SEC Proposes Amendments to Proxy Statement Notice and Access Rules

The Securities and Exchange Commission recently proposed amendments to its electronic proxy delivery rules to improve the clarity of the notice of availability of electronic proxy materials that is required to be delivered to shareholders. The proposed amendments would also allow more flexibility in explaining how to receive such materials and would amend the deadline imposed on non-issuers for sending a notice of availability of electronic proxy materials.

The proposed amendments continue the SEC's efforts to promote the use of the Internet to disseminate proxy materials to shareholders.

Overview of Notice and Access Method

In 2007, the SEC adopted rules allowing issuers and other soliciting persons to satisfy proxy delivery requirements by posting proxy materials to a Web site and by notifying shareholders of the availability of those materials. The "notice and access" rules were intended to provide a cost-efficient means of making proxy materials available to shareholders. Under notice and access, paper copies of proxy materials are required to be delivered only to shareholders that request them. Notice and access can be used as the only means of shareholder communications regarding a shareholders meeting ("notice-only"), or it can it can be used in combination with traditional "full set delivery" of printed proxy materials.

The notice of availability of proxy materials under the current notice and access rules must include specified information, including a description of the means by which a paper or electronic copy of the materials can be requested and a legend in the form prescribed in the SEC rules. The notice also generally cannot be sent with any other shareholder communication, including a proxy card. An issuer must send the notice to shareholders at least 40 days prior to the applicable meeting.

Reasons for Proposed Amendments

In its release proposing the amendments, the SEC expressed concern about statistics in a study by Broadridge Financial Solutions, Inc. of notice and access results that indicated lower shareholder response rates to notice-only proxy solicitations. The SEC also acknowledged that there appears to have been confusion among shareholders regarding the operation of the notice and access model. The proposed amendments attempt to address these issues.

Proposed Amendments

If adopted, the proposed amendments would:

• Provide flexibility in the formatting and language used in notices of availability of proxy materials. Instead of the specific detailed information currently required, the amendments would require only a legend that states: "Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on [date]."
• Permit those soliciting proxies to include information explaining how the notice and access system works in the notice. Such information is prescribed by the current rules.
• Require a soliciting shareholder using the notice-only method to file a preliminary proxy statement within 10 days after the issuer files its definitive proxy statement and to send its notice to shareholders no later than the date on which it files its definitive proxy statement with the SEC. Currently, a soliciting person other than the issuer must send the notice by the later of 40 days prior to the meeting or 10 days after the issuer first sends its notice or proxy materials to shareholders. The current deadline can create compliance problems for non-issuers because the SEC's review of a proxy statement in a contested election may extend beyond the current deadline for sending a notice, which could prevent a soliciting person from using the notice-only method.

The proposing release also clarifies that a notice, both currently and under the new rules, only needs to identify each matter to be considered at a meeting in general terms, such as "the election of directors" and does not need to mirror the related description in the proxy card.

Concerns Not Addressed by Proposed Amendments

The proposed amendments do not, however, address a few aspects of notice and access that may limit its use. First, the requirement that an issuer must send a notice to shareholders at least 40 days prior to the applicable shareholder meeting would not be reduced under the proposed amendments, although the SEC did request comment on whether a 30-day deadline would be appropriate. The amended rules would also continue to prohibit including certain types of shareholder communications with the notice, such as a proxy card.

Potential Impact on Public Companies

The comment period for the proposed amendments runs until November 20, 2009. The comment deadline makes it unclear whether the amendments, if adopted, will be effective for the upcoming proxy season.

Given the recent regulatory and governance changes relating to director elections, such as the amendment to New York Stock Exchange Rule 452 eliminating broker discretionary voting for uncontested director elections (see previous update here), and the uncertainty of how effectively the proposed amendments would address voting rates, companies should carefully consider their shareholder makeup and the historical response rates before using notice and access for all or part of its shareholders for the upcoming proxy season.