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From Securities Regulation Daily, February 12, 2015

Whole Foods steals show at SEC investor advisory meeting

By Mark S. Nelson, J.D.

Members of the SEC’s Investor Advisory Committee met to discuss a variety of issues today, and yet it was last month’s surprise reversal by the agency’s Corporation Finance (CorpFin) division on a shareholder proposal at Whole Foods and remarks earlier this week by Director Keith F. Higgins that hogged the limelight. Panelists queried CorpFin’s general counsel as the division prepares a reply to Chair Mary Jo White’s request that it review Rule 14a-8(i)(9).

Separately, Chair White did not comment on the issues raised by the Whole Foods no-action letters or yesterday’s dustup about the Commission’s flawed adoption of Regulation SBSR. But she did highlight a few rulemakings (both past and future), aimed at finishing more of the agency’s work on the Dodd-Frank Act and the JOBS Act. The SEC will host a proxy voting roundtable next week.

Commissioner Michael S. Piwowar said he looked forward to getting answers about the Financial Industry Regulatory Authority’s CARDS proposal, especially regarding the problems it is designed to solve and how it will safeguard privacy and data. The afternoon panels were to discuss FINRA’s CARDS initiative and other proposals from FINRA and the Municipal Securities Rulemaking Board. A different morning panel dealt with market structure issues.

CorpFin counsel on Whole Foods. Of the four main panelists for this morning’s proxy access session, CorpFin’s associate director and chief counsel, David Fredrickson, was the star attraction. Fredrickson took questions that focused mostly on how the CorpFin staff will go about reviewing its application of Rule 14a-8(i)(9), which permits a company to exclude a shareholder proposal from the proxy if it directly conflicts with one urged by the company.

This was the issue that drove the SEC’s decision to reverse its course and take no view on Whole Foods’ no-action letter request to exclude a conflicting proposal on shareholders’ right to nominate directors. CorpFin then said it would express no views on the issue for the remainder of this proxy season, pending the completion of its review of Rule 14a-8(i)(9).

On Tuesday, CorpFin’s Higgins spoke to a gathering in New York where he outlined the many questions CorpFin’s review will need to address. Fredrickson began by noting that the division’s Whole Foods messages do not convey the staffs’ view on proxy access and that he and others at CorpFin have an “open view” for now. He said public comments can be submitted to the i9review site.

University of Denver law professor J. Robert Brown, Jr. (also the advisory committee’s secretary) asked Fredrickson about Director Higgins’ observations on data points. Higgins had said in his Tuesday speech that “…even accepting that the vote on the shareholder proposal would be a data point for the directors to consider, the concern was that the data, taken as a whole, may be ambiguous for the directors to interpret and, just as importantly, that it would make it difficult for shareholders to decide how to send their message.”

Specifically, Brown asked what role Rule 14a-8 and the SEC staff might play in deciding what shareholders may find to be ambiguous. He also mulled if the rule was designed for this purpose.

Fredrickson echoed Higgins by noting that the meaning of “directly conflicts” is the key to understanding the rule. Historically, he said, the SEC staff has focused on whether the shareholder and management proposals deal with directly conflicting subject matter.

“But shouldn’t the board decide if a vote is confusing,” Brown interjected. Fredrickson emphasized that he was merely restating CorpFin’s long-standing practice, which is now under review. Fredrickson would later say that CorpFin is ill suited to deal with companies’ good faith under Rule 14a-8(i)(9), something Higgins also noted in his speech a few days ago.

Adam Kanzer, Managing Director and General Counsel at Domini Social Investments, and Chief Legal Officer at Domini Funds, observed that Whole Foods had planned to include a proposal, albeit with different terms, so what impact would Rule 14a-8(i)(10) have? That rule lets a company exclude a shareholder proposal if it has already substantially implemented the proposal.

According to Fredrickson, the question of which proposal came first may be important, and so is the “sincerity” and “concreteness” on the company’s part. But in any event, Fredrickson said there should be a chance for management to say it has a better way to implement what shareholders ask it to do. Still, he said CorpFin’s review of Rule 14a-8(i)(9) will look at how the rule interacts with Rule 14a-8(i)(10), although historically the two provisions have been seen differently.

In reply to a question from Damon Silvers, Associate General Counsel at AFL-CIO, about timing and structural problems with Rule 14a-8(i)(9), Fredrickson said the staff will look at the rule’s evolution and whether the SEC’s rules are “being played.” Fredrickson again emphasized that he has an open mind at this stage about whether the CorpFin staff will merely rethink its view or go to the Commission possibly with a recommendation.

Not just about zombies. Interest groups in favor of greater board accountability, such as the Council of Institutional Investors, describe “zombie” directors as directors who remain on a company’s board after having failed to get a majority of votes. But questions persist on how what, if anything, proxy access can do to force these directors out.

Darla Stuckey, President and CEO of the Society of Corporate Secretaries and Governance Professionals, Inc., said it is not always the case that a so-called zombie director was not properly elected. Yet she would limit proxy access to a small number of cases and urged the majority vote approach as the better solution to the zombie director problem.

Michael Garland, who focuses on governance issues at New York City Office of the Comptroller, agreed that zombie directors are just the “most visible” board accountability issue. He backs a much wider proxy access regime.

GE’s solution. Stuckey said proxy access is a “no go” when activist investors are present. She also said CorpFin’s Whole Foods turnaround left many companies in a “no-win situation” that may beget “vote no” campaigns and could be “punishment” for companies that have done nothing wrong as bigger issues, like cybersecurity, fall by the wayside.

But Kanzer said he saw consensus around a few key principles. For one, access should be limited to long-term investors, although many commenters disagree on what degree of access is too much or too little. He also said proxy access should be rarely invoked. He echoed Stuckey’s notion that proxy access is best left for a situation where a majority vote standard board ignores a majority vote.

Garland reiterated the NYC Comptrollers’ view that the SEC should reissue its now judicially vacated universal rule because proxy access is a fundamental shareholder right. Moreover, he cited the example of General Electric Company’s (GE’s) recent shareholder access bylaw, even though he favors even lower thresholds. He said it is significant that former SEC Chair Mary L. Shapiro, who shepherded the agency’s failed Rule 14a-11, is now a member of GE’s board.

GE announced yesterday that it would open its proxy to an individual shareholder (or group of 20 shareholders) who own at least 3 percent of the company’s stock continuously for at least three years to nominate up to 20 percent of the company’s board.  Garland noted that GE’s bylaw mostly tracked the SEC’s defunct access rule. A common theme in today’s meeting was that even 3 percent ownership is a very high threshold for most companies’ shareholders.

Companies: Society of Corporate Secretaries and Governance Professionals, Inc.; Domini Social Investments; Domini Funds; AFL-CIO

MainStory: TopStory SECNewsSpeeches CorporateGovernance DirectorsOfficers DoddFrankAct JOBSAct Proxies

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