-circuit the access process through side agreements with nominees or nominators.
  7. This provision is to ensure a level playing field with regard to disclosures in the proxy and and their accessibility by shareowners.
  8. This provision will ensure that shareowners know the source of the nomination so they can make a fully informed decision.
  9. This provision is the main point; include all “qualified” candidates on the proxy card so that shareowners can vote for them.

Get Involved!

Since the timeframe for submitting proxy proposals is rapidly approaching for many corporations, time is of the essence. Additionally, I will be traveling for several weeks beginning the second week in November. Therefore, I would propose that we have the first phase of work done (model “resolved” language) by November 5th. Hopefully, the group can reach consensus by then.

Of course, with or without consensus, anyone is free to use the language however they want. After November 5th I would hope the group can move on to identifying possible targets and submitting proposals. Key will be choosing targets where shareowners already recognize a lack of board leadership and will be ready to vote for change.

Again, here are the links you need to join the USPX and then join the new  Proxy Access members group. Don’t forget to e-mail me at, so I can add your e-mail address to the master distribution list.

SEC Plays King Solomon: Divides Proposal-Baby In Half

October 19, 2011 in General

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.

SEC Enforcement: Will They or Won’t They?

March 31, 2011 in General

A Houston firm bringing a case before a Houston judge with representation from a prominent Houston law firm, Apache must have figured they had the advantage.

The SEC has a reputation of enforcing regulations against two-bit players in the financial arena while tiptoeing around the big boys. Back in December, Apache Corp. (APA) announced plans to flaunt US securities laws. The Commission’s response has been three months of unbroken silence.

Apache’s CEO, G. Steven Farris, is waging a war against shareowner rights. We don’t have many left, and he is targeting the biggest. I am not talking about electing directors. We lost that right decades ago. Under the SEC’s draconian “proxy solicitation” rules, corporate elections in America resemble Politburo elections in the former Soviet Union, with entrenched autocrats running unopposed year in and year out. No, what I am talking about is shareowners’ right to submit proposals to be included in management’s proxy materials and voted on at the annual meeting. That right is alive and well. It is what Farris is targeting.

Annual meetings are supposed to be deliberative bodies, where shareowners move proposals, debate them and then vote. That doesn’t happen. You might suppose the problem is shareowner apathy, but it was actually corporate boards who, long ago, took steps to suppress deliberation. Many corporations’ bylaws include an “advance notice” provision. If you want to make a motion at an annual meeting, you have to give the corporation several weeks notice. Even then, your motion won’t appear on the proxy materials the firm distributes. Those are management’s proxy materials. If you want to create awareness of—and get votes for—your proposal, be prepared to spend a few million dollars distributing your own proxy materials.

Back in the 1940s, the SEC addressed this problem with a new Rule 14a-8. In its current form, this allows any shareowner who has held $2,000 of a company’s stock for a year to submit a proposal and have it included in management’s proxy materials. This is one of the most enlightened things the SEC ever did. It didn’t restore deliberation to annual meetings, but it did ensure shareowners have some ability to raise issues. There are plenty of restrictions. Read the rule itself as well as Staff Legal Bulletin 14 for more information. As a practical matter, most Rule 14a-8 proposals are precatory. That means they are advisory only—even if they receive a majority vote, the board can ignore them.In its early days, the rule was used to prompt corporations to hire independent auditors. Then it languished. Activists used it to raise awareness about social or environmental issues, but their proposals received few votes. Only in the last two decades has the rule come into its own, as the emerging corporate governance movement embraced it. Today, shareowners submit proposals on a host of issues, including the elimination of staggered boards, director independence and elimination of poison pills. Proposals often receive majority votes.

For the most part, boards are responsive when a proposal receives a majority vote, even if it is merely precatory. There are exceptions. For six years, between 2005 and 2009, shareowners of First Energy (FE) submitted a proposal asking that all shareowner votes require just a simple majority to pass. Any bylaw provisions requiring super-majority votes would be amended. This precatory proposal received between 71% and 80% support every year, and every year the board ignores it.

Corporate CEOs despise Rule 14a-8. Most of them try to nurture a cult of personality around themselves, with image consultants, public relations firms and media department all working to present them as brilliant, charismatic visionaries, always in tune with shareowners as they propel corporations to success after success. Shareowner proposals prick that little bubble, suggesting there may be matters of concern to shareownes that well-coiffed CEOs somehow miss. Whenever Rule 14a-8 proposals appear in a corporation’s proxy materials, there is an accompanying note from the board advising a “no” vote.Rule 14a-8 proposals are a painstaking way to implement reform. If Congress wants to implement reform, they pass a law. If the Supreme Court wants to affect change, they make a ruling. If a shareowner is successful with a proposal at a firm, that only impacts one firm. What about the other 10,000 or so publicly traded firms in the United States? Suppose shareowners wanted to do away with the “advance notice” bylaws provision I mentioned earlier. To implement that reform at all publicly traded corporations would require submitting a proposal to every single one.

This is where John Chevedden comes in. He is a shareowner who strives to facilitate reform via Rule 14a-8. He and a small team off supporters will identify a proposal that wins a majority vote at one firm and then submit that same proposal to other firms. In this way, they give shareowners the opportunity to vote on proposals that shareowners at other firms have already embraced. Through plenty of hard work, company by company, reforms gradually spread.

Remember I mentioned how shareowners have submitted the same proposal to First Energy for six years? That is John Chevedden in action.

Well-coiffed CEOs hate John Chevedden. They spend millions of shareowner dollars a year in legal fees trying to shut him down. That is not particularly effective because Mr. Chevedden’s work is entirely legal. The lawyers look at all the SEC’s exceptions to Rule 14a-8 and try to make them apply to Mr. Chevedden’s proposals, or they try to devise novel legal arguments against him.

Such disputes are generally decided through a no-action process established by the SEC to conveniently and inexpensively resolve issues. Through that process, a corporation that wants to exclude a shareowner proposal from its proxy materials may request a no-action letter from the SEC confirming the SEC would be unlikely to take regulatory action. The process is informal. Parties always have recourse to the courts, but disputes between corporations and shareowners rarely go beyond the no-action process.

Apache’s CEO, Stephen Farris, is somewhat of a crusader against Rule 14a-8. In a 2007 comment letter to the SEC, he argued that precatory proposals should be banned. Last year he had Apache sue Mr. Chevedden to block one of his proposals. I won’t go into the convoluted argument Apache’s lawyers made. It was the same argument Hain Celestial had made in a no-action request to the SEC in 2008 concerning another of Mr. Chevedden’s proposals. SEC staff had denied that request. Last year, Apache skipped the no-action process and went straight to court. A Houston firm bringing a case before a Houston judge with representation from a prominent Houston law firm, Apache must have figured they had the advantage. Chevedden couldn’t afford a lawyer and defended himself remotely from California.

As it turned out, the judge rejected Apache’s convoluted argument, but she found a reason to allow them to block Chevedden’s proposal anyway. The reason was contrived, but it is important. I will briefly explain:

Under Rule 14a-8,  shareowners must prove their ownership of shares in order to submit a proposal. They can do so with a letter from their bank or broker. But many financial institutions are conglomerates with multiple affiliated or subsidiary companies. Under Rule 14a-8, does a verification letter have to come from the specific firm that holds the proponent’s shares, or can it come from a parent, affiliate or subsidiary? Stated another way, does the letter have to be under the “right” letterhead? In the seventy year history of Rule 14a-8, I don’t think this novel issue has ever been raised. I believe such a requirement would needlessly complicate the process of submitting proposals. For example, if a proponent holds shares through Fidelity Brokerage Services, shouldn’t a letter on Fidelity Investments stationary suffice? The court disagreed, but its decision hinged on more than that:

Mr. Cheveddden held his shares through a bank called Ram Trust Services (RTS). Apache’s lawyers had visited the RTS website and noticed that RTS has a wholly owned broker subsidiary, Atlantic Financial Services (AFS). They then hypothesized that, perhaps, Mr. Chevedden actually held his shares through the broker subsidiary and not RTS. They then proposed—and the judge accepted that—the letter evidencing Mr. Chevedden’s share ownership should, perhaps, have come from AFS and not RTS. Here is what the judge said:

The record suggests that Atlantic Financial Services of Maine, Inc., a subsidiary of RTS … may be the relevant broker rather than RTS. Atlantic Financial Services did not submit a letter confirming Chevedden’s stock ownership. RTS did not even mention Atlantic Financial Services in any of its letters to Apache.

On these peculiar grounds, the judge ruled that Apache could ignore Mr. Chevedden’s 2010 proposal. But she was explicit that the ruling was narrow, applying only to the facts in that particular case:

The ruling is narrow. This court does not rule on what Chevedden had to submit to comply with Rule 14a-8(b)(2). The only ruling is that what Chevedden did submit within the deadline set under that rule did not meet its requirements.

After the judge’s ruling, Mr. Chevedden followed-up with RTS. They confirmed that they did in fact directly hold Mr. Chevedden’s shares. Their 2010 letter made no mention of AFS because AFS played no role in the custody of Mr. Chevedden’s shares. For purposes of Rule 14a-8, RTS was the record holder of Mr. Chevedden’s securities. The judge ruled “narrowly” against him because she thought, perhaps, AFS might be the real record holder.

Apache’s “success” has prompted other companies to submit frivolous no-action requests targeting Mr. Chevedden’s proposals, claiming they may do so based on the Apache vs. Chevedden decision. In all cases where Commission staff have so far made decisions, they have rejected these requests. Now KBR has hired the same lawyer that represented Apache in Apache vs. Chevedden to file a similar lawsuit before the same judge. They are no doubt hoping for a similarly flawed ruling. This has become a farce.

Apache was able to ignore Mr. Chevedden’s 2010 proposal, but he has submitted another one for 2011. This time, he provided a verification letter from RTS that makes it absolutely clear that they are the owner of record for his shares. There should be no issue here. He has addressed the court’s contrived concern, so the proposal should be included in Apache’s 2011 proxy material. Instead, Apache is upping the ante.

This time around, they are skipping the courts and they are skipping the no-action process. On December 29, they merely notified the SEC that they would not be including Mr. Chevedden’s latest proposal in their 2011 proxy materials. They provided various reasons, which largely reproduced the convoluted arguments the Houston court had rejected in Apache vs. Chevedden. Essentially, Apache is treating the court’s narrow and flawed ruling as a perpetual license to ignore Mr. Chevedden’s proposals.

If Apache excludes Mr. Chevedden’s proposal from their 2011 proxy materials, they will be flaunting Rule 14a-8. But what is the SEC going to do? It has been three months now, and all we have heard from them is silence. On March 2, Apache filed preliminary proxy materials with the SEC that did not include Mr. Cheveden’s latest proposal. In a week or two, they should file their final proxy materials.

Apache is forcing this issue, and they clearly expect the SEC to back down. If that happens, expect copycat firms to next year also bypass the courts and the no-action process and similarly ignore Mr. Chevedden’s proposals. The shareowner community could lose their champion. What is more, with Rule 14a-8 being trampled, every shareowner’s ability to submit proposals is at risk.Yesterday, the USPX wrote a letter to the SEC. On behalf of the shareowner community, we asked them to enforce Rule 14a-8.

Broadridge: Should the Federal Trade Commission Intervene?

December 15, 2010 in General

One of Michael Lantz's "Man Controlling Trade" statues, which are displayed outside the Federal Trade Commission in Washington, D.C.

Broadridge Financial Solutions (BR) essentially monopolizes the proxy processing business in North America, providing such services to 90% of public corporations and mutual funds in the region. Monopolies aren’t necessarily bad. Some products and services are most efficiently delivered by a single provider. But good monopolies are regulated monopolies, and Broadridge isn’t regulated. Whenever the SEC updates rules governing the proxy process, they usually have to ask Broadridge how things are actually done. It’s kind of pathetic.

By choosing how to do things, Broadridge makes de facto rules. A perfect example is Voting Instruction Form (VIFs). These look and feel like proxy cards, but they are not. Broadridge mails out VIFs with shareowners’ proxy materials in lieu of proxy cards. The way Broadridge explains it, shareowners fill out VIFs to indicate how they want their proxies voted, which is not the same thing as filling out a proxy. Got that? The practical significance of VIFs is that they allow corporations to circumvent the SEC’s rules governing the content and layout of proxy cards. A proxy card is essentially a ballot, so those rules are important for ensuring fair corporate elections. The rules apply to proxy cards, but VIFs aren’t proxy cards. In May 2009, the USPX joined Jim McRitchie in filing a request for rulemaking with the SEC. This asked the Commission to address abuses related to VIFs. To date, the Commission has not acted on the request.

No legislation ever created VIFs. We are not aware that the SEC promulgated their use. As far as anyone can tell, Broadridge quietly created them. Whenever the SEC found out, they didn’t stop the practice. De facto, Broadridge makes the rules.

VIFs are identified with 12-digit control numbers. Broadridge issues and manages the control numbers. And they are using those control numbers to offer a host of on-line products. Want to submit your VIF online? Go to Broadridge’s website, and enter your control number. Want to attend a virtual annual meeting? Go to a Broadridge website, and enter your control number. Broadridge is poised to monopolize such on-line services for the simple reason they own the control numbers, and would-be competitors don’t. In 2011, Broadridge plans to release phone apps that will allow people to submit VIFs on the go. You will just tap on a Broadridge icon and type in your control number.

Shareowners’ response to Broadridge’s digital services have mostly been negative. has attracted millions of users, and it is convenient. As with all things Broadridge, transparency is an issue. You can’t know if your votes actually make it into the totals. Worse, shareowners noticed that items left unvoted were being automatically filled in as votes according to management recommendations. That little feature was what motivated McRitchie’s request for rulemaking.

The USPX has reported on the various ways Broadridge’s virtual annual meeting service disenfranchises. See in particular reports on Symantec’s virtual meeting in September and Broadridge’s own virtual annual meeting last month.

Perhaps the biggest flop among Broadridge’s forays into the digital realm has been their Investor Network, which allows corporations to pay Broadridge between $20,000 and $50,000 a year to host an on-line forum for their shareowners. In January 2008, the SEC adopted a new Rule 14a-17 and amended Rule 14a-2 to

… facilitate the use of electronic shareholder forums by public companies and their shareholders.

With the Investor Network, Broadridge tried to capitalize on this opportunity. Their CEO, Richard Daly, likes to boast that, on their forums,

… we can know with complete confidence that the person whose post you are reading or with whom you are communicating is an actual investor.

I am not sure why that is important, as shareowner forums would benefit from the participation of journalists, regulators, employees or shareowner activists. But Broadridge controls the control numbers, so they can guarantee it.

Few corporations have adopted the Investor Network, and those who have generally did so to augment a Broadridge-hosted virtual annual meeting. Shareowners have mostly given the service a pass. With the initiative floundering, Broadridge is shifting to a “Plan B.” Dominic Jones of IR Web Report broke the news that Daly is personally lobbying the SEC commissioners to mandate that all public corporations offer shareowner forums. Daly anticipated this course two years ago in an August 2008 conference call:

The activity here is really going to be driven by, is the SEC going to deem that this is something that shareholders need to have the right to. And if that was the case, then I can’t imagine it getting done any other way than through the plumbing we have in place, and again that’s a chasm between us and any one else, no one else is close to connecting every investor to every public company.

As things already stand, anyone can implement a shareowners forum. There is no need to force corporations to do so. There is no reason to mandate that such forums offer features that only Broadridge is poised to provide. That would only postpone the day when shareowner forums actually take off.

If Daly persuades the SEC to mandate his monopolistic vision, it will be time for shareowners to petition the Federal Trade Commission for some antitrust enforcement. It may already be time.

The Discussion Schapiro Sidestepped

July 22, 2010 in General

SEC Chair Mary Schapiro

SEC Chairman Schapiro made a disappointing comment at last week’s open meeting (see the July 15 post):

Rather than passing judgment on the merits of securities lending, this release examines questions of whether the lenders of securities need information sooner about the content of upcoming shareholder meetings than they now generally receive it.


Rather than even allow a discussion of whether lending of shares should be allowed, the SEC is exploring ways of facilitating the practice.

Fine. Let’s have The Discussion Schapiro Sidestepped here on our own forum.

Two decades ago, anyone who claimed our stock market had become a casino would have been dismissed as some sort of socialist. Not any more! After a decade of extreme volatility, two market panics, zero returns and widespread manipulation, it is patently obvious our stock markets serves Wall Street and not investors.

Securities lending is one of the quintessential attributes of a speculative market. Since you have to borrow shares before you can sell them short, securities lending is essential to short selling. Short selling has nothing to do with investing. Its purpose is to provide speculators another way to bet on the market—another way for Wall Street to earn trading commissions.

Short selling is defended on two grounds. First, it is argued that short selling helps markets correctly price securities. This is patently false because there is no such thing as a “correct price” for a stock in the first place. Two markets, regulated differently, may arrive at different prices for a given share of stock, but there is no basis for claiming one of those prices is more “correct” than the other.

The second argument in support of short selling is that it adds liquidity to a market. Because short selling facilitates trades that would otherwise not take place, this may be true. But who ever said our stock market has a liquidity problem? Daily trading volumes are staggering. The legitimate needs of investors would be fully served if trading volumes were one one-hundredth of what they are. Trading, like gambling, is a zero sum game (that is, before you subtract out Wall Street’s or the casino’s commissions or cut). Short selling adds liquidity? Maybe, but no thanks.

What short selling does do is make a mockery out of the notion that shareowners actually own the corporations they invest in. When shares have been loaned and sold short, who actually owns them, the party that loaned them out, or the party that purchased them from the short seller? No one wants to deal with that knotty little question. In theory, it is the latter who owns the shares. But in a world, where a broker might lend your securities without ever telling you, the broker doesn’t want to break the news that you can’t vote the shares. In practice, both parties—lender and buyer—are allowed to vote. This practice is so common it has a name: “overvoting”. In Schapiro’s stock market, one-man-one-vote is less important than short selling, and corporate elections are a charade.

SEC Plans to Patch – Not Fix – the Proxy System

July 15, 2010 in General

The SEC issued a concept release on "proxy plumbing".

Yesterday, the SEC held an open meeting to issue a concept release seeking public commentary on the US proxy system. Cluttered with Washington-style self-congratulation, the meeting can be summed up with a comment from Meredith Cross, Director of the Division of Corporation Finance. Referring to the proxy system, she said:

While we believe the system is overall working, it is certainly reasonable to ask if it can work better.

In case you are confused, she was talking about the US proxy system, which has our corporate elections resembling politburo elections of the former Soviet Union, with corporate boards routinely running unopposed, a complete lack of transparency, no hope of ever auditing a vote, blatant vote buying, as many as 5% of votes being lost or double counted in each corporate election, and an average cost of $300,000 for anyone with the temerity to actually nominate an independent candidate for a board. That is the system Cross said is “overall working.”

Clearly, the SEC has no intention of implementing fundamental change. With that painfully understood, we can otherwise commend Meredith Cross and her colleagues for an excellent concept release. While it is not ambitious, it clearly explains many important issues, including:

  • broker over-voting and under-voting of the shares they hold on behalf of clients
  • the possibility of allowing some means of confirming a shareowner’s vote was actually cast as instructed
  • the possibility of helping institutions who have loaned shares recover those shares in time to be allowed to vote
  • proxy distribution fees charged by brokers
  • the limited ability of corporations to communicate with their shareowners
  • approaches for promoting retail investor participation
  • data tagging of proxy materials
  • proxy advisory firms
  • dual record dates, and
  • empty voting

If some of these topics are a mystery to you, certainly read the concept release. It explains them all extremely well:

SEC concept release on proxy plumbing

The SEC is allowing 90 days for comments. The USPX will prepare detailed comments, and we will invite members to participate in that process. We will have more to say about specific issues raised in the concept release in the weeks ahead.