September 2011

The SEC is currently considering a petition submitted by a group of 10 law professors asking the SEC to adopt rules that would require public reporting companies to disclose political contributions in their annual proxy statements. As justification for the proposal, the petitioners assert that there is empirical evidence that indicates public company shareholders are becoming more and more interested in receiving disclosure of corporate political contributions. Moreover, the petitioners further support their proposal by pointing out that the U.S. Supreme Court has regularly recognized and relied on corporate accountability mechanisms in instances where shareholder resources are used for political purposes. Specifically, in the recent landmark case of Citizens United v. FEC, the Court recognized certain protected corporate speech, effectively extending constitutional protections under the First Amendment to independent corporate political spending. In its opinion, the Court relied on “procedures of corporate democracy” as a means by which shareholders could monitor the use of corporate assets for political purposes and also effect corporate change where such political purposes were inconsistent with shareholder interests. The petitioners point out, however, that in order for corporate democracy to be effective, shareholders must have information about a company’s political speech; otherwise, shareholders are unable to know whether such speech “advances the corporation’s interest in making profits.” Therefore, the petitioners conclude that political contribution disclosure rules are necessary in order for these accountability mechanisms and corporate democracy to function properly and efficiently.

A copy of the petition can be viewed on the SEC’s website by clicking here. While the SEC has not indicated whether it will take any further action in response to the petition, it is accepting public comments regarding the proposal. The public comments that the SEC has received to date are also posted on its website and can be viewed by clicking here. We believe that given the controversy of the Citizens United case, the SEC may give this petition strong consideration.

Considering the time and expense it takes to comply with many of the Federal Reserve rules, it seems odd that any company would volunteer to be regulated.  But some want to sign up.  In particular, some foreign companies that own a securities broker or dealer are required to register in the U.S. to do business here.  These companies are known as securities holding companies and may be required by their foreign regulators to be supervised in the U.S. on a consolidated basis.

Historically, these companies registered with the SEC, but the Dodd-Frank Act moved this responsibility to the Federal Reserve.  This change will effectively consolidate the regulation of holding companies under the Federal Reserve, which is the U.S. regulator that is best equipped to regulate these entities because it already regulates bank holding companies.  For this reason alone, the move makes sense.

To implement the move, the Federal Reserve recently put out proposed rules for comment.  The proposed rules lay out the procedures for electing to be regulated and other requirements, including the filing of the election, the provision of additional information, and a 45 day waiting period that may be shortened in the Federal Reserve’s discretion.  Comments on the proposed rules must be received by October 11, 2011.

Despite the SEC’s decision not to appeal the recent decision by the U.S. Court of Appeals for the D.C. Circuit to vacate the proxy access rules, proxy access is still alive and well. 

In Tuesday’s release by the SEC, the SEC noted that the amendment to Rule 14a-8, which had been stayed pending the litigation over Rule 14a-11, will go into effect.  As discussed in our previous blog, the Business Round Table and the U.S. Chamber of Commerce had challenged Rule 14a-11, which would have permitted shareholders to more easily and more cheaply nominate a minority slate of director candidates for election on an issuer’s board if they held at least 3% of the issuer’s stock for at least three years.  The amendment to Rule 14a-8, which was a companion rule adopted by the SEC in conjunction with Rule 14a-11, narrowed the previously broad exclusion available to issuers to preclude shareholder proposals relating to director elections.  The new exclusion in Rule 14a-8 is much narrower and will allow shareholders to propose a process for the nomination of directors by shareholders.  Starting in 2012, issuers will likely be faced with shareholder proposals to allow for proxy access beginning in 2013.  Amended Rule 14a-8 essentially leaves proxy access for particular companies in the hands of activist shareholders and issuers’ Board of Directors.