SEC Proposes Rules for Director Nominations and Shareholder Communications
Following on the heels of the Sarbanes-Oxley Act rules and a staff report recommending greater participation by shareholders in the director nomination process, the SEC has proposed changes to the proxy rules to "enhance the transparency of the operation of boards of directors."
Currently, a public company must disclose whether it has a nominating committee, and whether and how securities holders can nominate directors. The proposal expands these rules to require:
- disclosure of the material terms of any nominating committee charter and whether any committee member is not independent;
- descriptions of policies and procedures for consideration of director candidates recommended by shareholders, any minimum nominee qualifications, and the process for identifying and evaluating director nominees;
- a statement of the specific source, such as the name of an executive officer, director, or other individual, of each nominee included on the proxy; and
- if the nominating committee decides not to nominate a candidate recommended by a stockholder owning more than 3% of the company's voting stock, disclosure of the name of the stockholder and the reasons for not including the candidate as a nominee.
The SEC also wants to improve communications between shareholders and boards of publicly traded companies. Accordingly, the SEC has proposed that proxy statements disclose:
- whether the company has a process for shareholders to send communications to the board, and if not, a statement explaining why; and
- a description of the process for stockholders to communicate with the board, identification of board members to whom stockholders can send communications, and any material action taken by the board in the preceding year as a result of communications from stockholders.
At present, there is no requirement that companies have nominating committees. Both NASDAQ and the NYSE have pending proposals that would require all listed companies to have nominating committees composed of independent directors. The SEC appears to be using a "disclose or explain" approach to move beyond the listing standards and require the establishment of not only nominating committees but also procedures for considering director candidates.
Comments on the proposed rules are due Sept. 15. The SEC also indicated that it may propose additional rules allowing shareholders, under certain circumstances, to use a company's proxy statement to nominate their own director candidates.