Risk & Compliance

Proxy Battle Shaping Up — at the SEC

Commission leaning toward empowering directors over officers; officers likely to launch campaign to stop the insanity. Plus: E-filing regulation ig...
Craig Schneider and Alix StuartJuly 21, 2003

Last week, staff members of the Securities and Exchange Commission issued a report recommending that the agency change its proxy process to aid shareholders with nominating and electing board directors.

The report recommends that the commission require companies to make greater disclosure of the nominating committee process, as well as consider shareholder candidates in company proxy materials.

Currently, SEC rules allow shareholders to elect directors and nominate candidates, but they stop short of requiring the name placement in the proxy. That leaves protesting shareholders with the options to either withhold their votes or launch costly, time-consuming campaigns for their board candidates.

The report also recommends certain trigger events that would enable shareholder groups to officially nominate directors — for instance, if a company ignores proposals voted on by groups of investors for changes in policy. Another condition would be that the investors supporting a particular candidate would have to hold a certain percentage of the company’s stock. Eligibility thresholds recommended most frequently were 3 percent and 5 percent, the report noted.

SEC Chairman William Donaldson appears supportive of the change in the proxy rules. Why? He thinks the changes will make officers and directors more responsive to long-term shareholders. “An effective proxy process has never been more important to restoring investor confidence,” he said in a statement following the release of the staff report.

The commission intends to consider proposals based on the report and seek public comment as early as September.

Several corporate executives oppose the move, while many institutional investors, pension plans, and shareholder activists have come out in support of it. Patrick McGurn, Institutional Shareholder Services senior vice president and special counsel, is hopeful that the SEC will take action. But as McGurn says, “the devil is in the details on these types of things.”

Adds McGurn: “[The report] clearly indicates the SEC, at least at the staff levels, recognizes that there are inadequate tools for investors to discipline boards not acting in shareholders interests.”

The commission has reviewed the issue of shareholder access to a company’s proxy materials for the nomination of directors in the past (1942, 1978, and 1992). But each time, the commissioners have decided not to adopt any changes.

Donaldson, however, sounds driven to shift the dominance away from corporate executives and back to corporate boards. “This has been debated for too long,” he told The Washington Post. The goal of the new rules: to create a system in which “the board hires a chief executive, not the other way around.” The Post also indicated that the four other commissioners support the staff recommendations.

Nell Minow, editor of the Corporate Library, a corporate governance research firm, told the paper she sees a fight brewing over the proposed change in the proxy process. “We can expect the corporate community to pull out all the stops to slow this down, including a challenge in the courts about whether the SEC even has the authority to do this instead of leaving it up to the states.”

SEC Finds Hundreds of E-Filing Violations

As of June 30, the SEC required that corporate ownership filings be sent electronically. But some companies apparently missed the memo on that one.

According to SEC spokesman John Heine, the agency received about 605 Section 16 paper filings (mostly Form 4 for changes in holdings) by directors, officers, and/or 10 percent shareholders, during the first week following the new regulation. The paper violations represented just 7.6 percent of the total Sec. 16 filings for the holiday week. There were 7,320 electronic filings from Monday through Thursday.

The E-filing rule was put into place as part of the commission’s implemented provisions under the Sarbanes-Oxley Act. No telling whether the violations were by accident or carelessness. “It may be they hadn’t heard about the rule,” or that paper filings mailed close to the deadline took too long to arrive, speculates Heine. As far as the commission taking action against the parties that fail to follow its rules, he says, “it depends on the facts and circumstances.”

For the second week, the agency rejected far fewer Sec. 16 filings; it received 100 on paper and 2,750 electronically.

Bear Stearns Subpoenaed by SEC, Others

Bear Stearns Cos. said Tuesday in regulatory filings that it received subpoenas from the SEC, the New York Stock Exchange, and the National Association of Securities Dealers. In May, the securities regulators reportedly requested documents and information from the company in connection with their investigation in stock research.

Reportedly, the investigation focuses on the supervision by the heads of investment banking and stock research, as well as the role of the bank’s chairman and chief executive officer, James Cayne. Top U.S. investment banks, including Bear Stearns, agreed in April to pay $1.4 billion to settle charges with regulators over research conflicts of interest. Bear Stearns agreed to pay $80 million as part of that settlement, say wire reports.

In its quarterly report filed with the SEC, Bear Stearns also noted that the agency had issued similar subpoenas to all of the firms in the landmark settlement. An SEC spokesman declined to comment on the subpoena.

J.P. Morgan Nears Settlement with SEC

J.P. Morgan Chase & Co. is close to reaching two separate settlements with regulators, according to The Wall Street Journal. The Journal notes that executives at the bank are negotiating to pay as much as $175 million to resolve allegations that the bank wrongly helped Enron Corp.

The bank is reportedly negotiating with both Manhattan District Attorney Robert Morgenthau and the SEC, which have been investigating the bank’s role in financing Enron. One of the proposed settlements would involve a payment of roughly $25 million to avoid criminal prosecution, writes the Journal, citing people familiar with the matter. The settlement is also expected to include promises by J.P. Morgan Chase to change its business practices.

The paper also reports that the bank is close to settling with the SEC over the same transactions, but for somewhere between $100 million and $150 million. Representatives for J.P. Morgan declined comment in the article.

Tax: Nexus and the ‘Net

Should businesses have to collect sales taxes for states in which they have no physical presence? Riding the coattails of interest surrounding the soon-to-expire Internet Tax Non-discrimination Act, a growing number of cash-strapped states are pushing to get Congress to say yes.

While the act primarily addresses taxes on Internet access charges — not sales — the bill has become a catalyst for the long-running debate about how and when companies must collect state and local taxes. “It’s not just going to be about extending the legislation,” which is set to expire November 1, says Jeff Friedman, tax partner with KPMG LLP. “We expect to see bills and amendments introduced to expand the protections for E-commerce, and possibly to redefine nexus,” potentially making a company’s physical location irrelevant to its tax obligations.

Currently, most companies do not have to collect sales tax for states in which they do not have a presence, thanks to a 1992 U.S. Supreme Court decision that said managing the myriad and ever-changing rules on all state and local taxes would be too burdensome.

In an effort to get that decision overturned, however, this spring 13 states passed laws to adopt the agreement drawn up by the Streamlined Sales Tax Project (SSTP), which aims to standardize definitions of taxable goods across states and limit each state to two sales-tax rates, thereby defusing the burden argument. According to Neal Osten, a director for the National Conference of State Legislatures, project backers are hoping to get a bill before Congress by next fall seeking authority for states to require all out-of-state sellers, including Web-based ones, to collect sales tax.

“Businesses would benefit from the simplification,” says Douglas Lindholm, president and executive director of the Council on State Taxation, which represents 550 multistate corporations on tax issues. However, he says, the reform should include congressional action to stop states from using the same logic to pad their income-tax bills. “If you set physical presence aside as a standard for sales-tax purposes,” says Lindholm, “the big unanswered question is, what is the nexus standard for business-activity taxes?”

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