[Federal Register Volume 68, Number 157 (Thursday, August 14, 2003)]
[Proposed Rules]
[Pages 48724-48738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20609]



[[Page 48723]]

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Part III





Securities and Exchange Commission





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17 CFR Part 240



Disclosure Regarding Nominating Committee Functions and Communications 
Between Security Holders and Boards of Directors; Proposed Rule

  Federal Register / Vol. 68, No. 157 / Thursday, August 14, 2003 / 
Proposed Rules  

[[Page 48724]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release Nos. 34-48301; IC-26145; File No. S7-14-03]
RIN 3235-AI90


Disclosure Regarding Nominating Committee Functions and 
Communications Between Security Holders and Boards of Directors

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing new disclosure requirements and amendments to 
existing disclosure requirements to enhance the transparency of the 
operation of boards of directors. Specifically, we are proposing 
enhancements to existing disclosure requirements regarding the 
operation of board nominating committees and a new disclosure 
requirement concerning the means, if any, by which security holders may 
communicate with members of the board of directors. These proposed 
disclosure requirements would not mandate any particular action by a 
company or its board of directors; rather, the proposals are intended 
to make more transparent to security holders the operation of the 
boards of directors of the companies in which they invest.

DATES: Comments should be received on or before September 15, 2003.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by one method--U.S. mail or 
electronic mail--only. Comments should be submitted in triplicate to 
Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission, 
450 Fifth Street, NW., Washington, DC 20549-0609. Comments also may be 
submitted electronically at the following e-mail address: [email protected]. All comment letters should refer to File No. S7-14-
03. This number should be included in the subject line if sent via 
electronic mail. Electronically submitted comment letters will be 
posted on the Commission's Internet Web site (http://www.sec.gov). We 
do not edit personal information, such as names or electronic mail 
addresses, from electronic submissions. You should submit only 
information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Lillian K. Cummins, at (202) 942-2900, 
Andrew Thorpe at (202) 942-2910, or Grace K. Lee, at (202) 942-2900 in 
the Division of Corporation Finance, or with respect to investment 
companies, Christian L. Broadbent, Senior Counsel, Division of 
Investment Management, at (202) 942-0721, U.S. Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington DC 20549-0402.

SUPPLEMENTARY INFORMATION: We are proposing amendments to Items 7 and 
22 of Schedule 14A \1\ under the Securities Exchange Act of 1934.\2\ 
Although we are not proposing amendments to Schedule 14C \3\ under the 
Exchange Act, the proposed amendments will affect the disclosure 
provided in Schedule 14C, as Schedule 14C requires disclosure of some 
items of Schedule 14A.
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    \1\ 17 CFR 240.14a-101.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 17 CFR 240.14c-101.
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I. Introduction

A. Review of the Proxy Rules Regarding Procedures for the Election of 
Directors

    On April 14, 2003, the Commission directed the Division of 
Corporation Finance to formulate possible changes in the proxy rules 
regarding procedures for the election of corporate directors.\4\ On May 
1, 2003, the Commission solicited public views on the Division's review 
of the proxy rules relating to the nomination and election of 
directors.\5\ The majority of commenters supported the Commission's 
decision to direct this review.\6\ Reflecting concern over the 
accountability of corporate directors and recent corporate scandals, 
commenters generally urged the Commission to adopt rules that would 
grant security holders greater access to the nomination process and 
greater ability to exercise their rights and responsibilities as owners 
of their companies.\7\ In addition, many of those commenters noted that 
current director nomination procedures afford little meaningful 
opportunity for participation or oversight by security holders.\8\
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    \4\ See Press Release No. 2003-46 (April 14, 2003).
    \5\ See Release No. 34-47778 (May 1, 2003) [68 FR 24530]. In 
addition to receiving written comments, the Division spoke with a 
number of interested parties representing security holders, the 
business community, and the legal community. Each of the comment 
letters received, memoranda documenting the Division's meetings, and 
a summary of the comments are included on the Commission's Web site, 
http://www.sec.gov, in comment file number S7-10-03. [Summary of 
Comments in Response to the Commission's Solicitation of Public 
Views Regarding Possible Changes to the Proxy Rules (July 15, 
2003)].
    \6\ See 2003 Summary of Comments.
    \7\ See id.
    \8\ See id.
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    Many of the comments received in connection with the Division's 
review evidence a growing concern among security holders that they lack 
sufficient input into decisions made by the boards of directors of the 
companies in which they invest.\9\ Two particular areas of concern 
regard the nomination of candidates for election as directors and the 
ability of security holders to communicate effectively with members of 
the board of directors.\10\
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    \9\ See id.
    \10\ The Division's review also addressed the issue of security 
holders' ability to access company proxy materials for purposes of 
nominating candidates for election as directors. The Commission 
expects that its proposals regarding this significant issue will be 
included in a separate release published this fall. As such, this 
proposing release does not address that issue directly. The 
Division's Staff Report to the Commission, detailing the results of 
its review of the proxy process related to the nomination and 
election of directors, can be found on the Commission's Web site at 
http://www.sec.gov. [Staff Report: Review of the Proxy Process 
Regarding the Nomination and Election of Directors, Division of 
Corporation Finance (July 15, 2003)].
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B. Current Disclosure Regarding Nominating Committees and Security 
Holder Communications With Boards of Directors

    In 1977, the Commission undertook a thorough review of security 
holder communications, security holder participation in the corporate 
electoral process, and corporate governance generally. The Commission 
solicited written comment and held hearings as part of that review. 
While an important focus of the hearings was security holder access to 
company proxy materials, the Commission also requested comment on 
whether more disclosure related to the nominating process and 
nominating committees would be appropriate.\11\
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    \11\ See Release Nos. 34-13482 (April 28, 1977) [42 FR 23901] 
and 34-13901 (August 29, 1977) [42 FR 44860].
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    In response to the Commission's 1977 request, commenters 
recommended that nominating committees be required to consider security 
holder nominees, that outside directors comprise all or a majority of 
nominating committees,\12\ and that security holders be advised of 
``the existence and purpose of such committee and its standards for 
director qualifications.''\13\ Commenters favoring these requirements 
indicated their view that they would encourage security holders to 
contact nominating committee members with their

[[Page 48725]]

recommendations; however, the commenters were less supportive of 
disclosure relating to the nominee selection process, the criteria to 
be applied by the nominating committee in selecting nominees, and the 
required qualifications of nominees.\14\ Those who did not support 
expanded nominating committee disclosure stated their concern that 
companies would merely make ``self-serving `boilerplate' '' 
disclosures.\15\
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    \12\ See Re-Examination of Rules Relating to Security Holder 
Communications, Security Holder Participation in the Corporate 
Electoral Process and Corporate Governance Generally, Summary of 
Comments (1978), at 65.
    \13\ Division of Corporation Finance, Securities and Exchange 
Comm'n, Staff Report on Corporate Accountability (Sept. 4, 1980) 
(printed for the use of Senate Comm. on Banking, Housing, and Urban 
Affairs, 96th Cong., 2d Sess.), at A54.
    \14\ See 1978 Summary of Comments, at 75.
    \15\ See id.
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    In the 1978 release proposing amendments to the proxy rules to 
include the current disclosure requirements related to nominating 
committees, the Commission stated generally its belief that the new 
disclosure requirements would facilitate improved accountability.\16\ 
Specifically, the Commission stated that:
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    \16\ See Release No. 34-14970 (July 18, 1978) [43 FR 31945].

* * * information relating to nominating committees would be 
important to security holders because a nominating committee can, 
over time, have a significant impact on the composition of the board 
and also can improve the director selection process by increasing 
the range of candidates under consideration and intensifying the 
scrutiny given to their qualifications. Additionally, the Commission 
believes that the institution of nominating committees can represent 
a significant step in increasing security holder participation in 
the corporate electoral process, a subject which the Commission will 
consider further in connection with its continuing proxy rule re-
examination.\17\
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    \17\ See id.

    The Commission ultimately adopted nominating committee disclosure 
standards, currently found in Item 7 of Exchange Act Schedule 14A, 
that, among other requirements, require a company to state whether they 
have a nominating committee and, if so, whether the nominating 
committee will consider security holder nominees.\18\
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    \18\ See Release No. 34-15384 (December 6, 1978) [43 FR 58522].
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    Following the Commission's adoption of the nominating committee 
disclosure requirements, a 1980 staff report to the Senate expressed 
the view that, due to the emerging concept of nominating committees, 
the Commission should not propose and adopt a security holder access 
rule at that time.\19\ The staff report recommended, however, that the 
staff monitor the development of nominating committees and their 
consideration of security holder recommendations.\20\
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    \19\ The Task Force on Corporate Accountability was formed as an 
outgrowth of the review of the proxy rules that began in 1977. The 
work of the Task Force culminated in the Staff Report on Corporate 
Accountability, completed and presented to the Senate Committee on 
Banking, Housing, and Urban Affairs. See Staff Report on Corporate 
Accountability, at A60-65.
    \20\ The Staff Report on Corporate Accountability states: ``* * 
* all nominating committees should be open to suggestions of 
nominees from security holders.'' Id., at A56.
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II. Proposed Disclosure Requirements

A. Enhanced Nominating Committee Disclosure

1. Necessity for the Proposal
    Companies currently must disclose whether they have a nominating 
committee and, if so, whether the committee considers nominees 
recommended by security holders and how any such recommendations may be 
submitted.\21\ Based on the comments received in response to the 
Commission's solicitation of public input, it does not appear that the 
existing disclosure requirements have effected significant change in 
the transparency of, or increased security holder understanding of, the 
nominating process. In particular, commenters indicated that the 
existing disclosure requirements have resulted in mere boilerplate 
disclosure and, as such, have not provided investors with the 
information necessary to understand the nominating process at the 
companies in which they invest.\22\
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    \21\ See Paragraphs (d)(1) and (d)(2) of Item 7 of Exchange Act 
Schedule 14A.
    \22\ See 2003 Summary of Comments.
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    We are proposing new disclosure requirements that would expand 
disclosure in company proxy statements regarding the nominating 
committee and the nominating process. This enhanced disclosure is 
intended to provide security holders with additional, specific 
information upon which to evaluate the boards of directors and 
nominating committees of the companies in which they invest. Further, 
we intend that increased transparency of the nominating process will 
make that process more understandable to security holders.
    In particular, we have proposed a number of specific and detailed 
disclosure requirements because we believe that each of these 
requirements may be necessary in order to assist security holders in 
understanding each of the processes and policies of the nominating 
committees and boards of directors of companies regarding the 
nomination of candidates for director. We request comment on whether 
each of these detailed requirements is appropriate for that purpose and 
whether there are additional specific and detailed disclosures that 
should be required.
2. Proposed Disclosure Requirements
    The amendments we are proposing today would expand the current 
proxy statement disclosure regarding a company's nominating or similar 
committee to require:
    [sbull] A statement as to whether or not the company has a standing 
nominating committee or a committee performing similar functions \23\ 
and, if the company does not have such a committee, a statement of the 
specific basis for the view of the board of directors that it is 
appropriate for the company not to have such a committee and the names 
of those directors who participate in the consideration of director 
nominees; \24\
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    \23\ As noted earlier in this release, this disclosure currently 
is required under Paragraph (d)(1) of Item 7 of Exchange Act 
Schedule 14A.
    \24\ Under proposed listing standards, a company that is listed 
on the NYSE would be required to have an independent nominating 
committee. Under NASD proposed listing standards, a Nasdaq Stock 
Market-quoted company would be required to have an independent 
nominating committee or, in the alternative, have nominees 
determined by a majority of independent directors. See Release Nos. 
34-47672 (April 11, 2003) [68 FR 19051] and 34-47516 (March 17, 
2003) [68 FR 14451].
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    [sbull] The following disclosure regarding the nominating process: 
\25\
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    \25\ For the remainder of our discussion of this proposed 
disclosure requirement, the term ``nominating committee'' refers to 
a nominating committee or similar committee or group of directors 
fulfilling the role of a nominating committee. That group may 
comprise the full board. If the company has a standing nominating 
committee or a committee fulfilling the role of a nominating 
committee, Item 7(d)(1) of Schedule 14A requires identification of 
the members of that committee. If the company does not have such a 
standing committee, the proposed amendments to Paragraph (d)(2) of 
Item 7 of Schedule 14A would require the identification of each 
director who participates in the consideration of director nominees.
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    [sbull] If the nominating committee has a charter, a description of 
the material terms of the nominating committee charter and disclosure 
as to where the nominating committee charter is available, which can be 
the company's Web site;
    [sbull] If the nominating committee does not have a charter, a 
statement of that fact;
    [sbull] If the company is a listed issuer \26\ whose securities are 
listed on a national securities exchange registered pursuant to section 
6(a) of the Exchange Act \27\ or in an automated inter-dealer quotation 
system of a national securities association registered pursuant to 
section 15A(a) of the Exchange Act \28\ that has independence 
requirements for nominating committee members, disclosure of any 
instance during the

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last fiscal year where any member of the nominating committee did not 
satisfy the definition of independence in the listing standards of the 
market on which they are listed or quoted; \29\
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    \26\ As defined in Exchange Act Rule 10A-3 [17 CFR 240.10A-3].
    \27\ 15 U.S.C. 78f(a).
    \28\ 15 U.S.C. 78o-3(a).
    \29\ For purposes of this disclosure requirement, to the extent 
the market on which the company is listed permits a member of a 
nominating committee to rely on an exclusion from applicable 
independence standards, and a member of a nominating committee is 
not independent in reliance on that exclusion, this disclosure would 
not be required.
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    [sbull] If the company is not a listed issuer,\30\ disclosure of 
whether each of the members of the nominating committee are 
independent. In determining whether a member is independent, the 
company must use a definition of independence of a national securities 
exchange registered pursuant to Section 6(a) of the Exchange Act or a 
national securities association registered pursuant to Section 15A(a) 
of the Exchange Act that has been approved by the Commission (as that 
definition may be modified or supplemented), and state which definition 
it used. Whatever definition the company chooses, it would have to 
apply that definition consistently to all members of the nominating 
committee and use the independence standards of the same national 
securities exchange or national securities association for purposes of 
nominating committee disclosure under this requirement and audit 
committee disclosure under Exchange Act Rule 10A-3;
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    \30\ As defined in Exchange Act Rule 10A-3.
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    [sbull] If the nominating committee has a policy with regard to the 
consideration of any director candidates recommended by security 
holders, a description of the material elements of that policy, which 
shall include, but not be limited to, a statement as to whether the 
committee will consider director candidates recommended by security 
holders;
    [sbull] If the nominating committee does not have a policy with 
regard to the consideration of any director candidates recommended by 
security holders, a statement of that fact;
    [sbull] If the nominating committee will consider candidates 
recommended by security holders, a description of the procedures to be 
followed by security holders in submitting such recommendations;\31\
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    \31\ This disclosure currently is required under Paragraph 
(d)(2) of Item 7 of Exchange Act Schedule 14A.
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    [sbull] A description of any specific, minimum qualifications that 
the nominating committee believes must be met by a nominating 
committee-recommended nominee for a position on the company's board of 
directors, any specific qualities or skills that the nominating 
committee believes are necessary for one or more of the company's 
directors to possess, and any specific standards for the overall 
structure and composition of the company's board of directors;
    [sbull] A description of the nominating committee's process for 
identifying and evaluating nominees for director, including nominees 
recommended by security holders, and any differences in the manner in 
which the nominating committee evaluates nominees for director based on 
whether or not the nominee is recommended by a security holder;
    [sbull] A statement of the specific source, such as the name of an 
executive officer, director, or other individual, of each nominee 
(other than nominees who are executive officers or directors standing 
for re-election) approved by the nominating committee for inclusion on 
the company's proxy card;
    [sbull] If the company pays a fee to any third party or parties to 
identify or assist in identifying or evaluating potential nominees, 
disclosure of the function performed by each such third party; and
    [sbull] If the nominating committee (a) receives a recommended 
nominee from a security holder or group of security holders who 
individually, or in the aggregate, beneficially owned greater than 3% 
\32\ of the company's voting common stock for at least one year as of 
the date of the recommendation,\33\ and (b) the nominating committee 
decides not to nominate that candidate, disclosure of: \34\
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    \32\ In addition to the disclosure proposed today, the Division 
of Corporation Finance Staff Report, dated July 15, 2003, also 
recommended new rules to require enhanced security holder access to 
the nomination process. The issue of the appropriate ownership 
threshold, if any, for any such enhanced access is a separate issue 
from the appropriate ownership threshold for the disclosure we are 
proposing today and is not addressed in this release.
    \33\ Similar to the method used in Exchange Act Rule 14a-8 [17 
CFR 240.14a-8] with regard to shareholder proponents, the percentage 
of securities held by a nominating security holder, as well as the 
holding period of those securities may be determined by the company, 
on its own, if the security holder is the registered holder of the 
securities. If not, the security holder can submit one of the 
following to the company to evidence the required ownership and 
holding period:
    (1) a written statement from the ``record'' holder of the 
securities (usually a broker or bank) verifying that, at the time 
the security holder made the recommendation, he or she had held the 
required securities for at least one year; or
    (2) if the security holder has filed a Schedule 13D (Sec.  
240.13d-101), Schedule 13G (Sec.  240.13d-102), Form 3 (Sec.  
249.103), Form 4 (Sec.  249.104), and/or Form 5 (Sec.  249.105), or 
amendments to those documents or updated forms, reflecting ownership 
of the shares as of or before the date of the recommendation, a copy 
of the schedule and/or form, and any subsequent amendments reporting 
a change in ownership level, as well as a written statement that the 
security holder continuously held the required securities for the 
one-year period as of the date of the recommendation.
    \34\ Information available to our Office of Economic Analysis 
indicates that, of the companies listed on the New York Stock 
Exchange, Nasdaq Stock Market and American Stock Exchange as of 
December 31, 2002, more than 70% had at least one institutional 
security holder that beneficially owned more than 3% of the common 
equity or similar securities and 13% had five or more such security 
holders. This information was derived from filings on Exchange Act 
Form 13F (17 CFR 249.325), that indicated that the filing security 
holder had held their securities for at least one year.
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    [sbull] The name or names of the security holders who recommended 
the candidate; and
    [sbull] The specific reasons for the nominating committee's 
determination not to include the candidate as a nominee.\35\
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    \35\ Disclosure of the names of any recommended candidates would 
not be required.
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    As previously discussed, the disclosure that would be required by 
each of the proposed disclosure standards described above would provide 
security holders with important information regarding the management of 
the companies in which they invest. Commenters who responded to the 
Commission's solicitation of public views indicated the necessity for 
increased specific disclosure regarding the functioning of the 
nominating committees of public companies.\36\ The disclosure standard 
we propose today would build upon existing disclosure requirements to 
require a number of specific disclosures.
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    \36\ See 2003 Summary of Comments.
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    We believe that the proposed detailed disclosure requirements 
regarding the decision to have a nominating committee or not, the 
nominating committee's charter, if any, its processes for identifying 
and evaluating candidates, and the minimum qualifications and 
qualities, skills and standards that the nominating committee believes 
are necessary or desirable for nominees and the board, are necessary to 
give security holders a more complete overview of the nominating 
process for directors of the companies in which they invest. We believe 
that information as to whether nominating committee members are 
independent within the requirements of proposed listing standards 
applicable to a company is meaningful to a security holder in 
evaluating the nominating process of that company, how that process 
works, and the seriousness with which it is considered by the company. 
We believe that identification of the source of each nominee and 
disclosure as to whether there are third parties that receive 
compensation related to

[[Page 48727]]

identifying and evaluating candidates, which we expect will generally 
be executive search firms, provides important information as to the 
process followed by a company. In the absence of these specific 
proposed disclosure requirements, we believe that disclosure could be 
at a level of generality that would not be sufficiently helpful to 
security holders in understanding the nominating process.
    We also believe that it is important for security holders to 
understand the application of the nominating processes specifically to 
candidates put forward by security holders. The ability to participate 
in the nominating process is an important matter for security 
holders.\37\ Disclosure as to whether and how they may participate in a 
company's nominating process, and the manner in which security holder 
candidates are evaluated, including differences between how they are 
evaluated and other candidates are evaluated, therefore represents 
important information for security holders. Specific disclosure 
requirements regarding the treatment of candidates put forward by large 
security holders or groups of security holders that have a long-term 
investment interest are appropriate, given the particular concerns of 
these investors as to how they might participate in the nominating 
process. Again, we believe that specific detailed disclosure 
requirements are necessary and appropriate to assure the desired degree 
of clarity and transparency regarding these matters, and that more 
general requirements may not achieve our desired objective.
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    \37\ See id.
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3. Interaction of the Proposed Disclosure Requirements With Proposed 
Listing Standard Amendments of the Markets
    The New York Stock Exchange and the Nasdaq Stock Market have 
proposed revised listing standards that would require listed companies 
to have independent nominating committees.\38\ While these proposed 
listing standard changes demonstrate the importance of the nominating 
process and the nominating committee, and represent a strengthening of 
the role and independence of the nominating committee, they would not 
require nominating committees to consider security holder nominees or 
companies to make the disclosures described above. The disclosure 
requirements we propose today would provide useful information to 
security holders regarding the nominating process, the manner of 
evaluating nominees, and the extent to which the boards of directors of 
the companies in which they invest have a process for considering, and 
do in fact consider, security holder recommendations. Accordingly, the 
proposed disclosure requirements would operate in conjunction with any 
proposed listing standards regarding nominating committees that are 
adopted.
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    \38\ See Release No. 34-47672 (April 11, 2003) and Release No. 
34-47516 (March 17, 2003). While the NYSE proposal includes an 
absolute requirement that listed companies have an independent 
nominating committee, the proposed Nasdaq standards provide that the 
nomination of directors may, alternatively, be determined by a 
majority of the independent directors. In discussing the NYSE and 
Nasdaq proposals, our references to independent nominating 
committees encompass this alternative under the Nasdaq proposal.
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    In response to our solicitation of input into the proxy review by 
the Division of Corporation Finance, a number of commenters from the 
business community and their advisors made clear their view that the 
proposed listing standards regarding nominating committees represent a 
significant strengthening of the nominating process and should be 
allowed to take effect and operate before we take any further action 
regarding the election of directors.\39\ Nearly 25 years have passed 
since the adoption of our disclosure requirements regarding nominating 
committees. The many comments reflecting a continued lack of security 
holder access to the director nomination process and security holder 
dissatisfaction with that process \40\ are evidence that the promise of 
those earlier amendments has not been realized. As such, it is 
appropriate to consider those additional, constructive steps that we 
can now take to complement any proposed listing standards that are 
adopted. We believe that the disclosure requirements we propose today 
are appropriate steps in this process. We also believe that 
consideration must be given to additional security holder access to the 
proxy process in connection with the election of directors, as will be 
discussed further in a proposing release that we expect to publish this 
fall.
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    \39\ See 2003 Summary of Comments.
    \40\ See id.
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4. Questions Regarding Enhanced Nominating Committee Disclosure
    1. Would increased disclosure related to the nominating committee 
and its policies and criteria for considering nominees be an effective 
means to increase security holder understanding of the nominating 
process, board accountability, board responsiveness, and corporate 
governance policies?
    2. (a) If so, do the proposed specific disclosure standards, 
including those in each of the following areas, provide security 
holders with useful information that provides an understanding of a 
company's nominating process:
    [sbull] The existence of a nominating committee;
    [sbull] The nominating committee charter, if any;
    [sbull] Compliance with applicable nominating committee 
independence requirements;
    [sbull] The process for identifying and evaluating candidates;
    [sbull] The qualifications and standards for director nominees;
    [sbull] The source of candidates other than those standing for re-
election; and
    [sbull] The involvement of third parties receiving compensation for 
identifying and evaluating candidates?
    (b) If so, do the proposed specific disclosure standards, including 
those in each of the following areas, provide security holders with 
useful information that provides an understanding of the ability of 
security holders to participate in the nominating process:
    [sbull] Policies for consideration of security holder candidates;
    [sbull] Procedures for submission of security holder candidates; 
and
    [sbull] Specific information regarding consideration of candidates 
submitted by large, long-term security holders or groups of security 
holders?
    3. As noted above, the proposed disclosure requirements are 
intended to provide security holders with detailed, specific 
information that we believe is important. Are there alternative means 
to better achieve our objective? For example, would it be more 
appropriate to include a broader, less detailed disclosure standard? 
Would any of the detailed disclosure requirements within the proposed 
standard result in disclosure that is unnecessarily detailed for the 
purpose of providing security holders with useful information regarding 
the management of the companies in which they invest? If so, describe 
specifically the basis for that conclusion.
    4. We propose to require disclosure of the material terms of the 
nominating committee charter. Instead of requiring companies to 
disclose the material terms of the charter, should we require that the 
company attach the nominating committee charter to the proxy statement? 
If so, should companies be required to attach it every year? Should we 
require that the charter be filed with the Commission? Should we 
require disclosure of any (or only material) amendments to the charter? 
Does Web site disclosure provide sufficient access

[[Page 48728]]

to investors? Should companies be required to provide investors a copy 
of the charter upon request?
    5. We propose to require disclosure of any instances where a member 
of a company's nominating committee did not satisfy the applicable 
listing requirements for independence. In addition, we propose to 
require similar disclosure for unlisted companies. We request comment 
on whether the disclosures will help inform investors about the 
independence of the nominating committee. If the markets do not adopt 
the proposed amendments to the listing standards, are there disclosures 
that we could require that would achieve the same purposes? Should we 
require companies whose securities are not listed on an exchange or 
quoted in the Nasdaq Stock Market to disclose whether the members of 
their nominating committee, if any, meet any of the independence 
definitions of the proposed amendments to the listing standards? Is it 
appropriate to let issuers choose which definition? Should disclosure 
be required even if the noncompliance has been cured by the time the 
proxy statement is prepared?
    6. We propose to require disclosure concerning a nominating 
committee's policy with regard to the consideration of security holder 
recommendations. If a committee has no policy, should we require the 
company to disclose the reason it does not have a policy? In the 
absence of a formal policy, are there other disclosures a company 
should be required to provide to investors to help them understand the 
standard(s) a committee uses in determining a suitable candidate?
    7. Where security holders have the ability to recommend a nominee 
for a company's board of directors, meaningful participation by 
security holders should be facilitated by disclosure of information 
regarding the process for security holder nominations. As such, we have 
proposed to require disclosure of the procedures for submitting 
recommendations. Should we require disclosure during the year of any 
changes made to the procedure, for example in the next Form 10-Q or 
Form 10-QSB or on Form 8-K?
    8. We have proposed requiring disclosure of information regarding 
criteria used by a nominating committee to screen nominee candidates 
and the minimal qualifications that the committee believes must be met 
by a nominee. Are there other eligibility requirements or 
qualifications about which investors should be informed? Should we 
require the company to disclose when it chooses candidates who do not 
meet the criteria? Should there be a specific disclosure requirement as 
to whether the company applies the same criteria to candidates 
recommended by security holders as to company nominees?
    9. We have proposed that companies be required to describe the 
source of each of their nominees for director other than nominees who 
are executive officers or directors standing for re-election--including 
the name of each source--and their nominating committee's process for 
identifying and evaluating candidates. In addition to the name of each 
candidate's sponsor, should we require disclosure of any financial 
interest between the candidate and sponsor? Should we require 
disclosure of any other interest? Is the name of the source important 
to security holders? Instead, should we require disclosure of the 
person's title (e.g., chief executive officer) or simply whether the 
source is an officer or director of the company? Should we require the 
name of the source only where the source is a director of the company, 
an employee of the company, or related to a director or employee of the 
company? If the source is not a director, an employee, or related to a 
director or employee, should we permit the source to be identified by 
category rather than name (e.g., security holder, third party firm paid 
by the company)? Are the proposed exceptions to the requirement 
appropriate?
    10. We have proposed requiring disclosure of information regarding 
the function performed by any third parties paid by the company. Should 
we require a company to disclose the methodology the third party uses 
to select candidates? Should we require a company to identify any such 
third parties?
    11. We propose to require disclosure regarding candidates that were 
recommended by certain security holders and rejected by the nominating 
committee. Would this type of disclosure raise privacy issues for 
rejected candidates, even if the candidates were not specifically named 
in the company's disclosure? Would it raise privacy issues for the 
recommending security holders? The proposed disclosure requirements 
with regard to rejected security holder-recommended candidates would 
not preclude a company from naming the candidates, though such 
disclosure would not be required under the proposed rule. Should the 
rule specify that companies should not disclose the names of rejected 
candidates? Should the rule specify that companies must include the 
name of any rejected candidate who consents to being so identified in 
the company's proxy statement?
    12. Are the proposed threshold requirements for a security holder 
recommendation that would trigger additional disclosure requirements by 
the company (i.e., recommendations from security holders that have 
beneficially held more than 3% of the company's securities for at least 
one year) appropriate? If not, what ownership threshold, if any, would 
be appropriate (e.g., no threshold, 1%, 2%, 4%, 5%, or higher) and what 
holding period, if any, would be appropriate (e.g., no threshold, 2 
years, 3 years, 4 years, or longer)? Should we use a different 
threshold, such as the three, four, or five largest security holders 
who are not directors or officers of the company? As proposed, the 
rules would not require that the nominating security holder indicate an 
intent to continue to own the securities for any specified period of 
time. Should we include such a requirement? If so, what is the 
appropriate period over which the security holder must intend to 
continue to own the securities (e.g., through the date of the related 
security holder meeting, six months after the recommendation, one year 
after the recommendation, or longer)? Is the proposed method to 
determine whether a security holder or group of security holders meets 
the threshold requirements to trigger additional disclosure by the 
company appropriate? For example, are the means of proving ownership 
appropriate? If not, what would be a more appropriate means? Is it 
appropriate to calculate ownership as of the date of the 
recommendation? If not, what other date would be more appropriate? 
Should we include a specific method of determining beneficial ownership 
for purposes of this disclosure item? For example, should securities 
underlying options be included or excluded for purposes of calculating 
the ownership threshold?
    13. Would the proposed disclosure requirements have unintended 
adverse effects on the nominating process? Would they increase the 
burdens on members of nominating committees or discourage service on 
nominating committees? If so, please provide specific reasons 
supporting your responses to these questions.

B. Disclosure Regarding the Ability of Security Holders To Communicate 
With the Board of Directors

1. Necessity for the Proposal
    During the past proxy season, as well as in the recent review of 
the proxy rules relating to the nomination and

[[Page 48729]]

election of directors, we have become increasingly aware of investors' 
desire for a means by which to communicate with the directors of the 
companies in which they invest.\41\ Although Exchange Act Rule 14a-8 
already creates a possible mechanism for security holders to seek 
further access to communicate with the board, investors and investor 
advocacy groups have indicated that this mechanism would be enhanced 
meaningfully by a process that allows security holders to communicate 
directly with board members.\42\
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    \41\ For example, two pension funds submitted proposals seeking 
greater security holder access to corporate boards. The AFSCME 
Employees Pension Plan submitted a security holder proposal to The 
Kroger Co. to amend Kroger's bylaws to provide for the creation of a 
security holder committee to communicate with the board regarding 
security holder proposals under Exchange Act Rule 14a-8 that were 
approved but not adopted. The Kroger Co. (April 11, 2003). In 
addition, several New York City employee pension funds submitted 
security holder proposals to Advanced Fibre Communications, Inc. and 
PeopleSoft, Inc. requesting that these Nasdaq-listed companies 
establish an ``Office of the Board of Directors'' to facilitate 
communications between non-management directors and security 
holders, including meetings, based on the proposed NYSE standard. 
Advanced Fibre Communications, Inc. (March 10, 2003); PeopleSoft, 
Inc. (March 14, 2003).
    \42\ See 2003 Summary of Comments.
---------------------------------------------------------------------------

    Providing security holders with disclosure about the process for 
communicating with board members would improve the transparency of 
board operations, as well as security holder understanding of the 
companies in which they invest. The Commission has published a NYSE 
listing standard proposal that states: ``In order that interested 
parties may be able to make their concerns known to non-management 
directors, a company must disclose a method for such parties to 
communicate directly and confidentially with the presiding director [of 
the non-management directors] or with non-management directors as a 
group.'' \43\ This method could be analogous to the method in the NYSE 
listing standards that will be required by Exchange Act Rule 10A-3 
regarding audit committees. These standards would require that ``[e]ach 
audit committee * * * establish procedures for the receipt, retention 
and treatment of complaints regarding accounting, internal accounting 
controls or auditing matters, including procedures for the 
confidential, anonymous submission by employees of the issuer of 
concerns regarding questionable accounting or auditing matters.'' \44\
---------------------------------------------------------------------------

    \43\ Release No. 34-47672 (April 11, 2003).
    \44\ Exchange Act Rule 10A-3.
---------------------------------------------------------------------------

    In response to our solicitation of input into the proxy review by 
the Division of Corporation Finance, representatives of the business 
community commented that disclosure regarding the means by which 
security holders may communicate directly with the board of directors 
would address issues of accountability and responsiveness without 
extensive disruption or costs.\45\ Comments from investors and investor 
advocacy groups also indicated the view that this disclosure would be 
helpful; \46\ however, these commenters also noted that disclosure 
alone would not address all issues, as, for example, a process for 
security holders to communicate with board members would not ensure 
that board members would be responsive to security holder concerns.\47\
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    \45\ See 2003 Summary of Comments.
    \46\ See id.
    \47\ See id.
---------------------------------------------------------------------------

2. Proposed Disclosure Requirements
    In making investment decisions, investors may wish to consider the 
corporate governance practices of companies. Further, disclosure 
regarding whether a company has a process for security holders to send 
communications to the board of directors will increase the transparency 
for security holders of this important aspect of board processes at the 
companies in which they invest. We have proposed a number of specific 
and detailed disclosure requirements regarding communications by 
security holders with the board of directors because we believe that 
each of these requirements may be necessary in order to give security 
holders a better understanding of the manner in which security holders 
can engage in these communications. We request comment on whether each 
of these detailed requirements is appropriate for that purpose and 
whether there are additional specific, detailed disclosure requirements 
that should also be included in these disclosure requirements.
    We are proposing that companies include the following information 
in their proxy materials where action is to be taken with respect to 
the election of directors:
    [sbull] A statement as to whether or not the company's board of 
directors provides a process for security holders to send 
communications to the board of directors and, if the company does not 
have a process for security holders to send communications to the board 
of directors, a statement of the specific basis for the view of the 
board of directors that it is appropriate for the company not to have 
such a process;
    [sbull] If the company has a process for security holders to send 
communications to the board of directors:
    [sbull] A description of the manner in which security holders can 
send such communications to the board;
    [sbull] Identification of those board members to whom security 
holders can send communications;
    [sbull] If all security holder communications are not sent directly 
to board members, a description of the company's process for 
determining which communications will be relayed to board members, 
including disclosure of the department or other group within the 
company that is responsible for making this determination; and
    [sbull] A description of any material action taken by the board 
during the preceding fiscal year as a result of communications from 
security holders.
    We believe that the proposed specific disclosure requirement 
regarding whether a board has a process by which security holders can 
communicate with it is necessary to give security holders a better 
picture of a critical component of the board's interaction with 
security holders. Specific, detailed disclosure regarding that process, 
if it exists, is important to security holders in evaluating the nature 
and quality of the communications process. We believe that information 
regarding material actions taken by the board as a result of 
communications with security holders is significant to security holders 
in evaluating the quality and responsiveness of the communications 
process. In the absence of these proposed specific disclosure 
requirements, we believe that disclosure could be at a level of 
generality that may not be sufficiently helpful to security holders in 
understanding and evaluating the communications process.
3. Questions Regarding Disclosure of the Ability of Security Holders To 
Communicate With the Board of Directors
    1. Would increased disclosure relating to security holder 
communications with board members be an effective means to improve 
board accountability, board responsiveness, and corporate governance 
policies? Would this disclosure be useful to security holders?
    2. If so, do the proposed specific disclosure standards, including 
those in each of the following areas, provide security holders with 
important information that provides an understanding of a company's 
process for communications with the board:
    [sbull] The existence of such a process;
    [sbull] A description of the manner in which security holders can 
communicate with the board;

[[Page 48730]]

    [sbull] Identification of board members to whom communications can 
be sent;
    [sbull] The process, if any, for determining which communications 
will be passed on to board members; and
    [sbull] A description of material actions taken as a result of 
security holder communications with the board?
    3. As noted above, the proposed disclosure standards are intended 
to provide security holders with specific, detailed information that we 
believe is important. Are there alternative means to better achieve our 
objectives? For example, would it be more appropriate to include a 
broader, less detailed disclosure standard? Would any of the detailed 
disclosure requirements within the proposed standard result in 
disclosure that is unnecessarily detailed for the purpose of providing 
security holders with important information regarding the process of 
communicating with the board? If so, please describe specifically the 
basis for that conclusion.
    4. Security holders who desire to communicate directly with 
individual directors, committees, and independent members of boards are 
often uncertain of the procedures to follow to contact directors. As 
such, we have proposed requiring disclosure with regard to security 
holder communications with board members. If no director accepts 
communications individually, should the company disclose why? Should 
companies be required to disclose the process they use to record and 
keep security holder communications?
    5. We have proposed requiring disclosure of the means by which 
companies ``filter'' security holder requests to communicate with board 
members. Should there be disclosure of the specific person who 
determines which communications are sent to board members? Should there 
be disclosure of whether management plays a role in ``filtering'' the 
security holder communications that are intended for directors?
    6. We have proposed requiring disclosure regarding any material 
actions taken in response to security holder communications. Are there 
any categories of communications or actions that should be excluded 
from coverage of the rule? For example, should the rule only apply to 
formal petitions to the entire board? Should this rule address 
specifically security holder proposals under Exchange Act Rule 14a-8? 
For example, should the rule make clear that disclosure is not required 
with regard to communications relating to proposals under Exchange Act 
Rule 14a-8? Alternatively, should those communications be included 
specifically within the disclosure requirement?
    7. Do companies currently provide a means for allowing security 
holders to communicate with board members? If so, how effective have 
these methods been in improving board accountability, board 
responsiveness, and corporate governance policies? Is it easier for 
larger minority security holders to communicate with board members?
    8. Because not all companies would be subject to any listing 
requirements that would allow security holders to communicate with 
board members, would a disclosure requirement alone be sufficient with 
regard to companies not subject to those listing requirements?
    9. Should communications with board members that are addressed in 
the disclosure requirements be limited to independent directors or 
extend to the entire board?
    10. We are using the term ``communications'' very broadly to 
discourage companies from taking a formalistic view as to disclosure 
regarding which communications are relayed and considered. We do not, 
however, intend this disclosure standard to require disclosure 
regarding communications with the board of directors from management of 
the company, employees of the company, or other agents of the company, 
where such persons happen also to be security holders. Should we 
include a specific limitation on the term ``communications'' in this 
disclosure standard? If so, how do we prevent companies from taking an 
unduly restrictive view of the term ``communications'' for purposes of 
this disclosure standard?
    11. The proposed rules relating to communications are disclosure 
standards only and would not require companies to establish procedures 
for security holders to communicate with directors. Should we 
nonetheless provide guidance to companies or otherwise address what we 
would view as appropriate procedures for companies to implement with 
regard to security holder communications with board members? If so, 
what procedures would be most appropriate and why? What would be the 
cost to companies of implementing and maintaining such procedures? How 
much time would directors and other company personnel be required to 
expend in implementing and maintaining such procedures? What other 
unintended burdens or other consequences would fall on directors as a 
result of such procedures? Could we give useful guidance in this area 
and, if so, how?

C. Investment Companies

    We are proposing to apply the new disclosure requirements regarding 
board nominating committees and security holders' communications with 
members of boards to proxy statements of investment companies 
(``funds'').\48\ Funds are currently required to comply with Exchange 
Act Schedule 14A when soliciting proxies, including proxies relating to 
the election of directors.\49\ Item 22(b)(14)(iv) of Exchange Act 
Schedule 14A requires funds to disclose the same information about 
nominating committees that is currently required for operating 
companies by Item 7(d)(2).\50\ As with operating companies, the 
enhanced disclosure provided by the amendments may benefit fund 
security holders by improving the transparency of the nominating 
process and board operations, as well as increasing security holders' 
understanding of the funds in which they invest.
---------------------------------------------------------------------------

    \48\ See proposed Paragraphs (e) of Item 7 and (b) of Item 22 of 
Exchange Act Schedule 14A.
    \49\ See Investment Company Act of 1940 Rule 20a-1[17 CFR 
270.20a-1] (requiring funds to comply with Regulation 14A [17 CFR 
240.14a-1 `` 14a-101]), Schedule 14A, and all other rules and 
regulations adopted pursuant to Section 14(a) of the Exchange Act 
[15 U.S.C. 78n] that would be applicable to a proxy solicitation if 
it were made in respect of a security registered pursuant to Section 
12 of the Exchange Act [15 U.S.C. 78l]).
    \50\ Funds are subject to Items 7 and 22(b) of Exchange Act 
Schedule 14A when soliciting proxies regarding the election of 
directors. Currently, in lieu of the disclosure required by 
Paragraphs (a)-(d)(2) of Item 7, funds must provide the information 
required by Item 22(b). See Paragraph (e) of Item 7. The 
Commission's proposals would amend Paragraph (e) of Item 7 to apply 
the disclosure requirements regarding nominating committees in 
Paragraph (d)(2) of Item 7 to funds, and would delete the current 
disclosure requirement regarding nominating committees in Paragraph 
(b)(14)(iv) of Item 22 as duplicative.
---------------------------------------------------------------------------

    The proposals would require disclosure as to whether or not the 
members of a fund's nominating committee are ``interested persons'' of 
the fund as defined in Section 2(a)(19) of the Investment Company 
Act,\51\ rather than independent under the listing standards of a 
national securities exchange or national securities association, as in 
the case of operating companies.\52\ We are requiring disclosure with 
respect to the Section 2(a)(19) test for members of nominating 
committees for funds because that test is tailored to capture the broad 
range of affiliations with investment advisers, principal underwriters, 
and others that are relevant to ``independence'' in the case of funds.
---------------------------------------------------------------------------

    \51\ 15 U.S.C 80a-2(a)(19).
    \52\ Proposed Item 22(b)(14)(ii) of Exchange Act Schedule 14A.

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[[Page 48731]]

Questions Regarding the Application of the Proposals to Funds
    1. Should the proposed amendments that would require disclosure 
regarding the operations of board nominating committees apply to funds? 
Should the proposed amendments that would require new disclosure 
concerning the means by which security holders may communicate with 
members of boards apply to funds? Are there any aspects of the proposed 
amendments that should be modified in the case of funds?
    2. Should we apply the ``interested person'' standard of Section 
2(a)(19) of the Investment Company Act in requiring disclosure 
regarding the independence of members of a fund's nominating committee? 
Should we instead apply a different standard to funds, such as the 
listing standards of national securities exchanges or national 
securities associations?

D. General Request for Comment

    We request and encourage any interested person to submit comments 
regarding:
    [sbull] The proposed amendments that are the subject of this 
release;
    [sbull] Additional or different changes; or
    [sbull] Other matters that may have an effect on the proposals 
contained in this release.
    We request comment from the point of view of companies, investors, 
and other market participants. With regard to any comments, we note 
that such comments are of great assistance to our rulemaking initiative 
if accompanied by supporting data and analysis of the issues addressed 
in those comments, as well as a discussion of specific alternatives if 
applicable.

III. Paperwork Reduction Act

A. Background

    The proposed amendments to Exchange Act Schedule 14A contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\53\ We are submitting the 
proposal to the Office of Management and Budget (``OMB'') for review in 
accordance with the PRA.\54\ The titles for the collections of 
information are:
---------------------------------------------------------------------------

    \53\ 44 U.S.C. 3501 et seq.
    \54\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Proxy Statements--Regulation 14A (Commission Rules 14a-1 
through 14a-15 and Schedule 14A)'' (OMB Control No. 3235-0059);
    (2) ``Information Statements--Regulation 14C (Commission Rules 14c-
1 through 14c-7 and Schedule 14C)''\55\ (OMB Control No. 3235-0057); 
and
---------------------------------------------------------------------------

    \55\ Exchange Act Schedule 14C requires disclosure of some items 
of Exchange Act Schedule 14A. Therefore, while we are not proposing 
to amend the text of Exchange Act Schedule 14C, the proposed 
amendments to Exchange Act Schedule 14A must also be reflected in 
the PRA burdens for Exchange Act Schedule 14C.
---------------------------------------------------------------------------

    (3) ``Rule 20a-1 under the Investment Company Act of 1940, 
Solicitations of Proxies, Consents and Authorizations'' (OMB Control 
No. 3235-0158).\56\ The first two titles were adopted pursuant to the 
Exchange Act and set forth the disclosure requirements for proxy and 
information statements filed by companies to ensure that investors can 
make informed voting or investing decisions.\57\ The third title was 
adopted pursuant to the Investment Company Act and concerns the 
solicitation of proxies, consents and authorizations with respect to 
securities issued by registered investment companies. The hours and 
costs associated with preparing, filing, and sending these schedules 
constitute reporting and cost burdens imposed by each collection of 
information. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
---------------------------------------------------------------------------

    \56\ Investment Company Act Rule 20a-1 requires registered 
investment companies to comply with Exchange Act Regulation 14A or 
14C, as applicable. Therefore, the annual responses to Investment 
Company Act Rule 20a-1 reflect the number of proxy and information 
statements that are filed by registered investment companies.
    \57\ The proxy rules apply only to domestic companies with 
equity securities registered under Section 12 of the Exchange Act 
and to investment companies registered under the Investment Company 
Act [15 U.S.C. 80a et seq.]. There is a discrepancy between the 
number of annual reports by reporting companies and the number of 
proxy and information statements filed with the Commission in any 
given year. This is because some companies are subject to reporting 
requirements by virtue of Section 15(d) of the Exchange Act [15 
U.S.C. 78o], and therefore are not covered by the proxy rules. In 
addition, companies that are not listed on a national securities 
exchange or Nasdaq may not hold annual meetings and therefore would 
not be required to file a proxy or information statement.
---------------------------------------------------------------------------

    Under the proposals, we would expand the disclosure that is 
currently required in company proxy or information statements regarding 
the functions of a company's nominating committee. In addition, the 
proposals would require disclosure regarding the policies and 
procedures regarding security holder communications with the board of 
directors. Compliance with the proposed disclosure requirements would 
be mandatory. There would be no mandatory retention period for the 
information disclosed, and responses to the disclosure requirements 
would not be kept confidential.
    For purposes of the PRA, we estimate the annual incremental 
paperwork burden for all companies to prepare the disclosure that would 
be required under our proposals to be approximately 19,557 hours of 
company personnel time and a cost of approximately $1,955,000 for the 
services of outside professionals.\58\ That estimate includes the time 
and the cost of preparing disclosure that has been appropriately 
reviewed by executive officers, the disclosure committee, in-house 
counsel, outside counsel, and members of the board of directors.\59\ 
Because the current rules already require a company to collect and 
disclose information about the composition, functions and policies and 
procedures of its nominating committee, the proposed disclosure should 
not impose significant new costs for the collection of information.
---------------------------------------------------------------------------

    \58\ For convenience, the estimated PRA hour burdens have been 
rounded to the nearest whole number.
    \59\ In connection with other recent rulemakings, we have had 
discussions with several private law firms to estimate an hourly 
rate of $300 as the cost of outside professionals that assist 
companies in preparing these disclosures.
---------------------------------------------------------------------------

    We derived the above estimates by estimating the total amount of 
time it would take a company to prepare and review the proposed 
disclosure. We estimate that over a three-year time period, the annual 
incremental disclosure burden would be an average of 3 hours per form. 
This estimate is based on the assumption that companies spend a greater 
amount of time preparing the disclosure in year one and will become 
more efficient in preparing the disclosure over the next two years.\60\ 
This estimate represents the average burden for all companies, both 
large and small, that are subject to the proxy rules. We expect that 
the disclosure burden could be greater for larger companies and lower 
for smaller companies. The estimate also has been adjusted to reflect 
the fact that not all proxy and information statements involve action 
to be taken with respect to the election of directors, and therefore 
would not require companies to provide the proposed disclosure.\61\
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    \60\ We estimate that it will take 6 hours to prepare the 
disclosure in year one, 3.13 hours in year two, and 2.03 hours in 
year three.
    \61\ We estimate that 20% of all proxy and information 
statements do not include disclosure about directors. This estimate 
is based on the proportion of preliminary proxy statements to 
definitive proxy statements filed in our 2002 fiscal year (2,555/
8,639=30%), which has been adjusted downward by 10% to reflect the 
fact that some preliminary proxy statements contain disclosure about 
directors. Registrants do not file preliminary proxy statements for 
security holder meetings where the matters to be acted upon involve 
only the election of directors or other specified matters. See 
Exchange Act Rule 14a-6 [17 CFR 240.14a-6].

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[[Page 48732]]

B. Revisions to PRA Reporting and Cost Burden Estimates

    Table 1 below illustrates the incremental annual compliance burden 
of the collection of information in hours and in cost for proxy and 
information statements under the Exchange Act and Investment Company 
Act. The burden was calculated by multiplying the estimated number of 
responses by the estimated average number of hours each entity spends 
completing the form. We have based our estimated number of annual 
responses on the actual number of filers during the 2002 fiscal year. 
We estimate that 75% of the burden of preparation is carried by the 
company internally and that 25% of the burden of preparation is carried 
by outside professionals retained by the company at an average cost of 
$300 per hour. The portion of the burden carried by outside 
professionals is reflected as a cost, while the portion of the burden 
carried by the company internally is reflected in hours.

                                                Table 1.--Calculation of Incremental PRA Burden Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Annual    Incremental                                                      25 percent
                                      responses    hours/form    Incremental burden     75 percent company        professional         $300 Prof. cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             (A)          (B)  (C) = (A) x (B)        (D) = (C) x 0.75       (E) = (C) x 0.25       (F) = (E) x $300
SCH 14A............................        7,188         3.00  21,564.00              16,173                 5,391.00               $1,617,300.00
SCH 14C............................          446         3.00  1,338.00               1,004                  334.50                 $100,350.00
Rule 20a-1.........................        1,058         3.00  3,174.00               2,381                  793.50                 $238,050.00
    Total..........................        8,692  ...........  .....................  19,557                 .....................  $1,955,700.00
                                    --------------

C. Solicitation of Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), we solicit comments to: (i) 
Evaluate whether the proposed collection of information is necessary 
for the proper performance of the functions of the agency, including 
whether the information will have practical utility; (ii) evaluate the 
accuracy of our estimate of the burden of the proposed collection of 
information; (iii) determine whether there are ways to enhance the 
quality, utility and clarity of the information to be collected; and 
(iv) evaluate whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
DC 20503, and should send a copy to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609, with reference to File No. S7-14-03. Requests for 
materials submitted to OMB by the Commission with regard to these 
collections of information should be in writing, refer to File No. S7-
14-03, and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services, 450 
Fifth Street, NW., Washington, DC 20549. OMB is required to make a 
decision concerning the collection of information between 30 and 60 
days after publication of this release. Consequently, a comment to OMB 
is best assured of having its full effect if OMB receives it within 30 
days of publication.

IV. Cost-Benefit Analysis

A. Background

    On April 14, 2003, the Commission directed the Division of 
Corporation Finance to formulate possible changes in the proxy rules 
and regulations regarding procedures for the election of directors \62\ 
and on May 1, 2003, the Commission solicited public views on that 
undertaking.\63\ Submissions from the public on this matter identified 
two particular areas of concern: the process for nominating candidates 
for election as directors and the ability of security holders to 
communicate effectively with the board of directors. After considering 
all of the comments on this matter, the Commission is proposing to 
expand disclosure in company proxy statements regarding the nominating 
committees of boards of directors and communications between security 
holders and directors.
---------------------------------------------------------------------------

    \62\ See Press Release No. 2003-46 (April 14, 2003).
    \63\ See Release No. 34-47778 (May 1, 2003) [68 FR 24530].
---------------------------------------------------------------------------

    Currently, companies must state whether or not they have a 
nominating committee and, if so, must identify the members of the 
nominating committee, state the number of committee meetings held, and 
briefly describe the functions performed by such committees.\64\ In 
addition, if a company has a nominating or similar committee, it must 
state whether the committee considers nominees recommended by security 
holders and, if so, must describe how security holders may submit 
recommended nominees.\65\ However, having reviewed the existing proxy 
rules and submissions from public commenters, we believe reforms may be 
necessary to improve the current disclosure regime. The proposed 
disclosures are designed to build upon existing disclosure requirements 
to elicit a more detailed discussion of the policies and procedures of 
the nominating committee as well as the means by which security holders 
can communicate with the board of directors.
---------------------------------------------------------------------------

    \64\ See Paragraph (d)(1) of Item 7 of Exchange Act Schedule 
14A.
    \65\ See id. at Paragraph (d)(2).
---------------------------------------------------------------------------

    The intent of the proposed disclosure requirements is to enhance 
transparency of the policies of boards of directors, with the goal of 
providing security holders a better understanding of the functions and 
activities of the boards of the companies in which they invest. For 
example, the proposal relating to nominating committees would require 
disclosure about the source of director candidates and the level of 
scrutiny applied to each candidate. The proposal relating to security 
holder communications with directors seeks to strengthen the 
association among security holders and directors. For example, the 
proposed disclosure would inform security holders of the manner in 
which to send communications to the board. Moreover, the proposals aim 
to enable investors to better evaluate a company's responsiveness to 
security holder issues and inquiries by illuminating the degree of 
director involvement with security holder concerns.
    The Commission has considered a variety of reforms to achieve its

[[Page 48733]]

regulatory objectives. As one possible approach, we considered 
requiring companies to include the security holder's proxy card in the 
company mailing. Alternatively, we considered amending or 
reinterpreting Exchange Act Rule 14a-8(i)(8) \66\ to allow security 
holder proposals requesting access to the corporation's proxy card for 
the purpose of making nominations. As an initial step in our efforts to 
reform the rules and regulations regarding security holder oversight of 
the companies in which they invest, the current proposals take a more 
measured approach by building on existing disclosure requirements.
---------------------------------------------------------------------------

    \66\ Exchange Act Rule 14a-8(i)(8) permits a company to exclude 
a security holder proposal from its proxy statement if the proposal 
``relates to an election for membership on the company's board of 
directors or analogous governing body.''
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B. Benefits

    The proposed rules would benefit security holders because they will 
assist security holders in better understanding their rights of 
ownership by focusing attention on the scope and efficacy of the 
policies and procedures that companies maintain to nominate directors 
and to enable security holders to communicate with directors. The more 
precise disclosure requirements in the proposals will promote more 
consistent disclosure among a cross-section of public companies because 
they will have greater certainty as to the required disclosure. In 
addition, increasing the amount and quality of information available to 
investors concerning board policies and procedures may improve investor 
confidence because investors may be able to identify the degree to 
which companies are responsive to security holder concerns. By 
providing greater transparency of board policies, we anticipate that 
the proposals would allow investors to make more informed choices when 
deciding how to invest.
    To the extent that security holders would rather invest in 
companies with boards that maintain policies and procedures that 
provide greater security holder oversight, companies may have 
incentives to adopt more meaningful policies and procedures regarding 
director nominations and security holder communications. The proposed 
rules also may encourage companies to consider their existing policies 
in relation to policies adopted by other companies and could facilitate 
competition among companies to adopt policies that reduce costs to 
security holders. For example, if security holder board nominees are 
given adequate consideration through the nominating process, a security 
holder may choose to submit its candidate to the nominating committee 
rather than incur the expense of soliciting proxies to support the 
nominee. Moreover, the proposed disclosure of the manner in which 
security holders can send communications to the board may encourage a 
less costly communication process for providing recommendations to the 
board than the current process embodied in Exchange Act Rule 14a-8.
Request for Comment
    [sbull] We solicit quantitative data to assist our assessment of 
the benefits of increased disclosure regarding nominating committees 
and security holder-director communications.
    [sbull] Are there any public companies that currently provide 
information to the public regarding their policies and procedures 
related to the functioning of the nominating committee or security 
holder communications with directors? If so, is there any data on 
whether investors find this information to be useful?

C. Costs

    The proposed rules would impose new disclosure requirements on 
companies subject to the proxy rules.\67\ We estimate that complying 
with the proposed disclosures would entail a relatively small financial 
burden. The proposed disclosures are designed to build upon existing 
disclosure requirements to elicit a more detailed discussion of the 
functions of the nominating committee as well as the means by which 
security holders can communicate with the board of directors. Thus, the 
task of complying with the proposed disclosure could be performed by 
the same person or group of persons responsible for compliance under 
the current rules. Because the current rules already require a company 
to collect and disclose information about the composition, functions 
and policies and procedures of its nominating committee, the proposed 
disclosure should not impose significant new costs for the collection 
of information.
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    \67\ The proxy rules apply only to domestic companies with 
equity securities registered under Section 12 of the Exchange Act 
and to investment companies registered under the Investment Company 
Act.
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    For purposes of the PRA, we estimate the annual incremental 
paperwork burden for all companies to prepare the disclosure that would 
be required under our proposals to be approximately 19,557 hours of 
company personnel time ( 2.25 hours per company),\68\ which translates 
into an estimated cost of $1,662,000 ($191 per company).\69\ We also 
estimate a cost of approximately $1,955,000 for the services of outside 
professionals ($225 per company).\70\ The figures above include the 
estimated burdens for investment companies. For investment companies, 
we estimate the incremental burden to be 2,381 hours of company 
personnel time (2.25 hours per company), which translates into an 
estimated cost of $202,385 ($191 per company). We also estimate a cost 
for investment companies of approximately $238,050 for the services of 
outside professionals ($225 per company). To the extent that the 
proposals influence corporate behavior, however, the costs would extend 
beyond a disclosure burden. For example, companies may incur additional 
costs in instituting more responsive policies and procedures regarding 
director nominations and security holder communications. We have not 
included these costs in our analysis of the additional disclosure 
requirement, but have sought comment regarding such costs and related 
matters.
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    \68\ 3 hours x 75% = 2.25 hours.
    \69\ We estimate the average hourly cost of in-house personnel 
to be $85. This cost estimate is based on data obtained from The SIA 
Report on Management and Professional Earnings in the Securities 
Industry (Oct. 2001).
    \70\ In connection with other recent rulemakings, we have had 
discussions with several private law firms to estimate an hourly 
rate of $300 as the cost of outside professionals that assist 
companies in preparing these disclosures.
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Request for Comment
    [sbull] What are the direct and indirect costs associated with the 
proposed rules?
    [sbull] What are the costs in the first year of compliance versus 
subsequent years?
    [sbull] To the extent that the proposals influence corporate 
behavior, what costs would a company incur to institute responsive 
policies and procedures regarding director nominations and security 
holder communications?
    [sbull] We solicit quantitative data to assist our assessment of 
the costs associated with increased disclosure regarding nominating 
committees and security holder-director communications.

D. Small Business Issuers

    Although the proposed rules apply to small business issuers, we do 
not anticipate any disproportionate impact on small business issuers. 
Like other issuers, small business issuers should incur relatively 
minor compliance costs, and should find it unnecessary to hire extra 
personnel. The issues of corporate accountability and security holder 
rights affect small companies as much as they affect large companies. 
Thus, we do not

[[Page 48734]]

believe that applying the proposed rules to small business issuers 
would be inconsistent with the policies underlying the small business 
issuer disclosure system.

E. Request for Comments

    To assist the Commission in its evaluation of the costs and 
benefits of the proposed disclosure discussed in this release, we 
request that commenters provide views and data relating to any costs 
and benefits associated with the proposed rules.

V. Consideration of Burden on Competition and Promotion of Efficiency, 
Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \71\ requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. In addition, Section 23(a)(2) 
prohibits us from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. The proposed rules are intended to make 
information about the functions of a company's nominating committee of 
the board of directors, as well as the ability of security holders to 
communicate with the board of directors, more transparent to investors. 
We anticipate that the proposed rules would provide increased 
information upon which to evaluate the functioning of boards of 
directors and make investment decisions. The proposed rules may affect 
competition because they would allow companies to consider their 
existing policies in relation to policies adopted by other companies. 
As a result, companies may compete to adopt policies that effectively 
balance security holder and director interests and therefore attract 
investors.
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    \71\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We have identified one possible area where the proposed rules could 
potentially place a burden on competition. The proposed disclosure 
would enable investors to compare companies' policies and procedures 
for director nominations and communications with directors. To the 
extent that investors would place a premium on a company that provides 
security holders with favorable director nomination and communication 
procedures, a company would be at a disadvantage to other companies who 
maintain more favorable procedures. We request comment regarding the 
degree to which our proposed disclosure requirements would create 
competitively harmful effects upon public companies, and how to 
minimize those effects. We also request comment on any disproportionate 
cross-sectional burdens among the firms affected by our proposals that 
could have anti-competitive effects.
    Section 3(f) of the Exchange Act \72\ and Section 2(c) of the 
Investment Company Act \73\ require us, when engaging in rulemaking 
that requires us to consider or determine whether an action is 
necessary or appropriate in the public interest, to consider, in 
addition to the protection of investors, whether the action will 
promote efficiency, competition and capital formation. We believe the 
proposed disclosure will make information about the operation of a 
company's director nomination process more transparent. In addition, 
disclosure regarding the means by which security holders may 
communicate directly with a company's board of directors may increase 
security holder involvement in the companies in which they invest. As a 
result, we believe that investors may be able to evaluate a company's 
board of directors more effectively and make more informed investment 
decisions. We believe that as a consequence of these developments, 
there may be some positive impact on the efficiency of markets and 
capital formation. The possibility of these effects, their magnitude if 
they were to occur, and the extent to which they would be offset by the 
costs of the proposals are difficult to quantify. We request comment on 
these matters and how the proposed amendments, if adopted, would affect 
efficiency and capital formation. Commenters are requested to provide 
empirical data and other factual support to the extent possible.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78c(f).
    \73\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

VI. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603. It relates to proposed revisions to Items 
7 and 22 of Exchange Act Schedule 14A. Under the proposals, we would 
expand the disclosure that currently is required in company proxy or 
information statements regarding the functions of a company's 
nominating committee. In addition, the proposals would require 
disclosure regarding the policies and procedures regarding security 
holder communications with the board of directors.

A. Reasons for the Proposed Action

    On April 14, 2003, the Commission directed the Division of 
Corporation Finance to formulate possible changes in the proxy rules 
and regulations regarding procedures for the election of directors \74\ 
and on May 1, 2003, the Commission solicited public views on that 
undertaking.\75\ Submissions from the public on this matter identified 
two particular areas of concern: the process for nominating candidates 
for election as directors and the ability of security holders to 
communicate effectively with the board of directors. After considering 
all of the comments on this matter, the Commission is proposing to 
expand disclosure in company proxy statements regarding the nominating 
committees of boards of directors and communications between security 
holders and directors.
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    \74\ See Press Release No. 2003-46 (April 14, 2003).
    \75\ See Release No. 34-47778 (May 1, 2003).
---------------------------------------------------------------------------

    Currently, companies must state whether or not they have a 
nominating committee and, if so, must identify the members of the 
nominating committee, state the number of committee meetings held, and 
briefly describe the functions performed by such committees.\76\ In 
addition, if a company has a nominating or similar committee, it must 
state whether the committee considers nominees recommended by security 
holders and, if so, must describe how security holders may submit 
recommended nominees.\77\ The proposed disclosures are designed to 
build upon existing disclosure requirements to elicit a more detailed 
discussion of the policies and procedures of the nominating committee 
as well as the means by which security holders can communicate with the 
board of directors.
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    \76\ See Paragraph (d)(1) of Item 7 of Exchange Act Schedule 
14A.
    \77\ See id. at Paragraph (d)(2).
---------------------------------------------------------------------------

B. Objectives

    The proposed disclosure requirements are designed to enhance 
transparency of the policies of boards of directors, with the goal of 
providing security holders a better understanding of the functions and 
activities of the boards of the companies in which they invest. For 
example, the proposal relating to nominating committees would require 
disclosure about the source of director candidates and the level of 
scrutiny accorded to each candidate. The proposal relating to security 
holder communications with directors seeks to strengthen the 
association among security holders and directors. For example, the 
proposed disclosure would inform security holders of the manner in

[[Page 48735]]

which to send communications to the board. Moreover, the proposals aim 
to enable investors to better evaluate a company's responsiveness to 
security holder issues and inquiries by illuminating the degree of 
director involvement with security holder concerns. The proposed 
disclosure requirements enhance transparency of the policies of boards 
of directors, with the goal of giving security holders a better 
understanding of the functions and activities of the boards of the 
companies in which they invest.

C. Legal Basis

    We are proposing the amendments under the authority set forth in 
Sections 3(b), 12, 14, 23(a) and 36 of the Securities Exchange Act of 
1934, as amended, and Sections 20(a) and 38 of the Investment Company 
Act of 1940, as amended.

D. Small Entities Subject to the Proposed Amendments

    The proposed amendments would affect companies that are small 
entities. Exchange Act Rule 0-10(a)\78\ defines a company, other than 
an investment company, to be a ``small business'' or ``small 
organization'' for purposes of the Regulatory Flexibility Act if it had 
total assets of $5 million or less on the last day of its most recent 
fiscal year. An investment company is considered to be a ``small 
business'' if it, together with other investment companies in the same 
group of related investment companies, has net assets of $50 million or 
less as of the end of its most recent fiscal year.\79\ As discussed 
below, we believe that the proposals would affect approximately 575, or 
23%, of the small entities that are operating companies. We believe 
that the proposals also would affect approximately 50 of the small 
entities that are investment companies.
---------------------------------------------------------------------------

    \78\ 17 CFR 240.0-10(a).
    \79\ 17 CFR 270.0-10(a)
---------------------------------------------------------------------------

    The Commission received 8,692 separate proxy and information 
statements in its 2002 fiscal year. We estimate that 6,536, or 80%, of 
those filings involved the election of directors, and would therefore 
be affected by the proposals.\80\ Furthermore, we estimate that 5,257 
companies are ``listed issuers'' (as defined in Exchange Act Rule 10A-
3) that are subject to the proxy rules.\81\ Because the relevant 
listing standards of national securities exchanges and the Nasdaq 
require that listed issuers hold annual meetings, and state law 
provides for the election of directors at annual meetings, we estimate 
that at least 5,257 proxy and information statements involve elections 
of directors,\82\ of which less than 225 operating companies and less 
than 25 investment companies constitute ``small entities.''\83\ 
Therefore, we deduced that 1,029 proxy and information statements 
relate to the election of directors for companies that are not ``listed 
issuers.''\84\ We estimate that approximately 352 of the proxy and 
information statements for operating companies that are not ``listed 
issuers'' would be filed by small entities affected by the proposed 
rules.\85\ We also estimate that approximately 25 of the proxy and 
information statements for investment companies that are not ``listed 
issuers'' would be filed by small entities affected by the proposals. 
Therefore, we estimate that the proposals would, in total, affect 
approximately 625 small entities.\86\
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    \80\ We estimate that 20% of all proxy and information 
statements do not include disclosure about directors. This estimate 
is based on the proportion of preliminary proxy statements to 
definitive proxy statements filed in our 2002 fiscal year (2,555/
8,639=30%), which has been adjusted downward by 10% to reflect the 
fact that some preliminary proxy statements contain disclosure about 
directors. Registrants do not file preliminary proxy statements for 
security holder meetings where the matters to be acted upon involve 
only the election of directors or other specified matters. See 
Exchange Act Rule 14a-6.
    \81\ We derived this estimate from the database provided by the 
Center for Research in Securities Prices at the University of 
Chicago (``CRSP''), the Standard & Poors Research Insight Compustat 
Database (``Compustat'') and SEC Form 1392.
    \82\ See, e.g., Rule 302.00 of NYSE listing standards and Rule 
4350(e) of Nasdaq listing standards.
    \83\ Data obtained from Compustat indicates that there are less 
than 225 listed operating companies that are small entities. 
Information compiled by the Commission staff indicates that there 
are less than 25 listed investment companies that are small 
entities.
    \84\ 6,536-5,257-225-25=1,029.
    \85\ This estimate is based on the proportion of small entities 
that are reporting companies (2,500) to the total domestic companies 
quoted on the OTCBB or the Pink Sheets (7,317). We derived the 
latter figure from the CRSP database.
    \86\ The calculation for the total number of small entities is 
as follows: 225 listed operating companies + 25 listed investment 
companies + 352 non-listed operating companies + 25 non-listed 
investment companies = 627.
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    We request comment on the number of small entities that would not 
be impacted by our proposals, including any available empirical data.

E. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposals are expected to result in minimal additional costs to 
all subject companies, large or small. Because the current rules 
already require a company to collect and disclose information about the 
composition, functions and policies and procedures of its nominating 
committee, the proposed disclosure should not impose significant new 
costs for the collection of information. Thus, the task of complying 
with the proposed nominating committee disclosure could be performed by 
the same person or group of persons responsible for compliance under 
the current rules at a minimal incremental cost. Moreover, if a small 
entity were to maintain a process for security holders to send 
communications to its board of directors, company personnel would be 
aware of such procedures and the disclosure burden would also be 
minimal. If a small entity does not maintain such a process, then the 
proposed disclosure would consist of a statement that the board does 
not have a communications process and the company would state the 
specific basis for the view of the board of directors that it is 
appropriate for the registrant not to have such a communications 
process. To the extent that the proposals influence corporate behavior, 
however, the costs would extend beyond a disclosure burden. For 
example, companies may incur additional costs in instituting more 
responsive policies and procedures regarding director nominations and 
security holder communications. The proposals, however, would not 
mandate any specific procedures.
    For purposes of the PRA, we estimated that it will take an average 
of 3 hours per year for companies, large and small, to comply with the 
proposed disclosure. We estimated that 75% of the compliance burden 
would be carried by the company internally and that 25% of the 
compliance burden would be carried by outside professionals retained by 
the company. Thus, we estimated the annual incremental paperwork burden 
for a company subject to the proxy rules would be 2.25 hours per 
company, which translates into an estimated cost of $191 per 
company,\87\ and a cost of approximately $225 per company for the 
services of outside professionals.\88\
    A cost of $416 per small entity may not, however, constitute a 
significant economic impact. That conclusion is based on our analysis 
of 1,245 small entities available on the Compustat database. We found 
that the average revenue of those small entities is $2.07 million per 
company. Therefore, on

[[Page 48736]]

average, the estimated $416 compliance expense would constitute 
approximately .02% of a small entity's revenues. We encourage written 
comments regarding this analysis. We solicit comments as to whether the 
proposed changes could have an effect that we have not considered. We 
request that commenters describe the nature of any impact on small 
entities and provide empirical data to support the extent of the 
impact.
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    \87\ We estimate the average hourly cost of in-house personnel 
to be $85. This cost estimate is based on data obtained from The SIA 
Report on Management and Professional Earnings in the Securities 
Industry (Oct. 2001).
    \88\ In connection with other recent rulemakings, we have had 
discussions with several private law firms to estimate an hourly 
rate of $300 as the cost of outside professionals that assist 
companies in preparing these disclosures.
---------------------------------------------------------------------------

F. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that there are no rules that conflict with or completely 
duplicate the proposed rules. There is a partial overlap with current 
disclosure requirements about nominating committees in proxy and 
information statements. This overlap is necessary because the proposed 
disclosures are designed to build upon existing disclosure requirements 
to elicit a more detailed discussion. The current requirements do not 
include much of the information specifically targeted for inclusion in 
the proposed rules.

G. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. In 
connection with the proposals, we considered the following 
alternatives:
    (a) The establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
    (b) The clarification, consolidation, or simplification of 
disclosure for small entities;
    (c) The use of performance rather than design standards; and
    (d) An exemption for small entities from coverage under the 
proposals.
    The Commission has considered a variety of reforms to achieve its 
regulatory objectives. As one possible approach, we considered 
requiring companies to include the security holder's proxy card in the 
company mailing. Alternatively, we considered amending or 
reinterpreting Exchange Act Rule 14a-8(i)(8) to allow security holder 
proposals requesting access to the corporation's proxy card for the 
purpose of making nominations. We believe that the current proposals 
are the most cost-effective initial approach to address specific 
concerns related to small entities because the proposals build on 
existing disclosure requirements.
    We have drafted the proposed disclosure rules to require clear and 
straightforward disclosure of a company's policies and procedures 
regarding the nomination of directors and security holder 
communications. Separate disclosure requirements for small entities 
would not yield the disclosure that we believe to be necessary to 
achieve our objectives. In addition, the informational needs of 
investors in small entities are typically as great as the needs of 
investors in larger companies. Therefore, it does not seem appropriate 
to develop separate requirements for small entities involving 
clarification, consolidation or simplification of the proposed 
disclosure.
    We have used design rather than performance standards in connection 
with the proposals for two reasons. First, based on our past 
experience, we believe the proposed disclosure would be more useful to 
investors if there were enumerated informational requirements. The 
proposed mandated disclosures may be likely to result in a more focused 
and comprehensive discussion. Second, more precise disclosure 
requirements in the proposals will promote more consistent disclosure 
among a cross-section of public companies because they will have 
greater certainty as to the required disclosure. In addition, more 
precise disclosure requirements would improve the Commission's ability 
to enforce the proposed rules. Therefore, adding to the disclosure 
requirements in existing proxy and information statements appears to be 
the most effective method of eliciting the disclosure.

H. Solicitation of Comments

    We encourage the submission of comments with respect to any aspect 
of this Initial Regulatory Flexibility Analysis. In particular, we 
request comments regarding: (i) The number of small entities that may 
be affected by the proposals; (ii) the existence or nature of the 
potential impact of the proposals on small entities discussed in the 
analysis; and (iii) how to quantify the impact of the proposed 
revisions. Commenters are asked to describe the nature of any impact 
and provide empirical data supporting the extent of the impact. Such 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, or in the alternative, a certification under 
Section 605(b) of the Regulatory Flexibility Act, if the proposals are 
adopted, and will be placed in the same public file as comments on the 
proposed amendments themselves.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\89\ a rule is ``major'' if it has resulted, 
or is likely to result in:
---------------------------------------------------------------------------

    \89\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

    [sbull] An annual effect on the economy of $100 million or more;
    [sbull] A major increase in costs or prices for consumers or 
individual industries; or
    [sbull] Significant adverse effects on competition, investment or 
innovation.
    We request comment on whether our proposals would be a ``major 
rule'' for purposes of SBREFA. We solicit comment and empirical data 
on: (a) The potential effect on the U.S. economy on an annual basis; 
(b) any potential increase in costs or prices for consumers or 
individual industries; and (c) any potential effect on competition, 
investment or innovation.

VIII. Statutory Basis and Text of Proposed Amendments

    The proposed amendments to Items 7 and 22 of Schedule 14A are being 
proposed pursuant to Sections 3(b), 12, 14, 23(a) and 36 of the 
Securities Exchange Act of 1934, as amended, and Sections 20(a) and 38 
of the Investment Company Act of 1940, as amended.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of the Proposed Amendments

    In accordance with the foregoing, the Securities and Exchange 
Commission proposes to amend Title 17, chapter II of the Code of 
Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATION, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, 7202, 7241, 7262, and 7263; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
    2. Amend Sec.  240.14a-101 by:
    a. Revising paragraph (d)(2) of Item 7;
    b. Revising the reference ``paragraphs (a) through (d)(2)'' in 
paragraph (e) of Item 7 to read ``paragraphs (a) through (d)(1) and 
(d)(2)(ii)(D)'';
    c. Adding paragraph (h) to Item 7;

[[Page 48737]]

    d. Revising the reference ``paragraphs (d)(3), (f), and (g)'' in 
the introductory text of paragraph (b) of Item 22 to read ``paragraphs 
(d)(2), (d)(3), (f), (g), and (h)'';
    e. Revising the last sentence of the introductory text of paragraph 
(b)(14) of Item 22;
    f. Revising paragraph (b)(14)(ii) of Item 22;
    g. Removing the semi-colon and ``and'' from the end of paragraph 
(b)(14)(iii) of Item 22 and in their place adding a period;
    h. Removing paragraph (b)(14)(iv) of Item 22; and
    i. Adding an Instruction directly after paragraph (b)(14)(iii) of 
Item 22.
    The additions and revisions read as follows.


Sec.  240.14a-101  Schedule 14A. Information required in proxy 
statement.

Schedule 14A Information

* * * * *
    Item 7. Directors and executive officers.
* * * * *
    (d)(1) * * *
    (2)(i) If the registrant does not have a standing nominating 
committee or committee performing similar functions, state the specific 
basis for the view of the board of directors that it is appropriate for 
the registrant not to have such a committee and identify each director 
who participates in the consideration of director nominees;
    (ii) Provide the following information regarding the registrant's 
director nomination process:
    (A) If the nominating committee has a charter, describe the 
material terms of the nominating committee charter and disclose where a 
current copy of the charter is available, which can be the registrant's 
Web site;
    (B) If the nominating committee does not have a charter, state that 
fact;
    (C) If the registrant is a listed issuer (as defined in Sec.  
240.10A-3), whose securities are listed on a national securities 
exchange registered pursuant to Section 6(a) of the Exchange Act (15 
U.S.C. 78f(a)) or in an automated inter-dealer quotation system of a 
national securities association registered pursuant to Section 15A(a) 
of the Exchange Act (15 U.S.C. 78o-3(a)) that has independence 
requirements for nominating committee members, disclose any instance 
during the last fiscal year where any member of the nominating 
committee did not satisfy the definition of independence in the 
applicable listing standards;
    (D) If the registrant is not a listed issuer (as defined in Sec.  
240.10A-3), disclose whether each of the members of the nominating 
committee are independent. In determining whether a member is 
independent, the registrant must use a definition of independence of a 
national securities exchange registered pursuant to Section 6(a) of the 
Exchange Act (15 U.S.C. 78f(a)) or a national securities association 
registered pursuant to Section 15A(a) of the Exchange Act (15 U.S.C. 
78o-3(a)) that has been approved by the Commission (as that definition 
may be modified or supplemented), and state which definition it used. 
Whatever definition the company chooses, it must apply that definition 
consistently to all members of the nominating committee and use the 
independence standards of the same national securities exchange or 
national securities association for purposes of nominating committee 
disclosure under this requirement and audit committee disclosure 
required under Sec.  240.10A-3;
    (E) If the nominating committee has a policy with regard to the 
consideration of any director candidates recommended by security 
holders, provide a description of the material elements of that policy, 
which shall include, but not be limited to, a statement as to whether 
the committee will consider director candidates recommended by security 
holders;
    (F) If the nominating committee does not have a policy with regard 
to the consideration of any director candidates recommended by security 
holders, a statement of that fact;
    (G) If the nominating committee will consider candidates 
recommended by security holders, describe the procedures to be followed 
by security holders in submitting such recommendations;
    (H) Describe any specific, minimum qualifications that the 
nominating committee believes must be met by a nominating committee-
recommended nominee for a position on the registrant's board of 
directors, describe any specific qualities or skills that the 
nominating committee believes are necessary for one or more of the 
registrant's directors to possess, and describe any specific standards 
for the overall structure and composition of the registrant's board of 
directors;
    (I) Describe the nominating committee's process for identifying and 
evaluating nominees for director, including nominees recommended by 
security holders, and any differences in the manner in which the 
nominating committee evaluates nominees for director based on whether 
or not the nominee is recommended by a security holder;
    (J) State the specific source, such as the name of an executive 
officer, director, or other individual, of each nominee (other than 
nominees who are executive officers or directors standing for re-
election) approved by the nominating committee for inclusion on the 
registrant's proxy card;
    (K) If the registrant pays a fee to any third party or parties to 
identify or assist in identifying or evaluating potential nominees, 
disclose the function performed by each such third party; and
    (L) If the registrant's nominating committee receives a recommended 
nominee from a security holder who beneficially owned greater than 3% 
of the registrant's voting common stock for at least one year as of the 
date the recommendation was made, or from a group of security holders 
who beneficially owned, in the aggregate, greater than 3% of the 
registrant's voting common stock, with each of the securities used to 
calculate that ownership held for at least one year as of the date the 
recommendation was made, and if the nominating committee chooses not to 
nominate that candidate:
    (1) State the name or names of the security holders who recommended 
the candidate; and
    (2) State the specific reasons for the nominating committee's 
determination not to include the candidate as a nominee.
    Instructions to paragraph (d)(2):
    1. For purposes of Item 7(d)(2)(ii), the term ``nominating 
committee'' refers not only to nominating committees and committees 
performing similar functions, but also to groups of directors 
fulfilling the role of a nominating committee, including the entire 
board of directors.
    2. For purposes of Item 7(d)(2)(ii)(L), the registrant need not 
identify the recommended candidate.
    3. For purposes of Item 7(d)(2)(ii)(L), the percentage of 
securities held by a nominating security holder, as well as the holding 
period of those securities, may be determined by the registrant if the 
security holder is the registered holder of the securities. If the 
security holder is not the registered owner of the securities, he or 
she can submit one of the following to the registrant to evidence the 
required ownership percentage and holding period:
    A. A written statement from the ``record'' holder of the securities 
(usually a broker or bank) verifying that, at the time the security 
holder made the recommendation, he or she had held the required 
securities for at least one year; or
    B. If the security holder has filed a Schedule 13D (Sec.  240.13d-
101),

[[Page 48738]]

Schedule 13G (Sec.  240.13d-102), Form 3 (Sec.  249.103), Form 4 (Sec.  
249.104), and/or Form 5 (Sec.  249.105), or amendments to those 
documents or updated forms, reflecting ownership of the shares as of or 
before the date of the recommendation, a copy of the schedule and/or 
form, and any subsequent amendments reporting a change in ownership 
level, as well as a written statement that the security holder 
continuously held the securities for the one-year period as of the date 
of the recommendation.
* * * * *
    (h)(1) State whether or not the registrant's board of directors 
provides a process for security holders to send communications to the 
board of directors and, if the registrant does not have such a process 
for security holders to send communications to the board of directors, 
state the specific basis for the view of the board of directors that it 
is appropriate for the registrant not to have such a process.
    (2) If the registrant has a process for security holders to send 
communications to the board of directors:
    (i) Describe the manner in which security holders can send 
communications to the board;
    (ii) Identify those board members to whom security holders can send 
communications;
    (iii) If all security holder communications are not sent directly 
to board members, describe the registrant's process for determining 
which communications will be relayed to board members, including 
identification of the department or other group within the registrant 
that is responsible for making this determination; and
    (iv) Describe any material action taken by the board of directors 
during the preceding fiscal year as a result of communications from 
security holders.
* * * * *
    Item 22. Information required in investment company proxy 
statement.
* * * * *
    (b) * * *
    (14) * * * Identify the other standing committees of the Fund's 
board of directors, and provide the following information about each 
committee, including any separately designated audit committee and any 
nominating committee:
* * * * *
    (ii) The members of the committee and, in the case of a nominating 
committee, whether or not the members of the committee are ``interested 
persons'' of the Fund as defined in Section 2(a)(19) of the Investment 
Company Act of 1940 (15 U.S.C. 80a-2(a)(19)); and
* * * * *
    Instruction to paragraph (b)(14): For purposes of Item 22(b)(14), 
the term ``nominating committee'' refers not only to nominating 
committees and committees performing similar functions, but also to 
groups of directors fulfilling the role of a nominating committee, 
including the entire board of directors.
* * * * *

    Dated: August 8, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20609 Filed 8-13-03; 8:45 am]
BILLING CODE 8010-01-P