[Federal Register Volume 68, Number 205 (Thursday, October 23, 2003)]
[Proposed Rules]
[Pages 60784-60826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26351]



[[Page 60783]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 240, 249 and 274



Security Holder Director Nominations; Proposed Rule

  Federal Register / Vol. 68, No. 205 / Thursday, October 23, 2003 / 
Proposed Rules  

[[Page 60784]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 249 and 274

[Release Nos. 34-48626; IC-26206; File No. S7-19-03]
RIN 3235-AI93


Security Holder Director Nominations

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing new rules that would, under certain 
circumstances, require companies to include in their proxy materials 
security holder nominees for election as director. These proposed rules 
are intended to improve disclosure to security holders to enhance their 
ability to participate meaningfully in the proxy process for the 
nomination and election of directors. The proposed rules would not 
provide security holders with the right to nominate directors where it 
is prohibited by state law. Instead, the proposed rules are intended to 
create a mechanism for nominees of long-term security holders, or 
groups of long-term security holders, with significant holdings to be 
included in company proxy materials where there are indications that 
security holders need such access to further an effective proxy 
process. This mechanism would apply in those instances where evidence 
suggests that the company has been unresponsive to security holder 
concerns as they relate to the proxy process. The proposed rules would 
enable security holders to engage in limited solicitations to form 
nominating security holder groups and engage in solicitations in 
support of their nominees without disseminating a proxy statement. The 
proposed rules also would establish the filing requirements under the 
Securities Exchange Act of 1934 for nominating security holders.

DATES: Comments should be received on or before December 22, 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. S7-19-
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 C. Brown or Grace K. Lee, 
Division of Corporation Finance, at (202) 824-5250, or, with regard to 
investment companies, John M. Faust, 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 new Rule 14a-11\1\ and 
amendments to Rules 13a-11,\2\ 13d-1,\3\ 14a-4,\4\ 14a-5,\5\ 14a-6,\6\ 
14a-8,\7\ 14a-12,\8\ 15d-11\9\ and 16a-1,\10\ Schedules 13G \11\ and 
14A,\12\ and Forms 8-K,\13\ 10-Q,\14\ 10-QSB,\15\ 10-K \16\ and 10-KSB 
\17\ under the Securities Exchange Act of 1934,\18\ and Forms N-CSR 
\19\ and N-SAR \20\ under the Securities Exchange Act of 1934 and the 
Investment Company Act of 1940.\21\ Although we are not proposing 
amendment to Schedule 14C \22\ under the Exchange Act, the proposed 
amendments would 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-11.
    \2\ 17 CFR 240.13a-11.
    \3\ 17 CFR 240.13d-1.
    \4\ 17 CFR 240.14a-4.
    \5\ 17 CFR 240.14a-5.
    \6\ 17 CFR 240.14a-6.
    \7\ 17 CFR 240.14a-8.
    \8\ 17 CFR 240.14a-12.
    \9\ 17 CFR 240.15d-11.
    \10\ 17 CFR 240.16a-1.
    \11\ 17 CFR 240.13d-102.
    \12\ 17 CFR 240.14a-101.
    \13\ 17 CFR 249.308.
    \14\ 17 CFR 249.308a.
    \15\ 17 CFR 249.308b.
    \16\ 17 CFR 249.310.
    \17\ 17 CFR 249.310b.
    \18\ 15 U.S.C. 78a et seq.
    \19\ 17 CFR 249.331 and 17 CFR 274.128.
    \20\ 17 CFR 249.330 and 17 CFR 274.101.
    \21\ 15 U.S.C. 80a et seq.
    \22\ 17 CFR 240.14c-101.
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I. Introduction

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

    On April 14, 2003, the Commission directed the Division of 
Corporation Finance to review the proxy rules and regulations and their 
interpretations regarding procedures for the nomination and election of 
corporate directors.\23\ On May 1, 2003, the Commission solicited 
public input with respect to the Division's review.\24\ Commenters 
generally supported the Commission's decision to review the proxy rules 
and regulations with respect to director nominations and elections. 
Reflecting concern over corporate scandals and the accountability of 
corporate directors, many commenters urged the Commission to adopt 
rules that would provide security holders with greater access to the 
nomination process and the ability to exercise their rights and 
responsibilities as owners of their companies.\25\ In addition, many of 
those commenters alleged that the current director nomination 
procedures afford little meaningful oversight to security holders and 
expressed a growing frustration at security holders' lack of ability to 
influence the membership of the boards of directors of the companies in 
which they invest.\26\
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    \23\ See Press Release No 2003-46 (April 14, 2003).
    \24\ 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://wwwsecgov), 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)].
    \25\ See 2003 Summary of Comments.
    \26\ See id.
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    On July 15, 2003, after considering the views expressed by 
commenters, the Division of Corporation Finance provided to the 
Commission its report and recommended changes to the proxy rules 
related to the nomination and election of directors.\27\ To best 
address many of the issues raised by commenters, the Division 
recommended proposed changes in two areas--disclosure related to 
nominating committee functions and security holder communications with 
boards of directors and enhanced security holder access to the proxy 
process relating to the nomination of directors.\28\
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    \27\ See Staff Report: Review of the Proxy Process Regarding the 
Nomination and Election of Directors, Division of Corporation 
Finance (July 15, 2003).
    \28\ See id.
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    On August 14, 2003, we published for comment proposed rules that 
would implement the first of the Division's recommendations--new 
disclosure standards requiring more robust disclosure of the nominating 
committee processes of public companies, including the consideration of

[[Page 60785]]

candidates recommended by security holders, as well as more specific 
disclosure of the processes by which security holders may communicate 
with the directors of the companies in which they invest.\29\
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    \29\ See Release No. 34-48301 (August 14, 2003) [68 FR 48724].
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    Today, we are proposing rules that would implement the second of 
the Division's recommendations. These proposals would create a 
mechanism for nominees of long-term security holders, or groups of 
long-term security holders, with significant holdings to be included in 
company proxy materials where there are indications that the proxy 
process has been ineffective or that security holders are dissatisfied 
with that process.

B. Prior Commission Consideration

    The Commission first addressed the issue of security holder access 
to company proxy materials for the nomination of directors as early as 
1942, when it requested that the staff review the proxy rules and 
submit to the Commission recommended changes.\30\ The Commission 
solicited comments on the staff recommendations, including a proposal 
to revise the proxy rules to provide that ``minority stockholders be 
given an opportunity to use the management's proxy material in support 
of their own nominees for directorships.'' \31\ According to testimony 
of Chairman Ganson Purcell before the House Committee on Interstate and 
Foreign Commerce, the staff had proposed that ``stockholders be 
permitted to use the management's proxy statement to canvass 
stockholders generally for the election of their own nominees for 
directorships, as well as for the nominees of the management.'' \32\ 
Under the proposal, a company would not have been required to include 
more than twice as many candidates on the proxy as director positions 
to be filled.\33\ The Commission did not adopt the proposal.\34\
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    \30\ See Securit[ies] and Exchange Commission Proxy Rules: 
Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House 
Comm on Interstate and Foreign Commerce, 78th Cong., 1st Sess., at 
17-19 (1943) (testimony of Chairman Ganson Purcell).
    \31\ Release No 34-3347 (December 18, 1942).
    \32\ Securit[ies] and Exchange Commission Proxy Rules: Hearings, 
at 19.
    \33\ See id. at 157.
    \34\ The Commission did not provide an explanation for its 
determination, stating simply that, ``a number of the suggestions 
proposed by the staff were not adopted,'' including the suggestion 
related to security holder access to company proxy materials. See 
Release No. 34-3347 (December 18, 1942).
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    In 1977, the Commission again focused on security holder access to 
company proxy materials regarding the nomination and election of 
directors during its broad review of security holder communications, 
security holder participation in the corporate electoral process, and 
corporate governance generally. In anticipation of public hearings held 
in September of 1977, the Commission, without formally proposing rule 
changes, requested comment on a number of issues, including whether 
``shareholders [should] have access to management's proxy soliciting 
materials for the purpose of nominating persons of their choice to 
serve on the board of directors.'' \35\
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    \35\ Release No. 34-13482 (April 28, 1977) [42 FR 23901], in 
which the Commission also asked:
    (a) what criteria should be applied to nominating security 
holders;
    (b) what disclosures should be required of nominating security 
holders;
    (c) whether security holder nominations are permissible under 
state law; and
    (d) whether a meaningful distinction can be drawn between 
control and non-control nominations.
    See also Release No. 34-13901 (August 29, 1977) [42 FR 44860], 
in which the Commission published the final schedule of issues to be 
considered at the hearings, which included:
    (a) whether security holders should have access to the company's 
proxy soliciting materials for the purpose of nominating directors;
    (b) whether security holder nominations are permissible under 
state law and consistent with Congressional intent in enacting 
Exchange Act Section 14(a);
    (c) what type of rule would be most appropriate and what 
criteria should be applied to nominating security holders;
    (d) whether the proxy rules should apply to soliciting 
activities by a nominating security holder; and
    (e) whether nominating security holders should be subject to the 
then-existing rules governing election contests.
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    After the 1977 hearings, the Commission proposed and adopted 
amendments to the proxy rules. These amendments did not relate directly 
to security holder access to company proxy materials regarding the 
nomination and election of directors. The Commission did adopt a 
requirement, however, that companies state whether they have a 
nominating committee and, if so, whether the nominating committee will 
consider security holder recommendations. Although the Commission 
stated its intent to address ``some of the more complex questions which 
have been raised in this proceeding relating to corporate governance 
and the means by which corporations can best account to shareholders 
and the public'' and determine ``what further action, if any, is 
appropriate with respect to shareholder communications and shareholder 
participation in the corporate electoral process generally,'' \36\ the 
Commission did not take further action on security holder access to 
company proxy materials at that time.\37\ According to a 1980 staff 
report to the Senate, the staff concluded that, due to the emerging 
concept of nominating committees, the Commission should not propose and 
adopt a rule regarding the inclusion of security holder nominees in 
company proxy materials at that time.\38\ The staff report recommended, 
however, that the staff monitor the development of nominating 
committees and their consideration of security holder 
recommendations.\39\ The staff report further cautioned that, if an 
insufficient number of companies adopted nominating committees or the 
efforts of these committees with regard to security holder nominations 
proved insufficient, Commission action might be necessary.\40\
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    \36\ Release No. 34-14970 (July 18, 1978) [43 FR 31945]. See 
also Release No. 34-15384 (December 6, 1978) [43 FR 58522].
    \37\ See id.
    \38\ 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. 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 
A60-65.
    \39\ The Staff Report on Corporate Accountability states: ``all 
nominating committees should be open to suggestions of nominees from 
shareholders.'' Id. at A56.
    \40\ With regard to security holder nominations, the staff 
recommended, ``If there is not a substantial increase in the 
percentage of companies with independent nominating committees who 
consider shareholder nominations, the Commission should authorize 
the staff to develop a rule to require companies to adopt a 
procedure for considering shareholder nominations.'' Id. at A69. See 
also id. at A60-65.
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    In the broad proxy revisions adopted in 1992,\41\ the Commission 
briefly revisited the security holder nominee issue in connection with 
amendments to the bona fide nominee rule set out in Exchange Act Rule 
14a-4, which provides that no person shall be deemed a bona fide 
nominee ``unless he has consented to being named in the proxy statement 
and to serve if elected.'' \42\ In adopting the Exchange Act Rule 14a-4 
amendments, the Commission noted ``the difficulty experienced by 
shareholders in gaining a voice in determining the composition of the 
board of directors,'' but stated the following with regard to security 
holder

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access to the company's proxy materials:
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    \41\ See Release No 34-31326 (October 16, 1992) [57 FR 48276].
    \42\ 17 CFR 240.14a-4(d)(4).

    Proposals to require the company to include shareholder nominees 
in the company's proxy statement would represent a substantial 
change in the Commission's proxy rules. This would essentially 
mandate a universal ballot including both management nominees and 
independent candidates for board seats.\43\
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    \43\ Release No 34-31326 (October 16, 1992).

    Rather than mandating a ``universal ballot,'' the Commission 
revised the bona fide nominee rule to allow security holders seeking 
minority board representation to ``fill out'' a partial or ``short'' 
slate with management nominees, thus making it easier for security 
holders to conduct an election contest in a non-control context. For 
example, if a security holder wishes to nominate only two candidates to 
a seven member board, Exchange Act Rule 14a-4(d) permits the security 
holder to choose five of management's nominees to fill out his or her 
ballot, provided that the security holder does not name those 
management nominees on his or her proxy card, but instead names only 
those management nominees that the security holder is opposing. 
Although the security holder still must disseminate and file a separate 
proxy statement and proxy card, he or she can now, in essence, allow 
security holders to vote for some of management's nominees on the non-
management proxy card.

II. Proposed Changes to the Proxy Rules

A. Proposed Security Holder Director Nomination Rule

1. Background
a. Discussion
    Section 14(a) of the Exchange Act \44\ prohibits any person from 
soliciting proxies with respect to a Section 12 \45\-registered 
security where that solicitation is in contravention of Commission 
rules and regulations. Section 14(a) ``stemmed from the congressional 
belief that `fair corporate suffrage is an important right that should 
attach to every equity security bought on a public exchange.' It was 
intended to `control the conditions under which proxies may be 
solicited with a view to preventing the recurrence of abuses which * * 
* [had] frustrated the free exercise of the voting rights of 
shareholders.' '' \46\ Section 14(a) authorizes the Commission to 
prescribe proxy solicitation rules that are ``necessary or appropriate 
in the public interest or for the protection of investors.'' \47\ As 
described and discussed below, we believe that today's proposals 
further the goals of Section 14,\48\ in that they will help facilitate 
the full and informed exercise of existing security holder nomination 
and voting rights through the proxy process by requiring companies to 
include disclosure regarding security holder nominees in company proxy 
materials in specified circumstances.
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    \44\ 15 U.S.C. 78n(a).
    \45\ 15 U.S.C. 78l.
    \46\ J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964) (citing 
H.R. Rep. No. 1383, 73rd Cong., 2d Sess. 13-14). See also Medical 
Comm. for Human Rights v. SEC, 432 F.2d 659, 676 (D.C. Cir. 1970), 
vacated as moot, 404 U.S. 403 (1972) (``Congress intended by its 
enactment of section 14 * * * to give true vitality to the concept 
of corporate democracy.'').
    \47\ 15 U.S.C. 78n(a). Cf. Medical Committee, 432 F.2d at 671 
(``Through section 14 of the Act, Congress has invested the 
Securities and Exchange Commission with sweeping authority to 
regulate the solicitation of corporate proxies.'').
    \48\ Professors Loss and Seligman have described the 
Commission's rules promulgated under this section as ``designed * * 
* to make the proxy device the closest practicable substitute for 
attendance at the [shareholder] meeting.'' Loss & Seligman, Chapter 
6.C.2b. Securities Regulation (3d ed.).
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    Based on the comments received in response to our solicitation of 
public input on the Division's review of the proxy rules relating to 
the election of directors, it is apparent that many of the issues 
raised in the Commission's 1977 review of the proxy rules merit 
reconsideration. In particular, because the disclosure requirements 
regarding nominating committees that were adopted in 1977 do not appear 
to have made the operation of those committees sufficiently 
transparent, we have proposed enhancements to those disclosure 
requirements. Further, it appears that the presence of nominating 
committees has not eliminated the concerns among some security holders 
with regard to the barriers to meaningful participation in the proxy 
process in connection with the nomination and election of 
directors.\49\ Although we recognize that the self-regulatory 
organizations have proposed changes to their listing standards 
concerning nominating committees and related corporate governance 
issues, these proposed changes do not address the role of security 
holders in the nomination procedure.
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    \49\ In our discussion of the proxy rules and our proposals, we 
use the term ``security holders,'' which is the term used currently 
throughout our proxy rules For purposes of our proposals, the term 
generally refers to shareholders having a right to vote at the 
meeting and on the matter in question.
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    Much of the public input that we have received suggests that 
including security holder nominees in company proxy materials would be 
the most direct and effective method of giving security holders a more 
effective role in the proxy process in connection with the nomination 
and election of directors.\50\ This input also suggests that security 
holders believe that another result would be to make corporate boards 
more responsive and accountable to security holders, as well as, in 
many instances, more diverse.\51\ Today, security holders generally are 
given an opportunity to vote only on those candidates nominated by the 
company. In addition, many companies use plurality rather than majority 
voting for board elections, which means that candidates can be elected 
regardless of whether they receive a majority of the security holder 
vote.\52\ Accordingly, all board nominees generally are elected, 
regardless of the number of ``withhold'' votes by security holders. 
Commenters indicated that many security holders, therefore, view the 
proxy process as ineffective and the election of directors as a mere 
formality or ``rubber stamp'' of the board's choices presented in the 
company's proxy materials.\53\
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    \50\ See 2003 Summary of Comments.
    \51\ See id.
    \52\ Under plurality voting, the candidate with the greatest 
number of votes is elected; therefore, in an election in which there 
are the same number of nominees as there are board positions open, 
each nominee receiving even a single vote will be elected, 
regardless of the number of votes ``withheld'' from a candidate.
    \53\ See 2003 Summary of Comments.
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    Currently, a security holder or group of security holders that is 
dissatisfied with the leadership of a company generally must undertake 
a proxy contest, along with its related expenses, to put nominees 
before the security holders for a vote.\54\ A board's nominees, on the 
other hand, do not bear the cost of their candidacies, which are funded 
out of corporate assets. While security holders can recommend a 
candidate to a company's nominating committee, security holder comments 
suggest that these recommendations rarely are effective and that, in 
some cases, it may be difficult for security holders to gain access to 
members of company boards and their committees.\55\
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    \54\ Under some circumstances, security holders may be able to 
effect change in board membership through security holder lawsuits. 
For example, security holders at Hanover Compressor Company and 
Homestore, Inc. recently obtained the right to nominate candidates 
for the boards of directors as a result of the settlement of 
security holder lawsuits against each of these companies. See 
Hanover Compressor Company, Form 8-K filed May 13, 2003 and 
Homestore, Inc., Form 8-K filed August 13, 2003.
    \55\ See 2003 Summary of Comments.
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    On the other hand, the business community and many of its legal 
advisors commented that giving security

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holders access to company proxy materials could turn every election of 
directors into a contest, which would be costly and disruptive to 
companies and could discourage some qualified board candidates from 
agreeing to appear on a company's slate of nominees. Because the 
composition of the board of directors is fundamental to a company's 
corporate governance, the current filing and disclosure requirements 
applicable to security holders who wish to propose an alternate slate 
are, in the view of these commenters, more appropriate than including 
security holder nominees in company proxy materials.\56\
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    \56\ See id.
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    After considering the range of views on this issue, we have 
determined to propose new rules that would, in certain circumstances, 
require companies to place security holder nominees for director in 
company proxy materials.\57\ This limited access right, which would not 
be available where security holders were seeking control of a board of 
directors or election of a director with a financial relationship to 
the security holder, would apply only in those instances where criteria 
suggest that the company has been unresponsive to security holder 
concerns as they relate to the proxy process. We recognize that there 
are many concerns regarding the operation of a security holder 
nomination procedure. Should we adopt such a procedure, it is our 
intention, therefore, to request the Commission staff to monitor that 
procedure and provide a report to the Commission within three years 
regarding the effects of the procedure and recommended improvements or 
modifications.
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    \57\ These proposals are in addition to the enhanced disclosure 
requirements that we proposed on August 14, 2003. See Release No 34-
48301 (August 14, 2003).
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    The security holder nomination procedure in proposed Exchange Act 
Rule 14a-11 would require any subject company to include information 
regarding a security holder's nominee or nominees for election as 
director in the company's proxy materials when the conditions of the 
rule are met.\58\ Nothing in the proposed procedure establishes a right 
of security holders to nominate candidates for election to a company's 
board of directors; rather, the proposed procedure involves disclosure 
and other requirements concerning proxy materials that are conditioned 
on the existence of such a right under state law and the occurrence of 
specified events.
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    \58\ See proposed Exchange Act Rule 14a-11(a). These nominees 
would then also be included on a company's form of proxy in 
accordance with the requirements of Exchange Act Rule 14a-4. We have 
proposed two amendments to Exchange Act Rule 14a-4(b)(2) [17 CFR 
240.14a-4(b)(2)]. The first proposed amendment would require a 
company to include in its form of proxy those security holder 
nominees that satisfy the requirements of proposed Exchange Act Rule 
14a-11. The second proposed amendment would prohibit companies from 
providing a means to vote for its nominees for director as a group 
where the form of proxy includes such a security holder nominee or 
nominees.
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    In connection with the recent review of the proxy process, 
commenters discussed both significant benefits of a security holder 
nomination procedure and significant concerns regarding such a 
procedure and its potential consequences. The proposal is intended to 
address this broad range of procedural and substantive issues regarding 
the operation of the nominating procedure. While we believe that the 
basic concept behind the proposed procedure is simple, addressing the 
concerns of commenters results in a somewhat complex proposal. To 
assist those who wish to comment on the proposal, we have separated our 
description of the proposal into a number of discrete discussions. 
Specifically, the discussion of the proposal will address the 
following:
    [sbull] To which companies would the proposed rule apply?
    [sbull] For those companies to which the proposed rule would apply, 
what events must occur before the company would be required to include 
a security holder nominee in its proxy materials?
    [sbull] What notice must a subject company give regarding the 
occurrence of an event that triggers operation of the proposed rule?
    [sbull] Once a nomination procedure triggering event occurs at a 
subject company, which security holders or security holder groups may 
submit a nominee that the company would be required to include in its 
proxy materials?
    [sbull] What are the eligibility requirements for a person whom a 
security holder or security holder group may nominate?
    [sbull] What is the maximum number of security holder nominees that 
the company must include in its proxy materials?
    [sbull] What notice must the security holder or security holder 
group provide to the company and file with the Commission?
    [sbull] What must the company do after it receives such a notice?
    [sbull] How would the liability provisions of the federal 
securities laws apply to statements made by the company and the 
nominating security holder or nominating security holder group?
    [sbull] How do the other Exchange Act proxy rules apply to 
solicitations by the nominating security holder or nominating security 
holder group?
    [sbull] How would the proposed rule apply to investment companies?
b. General Questions
    A.1. Should the Commission adopt revisions to the proxy rules to 
require companies to place security holder nominees in the company's 
proxy materials? Are the means that currently are available to security 
holders to address a company's perceived unresponsiveness to security 
holder concerns adequate?
    A.2. What would be the cost to companies if the Commission adopted 
proxy rules requiring companies to include security holder nominees in 
company proxy materials?
    A.3. What direct or indirect effect would this procedure have on 
companies' corporate governance policies relating to the election of 
directors? For example, will companies be more or less likely to adopt 
cumulative voting policies and/or elect directors annually?
2. To Which Companies Would the Proposed Rule Apply?
a. Security Holders Must Be Permitted by State Law To Nominate a 
Candidate for Election as a Director
    Proposed Exchange Act Rule 14a-11 would apply to all companies that 
are subject to the Exchange Act proxy rules,\59\ including investment 
companies registered under Section 8 of the Investment Company Act 
(``funds'').\60\ However, as proposed, a company would become subject 
to the security holder nomination procedure in Exchange Act Rule 14a-11 
only where the company's security holders have an existing, applicable 
state law right to nominate a candidate or candidates for election as a 
director. To eliminate any uncertainties in this regard, the proposed 
rule would state that the security holder nomination procedure would be 
available unless applicable state law prohibits the company's security 
holders from nominating a candidate or candidates for election as a 
director.\61\ If state law

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permits companies incorporated in that state to prohibit security 
holder nominations through provisions in companies' articles of 
incorporation or bylaws, the proposed procedure would not be available 
to security holders of a company that had included validly such a 
provision in its governing instruments.
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    \59\ Exchange Act Rule 3a12-3 [17 CFR 240.3a12-3] exempts 
foreign private issuers from the Commission's proxy rules. As such, 
the proposed procedure would not apply to foreign private issuers.
    \60\ 15 U.S.C. 80a-8. See Section II.A.12., below, for a 
discussion of the specific application of the proposal to registered 
investment companies and business development companies.
    \61\ This provision is set forth in proposed Exchange Act Rule 
14a-11(a)(1).
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    The regulation of proxy solicitations under the Exchange Act co-
exists with state corporate law in a number of situations. For example, 
state corporate law allows shareholders, generally, to raise proposals 
at the company's annual meeting of security holders and Exchange Act 
Rule 14a-8 creates a procedure for inclusion of information regarding 
those proposals in company proxy materials. Consistent with a basic 
concept underlying Exchange Act Section 14(a)--that security holders be 
made aware of significant matters to be decided at security holder 
meetings--Exchange Act Rule 14a-8 requires companies to include in 
their proxy materials full disclosure about and the opportunity to vote 
on those matters, including qualifying security holder proposals, that 
management knows will be presented at the annual meeting.\62\ Exchange 
Act Rule 14a-8 accomplishes this purpose by creating a procedure that 
provides an opportunity for a security holder owning a relatively small 
amount of a company's securities to have his or her proposal placed 
alongside management's proposals in that company's proxy materials for 
presentation to a vote at a meeting of security holders.
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    \62\ Exchange Act Rule 14a-8 generally requires the company to 
include the proposal of an eligible security holder who has complied 
with the rule's procedural requirements. The company is not required 
to include the proposal if it falls within one of the 13 substantive 
bases for exclusion set forth in the rule.
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    Exchange Act Rule 14a-8 balances the costs to the company against 
the benefits to the company and its shareholders by including modest 
security holder eligibility standards, limitations on the number and 
types of proposals, and limitations on the number of words that the 
company is required to include as a discussion of the security holder 
proposal. Exchange Act Rule 14a-8 addresses its interaction with state 
corporate law by not requiring companies to include any proposal that 
would violate state law.\63\
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    \63\ See Exchange Act Rule 14a-8(i)(1) and (2) [17 CFR 240.14a-
8(i)(1)-(2)].
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    Proposed Exchange Act Rule 14a-11 has a similar underlying purpose 
as Exchange Act Rule 14a-8--to the extent management is aware of a 
security holder's intent to present a nominee for director at the 
company's annual meeting and state corporate law allows security 
holders to nominate candidates for election as director at the 
company's annual meeting of security holders, the proposal would 
establish a procedure pursuant to which a company would have to provide 
specified information regarding that nomination in its proxy materials. 
Similar to Exchange Act Rule 14a-8, proposed Exchange Act Rule 14a-11 
addresses its interaction with state corporate law by premising the 
security holder nomination procedure upon the existence of a state law 
right of security holders to nominate candidates for election as 
directors. The proposed rule, like Exchange Act Rule 14a-8, also 
imposes conditions and limitations on the availability of the procedure 
in question.
b. Accelerated Filers
    We are considering as an additional element of the proposed rule, 
and seek comment on, whether proposed Exchange Act Rule 14a-11 should 
apply only to those companies that are subject to accelerated deadlines 
for filing Exchange Act periodic reports,\64\ and investment companies 
registered under Section 8 of the Investment Company Act.\65\ Companies 
that fall within the definition of ``accelerated filer'' in Exchange 
Act Rule 12b-2\66\ would be subject to the security holder nomination 
procedure for any fiscal year in which they must file all of their 
periodic reports on an accelerated basis. Accordingly, the security 
holder nomination procedure would apply to a company after it first 
meets the following conditions as of the end of its fiscal year:
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    \64\ See Release No. 33-8128 (September 5, 2002) [67 FR 56861]. 
The deadline for filing quarterly reports on Exchange Act Form 10-Q 
for these ``accelerated filers'' is set forth in General Instruction 
A.1.a. of that form. The deadline for filing annual reports on 
Exchange Act Form 10-K for these ``accelerated filers'' is set forth 
in General Instruction A.(2)(a) of that form.
    \65\ See Section II.A.12., below.
    \66\ 17 CFR 240.12b-2.
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    [sbull] The company's common equity public float was $75 million or 
more as of the last business day of its most recently completed second 
fiscal quarter;
    [sbull] The company has been subject to the reporting requirements 
of Section 13(a) \67\ or 15(d) \68\ of the Exchange Act for a period of 
at least 12 calendar months;
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    \67\ 15 U.S.C. 78m(a).
    \68\ 15 U.S.C. 78o(d).
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    [sbull] The company has previously filed at least one annual report 
pursuant to Section 13(a) or 15(d) of the Exchange Act; and
    [sbull] The company is not eligible to use Exchange Act Forms 10-
QSB and 10-KSB.\69\
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    \69\ Once a company becomes an accelerated filer, it remains an 
accelerated filer subject to shortened deadlines unless and until it 
subsequently becomes eligible to use Exchange Act Forms 10-QSB and 
10-KSB for its annual and quarterly reports. In that situation, the 
issuer would cease to be an accelerated filer unless and until it 
again meets the accelerated filer criteria.
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    We believe that appropriate security holder participation in the 
nomination process is important for companies of all sizes. Given the 
new approach that the proposed rules represent, however, we are 
considering whether, at least as a first step in implementing the 
proposed rules, companies that are not accelerated filers should be 
excluded from their operation. Implementing the proposed rules in this 
fashion would avoid the disproportionate burdens of regulation that the 
proposed procedure may impose on smaller companies. It also would allow 
our staff and the markets to gain experience with the proposed rule in 
an initial stage in which the rule applied only to larger companies, 
while we would retain the ability to expand the rule's application to 
all companies after gaining this experience. In addition, the 
information available to us suggests that interest in the proxy process 
is, to a significant degree, concentrated within the universe of 
companies that are accelerated filers. For example, of the 266 
companies that submitted letters to the Division of Corporation Finance 
during the 2002-2003 proxy season regarding their intention to exclude 
security holder proposals submitted under Exchange Act Rule 14a-8, only 
26 had a common equity public float of less than the $75 million 
threshold as specified in the definition of ``accelerated filer.'' \70\ 
We estimate that approximately 3,159 of the 14,484 companies filing 
periodic reports under the Exchange Act are ``accelerated filers.'' 
Therefore, while 78% of reporting companies are not ``accelerated 
filers,'' less than 10% of the companies involved in the security 
holder proposal process at the Commission are not ``accelerated 
filers.''
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    \70\ Source: SEC and Compustat.
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c. Questions
    B.1. As proposed, the security holder nomination procedure in 
Exchange Act Rule 14a-11 would apply to all companies subject to the 
proxy rules. Would this broad application have a disproportionate 
impact on smaller operating companies? Are there modifications that 
would accommodate the needs of small entities while

[[Page 60789]]

accomplishing the goals of the proposal? Would it instead be more 
appropriate to apply the procedure only to ``accelerated filers'' and 
funds? Would it be more appropriate to apply the procedure only to 
``accelerated filers'' and funds as an initial step? If so, are there 
any special provisions that would be necessary for companies 
transitioning to ``accelerated filer'' status with respect to the 
nomination procedure in proposed Exchange Act Rule 14a-11, such as the 
timing of nomination procedure triggering events or the proposed 
disclosure requirements? Would other limitations be more appropriate, 
such as applying the proposed rules to all companies other than small 
business issuers or all companies other than those that have been 
subject to the proxy rules for less than a specified period of time 
(e.g., 3 years)?
    B.2. Should companies be able to take specified steps or actions 
that would prevent application of the proposed nomination procedure 
where such procedure would otherwise apply? If so, what such steps or 
actions would be appropriate? For example, should companies that agree 
not to exclude any security holder proposal submitted by an eligible 
security holder pursuant to Exchange Act Rule 14a-8 be exempted from 
application of the proposed nomination procedure for a specified period 
of time? Should a company that implements all security holder proposals 
that receive passing votes in a given year be exempted? Conversely, 
should companies subject to Exchange Act Rule 14a-11 be permitted to 
exclude certain security holder proposals that they would otherwise be 
required to include? If so, what categories of proposals? For example, 
should the company be able to exclude proposals that are precatory, 
proposals that relate to corporate governance matters generally, 
proposals that relate to the structure or composition of boards of 
directors, or other proposals?
    B.3. Would adoption of this procedure conflict with any state law, 
Federal law, or rule of a national securities exchange or national 
securities association? To the extent you indicate that the procedure 
would conflict with any of these provisions, please be specific in your 
discussion of those provisions that you believe would be violated.
    B.4. Is it appropriate to limit the availability of the proposed 
nomination procedure to those situations where state law permits 
security holders to nominate candidates for director? Is it appropriate 
to permit companies to limit the availability of the proposed procedure 
by limiting the right to nominate directors, when allowed by state law? 
Will the proposed procedure's reliance on the pre-existence of a state 
law right, combined with the possibility that companies may limit 
security holders' rights in this regard, adversely affect the 
effectiveness of the procedure? Is the proposed procedure's reliance on 
the pre-existence of a state law right of nomination a proper balance 
between federal law and state law? Regardless of the existence of a 
state law right to nominate candidates for director, should companies 
be subject to the proposed procedure?
    B.5. Most companies currently use plurality voting in the election 
of directors; accordingly, proposed Exchange Act Rule 14a-11 is drafted 
assuming that in most cases plurality voting would apply to an election 
of directors in which the inclusion of a security holder nominee 
resulted in more nominees than available seats on the board of 
directors. What specific issues would arise in an election where state 
law or the company's governing instruments provided for other than 
plurality voting, (e.g., majority voting)? Would these issues need to 
be addressed in revisions to the proposed rule text? If so, how?
3. What Events Must Occur Before a Company Would Be Required To Include 
a Security Holder Nominee in Its Proxy Materials?
a. Nomination Procedure Triggering Events
    In order to focus the impact of the proposed security holder 
nomination procedure on those companies where there are criteria 
showing that the proxy process may be ineffective, the procedure would 
become operative for a company only after the occurrence of one or both 
of the nomination procedure triggering events described below. The 
procedure would then remain operative for any annual meetings or 
special meetings held during:
    [sbull] The remainder of the calendar year in which the triggering 
event occurs;
    [sbull] The calendar year following the calendar year in which the 
triggering event occurs; and
    [sbull] The portion of the second calendar year following the 
calendar year in which the triggering event occurs, up to and including 
the annual meeting (or special meeting in lieu of an annual meeting) 
held during that calendar year.\71\
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    \71\ It is our intention that the procedure would remain 
available for the two annual meetings following the occurrence of a 
nomination procedure triggering event. Because there are a number of 
variables that could impact this application, such as special 
meetings being held instead of annual meetings or a delay in the 
date of a later annual meeting, we have proposed that the procedure 
be operative during the period described.
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    As proposed, the following events would trigger the nomination 
procedure:
    [sbull] At least one of the company's nominees for the board of 
directors for whom the company solicited proxies received ``withhold'' 
votes \72\ from more than 35% of the votes cast at an annual meeting of 
security holders held after January 1, 2004 at which directors were 
elected (provided, that this event may not occur in the case of a 
contested election to which Exchange Act Rule 14a-12(c) \73\ applies or 
an election to which the proposed security holder nomination procedure 
in Exchange Act Rule 14a-11 applies); or
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    \72\ Because of plurality voting, in the election of directors 
security holders may vote for or withhold authority to vote for each 
nominee rather than vote for, against or abstain, as is the case for 
other matters to be voted on by security holders. See Exchange Act 
Rule 14a-4(b)(2).
    \73\ 17 CFR 240.14a-12(c).
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    [sbull] A security holder proposal submitted pursuant to Exchange 
Act Rule 14a-8 providing that the company become subject to the 
security holder nomination procedure in proposed Exchange Act Rule 14a-
11(a) was submitted for a vote of security holders at an annual meeting 
of security holders held after January 1, 2004 by a security holder or 
group of security holders that held more than 1% of the company's 
securities entitled to vote on the proposal for one year as of the date 
the proposal was submitted and provided evidence of such holding to the 
company; \74\ and (b) that ``direct access'' proposal received more 
than 50% of the

[[Page 60790]]

votes cast on that proposal at that meeting.\75\
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    \74\ The staff has informed us that it intends to take the 
position that such a proposal is not excludable under Exchange Act 
Rule 14a-8(i)(8) [17 CFR 240.14a-8(i)(8)]. To clarify the 
applicability of this provision in the context of proposed Exchange 
Act Rule 14a-11, we are proposing an amendment to Exchange Act Rule 
14a-8(i)(8) that would, if adopted, make clear that a company may 
not rely on the exclusion permitted by that paragraph (i.e., the 
exclusion for proposals relating to the election of directors) to 
exclude a proposal that the company become subject to the procedure 
in proposed Exchange Act Rule 14a-11. The requirements and 
exclusions in the remainder of Exchange Act Rule 14a-8 would, of 
course, continue to apply to any such security holder proposal. 
Although we are proposing a security holder nomination procedure in 
this release, we are not reviewing or revising the position taken by 
the Division of Corporation Finance regarding the application of 
Exchange Act Rule 14a-8(i)(8) to security holder proposals that 
would have the effect of creating a security holder nomination 
procedure, other than a direct access proposal (as described above). 
See, e.g., Division of Corporation Finance no-action letters to 
Citigroup, Inc. (January 31, 2003) and AOL Time Warner (February 29, 
2003).
    \75\ The votes cast on a proposal would be calculated in the 
same manner as for Exchange Act Rule 14a-8 proposals. Accordingly, 
only votes for and against a proposal would be included in the 
calculation of the security holder vote. See Instruction 2 to 
proposed Exchange Act Rule 14a-11(a). For a further explanation of 
this calculation, see also Section F.4. of Staff Legal Bulletin No. 
14 (July 13, 2001).
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    To be a nomination procedure triggering event, a direct access 
security holder proposal under Exchange Act Rule 14a-8, providing that 
the company become subject to proposed Exchange Act Rule 14a-11, would 
therefore have to be submitted by a security holder or group having 
more than 1% beneficial ownership for one year.\76\ Under Exchange Act 
Rule 14a-8 procedures, such a security holder or group must, in the 
same manner that it provides evidence of eligibility to use the rule 
otherwise, provide evidence to the company at the time it submits the 
proposal that it meets the more than 1% and one year thresholds in 
order to have the proposal, if adopted, be a nomination procedure 
triggering event. Under proposed Exchange Act Rule 14a-11, a direct 
access security holder proposal adopted after January 1, 2004 could be 
a nomination procedure triggering event. Therefore, security holders 
and groups should be aware that in order for the adoption of such a 
proposal to be a nomination procedure triggering event, should we adopt 
Exchange Act Rule 14a-11 as proposed, those security holders or groups 
should, using the existing Exchange Act Rule 14a-8 procedures, provide 
evidence that they satisfy the more than 1% and one-year thresholds 
when they submit their proposals.
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    \76\ Exchange Act Rule 14a-8(i)(11) [17 CFR 240.14a-8(i)(11)] 
permits companies to exclude duplicative security holder proposals. 
We have proposed an instruction to Exchange Act Rule 14a-8(i)(11) to 
specify that, where a company receives more than one ``direct 
access'' security holder proposal, the company would not be 
permitted by that rule to exclude a direct access proposal received 
by a holder of more than 1% of the company's securities.
---------------------------------------------------------------------------

    In order to facilitate an informed security holder vote with regard 
to security holder proposals that could trigger the security holder 
nomination procedure set out in Exchange Act Rule 14a-11, we have 
proposed an amendment to Exchange Act Rule 14a-5 that would require the 
company, where a security holder proposal is submitted by a more than 
1% security holder who has held their securities for at least one year, 
to advise security holders of this fact in the proxy statement relating 
to the meeting at which the security holder proposal will be presented. 
We recommend that, pending final action on that proposal, companies 
make such an identification, both in their interest and in the interest 
of their security holders. Companies also should consider whether 
failure to make such an identification has any implications under 
Exchange Act Rule 14a-9.\77\
    We recognize that the proposed procedure could include other 
nomination procedure triggering events, such as economic performance 
(e.g., lagging a peer index for a specified number of consecutive 
years), being delisted by a market, being sanctioned by the Commission, 
being indicted on criminal charges, having to restate earnings, or 
having to restate earnings more than once in a specified period. 
Because, however, today's proposals relate to the proxy process in 
connection with the nomination of directors, we are of the view that 
the nomination procedure triggering events should be tied closely to 
evidence of ineffectiveness or security holder dissatisfaction with a 
company's proxy process. While the nomination procedure triggering 
event requirement would add complexity to the operation of the rule, it 
also would limit the use of a security holder access rule to situations 
where there is evidence that the proxy process may otherwise have 
failed to permit security holder views to be adequately taken into 
account. We believe that this structure addresses best the concerns of 
some commenters regarding the potential adverse impact of such a 
nomination procedure on public companies.
---------------------------------------------------------------------------

    \77\ 17 CFR 240.14a-9.
---------------------------------------------------------------------------

    In determining the appropriate thresholds to propose, we considered 
the importance of using nomination procedure triggering events that 
would provide a meaningful opportunity for security holders to trigger 
operation of the security holder nomination procedure against the 
importance of ensuring that the process is used by security holders who 
represent a substantial and long-term interest in the subject company. 
The nomination procedure triggering events that we propose strike what 
we believe is an appropriate balance between these interests.
    The first of the nomination procedure triggers that we propose 
relates to the level of withhold director votes. We have proposed that 
the trigger require a more than 35% security holder withhold vote, 
based on votes cast. Based on a sample of 2,227 director elections over 
the past 2 years, it appears that approximately 1.1% of companies had 
total withhold votes in excess of 35% of the votes cast; \78\ however, 
our data does not enable us to calculate withhold votes on a candidate-
by-candidate basis. Because the data available to us suggest that the 
frequency of significant withhold votes is currently somewhat lower 
than that for majority votes on security holder proposals, as discussed 
below, we have proposed a lower threshold for the withhold votes 
trigger than the security holder proposal-based trigger. While we have 
selected a lower threshold, we have attempted to select a still-
substantial percentage that will reflect the intent of a significant 
percentage of security holders rather than a small minority. In 
addition, we believe that it is important to recognize the possibility 
that withhold votes for individual directors currently may occur more 
frequently than the data available to us suggest, and that they may, in 
the future, occur more frequently if they could trigger the nomination 
procedure.
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    \78\ Sample data provided by Automated Data Processing, Inc.; 
sample data relate to companies traded on the New York Stock 
Exchange, the American Stock Exchange, and the Nasdaq Stock Market. 
For each election, the number of ``yes'' votes and withhold votes 
received are totaled across all candidates on the proxy and then are 
reported. Thus, the level of withhold votes received on average 
across all candidates in a given election can be calculated, but not 
the outcome candidate-by-candidate. The result is that the number of 
elections in which a specific candidate received a certain number of 
withhold votes may be larger than the data presented here. This is 
due to the dilution experienced in elections where one candidate 
receives substantially more withhold votes than others on the same 
proxy.
---------------------------------------------------------------------------

    With regard to the more than 1% threshold with a one-year holding 
period that would be required of a direct access security holder 
proponent to trigger operation of the nomination procedure, we estimate 
that most companies have at least one security holder that is eligible 
to submit a security holder proposal that would initiate the security 
holder nomination procedure in proposed Exchange Act Rule 14a-11. For 
instance, we estimate that, of companies listed on an exchange or 
quoted on the Nasdaq Stock Market, 84% have at least one institution 
that has maintained ownership of at least 1% of the shares outstanding 
for one year.\79\ The submission of security holder proposals by 
security holders that own 1% of the shares outstanding is currently 
relatively rare, however. A

[[Page 60791]]

review of a sample of 237 security holder proposals submitted in 2002 
found that only three were submitted by an owner of more than 1% of the 
shares outstanding, with all three submitted by a single 1% owner. Of 
these three security holder proposals, only one received in excess of 
50% of the votes cast.\80\ This suggests that, while it is difficult to 
predict, the incidence of Exchange Act Rule 14a-11 submissions would 
not be overwhelming absent a significant change in the ownership levels 
of Exchange Act Rule 14a-8 security holder proponents, a change in 
their willingness to submit security holder proposals, or a willingness 
of smaller security holders to combine to submit proposals. At the same 
time, the information available to our Office of Economic Analysis 
suggests that security holders could aggregate their shares to reach 
the 1% threshold to submit a security holder proposal where those 
security holders feel that the proxy process has been ineffective.
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    \79\ Based on analysis of the Vickers Stock Research Form 13-F 
filings database for 2002. Consistent with the Form 13-F filings, 
the holdings of different funds within a mutual fund family have 
been combined when considering the size of an institution's 
ownership position. This data is limited to U.S.-based companies 
with common equity trading on the NYSE, AMEX, or Nasdaq markets as 
of December 31, 2002.
    \80\ Sample data provided by Georgeson Shareholder 
Communications Inc. The holdings of the proponent of the security 
holder proposal were taken from Vickers.
---------------------------------------------------------------------------

    Conversely, at higher percentages and holding periods, we are 
concerned that the trigger could be too difficult to meet and, 
therefore, less effective. For example, at a 3% threshold with a one-
year holding period, the percentage of companies with at least one 
institutional investor who is able to submit a security holder proposal 
that triggers the nomination procedure would drop to 72%, while at a 5% 
threshold with a one-year holding period the percentage of companies 
with at least one institutional investor who is able to submit a 
security holder proposal that triggers the nomination procedure would 
drop to 57%.\81\ These percentages drop to 59% and 42% respectively 
with a two-year holding period and 46% and 31% respectively at a three-
year holding period.\82\ By increasing the holding period required at 
the 1% threshold to 2 years, the percentage of companies with at least 
one institutional investor who is able to submit a security holder 
proposal that triggers the nomination procedure would drop to 75%, 
while an increase to a 3-year holding period drops the percentage to 
64%.\83\ The combination of this data with the requirement that an 
eligible security holder would have to submit a security holder 
proposal that is approved by the majority of the votes cast on that 
proposal leads us to believe that a higher ownership requirement or 
longer holding period could limit the availability of the direct access 
trigger in a manner that renders this trigger less effective.
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    \81\ Based on an analysis of the Vickers Form 13-F filings 
database for 2002. Consistent with the Form 13-F filings, the 
holdings of different funds within a mutual fund family have been 
combined when considering the size of an institution's ownership 
position. This data is limited to U.S.-based companies with common 
equity trading on the NYSE, AMEX, or Nasdaq markets as of December 
31, 2002.
    \82\ Id.
    \83\ Id.
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    With regard to the requirement that a direct access security holder 
proposal submitted by an eligible security holder must receive a 
majority of the votes cast at the meeting, we considered the percentage 
of security holder proposals that have received majority votes in prior 
recent years, based on both votes cast and votes outstanding. Samples 
of security holder proposals submitted between 2000 and 2003 \84\ 
indicate that between 28-31% of security holder proposals in the sample 
received 50% of the votes cast on those proposals. This percentage 
drops significantly if based on votes outstanding, to 8-11% of 
companies in the sample.\85\ In light of the very low percentage of 
companies at which security holder proposals received a majority of 
votes outstanding, even without considering the low number of security 
holder proposals that are submitted by 1% security holders, we have 
proposed that the direct access proposal trigger be based on votes cast 
rather than votes outstanding.
b. Implementation of Security Holder Proposals Under Exchange Act Rule 
14a-8 as a Nomination Procedure Triggering Event
    We are considering as an additional element of the procedure, and 
seek comment on, whether we should include a third nomination procedure 
triggering event that is premised upon a company's not implementing a 
security holder proposal submitted in accordance with Exchange Act Rule 
14a-8, other than a direct access security holder proposal, that 
receives support from the majority of votes cast. As noted previously, 
the nomination procedure we propose today is premised upon the 
existence of evidence regarding the ineffectiveness of, or security 
holder dissatisfaction with, a particular company's proxy process. 
Accordingly, we seek comment on a third nomination procedure triggering 
event that would result in a company being subject to that procedure 
if:
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    \84\ ADP sample based on 926 proposals for 2002-2003; Investor 
Responsibility Research Center sample based on 818 governance-
related proposals from 2000-2002; Georgeson sample based on 597 
proposals from 2000-2002.
    \85\ ADP and IRRC provided vote outcomes both by votes cast and 
votes outstanding, whereas the Georgeson sample provided only votes 
cast.
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    [sbull] A security holder proposal submitted pursuant to Exchange 
Act Rule 14a-8, other than a direct access security holder proposal, 
was submitted for a vote of security holders at an annual meeting by a 
security holder or group of security holders that held more than 1% of 
the company's securities entitled to vote on the proposal for one year 
and provided evidence of such holdings to the company;
    [sbull] The security holder proposal received more than 50% of the 
votes cast on that proposal; and
    [sbull] The board of directors of the company failed to implement 
the proposal by the 120th day prior to the date that the company mailed 
its proxy materials for the annual meeting.\86\
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    \86\ As is currently required in Exchange Act Rule 14a-8, this 
date would be calculated by determining the release date disclosed 
in the previous year's proxy statement, increasing the year by one, 
and counting back 120 calendar days.
---------------------------------------------------------------------------

    Any such nomination procedure trigger would apply to all security 
holder proposals, regardless of whether a proposal requires board 
action (a ``mandatory'' proposal) or requests board action (a 
``precatory'' proposal). It would be necessary for any new rule 
implementing such a nomination procedure triggering event to provide 
guidance to companies and security holders with regard to the 
determination of whether a proposal has been implemented. While it 
seems clear that a company would be deemed to have implemented a 
security holder proposal if the board of directors of the company takes 
all steps required to be taken by the board to implement the proposal, 
the timing of implementation may not fit properly within annual meeting 
cycles. For example, there likely would be situations in which a 
company would not be able to implement the proposal before the next 
annual meeting, either because the proposal cannot legally be 
implemented in that time period or the company would be required to 
take further action to implement the proposal (for example, where the 
security holder proposal requests action that would require a security 
holder vote to implement). Further, a security holder proposal may 
grant discretion to the board of directors or the company as to the 
manner in which the proposal should be implemented, either by its terms 
or because implementation of the proposal otherwise requires such 
discretion. In this case, a determination by the board that it had 
implemented the proposal or

[[Page 60792]]

another mechanism for determining that a proposal had been implemented 
would be necessary.
    In addition to the issues regarding ``implementation'' discussed 
above, a nomination procedure triggering event premised upon the 
implementation of a security holder proposal would need to provide a 
means to inform security holders regarding the date by which 
implementation would be necessary and a discussion of the manner in 
which a proposal would be deemed to have been implemented. We believe 
that the most appropriate means for informing investors of a potential 
triggering event and its impact upon the proposed nomination procedure 
would be in the periodic report in which the company discloses the 
results regarding any matter that has been put to a vote of security 
holders.\87\ Similarly, the most appropriate manner for determining 
implementation likely would be to have the board of directors of the 
company provide a representation on Exchange Act Form 8-K to the effect 
that it is the good faith judgment of those directors that the board 
has implemented the security holder resolution.
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    \87\ For example, the company could describe the proposal in 
that Exchange Act report and discuss the operation of the proposed 
security holder nomination procedure in that situation, including 
the topic of the security holder proposal, the date by which the 
company would become subject to the security holder nomination 
procedure if it has not yet implemented the proposal, and any 
obligation of the company to continue to inform security holders 
regarding the implementation of the proposal.
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    We are concerned that the inclusion of this third possible 
triggering event may affect a board's determination of how to react to 
or implement a security holder proposal or how to evaluate that 
proposal under state law. We believe, however, that an argument can be 
made that where a majority of votes cast by security holders favor a 
proposal and the board exercises its judgment not to implement it, 
there is an indication of ineffectiveness in, or dissatisfaction with, 
the proxy process. On the other hand, we are concerned that the link 
between the possible ineffectiveness of, or dissatisfaction with, a 
company's proxy process and this possible nomination procedure 
triggering event is more indirect than in the case of the two 
nominating process triggering events proposed today. A disagreement 
between a company's security holders and the board regarding its 
judgment on a proposal is a less directly linked indication of 
ineffectiveness relating to the director nomination and election 
process than a withhold vote on a director or a direct vote by security 
holders to provide for compliance with the nomination procedure. This 
is particularly the case in light of the possible diversity of subjects 
that can be addressed in a security holder proposal. We also are 
concerned about the complexity and potential for dispute regarding 
whether proposals are implemented.
    If we decide to adopt a nomination procedure that includes this 
third triggering event, non-implementation of a security holder 
proposal submitted as described above and adopted subsequent to January 
1, 2004 could be a nominating procedure triggering event. Therefore, 
security holders and groups should be aware that, should we adopt a 
nomination procedure that includes a ``non-implementation'' trigger, 
they should provide evidence to the company that they satisfy the more 
than 1% and one-year thresholds when they submit their proposals.\88\ 
As discussed above, we are proposing to amend Exchange Act Rule 14a-5 
to require that a company identify in its proxy materials any proposal 
that would, if adopted, be a nominating process triggering event. We 
recommend that, pending final action on that proposal, companies make 
such an identification, both in their interest and in the interest of 
their security holders. Companies also should consider whether failure 
to make such an identification has any implications under Exchange Act 
Rule 14a-9.
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    \88\ Security holders should use existing Exchange Act Rule 14a-
8 procedures to provide evidence of ownership.
---------------------------------------------------------------------------

c. Questions
    C.1. As proposed, the new procedure would require a triggering 
event for security holders to be able to use the security holder 
nomination procedure. Is this appropriate? If so, are the proposed 
nomination procedure triggering events appropriate? Are there other 
events that should trigger the procedure? For example, should the 
following trigger the procedure: lagging a peer index for a specified 
number of consecutive years; being delisted by a market; being 
sanctioned by the Commission; being indicted on criminal charges; or 
having to restate earnings once or restate earnings more than once in a 
specified period? Should the election of a security holder nominee as a 
member of a company's board of directors be deemed a triggering event 
in itself that would extend the process by another year or longer 
period of time?
    C.2. How long after a nomination procedure triggering event should 
security holders be able to use the nomination procedure, if not two 
years, as is proposed (e.g., one year, three years, or longer)? Should 
there be other ways for the operation of the procedure to terminate at 
a company? If so, what other means would be appropriate? For example, 
should companies be able to take specified actions that would terminate 
operation of the nomination procedure? If so, what such actions would 
be appropriate?
    C.3. As proposed, the nomination procedure could be triggered by 
withhold votes for one or more directors of more than 35% of the votes 
cast. Is 35% the correct percentage? If not, what would be a more 
appropriate percentage and why? Is it appropriate to base this trigger 
on votes cast rather than votes outstanding? If not, please provide a 
basis for the recommendation, including numeric data, where available. 
Is the percentage of withhold votes the appropriate standard in all 
cases? For example, what standard is appropriate for companies that do 
not use plurality voting? If your comments are based upon data with 
regard to withhold votes for individual directors, please provide such 
data in your response.
    C.4. Should the nomination procedure triggering event related to 
direct access security holder proposals trigger the procedure only 
where a more than 1% holder or group submits the proposal? If not, what 
would be a more appropriate threshold, if any? For example, should the 
standards otherwise applicable for inclusion of a proposal under 
Exchange Act Rule 14a-8 apply? Should the required holding period for 
the securities used to calculate the security holder's ownership be 
longer than one year? If so, what is the appropriate holding period? 
Should that holding period be shorter than one year? If so, what is the 
appropriate holding period?
    C.5. Are the existing methods under Exchange Act Rule 14a-8 
sufficient to demonstrate that a proposal was submitted by a more than 
1% security holder? If not, what other methods would be appropriate?
    C.6. As proposed, a direct access security holder proposal could 
result in a nomination procedure triggering event if it receives more 
than 50% of the votes cast with regard to that proposal. Is this the 
proper standard? Should the standard be higher (e.g., 55%, 60%, or 
65%)? Should the standard be based on votes cast for the proposal as a 
percentage of the outstanding securities that are eligible to vote on 
the proposal (e.g., 50% of the outstanding securities)?
    C.7. Should direct access security holder proposals be subject to a 
higher resubmission standard than other Exchange Act Rule 14a-8 
proposals? If

[[Page 60793]]

so, what standard would be appropriate?
    C.8. We have proposed that nomination procedure triggering events 
could occur after January 1, 2004. Is this the proper date? Should it 
be an earlier date? Should it be a later date?
    C.9. What are the possible consequences of the use of nomination 
procedure triggering events? Will there be more expense and effort 
related to votes on direct access security holder proposals? Will there 
be more campaigns seeking ``withhold'' votes? How will any such 
consequences affect the operation and governance of companies?
    C.10. Should companies be exempted from the security holder 
nomination procedure for any election of directors in which another 
party commences or evidences its intent to commence a solicitation in 
opposition subject to Exchange Act Rule 14a-12(c) prior to the company 
mailing its proxy materials? If so, should the period in which security 
holders in such companies may use the nomination procedure be extended 
to the next year (assuming that a nomination procedure triggering event 
is required)? What should be the effect if another party commences a 
solicitation in opposition after the company had mailed its proxy 
materials?
    C.11. We have discussed our consideration of and requested public 
comment on the appropriateness of a triggering event premised upon the 
company's non-implementation of a security holder proposal that 
receives more than 50% of the votes cast on that proposal. Should such 
a triggering event be included in the nomination procedure? In 
responding to this question, please also consider the following 
questions:
    a. Should a security holder proposal that receives more than 50% of 
votes cast operate as a nomination procedure triggering event 
regardless of the topic of the proposal, or would it be appropriate to 
instead require that the proposal relate to a specified category of 
topics (e.g., corporate governance matters)? If so, how should that 
specific category of topics (e.g., corporate governance matters) be 
defined?
    b. Should a security holder proposal result in a nomination 
procedure triggering event if it receives more than 50% of the votes 
cast with regard to that proposal? Should the standard be higher (e.g., 
55%, 60%, 65%)? Should the standard be based on votes cast for the 
proposal as a percentage of the outstanding securities that are 
eligible to vote on the proposal (e.g., 50% of the outstanding 
securities)? Would the described means of determining whether a 
security holder proposal has been implemented be sufficient? Should 
there be a different means for determining implementation?
    Are there other or additional criteria that would be appropriate? 
Should the determination be made by the entire board of directors? 
Should the determination be made by the independent members of the 
board of directors? Should the board be given broader flexibility 
(e.g., should it be able to represent its intention to implement a 
proposal)? Should the Commission or its staff (for example, the 
Division of Corporation Finance) play a role in this process (e.g., 
similar to that for security holder proposals under Exchange Act Rule 
14a-8)? Alternatively, what role should the courts play? What is the 
best record for a judicial determination?
    c. Should security holders that do not agree with a company's 
conclusion that a proposal had been implemented have the right to 
contest that conclusion through a judicial proceeding? Should they have 
a private right of action to do so? Is there any reason to believe that 
security holders would not have a private right of action to contest a 
company's determination that a proposal has been implemented? If so, 
what recourse, if any, should a security holder have with regard to a 
company's determination?
    d. Should a company be required to file an Exchange Act Form 8-K 
stating whether or not it implemented a security holder proposal that 
is eligible to trigger the rule? Is it appropriate to require that 
companies make such a statement on Exchange Act Form 8-K? Would this 
impose unnecessary liability on companies that make a determination 
regarding implementation of a security holder proposal with which 
security holders may disagree?
4. What Notice Must a Subject Company Give Regarding the Occurrence of 
an Event That Triggers the Operation of the Proposed Rule?
a. Disclosure on Exchange Act Forms 10-Q, 10-QSB, 10-K or 10-KSB \89\
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    \89\ In addition to the proposed additions to Exchange Act Forms 
10-Q, 10-QSB, 10-K and 10-KSB that we discuss in this section, we 
also have proposed corrective revisions to these forms to update 
outdated references to Exchange Act Rule 14a-11 that currently 
appear in Paragraph (d) of Item 4 of Part II to Forms 10-Q and 10-
QSB and Paragraph (d) of Item 4 of Part I to Forms 10-K and 10-KSB.
---------------------------------------------------------------------------

    Because the proposed security holder nomination procedure would 
operate only upon the occurrence of specified nomination procedure 
triggering events, it would be essential that the company make security 
holders aware when a nomination procedure triggering event has 
occurred. As such, the security holder nomination procedure in proposed 
Exchange Act Rule 14a-11 would require additional disclosures in a 
company's Exchange Act Form 10-Q, 10-QSB, 10-K or 10-KSB.\90\ The 
proposed procedure would require the following:
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    \90\ In lieu of Forms 10-Q, 10-QSB, 10-K or 10-KSB, registered 
investment companies (``funds'') would provide the additional 
disclosure on Form N-CSR. See Section II.A.12., below.
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    [sbull] Each company would be required to disclose the security 
holder vote with regard to either of the nomination procedure 
triggering events in its quarterly report on Exchange Act Form 10-Q or 
10-QSB for the period in which the matter was submitted to a vote of 
security holders or, where the nomination procedure triggering event 
occurred during the fourth quarter of the fiscal year, on Exchange Act 
Form 10-K or 10-KSB;\91\ and
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    \91\ Item 4 of Part II to Exchange Act Forms 10-Q and 10-QSB and 
Item 4 of Part I to Exchange Act Forms 10-K and 10-KSB currently 
require that companies disclose the results of the voting on all 
matters submitted to a vote of security holders during the period 
covered by the report. We have proposed an addition to this 
provision that would require disclosure of specific information 
relating to the security holder nomination procedure in proposed 
Item 4(e) of Part II to Exchange Act Forms 10-Q and 10-QSB and 
proposed Item 4(e) of Part I to Exchange Act Forms 10-K and 10-KSB.
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    [sbull] Each company would be required to include in that Exchange 
Act Form 10-Q, 10-QSB, 10-K or 10-KSB information disclosing that it 
would be subject to the security holder nomination procedure as a 
result of such vote, if applicable.\92\
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    \92\ See proposed Item 4(e) of Part II to Exchange Act Forms 10-
Q and 10-QSB and proposed Item 4(e) of Part I to Exchange Act Forms 
10-K and 10-KSB.
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b. Questions
    D.1. Will the proposed disclosure requirements in Exchange Act 
Forms 10-Q, 10-QSB, 10-K and 10-KSB provide adequate notice to security 
holders? Should additional notices be required? If so, what form should 
that notice take and at what time should it be made public?
    D.2. Should the company's notice be filed and/or made public in 
some other manner?
    If so, what manner would be appropriate?

[[Page 60794]]

5. Which Security Holders or Security Holder Groups May Submit a 
Nominee That the Company Would Be Required To Include in Its Proxy 
Materials?
a. Proposed Eligibility Standards
    To be eligible to submit a nomination in accordance with proposed 
Exchange Act Rule 14a-11, a security holder or group of security 
holders would be required to: \93\
    [sbull] Beneficially own, either individually or in the aggregate, 
more than 5% of the company's securities that are eligible to vote for 
the election of directors at the next annual meeting of security 
holders (or, in lieu of such an annual meeting, a special meeting of 
security holders), with each of the securities used for purposes of 
calculating that ownership having been held continuously for at least 
two years as of the date of the nomination; \94\
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    \93\ The manner in which a nominating security holder or 
nominating security holder group would establish its eligibility to 
use the procedure in proposed Exchange Act Rule 14a-11 is discussed 
in Section II.8.a., below.
    \94\ See proposed Exchange Act Rule 14a-11(b)(1)-(2).
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    [sbull] Intend to continue to own those securities through the date 
of that annual or special meeting; \95\
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    \95\ The requirement regarding the nominating security holder's 
intent to continue to own the securities is set forth in proposed 
Exchange Act Rule 14a-11(b)(2). The nominating security holder would 
be required to include a representation regarding this intent in its 
notice to the company, pursuant to proposed Exchange Act Rule 14a-
11(c)(2).
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    [sbull] Be eligible, as to the security holder or each member of 
the security holder group, to report beneficial ownership on Exchange 
Act Schedule 13G, rather than Exchange Act Schedule 13D,\96\ in 
reliance on Exchange Act Rule 13d-1(b) or (c);\97\ and
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    \96\ 17 CFR 240.13d-101.
    \97\ 17 CFR 240.13d-1(b)-(c). This requirement is set forth in 
proposed Exchange Act Rule 14a-11(b)(3). The nominating security 
holder would be required to include a representation regarding this 
eligibility in its notice to the company, pursuant to proposed 
Exchange Act Rule 14a-11(c)(2). This requirement would not apply in 
the case of an open-end management investment company (``mutual 
fund'') because security holders of mutual funds are not required to 
file Exchange Act Schedules 13D or 13G. See Exchange Act Rules 13d-
1(a) and (i) [17 CFR 240.13d-1(a) and (i)] (requiring any person who 
is directly or indirectly the beneficial owner of more than 5% of a 
class of equity securities to file with the Commission a statement 
containing the information required by Exchange Act Schedule 13D, 
and defining ``equity security'' to mean any equity security of a 
class which is registered pursuant to Section 12 of the Exchange Act 
[15 U.S.C. 78l], or any equity security of any insurance company 
which would have been required to be so registered except for the 
exemption contained in Section 12(g)(2)(G) of the Exchange Act [15 
U.S.C. 78l(g)(2)(7)], or any equity security issued by a closed-end 
investment company registered under the Investment Company Act).
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    [sbull] Have filed an Exchange Act Schedule 13G or an amendment to 
Exchange Act Schedule 13G reporting their beneficial ownership as a 
passive or institutional investor (or group) on such schedule before or 
on the date of the submission of the nomination to the company, which 
Schedule must include a certification that the security holder or 
security holder group has held more than 5% of the subject securities 
for at least two years.\98\
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    \98\ This requirement is set forth in proposed Exchange Act Rule 
14a-11(b)(4). A nominating security holder or group for a mutual 
fund would be required to file information reporting the security 
holder or group's beneficial ownership as part of the security 
holder's notice to the fund, pursuant to proposed Exchange Act Rule 
14a-11(c)(11). See Section II.A.12., below.
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    The appropriate eligibility ownership threshold generated a great 
deal of comment in response to our solicitation of public input on the 
Division's review of the proxy rules.\99\ While some commenters 
believed that all security holders should be able to access company 
proxy materials for the purpose of nominating directors, others 
advocated no ownership threshold or share ownership thresholds ranging 
from the $2,000 threshold required to submit an Exchange Act Rule 14a-8 
proposal to substantial share ownership percentages such as 3%, 5% or 
10% of a company's outstanding common stock.\100\ Those who advocated 
no threshold or a nominal dollar amount argued that the imposition of a 
threshold would discriminate against smaller investors or unfairly 
advantage larger security holders who already may have the resources to 
run their own slates using the existing rules for contested 
elections.\101\ Those who advocated a larger share ownership threshold 
contended that a nominating security holder should have a substantial, 
long-term stake in the company in order to require the use of company 
funds to nominate a candidate.\102\ In addition, advocates of a larger 
share ownership threshold pointed out that the composition of the board 
of directors is critical to a corporation's functions and, accordingly, 
security holders should have to evidence a significant financial 
interest by satisfying a substantial ownership threshold in order to 
use a security holder nomination procedure that may impact that 
composition.\103\
---------------------------------------------------------------------------

    \99\ See 2003 Summary of Comments.
    \100\ See id.
    \101\ See id.
    \102\ See id.
    \103\ See id.
---------------------------------------------------------------------------

    We have proposed an ownership threshold of more than 5% in an 
effort to balance security holders' interest in being able to access 
company proxy materials for the purpose of nominating directors against 
companies' concerns about the potential disruption that some contend 
may result from frequent use of the process by security holders who do 
not represent a significant ownership stake in the subject company. We 
believe that a threshold of more than 5% ownership for two years 
strikes an appropriate balance between these interests. Roughly 42% of 
filers have at least one security holder that can meet this threshold 
individually, while roughly 50% of filers have two or more security 
holders that each have held at least 2% of the shares outstanding for 
the appropriate period and, thus, could more easily aggregate their 
securities in order to meet the threshold ownership requirement.\104\ A 
higher threshold amount would result in significantly fewer filers 
having even one security holder who could meet the required threshold. 
For example, using an ownership threshold of 10% would reduce the 
number of companies where a single security holder could make a 
nomination to 13% of the companies. Further, only 18% of filers have 
two or more security holders that have held at least 5% of the shares 
for the appropriate period. This data suggest that security holders may 
have significant difficulty in aggregating their shares to meet a 10% 
ownership threshold.
---------------------------------------------------------------------------

    \104\ Based on analysis of the Vickers Form 13-F filings 
database for 2002. Consistent with the Form 13-F filings, the 
holdings of different funds within a mutual fund family have been 
combined when considering the size of an institution's ownership 
position. This data is limited to U.S.-based companies with common 
equity trading on the NYSE, AMEX, or Nasdaq markets as of December 
31, 2002.
---------------------------------------------------------------------------

b. Questions
    E.1. Are the proposed thresholds for use of the proposed procedure 
appropriate? If not, should there be any restrictions regarding which 
security holder nominees for director would be required to be disclosed 
in the company proxy materials under the proposed procedure? If so, 
should those restrictions be consistent with the ownership requirements 
of Exchange Act Rule 14a-8? Should those restrictions be more extensive 
than the minimum requirements in Exchange Act Rule 14a-8?
    E.2. Is it appropriate to include a restriction on security holder 
eligibility that is based on percentage of securities owned? If so, is 
the more than 5% standard that we have proposed appropriate? Should the 
standard be lower (e.g., 2%, 3%, or 4%) or higher

[[Page 60795]]

(e.g. 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)?
    E.3. Should there be a restriction on security holder eligibility 
that is based on the length of time securities have been held? If so, 
is two years the proper standard? Should the standard be shorter (e.g., 
1 year) or longer (e.g., 3 years, 4 years, or 5 years)? Should the 
standard be measured by a different date (e.g., 2 years as of the date 
of the meeting, rather than the date of nomination)?
    E.4. As proposed, a nominating security holder would be required to 
represent its intent to hold the securities until the date of the 
election of directors. Is it appropriate to include such a requirement? 
Would it be appropriate to require the security holder to intend to 
hold the securities beyond the election of directors (e.g., for six 
months after the election, one year after the election, or two years 
after the election) and to so represent?
    E.5. Is the eligibility requirement that a security holder or 
security holder group must file an Exchange Act Schedule 13G 
appropriate? Should there be a different mechanism for putting 
companies and other security holders on notice that a security holder 
or security holder group has ownership of more than 5% of the company's 
securities and intends to nominate a security holder? Is it appropriate 
to permit the filing to be on Exchange Act Schedule 13G rather than 
Exchange Act Schedule 13D? If not, why not?
    E.6. Should the procedure include a provision that would deny 
eligibility for any nominating security holder or nominating security 
holder group that has had a nominee included in the company materials 
where that nominee did not receive a sufficient number of votes (e.g., 
5%, 15%, 25%, or 35%) within a specified period of time in the past? If 
there should be such an eligibility standard, how long should the 
prohibition last?
    E.7. Should security holders be allowed to aggregate their holdings 
in order to meet the ownership eligibility requirement to nominate 
directors? If so, is it appropriate to require that all members of a 
nominating security holder group individually meet the minimum holding 
period? Is it appropriate to require that all members of the group be 
eligible to file on Exchange Act Schedule 13G?
    E.8. As proposed, the beneficial ownership level of a nominating 
security holder or nominating security holder group would be 
established by the Exchange Act Schedule 13G filed by that security 
holder or security holder group, for companies other than open-end 
management investment companies (``mutual funds''). Is the filing of 
the Exchange Act Schedule 13G sufficient evidence of ownership? If not, 
what additional evidence would be appropriate? Should there be an 
additional procedure by which disputes regarding ownership levels are 
resolved?
6. What Are the Requirements for the Person Whom the Eligible Security 
Holder or Security Holder Group May Nominate?
a. The Nomination Must Be Consistent With Applicable Law and Regulation
    A company would not be required to include a security holder 
nominee in its proxy materials if the nominee's candidacy or, if 
elected, board membership, would violate:
    [sbull] Controlling state law;
    [sbull] Federal law; or
    [sbull] Rules of a national securities exchange or national 
securities association (other than rules of a national securities 
exchange or national securities association that set forth requirements 
regarding the independence of directors).\105\
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    \105\ This requirement is set forth in proposed Exchange Act 
Rule 14a-11(a)(3)(i). Pursuant to proposed Exchange Act Rule 14a-
11(c)(1), the notice to the company by the nominating security 
holder or nominating security holder group would be required to 
include a representation that the nominee's candidacy or, if 
elected, board membership, would not violate any of the specified 
provisions.
---------------------------------------------------------------------------

    Because compliance with independence standards can depend on the 
overall make-up of a board, we have excluded independence standards 
from this requirement and have, instead, proposed a separate 
requirement regarding independence standards.\106\ Pursuant to that 
separate requirement, a nominating security holder or nominating 
security holder group would be required to represent that the nominee 
meets the objective criteria for ``independence'' in any applicable 
national securities exchange or national securities association rules. 
For this purpose, the nominee would be required to meet the definition 
of ``independence'' that is generally applicable to directors of the 
company and not any particular definition of independence applicable to 
members of the audit committee of the company's board of directors. To 
the extent a rule imposes a standard regarding independence that 
requires a subjective determination by the board or a group or 
committee of the board (for example, requiring that the board of 
directors or any group or committee of the board of directors make a 
determination regarding the existence of factors material to a 
determination of a nominee's independence), this element of an 
independence standard would not have to be satisfied.\107\
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    \106\ As proposed, there would not be a separate standard 
regarding the security holder nominee's compliance with the 
applicable independence requirements of a national securities 
exchange or national securities association. Rather, compliance with 
these existing independence standards would be established through 
the inclusion in the notice to the company by the nominating 
security holder or nominating security holder group of a 
representation that the nominee satisfies the existing standard. 
This representation is required in proposed Exchange Act Rule 14a-
11(c)(4). In the case of a fund, a nominating security holder or 
group would be required to represent that its nominee is not an 
``interested person'' of the fund as defined in Section 2(a)(19) of 
the Investment Company Act. [15 U.S.C. 80a-2(a)(19)]. See Section 
II.A.12., below.
    \107\ See the Instruction to proposed Exchange Act Rule 14a-
11(c)(4). This proposed standard is discussed further in Section 
II.A.6.c., below.
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b. Prohibited Relationships Between the Nominee and the Nominating 
Security Holder or Group
    A number of commenters expressed concerns regarding the disruptive 
effect a security holder nomination procedure could have on board 
dynamics and board operation. A number of these comments related to the 
potential for ``special interest'' or ``single issue'' directors that 
would advance the interests of the nominating security holder over the 
interests of security holders as a group. While we recognize this 
concern, we believe that the procedure we propose today under Exchange 
Act Rule 14a-11 should afford a security holder or group meeting the 
proposed standards the ability to propose a candidate for director 
that, in the nominating security holder's view, is more qualified than 
those put forward by a nominating committee, board, management, or 
company. We therefore propose that, to be eligible to nominate a 
candidate under the proposal, a nominating security holder or 
nominating security holder group may not have specified relationships 
with the nominee. We believe that the proper procedures for nomination 
and solicitation of proxies for a candidate that would be an interested 
representative of a security holder, including a security holder 
meeting the proposed standards under Exchange Act Rule 14a-11, are 
those that otherwise exist under our current proxy rules. Therefore, as 
proposed, each person that is a security holder nominee would be 
required to meet the following standards of independence from the 
security holder or each member of the security holder group that has 
nominated such person:

[[Page 60796]]

    [sbull] If the nominating security holder or any member of the 
nominating security holder group is a natural person, the nominee is 
not the nominating security holder, a member of the nominating security 
holder group, or a member of the immediate family of the nominating 
security holder or any member of the nominating security holder group; 
\108\
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    \108\ For these purposes, ``immediate family'' would be defined 
in a manner that is consistent with the definition of ``family 
member'' that requires disclosure under Item 401(d) of Regulation S-
K [17 CFR 228401(d)].
---------------------------------------------------------------------------

    [sbull] If the nominating security holder or any member of the 
nominating security holder group is an entity, neither the nominee nor 
any immediate family member of the nominee has been an employee of the 
nominating security holder or any member of the nominating security 
holder group during the then-current calendar year nor during the 
immediately preceding calendar year;
    [sbull] Neither the nominee nor any immediate family member of the 
nominee has, during the year of the nomination or the immediately 
preceding calendar year, accepted directly or indirectly any 
consulting, advisory, or other compensatory fee from the nominating 
security holder or any member of the group of nominating security 
holders or any affiliate of any such holder or member, provided that 
compensatory fees would not include the receipt of fixed amounts of 
compensation under a retirement plan (including deferred compensation) 
for prior service with such holder or any such member (provided that 
such compensation is not contingent in any way on continued service);
    [sbull] The nominee is not an executive officer, director (or 
person fulfilling similar functions) of the nominating security holder 
or any member of the nominating security holder group, or of an 
affiliate of the nominating security holder or any such member of the 
nominating security holder group; and
    [sbull] The nominee does not control the nominating security holder 
or any member of the nominating security holder group (or in the case 
of a holder or member that is a fund, an interested person of such 
holder or any such member as defined in Section 2(a)(19) of the 
Investment Company Act).
c. Relationships Between the Nominee, the Nominating Security Holder or 
Group, and the Company
    A number of commenters expressed concerns regarding the effect of a 
nomination procedure on a company's compliance with requirements that 
certain of its directors be ``independent.'' Other commenters addressed 
the potential use of the process by nominating security holders that 
were acting merely as a surrogate for the company. To balance the 
benefits of a security holder nomination procedure against these 
concerns, we propose that the nominating security holder or nominating 
security holder group be required to include a representation regarding 
relationships between the nominee and the company and between the 
nominating security holder or nominating security holder group and the 
company.\109\ Specifically, as proposed, each nominating security 
holder or each member of the group of nominating security holders would 
be required to represent to the company that:
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    \109\ This representation would be required in the nominating 
security holder's notice to the company, pursuant to proposed 
Exchange Act Rule 14a-11(c)(5). Instruction 1 to proposed Exchange 
Act Rule 14a-11(d) clarifies that any nominee about which the 
nominating security holder is not able to make this representation 
shall not be counted in calculating the number of security holder 
nominees for purposes of proposed Exchange Act Rule 14a-11(d).
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    [sbull] The nominee submitted under the proposed rule by that 
nominating security holder or group of nominating security holders 
satisfies the applicable standards of a national securities exchange or 
national securities association regarding director independence, if 
any, except that, where a rule imposes a standard regarding 
independence that requires a subjective determination by the board or a 
group or committee of the board (for example, requiring that the board 
of directors or any group or committee of the board of directors make a 
determination regarding the existence of factors material to a 
determination of a nominee's independence), this element of an 
independence standard would not have to be satisfied;\110\ and
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    \110\ For example, the NYSE proposed listing standards include 
both subjective and objective components in defining an 
``independent director.'' Section 303A(2)(a) provides that no 
director will qualify as ``independent''' unless the board of 
directors ``affirmatively determines that the director has no 
material relationship with the listed company (either directly or as 
a partner, shareholder or officer of an organization that has a 
relationship with the company).'' Section 303A(2)(b) provides that 
``a director who receives, or whose immediate family member 
receives, more than $100,000 per year in direct compensation from 
the listed company, other than director and committee fees and 
pension or other forms of deferred compensation for prior service 
(provided such compensation is not contingent in any way on 
continued service), is presumed not to be independent until five 
years after he or she ceases to receive more than $100,000 per year 
in such compensation.'' See Release No. 34-47672 (April 11, 2003). 
In the case of a fund, a nominating security holder or group would 
be required to represent that its nominee is not an ``interested 
person'' of the fund as defined in Section 2(a)(19) of the 
Investment Company Act. See Section II.A.12., below.
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    [sbull] Neither the nominee nor the nominating security holder (or 
any member of the nominating security holder group, if applicable) has 
a direct or indirect agreement with the company regarding the 
nomination of the nominee.
    Commenters have expressed concern that the use of the proposed 
security holder nomination procedure, by itself, may be deemed to 
establish a relationship between the nominating security holder or 
nominating security holder group and the company that would result in 
that holder or group being deemed an ``affiliate'' of the company for 
purposes of the federal securities laws. It is our view that the mere 
use of the proposed procedure should not have such an effect. 
Accordingly, proposed Exchange Act Rule 14a-11(a) would include an 
instruction making clear that a nominating security holder will not be 
deemed an ``affiliate'' of the company under the Securities Act of 1933 
\111\ or the Exchange Act solely as a result of nominating a director 
or soliciting for the election of such a director nominee or against a 
company nominee pursuant to the security holder nomination 
procedure.\112\ In addition, where a security holder nominee is 
elected, and the nominating security holder or nominating security 
holder group does not have an agreement or relationship with that 
director, otherwise than relating to the nomination, the nominating 
security holder or nominating security holder group would not be deemed 
an affiliate solely by virtue of having nominated that director under 
the proposed rules.
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    \111\ 15 USC 77a et seq.
    \112\ This safe harbor is set forth in Instruction 3 to proposed 
Exchange Act Rule 14a-11(a). The safe harbor is intended to operate 
such that the determination of whether a holder or group is an 
``affiliate'' of the company would continue to be made based upon 
all of the facts and circumstances regarding the relationship of the 
holder or group to the company, other than such holder's or group's 
activities under the proposed security holder nomination procedure.
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d. Questions
    F.1. Should there be any other or additional limitations regarding 
nominee eligibility? Would any such limitations undercut the stated 
purposes of the proposed process? Are any such limitations necessary? 
If so, why?
    F.2. Is it appropriate to use compliance with state law, federal 
law, and listing standards as a condition for eligibility?
    F.3. Should there be requirements regarding independence from the

[[Page 60797]]

company? Should the fact that the nominee is being nominated by a 
security holder or security holder group, combined with the absence of 
any direct or indirect agreement with the company, be a sufficient 
independence requirement?
    F.4. How should any independence standards be applied? Should the 
nominee and the nominating security holder or nominating security 
holder group have the full burden of determining the effect of the 
nominee's election on the company's compliance with any independence 
requirements, even though those consequences may depend on the outcome 
of any election and may relate to the outcome of the election with 
regard to nominees other than security holder nominees?
    F.5. Are the proposed standards with regard to independence 
appropriate? If not, what standards would be appropriate? If these 
limitations generally are appropriate, are there instances where they 
should not apply?
    F.6. Where a company is subject to an independence standard of a 
national securities exchange or national securities association that 
includes a subjective component (e.g., subjective determinations by a 
board of directors or a group or committee of the board of directors), 
should the security holder nominee be subject to those same 
requirements as a condition to nomination?
    F.7. As proposed, a nominating security holder or nominating 
security holder group would be required to represent that the security 
holder nominee satisfies applicable standards of a national securities 
exchange or national securities association regarding director 
independence, except where a rule imposes a standard regarding 
independence that requires a subjective determination by the board or a 
group or committee of the board. What independence requirements should 
be used if the company is listed on more than one market with such 
independence requirements? Should the nominating security holder or 
nominating security holder group have the discretion to choose the 
applicable standards? Should the company have discretion to choose the 
applicable standards? Should all the standards of all markets on which 
shares are traded apply? Should the more stringent standards apply?
    F.8. Should there be requirements regarding independence of the 
nominee from the nominating security holder, nominating security holder 
group, or the company? If so, are the proposed limitations appropriate? 
What other or additional limitations would be appropriate? If these 
limitations generally are appropriate, are there instances where they 
should not apply?
    F.9. Should there be any standards regarding separateness of the 
nominee and the nominating security holder or nominating security 
holder group? Would such a limitation unnecessarily restrict access by 
security holders to the proxy process? If such standards are 
appropriate, are the proposed standards the proper standards? Should 
other standards be included? Should any of the proposed standards be 
eliminated?
    F.10. Should there be a prohibition, as is proposed, on any 
affiliation between nominees and nominating security holders or 
nominating security holder groups? If so, are the proposed rules 
appropriate? For example, we have proposed a definition of ``immediate 
family'' that is consistent with the existing disclosure requirement 
under Item 401(d) of Regulation S-K. Is this the appropriate definition 
for purposes of addressing relationships between the nominee and the 
nominating security holder or nominating security holder group? If not, 
what definition would be more appropriate?
    F.11. Should there be exceptions to the prohibition on any 
affiliation between nominees and nominating security holders or 
nominating security holder groups? If so, what exceptions would be 
appropriate?
    F.12. Is the two-year prohibition on payments from nominating 
security holders to nominees appropriate? Should it be longer (e.g., 3 
years, 4 years, or 5 years) or shorter (e.g., 1 year)? Should there be 
exceptions to this prohibition? If so, what exceptions would be 
appropriate?
    F.13. Is the prohibition on direct or indirect agreements between 
companies and nominating security holders appropriate? Would such a 
prohibition inhibit desirable negotiations between security holders and 
boards or nominating committees regarding nominees for directors? 
Should the prohibition provide an exception to permit such 
negotiations? If so, what should the relevant limitations be?
    F.14. Should there be a nominee eligibility criterion that would 
exclude an otherwise eligible nominee or nominating security holder or 
nominating security holder group where that nominee (or a nominee of 
that security holder or security holder group) has been included in the 
company's proxy materials as a candidate for election as director but 
received a minimal percentage of the vote? If so, what would be the 
appropriate standard (e.g., 5%, 15%, 25%, or 35%)?
    F.15. As proposed, the rule includes a safe harbor providing that 
nominating security holders will not be deemed ``affiliates'' solely as 
a result of using the security holder nomination procedure. This safe 
harbor would apply not only to the nomination of a candidate, but also 
where that candidate is elected, provided that the nominating security 
holder or nominating security holder group does not have an agreement 
or relationship with that director otherwise than relating to the 
nomination. Is it appropriate to provide such a safe harbor for 
security holder nominations? Should the safe harbor continue to apply 
where the nominee is elected?
7. How Many Security Holder Nominees Must the Company Include in Its 
Proxy Materials?
a. Proposed Limitation
    We do not intend the security holder nomination procedure in 
proposed Exchange Act Rule 14a-11 to be available for any security 
holder or security holder group that is seeking control of a company. 
The existing procedures regarding contested elections of directors are 
intended to continue to fulfill that purpose.\113\ The elements of this 
aspect of the proposal insofar as they relate to eligibility to use 
Exchange Act Schedule 13G are discussed below.
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    \113\ See, e.g., Exchange Act Rule 14a-12(c).
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    As proposed, a company would be required to include one security 
holder nominee if the total number of members of the board of directors 
is eight or fewer, two security holder nominees if the number of 
members of the board of directors is greater than eight and less than 
20 and three security holder nominees if the number of members of the 
board of directors is 20 or more. The proposal would have a separate 
standard for companies with classified or ``staggered'' boards of 
directors. Where a company has a director (or directors) currently 
serving on its board of directors who was elected as a security holder 
nominee, and the term of that director extends past the date of the 
meeting of security holders for which the company is soliciting 
proxies, the company would not be required to include on its proxy card 
more security holder nominees than could result in the total number of 
directors serving on the board that were elected as security holder 
nominees being greater than one if the total number of members of the 
board of directors is eight or fewer, two if the number of members of 
the board of directors is greater than eight and less than 20 and three 
if the number of

[[Page 60798]]

members of the board of directors is 20 or more.\114\
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    \114\ Based on a sample of 1,439 public companies provided by 
IRRC to our Office of Economic Analysis, in 2002, the median board 
size was 9, with boards ranging in size from 4 to 24 members. 
Approximately 42% of the boards in the sample had 8 or fewer 
directors, approximately 58% had between 9 and 19 directors, and 
less than 1% had 20 or more directors.
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    The proposed security holder nomination procedure would address 
situations where more than one security holder or group of security 
holders would be eligible to nominate a person or persons to a 
company's board of directors pursuant to the proposed rule. In those 
situations, the company would be required to include in its proxy 
statement and form of proxy the nominee or nominees of the security 
holder or security holder group with the largest beneficial ownership 
(as reported on Exchange Act Schedule 13G) at the time of the delivery 
of the nominating security holder's notice of intent to nominate a 
director pursuant to the rule, up to and including the total number 
required to be included by the company.\115\ We believe this method of 
determining which security holder or security holder group's nominees 
are included in the company's proxy materials is appropriate, as it 
relates directly to the level of interest in the company of the 
nominating security holder or the nominating security holder group.
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    \115\ This requirement is set forth in proposed Exchange Act 
Rule 14a-11(d)(3).
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b. Questions
    G.1. Is it appropriate to include such a limitation on the number 
of security holder nominees? If not, how would the proposed rules be 
consistent with our intention not to allow the proposed procedure to 
become a vehicle for changes in control?
    G.2. If there should be a limitation, is the proposed limitation 
appropriate? Should the number of security holder nominees be higher or 
lower? Should the limitation instead be based on the total percentage 
of the board that the security holder nominees would comprise? Should 
the limitation be the greater or lesser of the number or a specified 
percentage, rather than a set number, as proposed? Is it appropriate to 
permit more than one security holder nominee regardless of the size of 
the company's board of directors?
    G.3. Should the number increase during the second year of the 
proposed procedure? Should the number decrease during the second year 
of the proposed procedure?
    G.4. The proposal contemplates taking into account incumbent 
directors in the case of classified or ``staggered'' boards for 
purposes of determining the maximum number of security holder nominees. 
Is that appropriate? Should there be a different procedure to account 
for such incumbent directors? Also with regard to staggered boards, 
should the procedure address situations in which, due to a staggered 
board, fewer director positions are up for election than the maximum 
permitted number of security holder nominees? If so, how?
    G.5. We have proposed a limitation that permits the security holder 
or security holder group with the largest beneficial ownership to 
include its nominee(s) where there is more than one eligible nominating 
security holder or nominating security holder group. Is this proposed 
procedure appropriate? If not, should there be different criteria for 
selecting the security holder nominees (e.g., length of security 
ownership, date of the nomination, random drawing, allocation among 
eligible nominating security holders or security holder groups, etc.)? 
Rather than using criteria such as that proposed, should the company's 
nominating committee have the ability to select among eligible 
nominating security holders or security holder groups?
    G.6. Rather than a limitation on the maximum number of security 
holder nominees, should there be only a limitation on the number of 
security holder nominees that may be elected?
8. What Notice Must the Nominating Security Holder or Nominating 
Security Holder Group Provide to the Company and File With the 
Commission?
a. Notice to the Company
    To have a nominee included in the company's proxy statement and 
form of proxy, we propose that the nominating security holder or 
nominating security holder group be required to provide notice to the 
company of its intent to require that the company include that security 
holder's nominee on the company's proxy card no later than 80 days 
before the date that the company mails its proxy materials for the 
annual meeting.\116\ This notice would be required to include:
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    \116\ As is currently required in Exchange Act Rule 14a-8, this 
date would be calculated by determining the release date disclosed 
in the previous year's proxy statement, increasing the year by one, 
and counting back the required number of calendar days. If the 
company did not hold an annual meeting during the prior year, or if 
the date of the meeting has changed more than 30 days from the prior 
year, then the nominating security holder would be required to 
provide notice a reasonable time before the company mails its proxy 
materials for the current year, as specified by the company in an 
Exchange Act Form 8-K filed pursuant to proposed Item 13.
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    [sbull] A representation that the nominating security holder is 
eligible to submit a nominee under the security holder nomination 
procedure; \117\
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    \117\ The eligibility standards for nominating security holders 
are set forth in proposed Exchange Act Rule 14a-11(b). This 
representation would be included in the nominating security holder's 
notice pursuant to proposed Exchange Act Rule 14a-11(c)(2).
---------------------------------------------------------------------------

    [sbull] A statement that, to the knowledge of the nominating 
security holder or group, the candidate's nomination or service on the 
board, if elected, would not violate controlling state law, federal 
law, or listing standards (other than a standard relating to 
independence); \118\
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    \118\ Proposed Exchange Act Rule 14a-11(a)(3)(i) requires that 
the nomination not violate these standards. This representation 
would be included in the nominating security holder's notice 
pursuant to proposed Exchange Act Rule 14a-11(c)(1).
---------------------------------------------------------------------------

    [sbull] A representation that the nominee meets the objective 
criteria for independence from the company that are set forth in 
applicable rules of a national securities exchange or national 
securities association; \119\
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    \119\ This representation would be included in the nominating 
security holder's notice pursuant to proposed Exchange Act Rule 14a-
11(c)(4). In the case of a fund, a nominating security holder or 
group would be required to represent that its nominee is not an 
``interested person'' of the fund as defined in Section 2(a)(19) of 
the Investment Company Act. See Section II.A.12., below.
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    [sbull] Representations regarding the absence of a prohibited 
relationship between the nominee and the nominating security holder or 
nominating security holder group; \120\
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    \120\ This representation would be included in the nominating 
security holder's notice pursuant to proposed Exchange Act Rule 14a-
11(c)(3).
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    [sbull] A representation that neither the nominee nor the 
nominating security holder (or any member of the nominating security 
holder group, if applicable) has a direct or indirect agreement with 
the company regarding the nomination of the nominee; \121\
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    \121\ This representation would be included in the nominating 
security holder's notice pursuant to proposed Exchange Act Rule 14a-
11(c)(5).
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    [sbull] A copy of the nominating security holder's or nominating 
security holder group's filed Exchange Act Schedule 13G indicating 
ownership of more than 5% of the appropriate class of the company's 
securities; \122\
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    \122\ Proposed Exchange Act Rule 14a-11(b)(4) would require that 
the nominating security holder or nominating security holder group 
to have filed this Exchange Act Schedule 13G. A copy of this 
Exchange Act Schedule 13G would be included in the nominating 
security holder's notice pursuant to proposed Exchange Act Rule 14a-
11(c)(6). This requirement would not apply in the case of a company 
that is a mutual fund because security holders of mutual funds are 
not required to file Exchange Act Schedule 13G. See Exchange Act 
Rules 13d-1(a) and (i). A nominating security holder or group for a 
mutual fund would be required to file information reporting the 
security holder or group's beneficial ownership as part of the 
security holder's notice to the fund pursuant to proposed Exchange 
Act Rule 14a-11(c)(11). See Section II.A.12., below.

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[[Page 60799]]

    [sbull] A representation that the nominating security holder or 
each member of the nominating security holder group was eligible to 
report its security ownership on Exchange Act Schedule 13G in reliance 
on Exchange Act Rule 13d-1(b) or (c); \123\
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    \123\ Proposed Exchange Act Rule 14a-11(b)(3) requires that the 
nominating security holder or nominating security holder group 
satisfy this standard. This representation would be included in the 
nominating security holder's notice pursuant to proposed Exchange 
Act Rule 14a-11(c)(2). This requirement would not apply in the case 
of a company that is a mutual fund because security holders of 
mutual funds are not required to file Exchange Act Schedule 13G. See 
Exchange Act Rules 13d-1(a) and (i); Section II.A.12., below.
---------------------------------------------------------------------------

    [sbull] A representation that more than 5% of the appropriate class 
of the company's securities, as reflected in the Exchange Act Schedule 
13G of the nominating security holder or nominating security holder 
group, have been held continuously for at least two years and that the 
nominating security holder or nominating security holder group intends 
to continue to own those securities through the date of the subject 
election of directors; \124\
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    \124\ Proposed Exchange Act Rules 14a-11(b)(1) and 14a-11(b)(2) 
require that the nominating security holder meet these standards. 
This representation would be included in the nominating security 
holder's notice pursuant to proposed Exchange Act Rule 14a-11(c)(2). 
For companies that are mutual funds, this representation is modified 
to reflect the fact that security holders of mutual funds are not 
required to file Exchange Act Schedule 13G. See Exchange Act Rules 
13d-1(a) and (i); Section II.A.12., below.
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    [sbull] A statement from the nominee that the nominee consents to 
be named in the company's proxy statement and to serve on the board if 
elected, for inclusion in the company's proxy statement; \125\
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    \125\ This statement would be included in the nominating 
security holder's notice pursuant to proposed Exchange Act Rule 14a-
11(c)(7).
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    [sbull] Disclosure about the nominee complying with the 
requirements of Item 7(a), (b) and (c) and, for investment companies, 
Item 22(b) of Exchange Act Schedule 14A, for inclusion in the company's 
proxy statement; \126\
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    \126\ This information would be included in the nominating 
security holder's notice pursuant to proposed Exchange Act Rule 14a-
11(c)(8). This information would identify the nominee, describe 
certain legal proceedings, if any, related to the nominee, and 
describe certain of the nominee's transactions and relationships 
with the company. See paragraphs (a), (b), and (c) of Item 7 of 
Exchange Act Schedule 14A. With respect to a nominee for director of 
a fund, the disclosure would include certain basic information about 
the nominee and any arrangement or understanding between the nominee 
and any other person pursuant to which he was selected as a nominee; 
information about the positions, interests, and transactions and 
relationships of the nominee and his immediate family members with 
the fund and persons related to the fund; information about the 
amount of equity securities of funds in a fund complex owned by the 
nominee; and information describing certain legal proceedings 
related to the nominee, including legal proceedings in which the 
nominee is a party adverse to, or has a material interest adverse 
to, the fund or any of its affiliated persons. See paragraph (b) of 
Item 22 of Exchange Act Schedule 14A.
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    [sbull] Any of the following information with regard to each 
nominating security holder or member of a nominating security holder 
group that is not included in the Exchange Act Schedule 13G, for 
inclusion in the company's proxy statement: \127\
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    \127\ This information would be included in the nominating 
security holder's notice pursuant to proposed Exchange Act Rule 14a-
11(c)(9). Where the nominating security holder is an entity rather 
than an individual, the required disclosure would be provided with 
regard to the control persons of the entity. For example, if the 
nominating security holder is a corporation, the information called 
for in Exchange Act Rule 14a-11(c)(9) must be given with respect to 
each executive officer and director of the corporation, each person 
controlling the corporation, and each executive officer and director 
of any corporation or other person ultimately in control of the 
corporation. See the Instruction to proposed Exchange Act Rule 14a-
11(c)(9).

--Name and business address;
--Present principal occupation or employment and the name, principal 
business and address of any corporation or other organization in which 
such employment is carried on;
--The amount of each class of securities of the company that the 
individual owns beneficially, directly or indirectly, determined in 
accordance with Exchange Act Rule 13d-3; \128\
---------------------------------------------------------------------------

    \128\ 17 CFR 240.13d-3.
---------------------------------------------------------------------------

--Whether or not, during the past ten years, the individual has been 
convicted in a criminal proceeding (excluding traffic violations or 
similar misdemeanors) and, if so, the dates, the nature of the 
conviction, the name or other disposition of the case; and whether the 
individual has been involved in any other legal proceeding during the 
past five years, as specified in Item 401(f) of Regulation S-K; \129\ 
and
---------------------------------------------------------------------------

    \129\ 17 CFR 229.401(f).

    [sbull] The methods by which the nominating security holder or 
nominating security holder group may solicit security holders, 
including any Web site address on which the nominating security holder 
or nominating security holder group may publish soliciting 
materials.\130\
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    \130\ This information would be included in the nominating 
security holder's notice pursuant to proposed Exchange Act Rule 14a-
11(c)(10).
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b. Filing With the Commission
    The nominating security holder or the nominating security holder 
group would be required to file the notice described in the preceding 
section, excluding the already-filed Exchange Act Schedule 13G, with 
the Commission. This notice would be viewed as soliciting material of 
the nominating security holder or nominating security holder group, in 
that much of the information included in the notice would ultimately be 
disseminated to security holders in the company's proxy statement. 
Accordingly, the notice as filed with the Commission would be subject 
to the provisions of Exchange Act Rule 14a-9. We contemplate that this 
solicitation would be made in accordance with the exemption set out in 
proposed Exchange Act Rule 14a-11(f)(2). The notice would be filed with 
the Commission in the following manner: \131\
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    \131\ The requirement to file this information with the 
Commission is set forth in proposed Exchange Act Rule 14a-6(q).
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    [sbull] The filing would include a cover page in the form set forth 
in Exchange Act Schedule 14A, as proposed to be amended, with the 
appropriate box on the cover page marked;
    [sbull] The filing would be made under the subject company's 
Exchange Act file number; \132\ and
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    \132\ For a fund, the filing would be made under the subject 
company's Investment Company Act file number. See Section II.A.12., 
below.
---------------------------------------------------------------------------

    [sbull] The nominating security holder or nominating security 
holder group would be required to make the filing no later than two 
business days after providing the notice to the company.
c. Questions
    H.1. Are the proposed content requirements of the notice 
appropriate? Are there matters included in the notice that should be 
eliminated? Are there additional matters that should be included? For 
example, is there additional information that should be included with 
regard to the nominating security holder or nominating security holder 
group (e.g., disclosure similar to that required from participants in 
solicitations in opposition with regard to contracts, arrangements or 
understandings relating to the company's securities), or with regard to 
the security holder nominee?
    H.2. Are the required representations appropriate? Should there be 
additional representations? Should any of the proposed representations 
be eliminated?
    H.3. Is it appropriate to require that the notice (other than the 
copy of the Exchange Act Schedule 13G included in that notice) be filed 
with the Commission? Should additional or lesser information be filed 
with the Commission and be made publicly available? Is the proposed 
filing requirement appropriate? For example, should the notice be filed 
as an exhibit

[[Page 60800]]

to an amendment to the nominating security holder or nominating 
security holder group's Exchange Act Schedule 13G?
    H.4. When should the notice be required to be filed with the 
Commission? Should it be required to be filed at the time it is 
provided to the company? Should it be required to be filed within a 
specified period of time, such as two business days, after it is 
provided to the company, as is proposed? Should the information in the 
notice that is included in the company's proxy statement instead be 
filed on or about the date that the company releases its proxy 
statement to security holders?
    H.5. What should be the consequence to the nominating security 
holder or nominating security holder group of submitting the notice to 
the company after the deadline? Should such a late submission render 
the nominating security holder or nominating security holder group 
ineligible to use the nomination procedure, as is currently proposed 
under the rule? What should be the consequence to the nominating 
security holder or nominating security holder group of filing the 
notice with the Commission late? Should such late filing be viewed 
exclusively as a violation of Exchange Act Rule 14a-6 or should it 
affect eligibility to use the nomination procedure? Should the failure 
of a nominating security holder or nominating security holder group to 
file the notice with the Commission be viewed exclusively as a 
violation of Exchange Act Rule 14a-6 or should it affect eligibility to 
use the nomination procedure?
    H.6. The proposed notice requirements address both regularly 
scheduled annual meetings and circumstances where a company may not 
have held an annual meeting in the prior year or has moved the date of 
the meeting more than 30 days from the prior year. Under these 
circumstances, what is the appropriate date by which a nominating 
security holder must submit their notice to the company? We have 
proposed a standard similar to that currently used in connection with 
the Exchange Act Rule 14a-8 security holder proposal process. Is such a 
standard appropriate? If not, what standard would be more appropriate?
    H.7. As proposed, Exchange Act Rule 14a-11 includes a number of 
notice and other timing requirements. Should these timing requirements 
incorporate or otherwise address any advance notice provisions under 
state law or a company's governing instruments? If so, should any 
advance notice provisions govern? Should they instead be provided as an 
alternative to the timing provisions set out in the rule?
9. What Must the Company Do After It Receives a Notice From a 
Nominating Security Holder or a Nominating Security Holder Group Under 
Proposed Exchange Act Rule 14a-11?
a. Proposed Procedure
    We propose that a company that receives a nominee from a nominating 
security holder or nominating security holder group under the security 
holder nomination procedure in Exchange Act Rule 14a-11 would determine 
whether the nominating security holder or nominating security holder 
group has complied with proposed Exchange Act Rule 14a-11 and whether 
the nominee satisfies each of the requirements of the proposed 
procedure. Unless a company determines that it is not required to 
include a nominee from a nominating security holder or nominating 
security holder group in its proxy materials, the company would be 
required to include information regarding the security holder nominee 
in the company's proxy statement that it sends to its security holders, 
including the Web site address on which the nominating security holder 
or nominating security holder group intends to solicit in favor of its 
nominee, and include the name of the nominee on the company's proxy 
card that is included in those materials.\133\ The proposed procedure 
specifies the information regarding that nominee that the company must 
include in its proxy materials.\134\
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    \133\ These requirements are set forth in proposed Exchange Act 
Rule 14a-11(a) and proposed amendments to Exchange Act Rule 14a-
4(b)(2).
    \134\ This information is specified in proposed Item 7(i) of 
Exchange Act Schedule 14A.
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    In addition to required disclosures related to each director 
candidate, companies may wish to include statements in the proxy 
statement supporting company nominees and/or opposing the nominating 
security holder or nominating security holder group nominee or 
nominees. While we believe that companies should be able to include 
such disclosure in the proxy statement, provided that it complies with 
Exchange Act Rule 14a-9, we also are of the view that nominating 
security holders or nominating security holder groups should be 
afforded the same opportunity, if the company chooses to include such a 
statement. Accordingly, we are proposing that if the company includes 
any such statement in its proxy materials, other than a mere 
recommendation to vote in favor of or withhold votes from specified 
candidates, a nominating security holder or nominating security holder 
group would be given the opportunity to include in the company's proxy 
statement a statement of support for the security holder nominee or 
nominees, of a length not to exceed 500 words.\135\ Should the company 
choose not to make any statement in its proxy statement supporting 
company nominees and/or opposing the security holder nominee or 
nominees, other than the mere recommendation described above, the 
company would not be required to include in its proxy statement the 
nominating security holder's supporting statement. In either case, both 
the company and the nominating security holder or nominating security 
holder group would be able to solicit in favor of their nominees 
outside the proxy statement, for example on a designated Web site, 
provided that such solicitations were made within the parameters of the 
applicable proxy rules.
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    \135\ Under the proposed rules, inclusion of a security holder 
nominee in the company's proxy materials would not require the 
company to file a preliminary proxy statement provided that the 
company was otherwise qualified to file directly in definitive form. 
In this regard, the proposed rules make clear that inclusion of a 
security holder nominee would not be deemed a solicitation in 
opposition. See proposed revisions to Exchange Act Rule 14a-6(a)(4) 
and Note 3 to that rule.
---------------------------------------------------------------------------

    With regard to the company's proxy card, similar to the current 
practice with regard to security holder proposals submitted pursuant to 
Exchange Act Rule 14a-8, the company could identify any security holder 
nominees as such and recommend that security holders vote against, or 
withhold votes from, those nominees and in favor of the management 
nominees on the form of proxy. The company must otherwise present the 
nominees in an impartial manner in accordance with Exchange Act Rule 
14a-4. Under the current rules, a company may provide security holders 
with the option to vote for or withhold authority to vote for the 
company's nominees as a group, provided that security holders also are 
given a means to withhold authority for specific nominees. In our view, 
this option would not be appropriate where the company's proxy card 
includes security holder nominees, as grouping the company's nominees 
may make it easier to vote for all of the company's nominees than to 
vote for the security holder nominees in addition to some of the 
company nominees. Accordingly, the proposed rules would not permit a 
company to provide security holders the option of voting for or 
withholding authority to vote for the company nominees as a group, but 
would instead

[[Page 60801]]

require that each candidate be voted on separately.\136\
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    \136\ We anticipate that companies would continue to be able to 
solicit discretionary authority to vote a security holder's shares 
for the company nominees, as well as to cumulate votes for the 
company nominees in accordance with applicable state law, where such 
state law provides for cumulative voting.
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    A company may determine that it is not required to include a 
nominee from a nominating security holder or nominating security holder 
group in its proxy materials if it determines any of the following:
    [sbull] The security holder nomination procedure in proposed 
Exchange Act Rule 14a-11 is not applicable to the company;
    [sbull] The nominating security holder or nominating security 
holder group has not complied with the requirements of the procedure;
    [sbull] The nominee does not meet the requirements of the 
procedure;
    [sbull] Any representation required to be included in the notice to 
the company is false in any material respect; or
    [sbull] The company has received more nominees than it is required 
to include by proposed Exchange Act Rule 14a-11 and the nominating 
security holder or nominating security holder group is not entitled to 
have its nominee included in that situation.\137\
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    \137\ See proposed Exchange Act Rule 14a-11(a).
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    The nominating security holder or nominating security holder group 
would need to be made aware of the company's determination whether or 
not to include the security holder nominee in sufficient time to 
consider the validity of any determination to exclude the nominee. As 
such, the company would be required to notify the nominating security 
holder or nominating security holder group, in writing, of its 
determination. As proposed, the company would have to provide this 
notice promptly, but in no case less than 30 calendar days before the 
date of the company's proxy statement released to security holders in 
connection with the previous year's annual meeting and, where the 
company did not hold an annual meeting in the previous year, or if the 
date of this year's annual meeting has been changed by more than 30 
days from the date of the previous year's meeting, then the notice must 
be provided a reasonable time before the company mails its proxy 
materials for the current year. If the company determines that it is 
entitled to exclude the nominee, the notice must include the following 
information regarding the company's determination:
    [sbull] A description of the determination made by the company's 
board of directors, including an affirmative statement of its 
determination not to include that specific nominee;
    [sbull] A discussion of the specific requirement or requirements of 
Exchange Act Rule 14a-11 that the company's board of directors has 
determined permit the company not to include that specific nominee; and
    [sbull] A discussion of the specific basis for the belief of the 
company's board of directors that the company is permitted to not 
include that specific nominee.
    The company would be required to include in its proxy statement for 
the meeting for which the nominee was submitted a statement that it has 
made such a determination as well as disclosure of the information 
relating to that determination that the company included in the notice 
to the nominating security holder.
    If the company determines that it must include the security holder 
nominee, it would be required to advise the nominating security holder 
or nominating security holder group of this determination and state 
whether the company intends to include in its proxy statement 
disclosure opposing the security holder nominee and/or supporting 
company nominees. If the company intends to include such a statement, 
it must advise the nominating security holder or nominating security 
holder group that it may submit a statement of not more than 500 words 
supporting the security holder nominee(s). The company also must advise 
the nominating security holder or nominating security holder group of 
the date by which this statement must be provided to the company, which 
could not be less than 10 business days from the date of the company's 
notice to the security holder. The nominating security holder or 
nominating security holder group's supporting statement would be viewed 
as soliciting material and would therefore be required to be filed as 
such by the nominating security holder in accordance with proposed 
Exchange Act Rule 14a-11(f)(2) and proposed Exchange Act Rule 14a-6(p), 
on or about the date that the company's proxy statement is first 
released to security holders.
b. Questions
    I.1. Is it appropriate to require that the company include in its 
proxy statement a supporting statement by the nominating security 
holder or nominating security holder group? If so, is it appropriate to 
limit this requirement to instances where the company wishes to make a 
statement opposing the nominating security holder's nominee or nominees 
and/or supporting company nominees? Is it appropriate to limit the 
supporting statement to 500 words? If not, what limit, if any, is more 
appropriate? Is it appropriate to require filing of the statement on 
the date that the company releases its proxy statement to security 
holders? If not, what filing requirement would be appropriate?
    I.2. Is it appropriate for the company to make the specified 
determinations regarding the basis on which a nominee would not be 
included? By what means should a company's determination be subject to 
review? By the courts? Should there be an explicit statement by the 
Commission regarding this review? Should any determination by the 
company be subject to review by the Commission or its staff? Should 
there be an explicit provision for such review, as, for example, with 
security holder proposals under Exchange Act Rule 14a-8?
    I.3. Proposed Exchange Act Rule 14a-11(a)(3) provides that a 
company is not required to include a security holder nominee where 
either: (a) The nominee's candidacy or, if elected, board membership, 
would violate controlling state law, federal law or rules of a national 
securities exchange or national securities association, (b) the 
nominating security holder's notice is not adequate, (c) any 
representation in the nominating security holder's notice is false in 
any material respect, or (d) the nominee is not required to be included 
in the company's proxy materials due to the proposed limitation on the 
number of nominees required to be included. Instruction 4 to proposed 
Exchange Act Rule 14a-11(a)(3) provides that the company shall 
determine whether any of these events have occurred. Should the 
nomination procedure include a procedure for a company to gather 
information additional to that included in the notice that is 
reasonably necessary for the company to make its determination in this 
regard? If so, please respond to the following additional questions.
    a. Should the company be provided with a maximum amount of time to 
request specific information (e.g., three days, five days, one week, 
two weeks, or one month)?
    b. Should nominating security holders and/or nominees be provided 
with a maximum amount of time to respond to such a request (e.g., three 
days, five days, one week, two weeks, or one month)?
    c. Should the procedure prescribe the type of information that a 
company may request from a nominating security holder or nominee? 
Should the

[[Page 60802]]

procedure specify those representations in the nominating security 
holder's notice to the company with regard to which the company may 
request information?
    d. Should the procedure include a method for a company to obtain 
follow-up information after a nominating security holder or nominee 
submits an initial response? If so, should that follow-up method have 
similar time frames and informational standards to those related to the 
initial request and response?
    e. Should the rule explicitly state that a nominee may be excluded 
from a company's proxy materials if the nominating security holder or 
nominee does not provide the requested information in the required 
timeframe, or if the information does not confirm the representations 
included in the notice to the company, or is it sufficient to rely on 
the proposed provision that permits the exclusion of nominees when a 
representation is false in any material respect? In order to facilitate 
reliance on this proposed provision if a nominating security holder or 
nominee fails to provide requested information, would it be appropriate 
to require that a nominating security holder represent that the 
nominating security holder or nominee will respond to a request by the 
company for information that is reasonably necessary to confirm the 
accuracy of representations of the nominating security holder?
    f. Should this procedure be the same for operating companies, 
registered investment companies, and business development companies? 
Should there be unique procedures for different types of entities? If 
so, what is unique to a particular type of entity that would require a 
unique procedure?
    I.4. As proposed, the company must provide the nominating security 
holder or nominating security holder group with notice of its 
determination whether to include in its proxy statement the security 
holder nominee by a date that will generally fall approximately 30 days 
prior to the date the company will mail its proxy statement. Does this 
requirement allow the nominating security holder or nominating security 
holder group adequate time to contest a company's determination with 
regard to a potential security holder nominee? If not, what timing 
would be more appropriate? Is the timing requirement with regard to the 
nominating security holder's submission of its statement of support to 
the company appropriate? If not, what timing would be appropriate?
    I.5. As proposed, the rule would not provide a mechanism by which a 
nominating security holder or nominating security holder group could 
``cure'' a defective notice. Would such a ``cure'' period, similar to 
that currently provided under Exchange Act Rule 14a-8, be appropriate? 
If so, how and by what date should a company be required to notify a 
nominating security holder or nominating security holder group of a 
defect in the notice? How long should the nominating security holder or 
nominating security holder group have to cure any defects? Are there 
any defects that would not require notice by the company, for example, 
where a defect could not be remedied?
    I.6. As proposed, inclusion of a security holder nominee in the 
company's proxy materials would not require the company to file a 
preliminary proxy statement provided that the company was otherwise 
qualified to file directly in definitive form. In this regard, the 
proposed rules make clear that inclusion of a security holder nominee 
would not be deemed a ``solicitation in opposition.'' Is it appropriate 
to view the inclusion of a nominee in this manner or should the 
inclusion of a nominee instead be viewed as a solicitation in 
opposition that would require a company to file its proxy statement in 
preliminary form? Should we view inclusion of a security holder nominee 
as a solicitation in opposition for other purposes (e.g., expanded 
disclosure obligations)?
    I.7. As proposed, the rule would prohibit companies from providing 
security holders the option of voting for the company's slate of 
nominees as a whole. Should we allow companies to provide that option 
to security holders? Are any other revisions to the form of proxy 
appropriate?
10. How Would the Liability Provisions in the Federal Securities Laws 
Apply to Statements Made By the Company and the Nominating Security 
Holder or Nominating Security Holder Group?
a. Exchange Act Liability for Statements
    It is our intent that the nominating security holder or nominating 
security holder group be liable for any false or misleading statements 
included in the notice provided to the company by the nominating 
security holder or nominating security holder group. The proposed rules 
contain express language, modeled on Exchange Act Rule 14a-
8(l)(2),\138\ providing that the company would not be responsible for 
that disclosure.\139\
---------------------------------------------------------------------------

    \138\ 17 CFR 240.14a-8(l)(2).
    \139\ See proposed Exchange Act Rule 14a-11(e). Exchange Act 
Rule 14a-8(l)(2) applies with respect to proposals and supporting 
statements that are submitted by shareholders and then required to 
be repeated in the company's proxy materials by Exchange Act Rule 
14a-8. In this regard, Exchange Act Rule 14a-8 states that ``the 
company is not responsible for the contents of [the shareholder 
proponent's] proposal or supporting statement.''
---------------------------------------------------------------------------

b. Securities Act and Exchange Act Liability Resulting From 
Incorporation by Reference
    As proposed, the security holder nomination procedure would provide 
that any information that is provided to the company in the notice from 
the nominating security holder or nominating security holder group 
(and, as required, filed with the Commission by the nominating security 
holder or nominating security holder group) and then included in the 
company's proxy materials would not be incorporated by reference into 
any filing under the Securities Act or the Exchange Act unless the 
company determines to incorporate that information by reference 
specifically into that filing.\140\ However, to the extent the company 
does so incorporate that information by reference, we would consider 
the company's disclosure of that information as the company's own 
statement for purposes of the antifraud and civil liability provisions 
of the Securities Act or the Exchange Act, as applicable.
---------------------------------------------------------------------------

    \140\ See the Instruction to proposed Item 7(i) of Exchange Act 
Schedule 14A.
---------------------------------------------------------------------------

c. Questions
    J.1. Is it appropriate to characterize the statements in the 
nominating security holder's notice as the nominating security holder's 
representations and not the company's? Does the proposal make clear 
that the nominating security holder would be responsible for the 
information submitted to the company? Should the proposal characterize 
these statements differently? If so, please explain in what manner.
    J.2. Does the proposal make clear the company's responsibilities 
when it includes such information in its proxy materials? Should the 
proposal include language otherwise addressing a company's 
responsibility for repeating statements that it knows are not accurate?
    J.3. Should information provided by nominating security holders or 
nominating security holder groups be deemed incorporated by reference 
into Securities Act or Exchange Act filings? Why?

[[Page 60803]]

11. How Do the Other Exchange Act Proxy Rules Apply to Solicitations by 
the Nominating Security Holder or Nominating Security Holder Group?
a. Discussion
    As proposed, Exchange Act Rule 14a-11 would permit security holders 
to form groups that would aggregate their securities in order to meet 
the minimum ownership threshold of more than 5% to nominate a director 
candidate under the rule. Accordingly, we anticipate that security 
holders would, in many instances, engage in communications with other 
security holders in an effort to form these nominating security holder 
groups that would be deemed solicitations under the proxy rules. In an 
effort to facilitate these types of communications, we are proposing a 
limited exemption from certain of the proxy rules that would enable 
security holders to communicate for the limited purpose of forming a 
nominating security holder group without filing and disseminating a 
proxy statement. To qualify for the exemption, security holders would 
have two options. The communications would be made either to a limited 
number of security holders or, in the alternative, to an unlimited 
number of security holders, provided that the communication is limited 
in content, as described below, and filed with the Commission.\141\
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    \141\ See proposed Exchange Act Rule 14a-11(f)(1).
---------------------------------------------------------------------------

    As proposed, Exchange Act Rules 14a-3 to 14a-6(o),\142\ 14a-8, 14a-
10, and 14a-12 to 14a-15 \143\ would not apply to any solicitation by 
or on behalf of any security holder in connection with the formation of 
a nominating security holder group, provided that:
---------------------------------------------------------------------------

    \142\ 17 CFR 240.14a-3--14a-6(o).
    \143\ 17 CFR 240.14a-10--14a-15.
---------------------------------------------------------------------------

    [sbull] The total number of persons solicited is not more than 30; 
or
    [sbull] Each written communication includes no more than:

--A statement of the security holder's intent to form a nominating 
security holder group in order to nominate a director under the 
proposed rule;
--The percentage of securities that the security holder beneficially 
owns or the aggregate percentage owned by any group to which the 
security holder belongs; and
--The means by which security holders may contact the soliciting party; 
and

    [sbull] Any soliciting material published, sent or given to 
security holders in accordance with this paragraph is filed with the 
Commission by the nominating security holder, under the company's 
Exchange Act file number, no later than the date the material is first 
published, sent or given to security holders.\144\ The soliciting 
material would be required to include a cover page in the form set 
forth in Exchange Act Schedule 14A, with the appropriate box on the 
cover page marked.
---------------------------------------------------------------------------

    \144\ For a fund, the filing would be made under the subject 
company's Investment Company Act file number. See Section II.A.12., 
below.
---------------------------------------------------------------------------

    Both the nominating security holder or nominating security holder 
group and the company may wish to solicit in favor of their nominees 
for director by various means, including U.S. mail, electronic mail, 
and Web site postings. While the company ultimately would file a proxy 
statement and could therefore rely on the existing proxy rules to 
solicit outside the proxy statement,\145\ security holders could be 
limited in their soliciting activities under the current proxy rules. 
Accordingly, we are proposing a new exemption to the proxy rules 
providing that solicitations by or on behalf of a nominating security 
holder or nominating security holder group in support of a nominee 
placed on the company's proxy card in accordance with the proposed 
rule, would not be subject to Exchange Act Rules 14a-3 to 14a-6(o), 
14a-8, 14a-10, and 14a-12 to 14a-15, provided that:
---------------------------------------------------------------------------

    \145\ See Exchange Act Rule 14a-12.
---------------------------------------------------------------------------

    [sbull] The soliciting party does not, at any time during such 
solicitation, seek directly or indirectly, either on its own or 
another's behalf, the power to act as proxy for a security holder and 
does not furnish or otherwise request, or act on behalf of a person who 
furnishes or requests, a form or revocation, abstention, consent or 
authorization;
    [sbull] Each written communication includes:

--The identity of the nominating security holder or nominating security 
holder group and a description of his or her direct or indirect 
interests, by security holdings or otherwise;
--A prominent legend in clear, plain language advising security holders 
that a security holder nominee is or will be included in the company's 
proxy statement and to read the company's proxy statement when it 
becomes available because it includes important information. The legend 
also must explain to security holders that they can find the proxy 
statement, other soliciting material and any other relevant documents, 
at no charge on the Commission's Web site; and

    [sbull] Any soliciting material published, sent or given to 
security holders in accordance with this paragraph must be filed by the 
nominating security holder or nominating security holder group with the 
Commission, under the company's Exchange Act file number, no later than 
the date the material is first published, sent or given to security 
holders.\146\ Three copies of the material would at the same time be 
filed with, or mailed for filing to, each national securities exchange 
upon which any class of securities of the company is listed and 
registered. The soliciting material would be required to include a 
cover page in the form set forth in Exchange Act Schedule 14A, with the 
appropriate box on the cover page marked.\147\
---------------------------------------------------------------------------

    \146\ For a fund, the filing would be made under the subject 
company's Investment Company Act file number. See Section II.A.12., 
below.
    \147\ See proposed Exchange Act Rule 14a-11(f)(2).
---------------------------------------------------------------------------

b. Questions
    K.1. What requirements should apply to soliciting activities 
conducted by a nominating security holder? In particular, what filing 
requirements and specific parameters should apply to any such 
solicitations? For example, we have proposed that certain solicitations 
by security holders seeking to form a nominating security holder group 
be limited to no more than 30 security holders. Is this limitation 
appropriate? If not, what limitation would be appropriate, if any 
(e.g., fewer than 10 security holders, 10 security holders, 20 security 
holders, 40 security holders, more than 40 security holders)? In 
addition, is the alternate, content-based limitation appropriate? If 
not, what limitations would be more appropriate?
    K.2. Should communications in connection with a direct access 
security holder proposal, for example by security holders seeking to 
form a more than 1% group to submit a security holder proposal, be 
included in the exemption provided for communications between security 
holders seeking to form a nominating security holder group? Would such 
an exemption be necessary and/or appropriate? If so, what parameters 
should apply?
    K.3. Should all soliciting materials be filed with the Commission 
on the date of first use? For example, as proposed, security holder 
communications that are limited to no more than 30 security holders 
would be filed with the Commission. Would such filing render the 
limitation unworkable in that the communication would be readily 
accessible to security holders on EDGAR?
    K.4. We contemplate that solicitations in connection with elections 
involving Exchange Act Rule 14a-11 could involve electronic means. We 
have

[[Page 60804]]

provided that, where requested, the company would include in its proxy 
materials the Web site address where solicitation materials related to 
a security holder nominee may be found. Are there other steps that we 
should take to provide for or encourage the use of electronic means for 
these elections?
12. How Would the Proposed Rule Apply to Investment Companies?
a. Application of the Security Holder Nomination Procedure to 
Investment Companies
    We are proposing to apply the security holder nomination procedure 
in proposed Exchange Act Rule 14a-11 to funds. Funds currently are 
required to comply with the proxy rules under the Exchange Act when 
soliciting proxies, including proxies relating to the election of 
directors.\148\ As in the case of operating companies, the proposed 
rules are intended to improve the ability of fund security holders to 
participate meaningfully in the nomination and election of directors. 
The nomination procedure would apply to funds in the same manner that 
it would apply to operating companies, with the following modifications 
to reflect the different circumstances and reporting requirements 
applicable to funds.
---------------------------------------------------------------------------

    \148\ See Investment Company Act Rule 20a-1 [17 CFR 270.20a-1] 
(requiring funds to comply with Regulation 14A, Schedule 14A, and 
all other rules and regulations adopted pursuant to Section 14(a) of 
the Exchange Act 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)
---------------------------------------------------------------------------

    As in the case of operating companies, the proposed nomination 
procedure would become operative for a fund only after the occurrence 
of one or both of the nomination procedure triggering events described 
above.\149\ Funds would be required to provide disclosure regarding the 
occurrence of these nomination procedure triggering events parallel to 
that required for operating companies. However, because funds do not 
file quarterly reports on Exchange Act Form 10-Q, the disclosure would 
be included on Form N-CSR, which funds file semi-annually.\150\ We also 
are proposing to require disclosure in Form N-CSR regarding each matter 
submitted to a vote of security holders similar to that currently 
required by Item 4 of Part II of Exchange Act Form 10-Q, and to delete 
as duplicative Item 77C of Form N-SAR, which currently requires similar 
disclosure.\151\
---------------------------------------------------------------------------

    \149\ See Section II.A.3., above.
    \150\ Proposed Item 8 of Form N-CSR.
    \151\ Proposed Items 8(a), (b), (c), and (d) of Form N-CSR. 
Small business investment companies, which are not required to file 
Form N-CSR, would provide the required disclosure regarding matters 
submitted to a vote of security holders, and the new disclosure 
regarding the occurrence of any of the nomination procedure 
triggering events, under Item 102B of Form N-SAR. See proposed 
Instruction to Item 102B of Form N-SAR.
---------------------------------------------------------------------------

    As with operating companies, if the fund did not hold an annual 
meeting during the prior year, or if the date of the meeting has 
changed more than 30 days from the prior year, then the nominating 
security holder would be required to provide notice a reasonable time 
before the fund mails its proxy materials for the current year, as 
specified by the fund in an Exchange Act Form 8-K filed pursuant to 
proposed Item 13.\152\ The fund also would be required to disclose the 
date of the meeting in Item 13 of Exchange Act Form 8-K. Although funds 
generally are not required to file on Exchange Act Form 8-K, we are 
proposing to require them to file on Exchange Act Form 8-K for this 
limited purpose, in order to help ensure that security holders are made 
aware in a timely manner of the date by which they must submit a notice 
of intent to nominate a director.\153\
---------------------------------------------------------------------------

    \152\ Proposed Item 13 of Exchange Act Form 8-K; Instruction 5 
to proposed Exchange Act Rule 14a-11(a).
    \153\ See proposed Exchange Act Rule 13a-11(b)(2) and 15d-
11(b)(2).
---------------------------------------------------------------------------

    The proposals would require any nominating security holder or group 
of security holders to represent that its nominee to the board of a 
fund is not an ``interested person'' of the fund as defined in Section 
2(a)(19) of the Investment Company Act, rather than independent under 
the listing standards of a national securities exchange or national 
securities association, as in the case of operating companies.\154\ 
This ``interested person'' test also would apply to nominees by a 
security holder or security holder group for election to the board of 
directors of a business development company.\155\ We are proposing to 
substitute the Section 2(a)(19) test for the test applied to operating 
companies because this 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.
---------------------------------------------------------------------------

    \154\ See proposed Exchange Act Rule 14a-11(c)(4); 15 U.S.C. 
80a-2(a)(19).
    \155\ Business development companies are a category of closed-
end investment company that are not registered under the Investment 
Company Act, but are subject to certain provisions of that Act. See 
Sections 2(a)(48) and 54-65 of the Investment Company Act [15 U.S.C. 
80a-2(a)(48) and 80a-53-64].
---------------------------------------------------------------------------

    Because security holders of a mutual fund are not required to file 
Exchange Act Schedule 13G, the proposals would require a nominating 
security holder or security holder group for a mutual fund to include 
the following information, similar to certain information that would 
otherwise be required on Exchange Act Schedule 13G, as part of the 
notice to the fund of the security holder's intent to require its 
nominee on the company's proxy card: \156\
---------------------------------------------------------------------------

    \156\ See proposed Exchange Act Rule 14a-11(c)(11).
---------------------------------------------------------------------------

    [sbull] The percentage of each class of securities of the fund that 
the individual owns beneficially, directly or indirectly, and the 
number of shares as to which the person has:

--Sole power to vote or to direct the vote;
--Shared power to vote or to direct the vote;
--Sole power to dispose or to direct the disposition of such shares; 
and
--Shared power to dispose or to direct the disposition of such shares; 
\157\ and
---------------------------------------------------------------------------

    \157\ For purposes of determining the amount of outstanding 
securities of a class of equity securities, the security holder 
generally could rely upon information set forth in the fund's most 
recent report on Form N-CSR. See proposed Instruction to Exchange 
Act Rule 14a-11(c)(11)(i).

    [sbull] A certification, signed by each person on whose behalf the 
notice is filed or his or her authorized representative, that the 
securities have been held continuously for at least three years.\158\
---------------------------------------------------------------------------

    \158\ See proposed Exchange Act Rule 14a-11(c)(11)(ii).
---------------------------------------------------------------------------

    This information would be in addition to the information required 
to be included in the security holder notice by any nominating security 
holder or member of a nominating security holder group.\159\ The 
security holder notice, as well as any soliciting material published, 
sent, or given to security holders in connection with the formation of 
a nominating security holder group, would be required to be filed under 
the fund's Investment Company Act file number.\160\
---------------------------------------------------------------------------

    \159\ See proposed Exchange Act Rule 14a-11(c)(9).
    \160\ See proposed Exchange Act Rules 14a-11(f)(1)(iii) and 14a-
11(f)(2)(iii).
---------------------------------------------------------------------------

    We note that the proposed security holder nomination procedure is 
consistent with the provisions in several of our exemptive rules under 
the Investment Company Act that require independent directors of funds 
relying on those rules to select and nominate any other independent 
directors.\161\ As discussed above, the proposed security

[[Page 60805]]

holder nomination procedure is premised upon the existence of a state 
law right of security holders to nominate candidates for election as 
directors.\162\ As we have previously stated, the exemptive rule 
provision requiring independent directors to select and nominate any 
other independent director was not intended to supplant or limit the 
ability of fund security holders under state law to nominate 
independent directors.\163\
---------------------------------------------------------------------------

    \161\ See Release No IC-24816 (Jan. 2, 2001) [66 FR 3734, 3737] 
(adopting a requirement that independent directors of funds select 
and nominate any other independent directors as a condition of 
relying on Investment Company Act Rules 10f-3, 12b-1, 15a-4(b)(2), 
17a-7, 17a-8, 17d-1(d)(7), 17e-1, 17g-1(j), 18f-3, or 23c-3).
    \162\ See Section IIA2a, above.
    \163\ See Release No IC-24816 (Jan. 2, 2001) [66 FR 3734, 3737].
---------------------------------------------------------------------------

b. Questions
    L.1. Should the proposed security holder nomination procedure apply 
to funds? If so, to which funds should it apply? Are there any aspects 
of the proposed nomination procedure that should be modified in the 
case of funds?
    L.2. Should we apply the ``interested person'' standard of Section 
2(a)(19) of the Investment Company Act with respect to the 
representation that a security holder nominee be independent from a 
company that is a fund? Should the ``interested person'' standard also 
apply to security holder nominees for election to the board of 
directors of a business development company? Should we instead apply a 
different independence standard to funds or business development 
companies, such as the definition of independence in Exchange Act Rule 
10A-3? \164\
---------------------------------------------------------------------------

    \164\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    L.3. Is it appropriate to require a nominating security holder or 
group of security holders of a mutual fund to provide disclosure of its 
5% beneficial ownership of the fund's securities in its notice to the 
fund of its intent to require its nominee on the fund's proxy card? If 
so, what requirements from Exchange Act Schedule 13G (or other 
information) should be required to be included in the notice? Should 
such a security holder or group instead be required to file on Exchange 
Act Schedule 13G upon reaching the 5% beneficial ownership threshold, 
in order to provide the fund with notice in advance that the security 
holder or group has reached this threshold? If so, are there any 
requirements of Exchange Act Schedule 13G that should be modified for 
this purpose?
    L.4. Are the triggering events proposed for use of the security 
holder nomination procedure appropriate for funds? Are there other 
nomination procedure triggering events that should be used?
    L.5. Should a fund be required to provide disclosure on Form N-CSR 
of whether it would be subject to the security holder nomination 
procedure as a result of a security holder vote with regard to any of 
the nomination procedure triggering events, and the required disclosure 
regarding such a nomination procedure triggering event? Will this 
disclosure allow sufficient time for a security holder to effectively 
exercise the nomination procedure? Should this disclosure instead be 
required on a different form?
    L.6. We are proposing to delete as duplicative Item 77C of Form N-
SAR, which currently requires disclosure regarding matters submitted to 
a vote of security holders similar to that required by Item 4 of Part 
II of Exchange Act Form 10-Q, and move this disclosure to Form N-CSR. 
Should this disclosure remain in Form N-SAR?
    L.7. Should a fund be required to disclose on Exchange Act Form 8-K 
the date by which a security holder or security holder group must 
submit the notice to the fund of its intent to require its nominees on 
the fund's proxy card? Should funds instead be permitted to provide 
this disclosure in a different manner?

B. Related Rule Changes

1. Beneficial Ownership Reporting Requirements
a. Discussion
    Any person who is directly or indirectly the beneficial owner of 
more than 5% of a class of equity securities registered under Section 
12 of the Exchange Act must report that ownership by filing an Exchange 
Act Schedule 13D with the Commission.\165\ There are exceptions to this 
requirement, however, that permit such a person to report that 
ownership on Exchange Act Schedule 13G rather than Exchange Act 
Schedule 13D.\166\ One exception permits filings on Exchange Act 
Schedule 13G for a specified list of qualified institutional investors 
who have acquired the securities in the ordinary course of their 
business and not with the purpose nor with the effect of changing or 
influencing control of the company. A second exception applies to 
persons who are not specified in the first exception. These beneficial 
owners of more than 5% of a subject class of securities may file on 
Exchange Act Schedule 13G if they have not acquired the securities with 
the purpose nor with the effect of changing or influencing control of 
the company and they are not directly or indirectly the beneficial 
owner of 20% or more of the subject class of securities.
---------------------------------------------------------------------------

    \165\ See Exchange Act Rule 13d-1.
    \166\ See, e.g., Exchange Act Rules 13d-1(b) and 13d-1(c).
---------------------------------------------------------------------------

    Two of the eligibility requirements for a nominating security 
holder or nominating security holder group under proposed Exchange Act 
Rule 14a-11 relate to that security holder or group filing an Exchange 
Act Schedule 13G to report their ownership. The first is that the 
security holder or group would have to be eligible to report their 
ownership on Exchange Act Schedule 13G, rather than Exchange Act 
Schedule 13D. The second is that the security holder or group would be 
required to have filed an Exchange Act Schedule 13G to report their 
ownership by the date that the nominating security holder or nominating 
security holder group submits its notice of intent to nominate a 
director to the company.\167\
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    \167\ This requirement would not extend the date by which the 
beneficial ownership report is otherwise due under Exhange Act 
Regulation 13D.
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    Central to Exchange Act Schedule 13G eligibility is that the 
security holder be a passive investor that has acquired the securities 
without the purpose nor with the effect of changing or influencing 
control of the company. In addition, security holders who are filing as 
qualified institutional investors must have acquired the securities in 
the ordinary course of their business. We believe that the formation of 
a security holder group solely for the purpose of nominating a director 
pursuant to proposed Exchange Act Rule 14a-11, the nomination of a 
director, soliciting activities in connection with such a nominee, or 
having a nominee elected as a director under the proposed procedure, 
should not be viewed as having a purpose or effect of changing or 
influencing control of the company. We therefore believe that 
beneficial owners who engage in these activities should be permitted to 
report on Exchange Act Schedule 13G, rather than Exchange Act Schedule 
13D. Accordingly, we are proposing to add an instruction to the 
description of the first and second categories of persons who may 
report their ownership on Exchange Act Schedule 13G to make clear our 
belief that a beneficial owner who acquires or holds a company's 
securities in connection with a nomination, soliciting activities, or 
election of a nominee under Exchange Act Rule 14a-11 should not be 
deemed to have a purpose or effect of changing or influencing the 
control of the company solely by virtue of making the nomination or 
engaging in such activities. Any activity other than those provided for 
under Exchange Act Rule

[[Page 60806]]

14a-11 would make these instructions inapplicable.
    To enable the functioning of the proposed procedure, we also 
propose to amend Exchange Act Schedule 13G to require that the security 
holder or group certify that they have owned at least the required more 
than 5% amount of the securities for the minimum time period of two 
years required in proposed Exchange Act Rule 14a-11. A security holder 
or group of security holders that previously had filed an Exchange Act 
Schedule 13G would be required to amend that Schedule to provide the 
required certification to make a nomination under proposed Exchange Act 
Rule 14a-11.\168\ Upon termination of the nominating security holder 
group, the group would file a final amendment to the Exchange Act 
Schedule 13G disclosing termination of the group and, therefore, the 
group's filing obligation on Exchange Act Schedule 13G.\169\ As is 
currently the case in determining that a group has been formed and a 
group filing is therefore required, the group would be required to file 
as such only so long as the security holders comprising that group 
continue to have an agreement to act together for the purpose of 
acquiring, holding, voting or disposing of the company's equity 
securities.\170\
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    \168\ The percentage of securities listed in such certification 
will be used not only to determine eligibility to submit a security 
holder nomination pursuant to proposed Exchange Act Rule 14a-11, but 
also to determine the security holder or security holder group with 
the largest percentage of eligible subject securities where more 
than one security holder or security holder group provides notice of 
its intention to submit a nomination pursuant to proposed Exchange 
Act Rule 14a-11 and is otherwise eligible to do so.
    \169\ This and other amendments would be filed in accordance 
with the existing timing requirements for beneficial holders who 
qualify as either qualified institutional investors or passive 
investors.
    \170\ See Exchange Act Rule 13d-5(b)(1) [17 CFR 240.13d-
5(b)(1)].
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b. Questions
    M.1. The proposal would provide that a security holder or security 
holder group would not, solely by virtue of nominating a director under 
proposed Exchange Act Rule 14a-11, soliciting on behalf of that 
candidate, or having that candidate elected, be viewed as having 
acquired securities for the purpose or effect of changing or 
influencing the control of the company. This provision would then 
permit those holders or groups of holders to report their ownership on 
Exchange Act Schedule 13G, rather than Exchange Act Schedule 13D. Is 
this approach appropriate? Should other conditions be required to be 
satisfied? If so, what other conditions?
    M.2. Should nominating security holders, including groups, be 
deemed to have a ``control'' purpose that would create additional 
filing and disclosure requirements under the Exchange Act beneficial 
ownership reporting standards?
    M.3. As proposed, security holders that intend to nominate a 
director pursuant to Exchange Act Rule 14a-11 would be required to 
disclose this intent on Exchange Act Schedule 13G. Those filers who 
originally filed an Exchange Act Schedule 13G without an Exchange Act 
Rule 14a-11 intent would be required to amend their Exchange Act 
Schedule 13G to disclose such intent if it exists. Is it appropriate to 
require such an amendment by existing filers? If not, how should such 
filers indicate their intent to make a nomination pursuant to Exchange 
Act Rule 14a-11? Are the security holder notice requirements of 
Exchange Act Rule 14a-11(c) sufficient for this purpose? Intent to use 
the nomination procedure would be evidenced in both new filings and 
amendments to already-filed Schedules by the beneficial owner checking 
the box on the cover page of the Schedule to identify the filing as 
having been made in connection with a nomination under the procedure 
and by making the proposed new certification regarding ownership of the 
required amount of company securities. Is this sufficient notice of the 
beneficial owner's intent to use the nomination procedure? Should we 
also require new disclosure related to such intent in a new item 
requirement to the Schedule? Would this be appropriate in light of the 
fact that Exchange Act Schedule 13G currently does not require such 
``purpose'' disclosure?
    M.4. As proposed, nominating security holders and nominating 
security holder groups would be required to amend their Exchange Act 
Schedule 13G filings in accordance with the existing timing 
requirements for qualified institutional investors and passive 
investors. Should we instead require that such filers amend on a more 
expedited basis? For example, should such filers be required to report 
changes in the information reported previously promptly after such 
change or within another, specified period of time? Should amendments 
be limited to material changes in the information reported if such an 
expedited requirement is used? Should the election as director of a 
nominating security holder group's nominee be deemed the termination of 
that group (provided that the group does not have an agreement to act 
together for some other purpose)? Should such an election require an 
amendment to the nominating security holder or nominating security 
holder group's Exchange Act Schedule 13G?
    M.5. Are there any qualified institutional investors under Exchange 
Act Rule 13d-1(b) that would be qualified to file on Exchange Act 
Schedule 13G but should not be included in the category of filers who 
may nominate a director using the proposed procedure? If so, please 
explain why.
    M.6. A related issue with regard to beneficial ownership reporting 
is whether the withhold votes nomination procedure trigger may result 
in increased numbers of ``vote no'' campaigns by security holders who 
are attempting to trigger the nomination procedure. The possibility of 
triggering Exchange Act Schedule 13D reporting requirements currently 
may have a chilling effect on security holders who otherwise would 
organize such an effort. With regard to this concern, do the current 
rules under Exchange Act Regulation 13D have such a chilling effect?
    Are the current rules sufficient to determine when such activities 
should require additional security holder filings? Should security 
holders who organize such a campaign be deemed to have a control 
purpose or effect that would necessitate filing on Exchange Act 
Schedule 13D rather than Exchange Act Schedule 13G? Should we issue 
specific guidance with regard to these ``vote no'' campaigns and the 
beneficial ownership reporting requirements generally? Should any such 
guidance be limited to circumstances where the security holder engaging 
in the ``vote no'' campaign does so solely to trigger the security 
holder nomination procedure?
2. Exchange Act Section 16
a. Proposed Amendments to Rules Under Exchange Act Section 16
    Eligible security holder groups under proposed Exchange Act Rule 
14a-11 may be concerned that using the proposed nomination procedure 
will subject them to Section 16 of the Exchange Act.\171\ Exchange Act 
Section 16 applies to every person who is the beneficial owner of more 
than 10% of any class of equity security registered under Section 12 of 
the Exchange Act (``10% owners''), and each officer and director 
(collectively with 10% owners,

[[Page 60807]]

``insiders'') of the issuer of such security. Generally:
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    \171\ 15 U.S.C. 78p.
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    [sbull] Exchange Act Section 16(a) requires an insider to file an 
initial report with the Commission disclosing his or her beneficial 
ownership of all equity securities of the issuer upon becoming an 
insider. To keep this information current, Exchange Act Section 16(a) 
also requires insiders to report changes in such holdings, in most 
cases within two business days following the transaction.\172\
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    \172\ Exchange Act Section 16(a) [15 U.S.C. 78p(a)].
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    [sbull] Exchange Act Section 16(b) provides the issuer (or security 
holders suing on behalf of the issuer) a private right of action to 
recover from an insider any profit realized by the insider from any 
purchase and sale (or sale and purchase) of any equity security of the 
issuer within any period of less than six months.\173\
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    \173\ Exchange Act Section 16(b) [15 U.S.C. 78p(b)].
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    [sbull] Exchange Act Section 16(c) makes it unlawful for an insider 
to sell any equity security of the issuer if the insider: (1) does not 
own the security sold; or (2) owns the security, but does not deliver 
it against the sale within specified time periods.\174\
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    \174\ Exchange Act Section 16(c) [15 U.S.C. 78p(c)].
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    We do not believe that a group formed solely for the purpose of 
nominating a director pursuant to proposed Exchange Act Rule 14a-11, 
soliciting in connection with the election of that nominee, or having 
that nominee elected as a director, would be the type of group that 
should be viewed as being aggregated together for purposes of Exchange 
Act Section 16. Their actions are fully disclosed and are not for a 
``control'' purpose, and they clearly do not have presumed ``insider'' 
status. Moreover, we believe it would be a disincentive to using the 
proposed security holder nomination procedure if security holders 
forming a group to nominate a director could become subject to Exchange 
Act Section 16 once the group owned over 10% of the company's equity 
securities. Accordingly, we are proposing an amendment to Exchange Act 
Rule 16a-1(a)(1), the rule that defines who is a 10% owner for Exchange 
Act Section 16 purposes, to exclude an Exchange Act Rule 14a-11 
nominating security holder group from the definition.\175\ These groups 
would remain subject to the general condition of the rule that they not 
have the purpose or effect of changing or influencing control of the 
issuer, but a note to Exchange Act Rule 16a-1(a)(1) would provide that 
members of nominating security holder groups would not be deemed to 
have a control purpose or effect solely by virtue of group 
membership.\176\ We are not proposing to exclude from the definition of 
beneficial ownership for purposes of Exchange Act Section 16 security 
holders whose individual ownership exceeds 10% and are not otherwise 
excluded under the current rule.
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    \175\ Proposed Exchange Act Rule 16a-1(a)(1)(i). Exchange Act 
Rule 16a-1(a)(1) also would be reorganized for clarity.
    \176\ Exchange Act Rule 16a-1(a)(1) [17 CFR 240.16a-1(a)(1)] 
also contains a general condition that the securities be held for 
the benefit of third parties or in customer or fiduciary accounts in 
the ordinary course of business, but this condition would not be 
applicable to nominating security holder groups. We believe that the 
requirement that they qualify for Exchange Act Schedule 13G rather 
than Exchange Act Schedule 13D provides adequate protection in this 
area.
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    Some security holders, particularly institutions and other 
entities, may be concerned that successful use of the proposed 
nomination procedure to elect a director may result in the nominating 
person also being deemed a director under the ``deputization'' theory 
developed by courts in Exchange Act Section 16(b) short-swing profit 
recovery cases.\177\ Under this theory it is possible for a person to 
be deemed a director subject to Exchange Act Section 16, even though 
the issuer has not formally elected or otherwise named that person a 
director. The judicial decisions in which this theory was applied do 
not establish precise standards for determining when ``deputization'' 
may exist. However, the express purpose of Exchange Act Section 16(b) 
is to prevent the unfair use of information by insiders through their 
relationships to the issuer.\178\ Accordingly, one factor that courts 
may consider in determining if Exchange Act Section 16(b) liability 
applies is whether, by virtue of the ``deputization'' relationship, the 
``deputizing'' entity's transactions in issuer securities may benefit 
from the deputized director's access to inside information.\179\
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    \177\ See Feder v. Martin Marietta, 406 F2d 260 (2d Cir.), cert. 
denied, 396 U.S. 1036 (1970); Blau v. Lehman, 368 U.S. 403 (1962); 
and Rattner v. Lehman, 193 F.2d 564 (2d Cir. 1952).
    \178\ Exchange Act Section 16(b) begins: ``For the purpose of 
preventing the unfair use of information which may have been 
obtained by such beneficial owner, director, or officer by reason of 
his relationship to the issuer. . . .''
    \179\ See, e.g., Feder v. Martin Marietta, at note 177, above.
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    Proposed Exchange Act Rule 14a-11 includes standards for 
establishing the independence of the nominee from the nominating 
security holder, or members of the nominating security holder group, as 
applicable. We believe that, given these independence standards the 
``deputization'' theory, whereby the beneficial ownership of a security 
holder or group is imputed to a ``deputized'' director (and director 
status imputed to the security holder or group), should not apply. In 
considering the proposed independence standards, discussed in Section 
II.A.8, above, commenters also should consider the director by 
``deputization'' theory, and whether the proposed standards should be 
modified in any way to make it less likely that in Exchange Act Section 
16(b) cases courts would find nominating security holders to be 
``deputized'' directors in circumstances where liability should not 
apply.
b. Questions
    N.1. Would the proposed Exchange Act Rule 16a-1(a)(1) amendments 
address nominating security holders and nominating security holder 
groups appropriately? Should the proposed exclusion be based on any 
additional or different conditions?
    N.2. If the Commission adopts a security holder nomination rule 
with an eligibility threshold of 10% or greater, would Exchange Act 
Section 16 reporting and short swing profit liability deter the 
formation of nominating security holder groups?

C. 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.

III. Paperwork Reduction Act

A. Background

    The proposed amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 
1995.\180\ We are submitting the proposal to the Office of Management 
and Budget for review in accordance with the PRA.\181\ The titles for 
the collections of information are:
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    \180\ 44 U.S.C. 3501 et seq.
    \181\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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    (1) ``Proxy Statements--Regulation 14A (Commission Rules 14a-1 
through

[[Page 60808]]

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)'' \182\ (OMB Control No. 3235-0057);
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    \182\ 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.
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    (3) ``Securities Ownership--Regulation 13D and 13G (Commission 
Rules 13d-1 through 13d-7 and Schedules 13D and 13G)'' (OMB Control No. 
3235-0145);
    (4) ``Form 10-K'' (OMB Control No. 3235-0063);
    (5) ``Form 10-KSB'' (OMB Control No. 3235-0420);
    (6) ``Form 10-Q'' (OMB Control No. 3235-0070);
    (7) ``Form 10-QSB'' (OMB Control No. 3235-0416);
    (8) ``Form 8-K'' (OMB Control No. 3235-0060);
    (9) ``Form N-CSR under the Investment Company Act of 1940 and 
Securities Exchange Act of 1934, Certified Shareholder Report'' (OMB 
Control No. 3235-0570);
    (10) ``Form N-SAR under the Investment Company Act of 1940, Semi-
Annual Report for Registered Investment Companies'' (OMB Control No. 
3235-0330); and
    (11) ``Rule 20a-1 under the Investment Company Act of 1940, 
Solicitations of Proxies, Consents, and Authorizations'' (OMB Control 
No. 3235-0158).
    These regulations, rules and forms were adopted pursuant to the 
Exchange Act and the Investment Company Act and set forth the 
disclosure requirements for securities ownership reports filed by 
investors and proxy and information statements,\183\ periodic reports 
and current reports filed by companies to ensure that investors are 
informed and can make informed voting or investing decisions. The hours 
and costs associated with preparing, filing and sending these schedules 
and forms 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 OMB control number.
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    \183\ 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. 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, and therefore are not 
covered by the proxy rules. In addition, companies that are not 
listed on a national securities exchange or traded on the Nasdaq 
Stock Market may not hold annual meetings and therefore would not be 
required to file a proxy or information statement.
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B. Summary of Proposed Amendments

    The proposed rules would, under certain limited circumstances, 
require companies to include in their proxy materials security holder 
nominees for election as director. Specifically, the proposed rules 
would create a mechanism for nominees of long-term security holders, or 
groups of long-term security holders, with significant holdings to be 
included in company proxy materials where security holders are 
permitted under state law to nominate directors and where evidence 
suggests that the company has been unresponsive to security holder 
concerns as they relate to the proxy process. For purposes of the PRA, 
we estimate the total annual incremental paperwork burden for operating 
companies, funds and security holders that would be required under our 
proposed rules to be approximately 1,793 hours of personnel time for 
operating companies, funds and security holders and a cost of 
approximately $409,000 for the services of outside professionals.\184\ 
As discussed further below, these total costs include all additional 
disclosure burdens associated with the proposed rules including burdens 
related to the triggering events, notice requirements and direct access 
itself.\185\ Compliance with the proposed 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.
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    \184\ For convenience, the estimated PRA hour burdens have been 
rounded to the nearest whole number, and the estimated PRA cost 
burdens have been rounded to the nearest $100. 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 and security holders (or 
security holder groups) in preparing these disclosures.
    \185\ The paperwork burden for funds will be discussed in the 
footnotes to Sections III.B.1-3., below.
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1. Applicability of Proposed Exchange Act Rule 14a-11
a. State Law Considerations
    The proposed rules would apply only where the company's security 
holders are permitted under state law to nominate a candidate or 
candidates for election as a director. We do not know the precise 
number of states that prohibit security holders from nominating a 
candidate or candidates for election as director or the number of 
companies that are permitted to and do/or (would) include a prohibition 
against nominating a candidate or candidates in their articles of 
incorporation or bylaws. We request comment and supporting empirical 
data, for purposes of the PRA, on any existing, applicable state law 
provisions that would prohibit security holders or security holder 
groups from nominating a candidate or candidates for election as 
director.
b. Nomination Procedure Triggering Events
    The proposed security holder nomination procedure would become 
operative for the company only after the occurrence of one or both of 
the following two nomination procedure triggering events:
    [sbull] At least one of the company's nominees for the board of 
directors for whom the company solicited proxies received ``withhold'' 
votes from more than 35% of the votes cast at an annual meeting of 
security holders held after January 1, 2004, at which directors were 
elected (provided, that this event may not occur in the case of a 
contested election to which Exchange Act Rule 14a-12(c) applies or an 
election to which the proposed security holder nomination procedure in 
Exchange Act Rule 14a-11 applies); or
    [sbull] A security holder proposal submitted pursuant to Exchange 
Act Rule 14a-8 providing that the company become subject to the 
security holder nomination procedure in proposed Exchange Act Rule 14a-
11(a) was submitted for a vote of security holders at an annual meeting 
of security holders held after January 1, 2004 by a security holder or 
group of security holders that held more than 1% of the company's 
securities entitled to vote on the proposal for one year as of the date 
the proposal was submitted and provided evidence of such holding to the 
company; and (b) that ``direct access'' proposal received more than 50% 
of the votes cast on that proposal at that meeting.
    Exchange Act Schedule 14A prescribes the information that a company 
must include in its proxy statement to ensure that security holders are 
provided material information relating to voting decisions. Exchange 
Act Schedule 14C prescribes the information that a company that is 
registered under Section 12 of the Exchange Act must include in its 
information statement in advance of a security holders' meeting when it 
is not

[[Page 60809]]

soliciting proxies from its security holders, including the taking of 
corporate action by written authorization or consent of security 
holders. Exchange Act Rule 14a-8 requires the company to include a 
security holder proposal in its Exchange Act Schedule 14A or 14C unless 
the security holder has not complied with the procedural requirements 
in Exchange Act Rule 14a-8 or the proposal falls within one of the 13 
substantive bases for exclusion in Exchange Act Rule 14a-8. Investment 
Company Act Rule 20a-1 requires registered investment companies to 
comply with Exchange Act Regulation 14A or 14C, as applicable.\186\
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    \186\ The annual responses to Investment Company Act Rule 20a-1 
reflect the number of proxy and information statements that are 
filed by funds.
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    For purposes of the PRA, we estimate the total annual incremental 
paperwork burden for operating companies and security holders or 
security holder groups to prepare the disclosure that would be required 
under this portion of the proposed rules to be approximately 648 hours 
of personnel time and a cost of approximately $64,800 for the services 
of outside professionals.\187\ These burdens and costs include the new 
disclosure requirement that the company notify security holders that it 
has received a proposal seeking direct access by a more than 1% 
security holder who has held the securities for at least one year. They 
also include the burdens and costs associated with the Exchange Act 
Rule 14a-8 security holder proposal process, including the security 
holder or security holder groups' preparation of the security holder 
proposal, the company's preparation of a no-action request, if 
applicable, and the company's preparation of the statement of 
opposition if the proposal is included in the proxy materials.\188\ 
Because Exchange Act Rule 14a-8 already requires companies to have a 
process for reviewing security holder proposals, the proposed 
amendments should not impose new incremental burdens and costs on 
companies in connection with such reviews or with training personnel.
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    \187\ For funds, we estimate that 14 Exchange Act Rule 14a-8 
security holder proposals seeking direct access will be submitted by 
holders of 1% or more of a fund's securities each year. We estimate 
that the incremental disclosure burden will be 1 hour for each fund 
to disclose on Exchange Act Schedule 14A that it has received a 
direct access security holder proposal by a more than 1% security 
holder who has held the securities for at least one year, for a 
total of 14 hours. We estimate that the annual incremental 
disclosure burden for the proponent's preparation of the proposal 
and the Exchange Act Rule 14a-8 no-action process would average 15 
hours per proposal, for a total of 210 hours (14 proposals x 15 
hours). Hence, the total burden would be 224 hours (14 hours + 210 
hours), corresponding to 168 hours of personnel time and $16,800 of 
costs for services of outside professionals. This burden would be 
added to the PRA burden of Rule 20a-1.
    \188\ We recognize that a company that receives a security 
holder proposal has no obligation to make a no-action request under 
Exchange Act Rule 14a-8 unless it intends to exclude the proposal 
from its proxy materials. Similarly, we recognize that a company is 
not obligated to provide a statement of opposition.
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    We believe that the annual incremental PRA burden due to the 
triggering events is likely to arise from the submission of Exchange 
Act Rule 14a-8 security holder proposals by holders of 1% or more of a 
company's securities providing that the company become subject to the 
security holder nomination procedure in proposed Exchange Act Rule 14a-
11. We estimate that the number of such proposals would be 54.\189\ We 
estimate an annual incremental disclosure burden of 1 hour for each 
company to disclose that it has received a security holder proposal 
seeking direct access by an over 1% security holder who has held the 
securities for one year, for a total of 54 hours. We estimate that the 
annual incremental disclosure burden for the proponent's preparation of 
the proposal and the Exchange Act Rule 14a-8 no-action process would 
average 15 hours per proposal, for a total of 810 hours.\190\
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    \189\ We estimate that 5% of the total number of security holder 
proposals received will be direct access proposals Based on an IRRC 
estimate that there will be 1,070 security holder proposals 
submitted in 2003, this corresponds to 54 proposals.
    \190\ We estimate an annual incremental disclosure burden of 
approximately 25 hours for each Exchange Act Rule 14a-8 no-action 
request that a company makes The Division of Corporation Finance 
received 465 Exchange Act Rule 14a-8 proposals in the 2002 proxy 
season. Based on the statistic provided by IRRC that 802 security 
holder proposals were filed in the 2002 proxy season, we estimate 
that companies will seek no-action relief on 58% of the proposals 
received 58% of 25 hours would correlate to 15 hours for each 
security holder proposal that a company receives.
---------------------------------------------------------------------------

    We do not believe that there would be any increased paperwork 
burden under this portion of the proposed rules for the triggering 
event related to company nominees for directors who receive over 35% 
``withhold'' votes.
    We estimate that this total burden of 864 hours would result in 648 
hours of internal time and $64,800 of outside costs.
2. Notice Requirements
    Proposed Exchange Act Rule 14a-11 would require each company to 
disclose the following:
    [sbull] Each company would be required to disclose the security 
holder vote with regard to any of the nomination procedure triggering 
events in its quarterly report on Exchange Act Form 10-Q or 10-QSB for 
the period in which the matter was submitted to a vote of security 
holders; where the nomination procedure triggering event occurred 
during the fourth quarter of the fiscal year, on Exchange Act Form 10-K 
or 10-KSB; or semi-annually on Investment Company Act Form N-CSR, in 
the case of a fund;\191\ and
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    \191\ We are proposing that funds be required to provide 
disclosure on Form N-CSR regarding each matter submitted to a vote 
of security holders and to delete as duplicative Item 77C of Form N-
SAR, which currently requires similar disclosure We estimate that 
281 matters submitted for a vote of security holders were disclosed 
on Item 77C of Form N-SAR during the most recent 12 months. We 
estimate that the removal of Item 77C will decrease the PRA burden 
for Form N-SAR by 0.5 hours per filing, or 140.5 hours total. This 
burden of 140.5 hours will be added to Form N-CSR under our 
proposals, together with the proposed new disclosure regarding the 
nomination procedure triggering events.
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    [sbull] Each company would be required to include in that Exchange 
Act Form 10-Q, 10-QSB, Exchange Act Form 10-K or 10-KSB, or Investment 
Company Act Form N-CSR, information disclosing that it would be subject 
to the security holder nomination procedure as a result of such vote, 
if applicable.
    If the company did not hold an annual meeting during the previous 
year, or if the date of the current year's annual meeting has been 
changed by more than 30 days from the previous year's annual meeting, 
the company would be required to disclose the date by which security 
holders must submit their notice to require that the company include 
the security holder's nominee on the company's proxy card.
    For purposes of the PRA, we estimate the annual incremental 
paperwork burden for companies to prepare the disclosure that would be 
required under this portion of the proposed rules to be approximately 
86 hours of company personnel time and a cost of approximately $8,700 
for the services of outside professionals.\192\ This estimate includes 
the company's cost to disclose the security holder vote with regard to 
a security holder proposal seeking direct access,\193\ the company's 
cost to disclose

[[Page 60810]]

that it would be subject to the security holder nomination procedure, 
if applicable, and the company's cost to disclose the date of the 
annual meeting if the company did not hold an annual meeting during the 
prior year or if the date of the meeting changed by more than one year. 
This 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.
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    \192\ For funds, we estimate that 14 funds will be required to 
provide disclosure on Form N-CSR regarding a direct access security 
holder proposal each year, which we estimate would average 
approximately 0.5 burden hours, for a total of 7 hours. We estimate 
that 14 funds will need to disclose on Form N-CSR that they are 
subject to the security holder nomination procedure, which we 
estimate would average approximately 1 burden hour, for 14 hours 
total. Hence, the total burden would be 21 hours (7 hours + 14 
hours), corresponding to 16 hours of fund personnel time and $1,500 
for the services of outside professionals. This burden would be 
added to the PRA burden of Form N-CSR.
    \193\ Item 4 of Part II of Exchange Act Forms 10-Q and 10-QSB 
and Item 4 of Part I of Exchange Act Forms 10-K and 10-KSB currently 
require that companies disclose the results of the voting on all 
matters submitted to a vote of security holders during the period 
covered by the report. Because security holders would be allowed to 
submit a direct access proposal under Exchange Act Rule 14a-8 as a 
result of the proposed rules, there would be an annual incremental 
disclosure burden to disclose the vote on this proposal.
---------------------------------------------------------------------------

    As noted above, we estimate that 54 companies would receive a 
direct access security holder proposal, which we estimate would average 
approximately 0.5 hours burden hours, for a total of 27 hours. We 
estimate that 73 companies would need to disclose that they are subject 
to the security holder nomination procedure, which we estimate would 
average approximately 1 burden hour, for 73 hours annually.\194\ We 
estimate that 3 of these 73 companies would need to file the Exchange 
Act Form 8-K because the company did not hold an annual meeting during 
the prior year or the date of the annual meeting has changed more than 
30 days from the prior year.\195\ We estimate 5 burden hours to 
prepare, review and file the Exchange Act Form 8-K, for a total of 15 
hours.
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    \194\ Our best estimate is that 11% of U.S. exchange-traded 
companies have director withhold votes of more than 35%, which 
corresponds to approximately 57 companies We combine this estimate 
with our estimate that 30% of companies will receive direct access 
proposals from holders of more than 1% of the companies' securities 
that will pass, which corresponds to 16 proposals.
    \195\ Based on a review of 1,255 companies' annual meeting 
dates, we estimate that 375% of companies' annual meeting dates 
changed by more than 30 days from the prior year. 3.75% of 73 
companies would correspond to roughly 3 companies that would be 
required to file a Form 8-K Source: IRRC.
---------------------------------------------------------------------------

    This total burden of 115 hours corresponds to 86 hours of internal 
time and $8,700 in outside costs.
3. Exchange Act Rule 14a-11 Nomination Procedure
    To be eligible to submit a nomination in accordance with proposed 
Exchange Act Rule 14a-11, a security holder or group of security 
holders would be required to:
    [sbull] Beneficially own, either individually or in the aggregate, 
more than 5% of the company's securities that are eligible to vote for 
the election of directors at the next annual meeting of security 
holders (or, in lieu of such an annual meeting, a special meeting of 
security holders), with each of the securities used for purposes of 
calculating that ownership having been held continuously for at least 
two years as of the date of the nomination and intend to continue to 
own those securities through the date of that annual or special 
meeting;
    [sbull] Be eligible, as to the security holder or each member of 
the security holder group, to report beneficial ownership on Exchange 
Act Schedule 13G and have filed an Exchange Act Schedule 13G or an 
amendment to Exchange Act Schedule 13G reporting their beneficial 
ownership as a passive or institutional investor (or group), which 
Schedule must include a certification that the security holder or 
security holder group has held more than 5% of the subject securities 
for at least two years;\196\ and
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    \196\ A nominating security holder or security holder group of a 
mutual fund would be required to file information reporting the 
security holder or security holder group's beneficial ownership as 
part of the security holder's notice to the fund, pursuant to 
proposed Exchange Act Rule 14a-11(c)(11).
---------------------------------------------------------------------------

    [sbull] Provide notice to the company of its intent to require that 
the company include that security holder's nominee(s) on the company's 
proxy card and make certain representations and provide information 
about the candidate or candidates.
    Unless the company determines that it is not required to include a 
nominee from a nominating security holder or nominating security holder 
group in its proxy materials, the company would be required to include 
information regarding the security holder nominee in the company's 
proxy statement. In addition, if the company chooses to include 
statements supporting company nominees and/or opposing the nominating 
security holder's nominees, nominating security holders would be 
afforded the same opportunity. If the company determines that it is not 
required to include a nominee in its proxy materials, it must provide 
notice of its determination.
    For purposes of the PRA, we estimate the total annual incremental 
paperwork burden for operating companies and security holders or 
security holder groups to prepare the disclosure that would be required 
under this portion of the proposed rules to be approximately 668 hours 
of personnel time and a cost of approximately $282,600 for the services 
of outside professionals.\197\ This estimate includes the security 
holder or security holder group's preparation of the nominating 
security holder or nominating security holder group's notice to the 
company of its intent to require that the company include that security 
holder's nominee on the company's proxy card; the security holder or 
security holder group's preparation and filing of an Exchange Act 
Schedule 13G and the related certification; and the security holder or 
security holder group's preparation of a statement of support for its 
candidate or candidates and/or opposition to the company's nominees, if 
applicable. This estimate also includes the company's preparation and 
review of the information to be included in the proxy materials if a 
nominee is to be included in the proxy materials, and the company's 
preparation and review of its statement of opposition to the security 
holder's nominee, if applicable. If the company determines that the 
security holder's nominee can be excluded from the proxy materials, 
this annual incremental burden also includes the company's preparation 
of the notice as to why the nominee is not eligible.
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    \197\ For funds, we estimate that the proposed access rule would 
be triggered in 14 funds each year, and in 9 of these funds at least 
one security holder or security holder group will make a nomination. 
Further, we estimate that, in funds where a nomination is made, an 
average of 2 security holders or groups will submit a nomination. We 
estimate that the disclosure burden for each of these 18 security 
holders or groups to provide notice of its intent to require that 
the fund include the security holder's nominee on the fund's proxy 
card would be approximately 4 hours, for a total of 72 hours. We 
also estimate that the disclosure burden for these 18 security 
holders or groups to review and file an Exchange Act Schedule 13G 
(in the case of a closed-end fund) or the portion of the notice to 
the fund requiring disclosure of beneficial ownership similar to 
Exchange Act Schedule 13G (in the case of a mutual fund) and the 
accompanying certification would be approximately 12 hours, for a 
total of 216 hours. This burden would be added to the PRA burden of 
Rule 20a-1.
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    We estimate that the proposed access rule would be triggered in 73 
companies, and in 45 of these companies at least one security holder or 
security holder group would make a nomination.\198\ Further, we 
estimate that, in companies where a nomination is made, an average of 2 
security holders

[[Page 60811]]

or security holder groups would submit a nomination. We estimate that 
the disclosure burden for each of these 90 nominating security holders 
or nominating security holder groups to provide notice of its intent to 
require that the company include the security holder's nominee in the 
company's proxy materials would be approximately 4 hours, for a total 
of 360 hours. We also estimate that the disclosure burden for these 90 
security holders or security holder groups to review and file an 
Exchange Act Schedule 13G and certification would be approximately 12 
hours, for a total of 1,080 hours.
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    \198\ Based on data on the size of institutional shareholdings, 
we estimate that approximately 50% of companies that receive over 
35% of withhold votes for one of their nominees would have an 
individual security holder or security holder group with 5% of the 
shares outstanding that would be able to make a nomination This 
would correspond to 29 companies. We estimate that all of the 
companies that receive a direct access proposal that passes will 
have an individual security holder or security holder group with 5% 
of the shares outstanding since security holders who submit an 
access proposal would likely do so only if they are confident that a 
group will make a nomination. This would correspond to 16 companies.
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    In order to conservatively estimate the PRA burden, we estimate 
that 49 nominees would be excluded from the proposed Exchange Act Rule 
14a-11 nomination procedure.\199\ We estimate that the annual 
disclosure burden for companies to notify the 49 nominating security 
holders or nominating security holder groups of their determination not 
to include the nominee(s) in its proxy materials would be 1 hour, for a 
total of 49 hours. We estimate the annual disclosure burden for 
companies to include the remaining 41 nominees in their proxy materials 
to be 1 burden hour, for a total of 41 hours. Of these 41 companies, we 
estimate that 20 companies would include a statement with regard to the 
security holder nominee or nominee.\200\ We estimate that this burden 
would be approximately 2 hours. Similarly, we estimate the disclosure 
burden for the security holder or security holder group to prepare a 
statement of support for its nominee or nominees to be approximately 2 
burden hours.\201\
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    \199\ The proposed rules contemplate that the company only would 
be required to include in its proxy statement and form of proxy the 
nominee or nominees of the security holder or security holder group 
with the largest beneficial ownership. As such, only 45 of the 90 
nominating security holders or security holder groups would be 
eligible to nominate a candidate or candidates to the board. 
Further, although there is no reliable way to predict the number of 
companies that would determine that they are not required to include 
a nominee in their proxy materials due to the nominee being 
ineligible under proposed Exchange Act Rule 14a-11, we estimate that 
approximately 10% of companies would make this determination.
    \200\ There is no way to determine how many companies would 
choose to include a statement regarding the security holder nominee 
or nominees We estimate that 50% of companies would include such a 
statement.
    \201\ For funds, we estimate that 10 nominees will be excluded 
from the security holder nomination procedure each year, and the 
annual disclosure burden for a fund to notify the 10 nominating 
security holders or groups of the fund's determination not to 
include the nominee in its proxy materials would be 1 hour, for a 
total of 10 hours. We estimate that the annual disclosure burden for 
a fund to include the remaining 8 nominees in its proxy materials to 
be 1 burden hour, for a total of 8 hours. Of these 8 funds, we 
estimate that 4 funds and nominating security holders will include a 
statement with regard to the security holder nominee or nominees and 
the disclosure burden would be approximately 4 hours, for a total of 
16 hours. The total burden with respect to the Exchange Act Rule 
14a-11 nomination procedure would be 322 hours (72 hours + 216 hours 
+ 10 hours + 8 hours + 16 hours), corresponding to 242 hours of fund 
personnel time and $24,000 for the services of outside 
professionals. See note 197, above. This burden also would be added 
to the PRA burden of Rule 20a-1.
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    We estimate that this total burden of 1,610 hours would result in 
668 hours of internal time and $282,600 of outside costs.
    All of the figures above are estimates because there is no reliable 
way to predict how many more security holder proposals would be 
submitted based on the proposed amendments, how often the events would 
be triggered or how many security holders would be able to meet the 
applicable requirements (e.g., minimum ownership threshold). We request 
comment and supporting empirical data on whether, for purposes of the 
PRA, there likely would be an increase in the number of Exchange Act 
Rule 14a-8 security holder proposals that companies receive as a result 
of creating triggering events to activate the nomination procedure; how 
often the triggering events likely would be triggered; and how likely 
it would be for security holders or security holder groups to be able 
to meet the requirements under proposed Exchange Act Rule 14a-11. We 
also request comment and supporting empirical data on the costs of 
submitting a no-action request.

C. 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 securities 
ownership reports filed by investors and proxy and information 
statements, periodic reports and current reports under the Exchange 
Act.\202\ 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 estimate that 75% of the burden of 
preparation of the proxy and information statement, periodic reports 
and current reports is carried by the company and security holder or 
security holder groups internally and that 25% of the burden of 
preparation is carried by outside professionals at an average cost of 
$300 per hour. We estimate that 100% of the burden for preparing Form 
N-SAR is carried by the fund. We estimate that 25% of the burden of 
preparation of securities ownership filings is carried by the security 
holder or security holder groups internally and that 75% of the burden 
of preparation is carried by outside professionals 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 internally by the company and security holder or security 
holder groups is reflected in hours.\203\
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    \202\ As discussed further below, we estimate that no small 
businesses will be affected by the proposed rule so we did not 
include any PRA estimates for the Form 10-QSB and Form 10-KSB.
    \203\ The estimated PRA burdens have not been rounded to the 
nearest whole number and $100 in order to accurately reflect figures 
in the text.

[[Page 60812]]



                                             Table 1.--Calculation of Incremental PRA Burden Estimates \204\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              Annual
                                                  Annual     responses  Incremental    Incremental      75% Company    25% Professional  $300 Prof. cost
                                                 responses   affected    hours/form       burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                ..........         (A)          (B)              (C)=(A) x (B)    (D)=(C) (E)=(C) x 0.25  (F)=(E) x $300
-----------------------------------------------
SCH 14A * [dagger]............................       7,188         104       12.56            1,306              980              326            $97,800
SCH 14C * [dagger]............................         446           7       12.56               88               66               22             $6,600
FORM 10-K *...................................       8,484          28         0.9               25               19                6             $1,800
FORM 10-Q *...................................  \1\ 23,743          83         0.9               75               56               19             $5,700
FORM 8-K......................................         \2\           3           5               15               11                4             $1,200
                                                   333,915
FORM N-CSR....................................   \3\ 6,658         281       0.575            161.5             21.1               40.4          $12,120
Rule 20a-1 * [dagger].........................       1,058          24       22.75              546              410              136            $40,800
-----------------------------------------------
                                                    Annual      Annual      Incre-      Incremental      25% Company   75% Professional  $300 Prof. cost
                                                 responses   responses      mental           burden
                                                              affected  hours/form
-----------------------------------------------
SCH 13G.......................................       9,500          90          12            1,080              270              810           $243,000
-----------------------------------------------
                                                    Annual      Annual      Incre-      Incremental     100% Company   0% Professional   $300 Prof. cost
                                                 responses   responses      mental           burden     and security
                                                              affected  hours/form                           holders
-----------------------------------------------
FORM N-SAR....................................    \4\ 9306         281        (0.5)          (140.5)          (140.5)               0                  0
                                               -------------
      Total...................................  ..........  ..........  ...........           3,156           1792.6             1363.4         $409,020
* These figures have been prorated across all the estimated number of responses affected.
[dagger] We have reflected the security holder's provision of notice to the company of its intent to require the company to include the security
  holder's nominee on the company's proxy card as a burden under Exchange Act Schedules 14A and 14C and Rule 20a-1.
\1\ 7,914 respondents.
\2\ 13,200 respondents.
\3\ 3,829 respondents.
\4\ 4,653 respondents.

D. 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.
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    \204\ The incremental burden estimate for Form N-CSR includes 
140.5 hours (281 responses X 0.5 hours per response) transferred in 
connection with the deletion of Item 77C of Form N-SAR. This Item 
currently requires disclosure regarding each matter submitted to a 
vote of security holders. In addition, the burden for Form N-CSR 
includes disclosure parallel to that proposed with respect to the 
nomination procedure triggering events on Forms 10-Q and 10-K. As 
discussed above, we estimate that the disclosure burden would be 21 
hours for this nomination procedure disclosure. Thus, we estimate 
that the incremental burden estimate for Form N-CSR will increase by 
a total of 161.50 hours (140.5 hours + 21 hours) or 0.57 hours per 
response (161.5 hours/281 responses) as a result of the required 
disclosure in this proposed rulemaking We estimate, however, that 
the net incremental burden increase for funds to comply with Form N-
SAR and Form N-CSR would be 21 hours.
    The incremental burden estimate for Rule 20a-1 includes the 
disclosure that would be required on Exchange Act Schedule 14A, 
discussed above, with respect to funds. We estimate that the burden 
associated with these disclosure requirements would be 546 hours 
(224 hours + 322 hours) or 22.75 hours per response (546 hours/24 
responses) as a result of the required disclosure in this proposed 
rulemaking.
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    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. S7-19-03. 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-
19-03, 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 review the proxy rules and regulations and their 
interpretations regarding procedures for the nomination and election of 
corporate directors \205\ and on May 1, 2003, the Commission solicited 
public input on the Division's review.\206\ On July 15, 2003, after 
considering the views expressed by commenters, the Division of 
Corporation Finance provided to the Commission its report and 
recommended changes to the proxy rules related to the nomination and 
election of directors.\207\ To best address many of the issues raised 
by commenters, the Division recommended changes in two areas--
disclosure related to nominating committee functions and security 
holder communications with boards of directors and enhanced

[[Page 60813]]

security holder access to the proxy process relating to the nomination 
of directors.\208\ On August 14, 2003, we published for comment 
proposed rules that would implement the first of the Division's 
recommendations--new disclosure standards requiring more robust 
disclosure of the nominating committee processes of public companies, 
including the consideration of candidates recommended by security 
holders, as well as more specific disclosure of the processes by which 
security holders may communicate with the directors of the companies in 
which they invest.\209\ Today, we are proposing rules that would 
implement the second of the Division's recommendations. These proposed 
rules would require companies to include in their proxy materials 
security holder nominees for election as director under certain limited 
circumstances.
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    \205\ See Press Release No 2003-46 (April 14, 2003).
    \206\ See Release No 34-47778 (May 1, 2003).
    \207\ See Staff Report: Review of the Proxy Process Regarding 
the Nomination and Election of Directors, Division of Corporation 
Finance (July 15, 2003).
    \208\ See id.
    \209\ See Release No 34-48301 (August 14, 2003).
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    Under the existing structure, security holders generally can have 
input in the director nomination procedure in two ways: Undertake an 
election contest and recommend candidates to the nominating committee. 
In the broad proxy revisions adopted in 1992, the Commission eased the 
requirements for security holders conducting an election contest in a 
non-control context when it revised Exchange Act Rule 14a-4(d) to allow 
security holders seeking minority board representation to ``fill out'' 
a partial or ``short'' slate with management nominees. Under the 
current proxy rules, these security holders still must disseminate and 
file a separate proxy statement. Although commenters noted the 
availability of this existing alternative, many other commenters noted 
the prohibitive expense in conducting an election contest.\210\ 
Pursuant to a company's bylaws, security holders also may recommend 
board candidates to the nominating committee. Several commenters noted 
that this process is not effective and expressed the view that 
nominating committees rarely include security holder candidates in 
company proxy materials.\211\
---------------------------------------------------------------------------

    \210\ See 2003 Summary of Comments.
    \211\ See id.
---------------------------------------------------------------------------

    After reviewing the existing proxy rules and comments from the 
public, we are proposing rules that would create a mechanism for 
nominees of long-term security holders, or groups of long-term security 
holders, with significant holdings to be included in company proxy 
materials. The intent of the proposed amendments is to improve the 
ability of security holders to participate meaningfully in the 
nomination and election of directors where evidence suggests that the 
company has been unresponsive to security holder concerns as they 
relate to an effective proxy process. Greater security holder 
involvement also may increase director accountability and 
responsiveness to security holders and their concerns.
    The Commission has considered a variety of reforms to achieve its 
regulatory objectives. As one possible approach, we considered 
requiring companies to include a separate security holder proxy card in 
the company mailing. Alternatively, we considered amending Exchange Act 
Rule 14a-8(i)(8) \212\ to allow security holder proposals requesting 
access to the company's proxy card for the purpose of making 
nominations. Based on comments we have received to date, we believe 
that requiring companies to include in their proxy materials security 
holder nominees for election as director under certain limited 
circumstances would best address the concerns raised by commenters and 
would provide the most benefit for the least cost.
---------------------------------------------------------------------------

    \212\ 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. Potential Benefits of the Proposed Rules

    The proposed amendments may serve to align the interests of the 
board and security holders, thereby giving investors greater confidence 
that the board is serving the interest of security holders, even if the 
provisions of the rule are rarely used.\213\ This alignment can occur 
in three ways. First, the presence of triggering events, as described 
below, may improve the responsiveness of boards to security holder 
preferences. Second, the disclosure requirements may enable investors 
to better understand and evaluate the performance of the board. Third, 
the ability of relatively large and long-term security holders to make 
a board nomination that is included in the company's proxy materials 
may improve corporate governance by enhancing security holders' ability 
to participate meaningfully in the proxy process.
---------------------------------------------------------------------------

    \213\ See 2003 Summary of Comments. Several commenters noted 
that better corporate governance would increase the long-term value 
of security holders' investments in companies.
---------------------------------------------------------------------------

    The security holder nomination procedure would become operative 
only if one or both of the following triggering events occur:
    [sbull] At least one of the company's nominees for the board of 
directors for whom the company solicited proxies received ``withhold'' 
votes from more than 35% of the votes cast at an annual meeting of 
security holders; or
    [sbull] A security holder proposal submitted pursuant to Exchange 
Act Rule 14a-8 providing that the company become subject to the 
security holder nomination procedure in proposed Exchange Act Rule 14a-
11 (a) was submitted for a vote of security holders at an annual 
meeting of security holders by a security holder or group of security 
holders that held more than 1% of the company's securities entitled to 
vote on the proposal for one year as of the date the proposal was 
submitted and provided evidence of such holding to the company; and (b) 
that ``direct access'' proposal received more than 50% of the votes 
cast on that proposal at that meeting.
    Allowing security holders access to company proxy materials in 
these two circumstances would limit the use of proposed Exchange Act 
Rule 14a-11 to companies where there is evidence indicating 
ineffectiveness of or dissatisfaction with the proxy process. In 
addition, the triggering events may serve to make boards more 
responsive to security holder concerns and security holder 
dissatisfaction with directors in cases where companies wish to avoid 
triggering the procedure in proposed Exchange Act Rule 14a-11.
    Under the proposed rules, a company would be required to disclose 
the security holder vote with respect to either of the triggering 
events and whether the company would be subject to proposed Exchange 
Act Rule 14a-11. These proposed notice requirements may benefit 
security holders by providing greater transparency of the level of 
security holder discontent with the company's nominees and the degree 
to which security holders believe a company is responsive to security 
holder concerns.
    In those cases where proposed Exchange Act Rule 14a-11 is 
triggered, requiring companies to include nominees of larger, long-term 
security holders or groups of security holders may benefit security 
holders by allowing them to have greater input in the nomination 
procedure where there is evidence indicating that the proxy process may 
be ineffective. Greater security holder input may lead to better 
performing boards whose interests are better aligned with security 
holders. When a security holder nominee is elected to a board, 
commenters were also of the opinion that this may lead to a more 
diverse board that could offer a

[[Page 60814]]

fresh perspective and improve boardroom dynamics.\214\
---------------------------------------------------------------------------

    \214\ See 2003 Summary of Comments.
---------------------------------------------------------------------------

C. Potential Costs of the Proposed Rules

    The proposed rules may impose additional direct costs. For purposes 
of the PRA, we estimate that the annual incremental burden to prepare 
the required disclosure would be approximately 1,828 hours of personnel 
time for operating companies, funds, and security holders, which 
translates into an estimated cost of $155,400 ($1,200 per company 
affected).\215\ We also estimate a cost of approximately $398,400 for 
the services of outside professionals ($3,000 per company 
affected).\216\
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    \215\ 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).
    \216\ The cost may vary from company to company. The total 
dollar costs have been prorated across all companies, funds and 
security holders affected. We estimate that 111 operating companies 
and 24 funds will be impacted by some aspect of the proposed rules. 
These figures differ slightly from the PRA figures reflected in the 
Calculation of Incremental PRA Burden Estimates table because they 
do not reflect the number of funds affected by the removal of Item 
77C from Form N-SAR and the transfer of the burden of 1405 hours 
associated with Item 77C to Form N-CSR. This transfer does not 
result in any net new costs to funds.
---------------------------------------------------------------------------

    As we noted above, under the current rules, security holders 
generally can participate in the director nomination procedure only by 
recommending candidates to the nominating committee or by undertaking 
an election contest. As previously noted, commenters have found the 
first alternative to be largely ineffective and the latter to be too 
costly. Given the high costs associated with undertaking an election 
contest, many of the costs of the proposed rules to companies would be 
offset by the cost to security holders of undertaking an election 
contest.
    For example, companies may incur additional printing and mailing 
costs if there is an increase in the number of security holder 
proposals seeking direct access that companies receive and must include 
in their proxy materials. Companies also may incur incremental printing 
and mailing costs to include the name and background information of 
security holder nominees in their proxy materials. In 1998, when the 
Commission last sought comment on a proxy rule amendment, companies 
reported that the average cost of printing and mailing security holder 
proposals was approximately $50,000.\217\ In response to our May 203 
request for public input, one commenter noted that increasing the 
weight of a company's proxy materials by two ounces could increase the 
cost of mailing 100,000 packages by $308,825.\218\ The additional 
incremental printing and mailing costs would vary based on the number 
of security holder proposals that are required to be included in a 
company's proxy materials, the number of security holder nominees that 
are required to be included in company proxy materials and the size and 
weight of a company's existing proxy statement.
---------------------------------------------------------------------------

    \217\ See Release No 34-40018 (May 21, 1998) [63 FR 29106].
    \218\ See 2003 Summary of Comments. The response may have 
accounted for the printing of more than one proposal.
---------------------------------------------------------------------------

    The additional incremental cost of printing and mailing security 
holder proposals seeking direct access and including security holder or 
security holder nominees in the company's proxy material would likely 
represent costs that would otherwise be borne by security holders to 
print and mail their own complete proxy statement when a security 
holder undertakes an election contest.
    There also may be increased costs associated with additional 
solicitations by both companies and security holders. Companies may 
increase solicitations to vote against security holder proposals or to 
vote for their slate of directors. Security holders may also increase 
solicitations to vote for security holder proposals or to withhold 
votes for a company's directors. Similarly, companies may also increase 
their costs for solicitations if security holders or security holder 
groups undertake election contests. For the purposes of the PRA, we 
estimate that the proposed Exchange Act Rule 14a-11 nomination 
procedure would occur in 41 incidences for operating companies and 9 
incidences for funds.
    There also may be a cost if the proposed rules serve to influence 
corporate behavior. Commenters argued that there is no evidence that 
security holder access would lead to better managed companies.\219\ To 
the extent that there is a change in corporate behavior, companies may 
incur additional costs in instituting more responsive policies and 
procedures to address security holder concerns. Commenters also were 
concerned that the time a company spends on its security holder 
relations could lessen the time that boards would have to engage in 
strategic and long-term thinking.\220\ Such a decrease in the time 
spent by a board on overseeing the management of a company may 
negatively affect the value of security holders' investments.
---------------------------------------------------------------------------

    \219\ See id.
    \220\ See id.
---------------------------------------------------------------------------

    In those cases where proposed Exchange Act Rule 14a-11 would be 
triggered, commenters also were concerned that security holder access 
may discourage qualified board members from running.\221\ If a security 
holder nominee is elected, commenters were further concerned that the 
security holder-nominated director may disrupt boardroom dynamics and 
polarize the board.\222\ In particular, commenters expressed concern 
that the security holder access rule could be used by special interest 
groups who have interests that are different from security holders 
generally.\223\ Any potential degradation in the quality of the 
individuals on the board may decrease the value of security holder 
investments.
---------------------------------------------------------------------------

    \221\ See id.
    \222\ See id.
    \223\ See id. Although the proposed rules address the issue of 
special interest directors by requiring that the nominating security 
holder be independent from the security holder nominee, there still 
may be concern that the security holder nominee is informally 
beholden to the nominating security holder.
---------------------------------------------------------------------------

D. Small Business Issuers

    Although the proposed rules apply to small business issuers, we do 
not anticipate any significant impact on them. Small businesses 
historically have received fewer security holder proposals than larger 
issuers.\224\ Further, the number of security holder proposals that 
generally receive a majority vote, the number of directors that receive 
35% ``withhold'' votes, and the percentage of nominating security 
holders that meet the ownership threshold and holding periods may be 
lower for small business issuers than other issuers since insiders 
generally hold a large percentage of shares in small businesses.\225\ 
While we recognize that issues of corporate accountability and security 
holder rights may affect small companies as much as they affect large 
companies, we have included a specific request for comment regarding

[[Page 60815]]

whether only those operating companies that fall within the definition 
of ``accelerated filer'' in Exchange Act Rule 12b-2 should be subject 
to the security holder nomination procedure. Implementing the proposed 
rule in this fashion would avoid the disproportionate burdens of 
regulation that the proposed procedure may impose on smaller companies. 
It also would allow our staff and the markets to gain experience with 
the proposed rule in an initial stage in which the rule applied only to 
larger companies, while we would retain the ability to expand the 
rule's application to all companies after gaining this experience. In 
addition, the information available to us suggests that interest in the 
proxy process is, to a significant degree, concentrated within the 
universe of companies that are accelerated filers.
---------------------------------------------------------------------------

    \224\ Of the 266 companies that submitted letters to the 
Division of Corporation Finance during the 2002-2003 proxy season 
regarding their intentions to exclude a security holder proposal 
submitted under Exchange Rule 14a-8, only 26 had a common equity 
public float of less than the $75 million threshold in the 
definition of ``accelerated filer.'' Accordingly, the number of 
small businesses issuers would be even less than that figure.
    \225\ See James S Ang, Rebel A Cole, & James Wuh Lin, Agency 
Costs and Ownership Structure, The Journal of Finance, Volume LV No 
1, 81, 96 (February 2000). Based on a sample size of 1,708 small 
companies, defined as companies with $6 million in sales, on 
average, 73% of these companies had one family that owned 50% or 
more of the company.
---------------------------------------------------------------------------

E. Request for Comments

    We are sensitive to the costs and benefits imposed by our rules, 
and have identified certain costs and benefits imposed by these 
proposals. We request comment on all aspects of this cost-benefit 
analysis, including identification of any additional costs and 
benefits. We encourage commenters to identify and supply relevant data 
concerning the costs and benefits of the proposed amendments. We also 
request comment on the following specific concerns:
    O.1. We solicit quantitative data to assist our assessment of the 
benefits and costs of enhanced security holder access to company proxy 
materials when there has been a demonstrated failure in the proxy 
process. Will proposed Exchange Act Rule 14a-11 increase director 
accountability and responsiveness? If so, what costs would be incurred 
in instituting responsive policies and procedures? Will more 
accountability and responsiveness lead to better managed boards? What 
effects, if any, would increased accountability and responsiveness have 
on the board's time spent in its duties overseeing management?
    O.2. We solicit quantitative data on the potential increases, if 
any, of security holder proposals under Exchange Act Rule 14a-8 as a 
result of these proposed rules. We also solicit quantitative data on 
how often the two triggering events that would activate proposed 
Exchange Act Rule 14a-11 would occur.
    O.3. We solicit quantitative date on the time and cost spent in 
preparing a no-action request to exclude a proposal under Exchange Act 
Rule 14a-8, the incremental cost spent to print and mail such a 
security holder proposal and to include a security holder nominee and 
his/her background information in the proxy materials, and the cost 
borne by both companies and security holders to solicit security 
holders regarding a direct access security holder proposal and election 
of a nominee or nominees to the board.

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

    Section 23(a)(2) of the Exchange Act \226\ 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 provide 
security holders with information about security holder nominees in 
company proxy materials where there has been evidence of an ineffective 
proxy process. The proposed rules should increase the transparency of 
security holder concerns and boards responsiveness to those concerns, 
increase investor confidence, and potentially cause companies to be 
better managed. Companies may consider their existing policies and 
responses to security holder concerns in relation to the policies and 
responses of other companies. As a result, companies may compete to 
adopt policies and procedures that effectively balance security holder 
and director interests and therefore attract investors.
---------------------------------------------------------------------------

    \226\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The notice requirements of the proposed rules would enable 
investors to compare companies' responsiveness to security holder 
proposals and compare security holders' general level of satisfaction 
with companies' nominees for director. Investors may place a premium on 
companies that are more responsive to security holder concerns and 
whose boards' interests are more closely aligned with those of security 
holders.
    In addition, if a company is required to include a security holder 
nominee in its proxy materials, there may be increased competition for 
board positions. To the extent that this would discourage less-
qualified candidates from running or, alternatively, would increase the 
quality of board members due to increased competition, investors may be 
more or less willing to invest in those companies where proposed 
Exchange Act Rule 14a-11 has been triggered.
    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 \227\ and Section 2(c) of the 
Investment Company Act \228\ 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.
---------------------------------------------------------------------------

    \227\ 15 U.S.C. 78c(f).
    \228\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    One possible adverse impact on efficiency, competition and capital 
formation is that boards may devote less time to overseeing the 
management of companies because they are spending more time on security 
holder relations. We believe, however, that the proposed rules may 
increase director accountability and responsiveness, which would lead 
to better corporate governance and better-managed boards. As a result, 
we believe that these measures ultimately may serve to enhance 
investors' value. In addition, 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.

VI. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Act Analysis has been prepared 
in accordance with 5 U.S.C. 603. It relates to proposed revisions to 
the rules and forms under the Exchange Act and the Investment Company 
Act that would, under certain limited circumstances, require companies 
to include in their proxy materials security holder nominees for 
election as director. The

[[Page 60816]]

proposals are intended to improve the ability of security holders to 
participate meaningfully in the nomination and election of directors.

A. Reasons for the Proposed Action

    On April 14, 2003, the Commission directed the Division of 
Corporation Finance to review the proxy rules and regulations and their 
interpretations regarding procedures for the nomination and election of 
corporate directors \229\ and on May 1, 2003, the Commission solicited 
public input on the Division's review.\230\ On July 15, 2003, after 
considering the views expressed by commenters, the Division of 
Corporation Finance provided to the Commission its report and 
recommended changes to the proxy rules related to the nomination and 
election of directors.\231\ To best address many of the issues raised 
by commenters, the Division recommended changes in two areas--
disclosure related to nominating committee functions and security 
holder communications with boards of directors and enhanced security 
holder access to the proxy process relating to the nomination of 
directors.\232\
---------------------------------------------------------------------------

    \229\ See Press Release No 2003-46 (April 14, 2003).
    \230\ See Release No 34-47778 (May 1, 2003).
    \231\ See Staff Report: Review of the Proxy Process Regarding 
the Nomination and Election of Directors, Division of Corporation 
Finance (July 15, 2003).
    \232\ See id.
---------------------------------------------------------------------------

    On August 14, 2003, we published for comment proposed rules that 
would implement the first of the Division's recommendations--new 
disclosure standards requiring more robust disclosure of the nominating 
committee processes of public companies, including the consideration of 
candidates recommended by security holders, as well as more specific 
disclosure of the processes by which security holders may communicate 
with the directors of the companies in which they invest.\233\ Today, 
we are proposing rules that would implement the second of the 
Division's recommendations. These proposals would create a mechanism 
for long-term security holders, or groups of long-term security 
holders, with significant holdings to access company proxy materials to 
nominate directors.
---------------------------------------------------------------------------

    \233\ See Release No 34-48301 (August 14, 2003).
---------------------------------------------------------------------------

B. Objectives

    The proposed amendments have two primary objectives. The first 
objective is to improve the ability of security holders to participate 
meaningfully in the nomination and election of directors. The second 
objective is to meet the first objective without unduly burdening 
companies. We seek to limit the cost and burden on companies by 
limiting the proposed security holder nomination procedure to only 
those companies:
    [sbull] Where the company's security holders are permitted under 
state law to nominate a candidate or candidates for election as 
directors;
    [sbull] Where there are criteria showing that the proxy process may 
be ineffective--specifically, only after the occurrence of one or both 
of the following triggering events:

--At least one of the company's nominees for the board of directors for 
whom the company solicited proxies received ``withhold'' votes from 
more than 35% of the votes cast at an annual meeting of security 
holders; or
--A security holder proposal submitted pursuant to Exchange Act Rule 
14a-8, providing that the company become subject to the security holder 
nomination procedure in proposed Exchange Act Rule 14a-11(a) was 
submitted for a vote of security holders at an annual meeting of 
security holders by a security holder or group of security holders that 
held more than 1% of the company's securities entitled to vote on the 
proposal for one year as of the date the proposal was submitted and 
provided evidence of such holding to the company; and (b) that ``direct 
access'' proposal received more than 50% of the votes cast on that 
proposal at that meeting; and

    [sbull] Where the nominating security holder or group of security 
holders demonstrate continuous beneficial ownership of more than 5% of 
the company's securities for at least two years as of the date of the 
nomination.
    These limitations would lower the cost to companies while still 
improving the ability of security holders to participate meaningfully 
in the nomination and election of directors. This increased 
participation may improve corporate governance by increasing director 
accountability and responsiveness and aligning the interests of the 
board and security holders, thereby, giving investors greater 
confidence that the board is serving the interest of security holders. 
This may, in turn, enhance the value of security holders' investments.

C. Legal Basis

    We are proposing amendments to the forms and rules under the 
authority set forth in Sections 3(b), 10, 13, 14, 15, 16, 23(a) and 36 
of the Securities Exchange Act of 1934, as amended, and Sections 10, 
20(a) and 38 of the Investment Company Act of 1940, as amended.

D. Small Entities Subject to the Proposed Rules

    The proposals would affect companies that are small entities. 
Exchange Act Rule 0-10(a) \234\ defines a 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.\235\ We estimate that there 
were approximately 2,500 public companies, other than investment 
companies, that may be considered small entities. We estimate from 
information compiled by the Commission staff that there are less than 
25 listed investment companies and less than 25 non-listed investment 
companies that are small entities that file proxy statements. As 
discussed below, we believe that the proposals would affect virtually 
no small entities that are reporting companies.
---------------------------------------------------------------------------

    \234\ 17 CFR 240.0-10(a).
    \235\ An investment company is a small entity 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. 17 CFR 270.0-10.
---------------------------------------------------------------------------

    As noted above, the number of security holder proposals that 
receive a majority vote, the number of directors that receive 35% 
withhold votes, and the percentage of nominating security holders that 
meet the ownership threshold and holding periods may be more infrequent 
for small entities because insiders may hold a larger percentage of 
shares in such entities.\236\
---------------------------------------------------------------------------

    \236\ Ang et al, above at note 225.
---------------------------------------------------------------------------

    We request comment on the number of small entities that would be 
impacted by our proposals, including any available empirical data.

E. Reporting, Recordkeeping and Other Compliance Requirements

    The proposed rules are expected to impact a limited number of 
companies because the nomination procedure would be triggered only 
where there are criteria showing that the proxy process may be 
ineffective. For purposes of the PRA, we estimate that the proposed 
nomination procedure would be triggered at only 73 operating companies 
and 14 funds and that only 41 operating companies and 9 funds would be 
subject to that procedure. Given the limited number of security holder 
proposals received by small entities and the ownership makeup of 
smaller entities, the proposed rules are likely to have virtually no 
impact on small entities.

[[Page 60817]]

    For purposes of the PRA, we estimate that the highest hourly burden 
for the company and the security holder to disclose the required 
information would be 43.5 if the nomination procedure is triggered, 
notice by the company that the nomination procedure is triggered is 
provided, notice that the upcoming annual meeting has changed by more 
than 30 days is provided, notice by the security holder or security 
holder group that it is seeking to use the procedure is provided, an 
Exchange Act Schedule 13G is filed and is provided, the company 
determines to include the proposal and the company provides a statement 
opposing the security holder nominee or nominees and/or supporting the 
company nominees, and the security holder also provides such a 
statement. This translates to a cost of $2,300, as a monetization of 
burden, to be carried by the company internally and a cost of $5,100 to 
be paid by a third party. A cost of $7,400 per small entity may not 
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, among larger ``small entities,'' 
the estimated $7,400 compliance expense would constitute approximately 
0.003% of a small entity's revenues. If small entities are impacted, 
there may be a greater impact on smaller ``small entities.''
    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. We also note that we are considering as an 
additional element of the proposed rule, and seek comment on, whether 
proposed Exchange Act Rule 14a-11 should apply only to those companies 
that are subject to the accelerated deadlines for filing Exchange Act 
periodic reports, and investment companies registered under Section 8 
of the Investment Company Act.

F. Duplicative, Overlapping or Conflicting Federal Rules

    We believe that there are no rules that conflict with or completely 
duplicate the proposed rules.

G. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objective, while 
minimizing any significant adverse impact on small entities. In 
connection with the proposed amendments, we considered the following 
amendments:
    1. The establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
    2. The clarification, consolidation or simplification of disclosure 
for small entities; and
    3. 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 Exchange Act 
Rule 14a-8(i)(8) \237\ to allow security holder proposals requesting 
access to the corporation's proxy card for the purpose of making 
nominations. We also have included a specific request for comment 
regarding whether only those operating companies that fall within the 
definition of ``accelerated filer'' in Exchange Act Rule 12b-2 should 
be subject to the security holder nomination procedure. We believe that 
the current proposals are the most cost-effective initial approach to 
address specific concerns related to small entities, as small entities 
may be less likely to be impacted by proposed Exchange Act Rule 14a-11 
because of their limited receipt of security holder proposals and their 
ownership makeup.
---------------------------------------------------------------------------

    \237\ 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.''
---------------------------------------------------------------------------

    In addition, an exemption or separate requirements for small 
entities may not address issues of corporate accountability and 
security holder rights that may affect small entities as much as they 
would affect large companies. Accordingly, it may be more appropriate 
to allow for the nomination procedure at small entities, where there 
has been evidence indicating ineffectiveness in the proxy process. The 
establishment of any differing compliance or reporting requirements or 
timetables or any exemptions for small business issuers may not be in 
keeping with the objectives of the proposed rules.

H. Solicitation of Comment

    We encourage 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 rules. 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 Analysis, 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,\238\ a rule is ``major'' if it has resulted, or is likely 
to result in:
---------------------------------------------------------------------------

    \238\ 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 amendments are proposed pursuant to Sections 3(b), 10, 13, 14, 
15, 16, 23(a) and 36 of the Securities Exchange Act of 1934, as 
amended, and Sections 10, 20(a) and 38 of the Investment Company Act of 
1940, as amended.

List of Subjects

17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

    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:

[[Page 60818]]

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

    1. The authority citations 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. The authority citations following Sec. Sec.  240.13d-1, 240.13d-
102, 240.14a-4 and 240.14a-5 are removed.
    3. Section 240.13a-11 is amended by revising paragraph (b) to read 
as follows:


Sec.  240.13a-11  Current reports on Form 8-K (Sec.  249.308 of this 
chapter).

* * * * *
    (b) This section shall not apply to foreign governments, foreign 
private issuers required to make reports on Form 6-K (17 CFR 249.306) 
pursuant to Sec.  240.13a-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file reports pursuant to Sec.  270.30b1-1 of this chapter under the 
Investment Company Act of 1940, except where such an investment company 
is required to file:
    (1) Notice of a blackout period pursuant to Sec.  245.104 of this 
chapter; or
    (2) Disclosure pursuant to Instruction 5 to Sec.  240.14a-11(a) of 
the date by which a security holder or security holder group must 
submit the notice required pursuant to Sec.  240.14a-11(c).
    4. By amending Sec.  240.13d-1 by adding an Instruction after 
paragraph (c)(3) to read as follows:


Sec.  240.13d-1  Filing of Schedules 13D and 13G.

* * * * *
    (c)(3) * * *
    Instruction to paragraphs (b) and (c): purposes of paragraphs (b) 
and (c), a beneficial owner who acquires or holds a registrant's 
securities in connection with a nomination under Sec.  240.14a-11 will 
not be deemed to have a purpose or effect of changing or influencing 
the control of the registrant solely by virtue of acquiring or holding 
the securities in connection with a director nomination pursuant to 
Sec.  240.14a-11, a solicitation for the election of that director 
nominee and/or against a registrant nominee, or the election of that 
director nominee.
* * * * *
    5. By amending Sec.  240.13d-102 to:
    a. Add a box on the cover page after the box titled ``[ ] Rule 13d-
1(d)''; and
    b. Add paragraph (c) to Item 10 before the ``Signature'' section.
    The additions read as follows:


Sec.  240.13d-102  Schedule 13G--Information to be included in 
statements filed pursuant to Sec.  240.13d-1(b), (c), and (d) and 
amendments thereto filed pursuant to Sec.  240.13d-2.

* * * * *
[ ] Rule 13d-1(b) or (c), filed in connection with Rule 14a-11
* * * * *
Item 10. Certifications
    (a) * * *
    (c) The following certification shall be included, in addition to 
the certification required under paragraph (a) or (b) of this Item, as 
applicable, if the statement is filed in connection with a security 
holder nomination pursuant to Sec.  240.14a-11:
    By signing below, I further certify that --% of the securities 
referred to above have been held continuously for at least 2 years.
    Instruction to paragraph (c).
    The percentage of securities listed above shall be used both for 
the purpose of determining eligibility to submit a security holder 
nomination pursuant to Sec.  240.14a-11 and, where more than one 
eligible security holder or security holder group provides notice of 
its intention to submit a nomination pursuant to Sec.  240.14a-11, for 
the purpose of determining the security holder or security holder group 
with the largest percentage of subject securities.
* * * * *
    6. By amending Sec.  240.14a-4 to:
    a. Revise the first sentence of paragraph (b)(2); and
    b. Add a sentence to the end of the paragraph following paragraph 
(b)(2)(iv), immediately preceding the Instructions.
    The revision and addition read as follows:


Sec.  240.14a-4  Requirements as to proxy.

* * * * *
    (b) * * *
    (2) A form of proxy that provides for the election of directors 
must set forth the names of persons nominated for election as 
directors, including any person whose nomination by a security holder 
or security holder group satisfies the requirements of Sec.  240.14a-
11. * * *
* * * * *
    (iv) * * * Means to grant authority to vote for any nominees as a 
group or to withhold authority for any nominees as a group may not be 
provided if the proxy card includes one or more security holder 
nominees in accordance with Sec.  240.14a-11.
* * * * *
    7. By amending Sec.  240.14a-5 to add paragraphs (g) and (h) to 
read as follows:


Sec.  240.14a-5  Presentation of information in proxy statement.

* * * * *
    (g) If the proxy statement includes a security holder proposal 
providing that the registrant become subject to the security holder 
nomination procedure in Sec.  240.14a-11 that was submitted pursuant to 
Sec.  240.14a-8 by any security holder or group of security holders 
that has held more than 1% of the securities entitled to vote on that 
proposal for at least one year as of the date of the nomination and has 
provided evidence of such holding to the registrant, the registrant 
must disclose that the security holder vote on that proposal may 
determine whether the registrant will become subject to the security 
holder nomination procedure pursuant to Sec.  240.14a-11 for the annual 
(or, in lieu of annual, special) meetings at which directors are 
elected during the remainder of the calendar year in which the subject 
vote was held, the following calendar year and the portion of the next 
calendar year up to and including the annual meeting (or special 
meeting held in lieu of an annual meeting) during that calendar year.
    (h) If the registrant received a security holder nomination that 
indicated that it was submitted pursuant to Sec.  240.14a-11 and the 
registrant determined that it was not required to include that nominee 
in its proxy materials, describe the determination made by the 
registrant's board of directors (including an affirmative statement of 
its determination not to include that specific nominee), discuss the 
specific provisions of Sec.  240.14a-11 that the registrant's board of 
directors relied upon to exclude the nominee, and discuss the specific 
basis for the belief of the registrant's board of directors that the 
registrant is permitted to not include that nominee in its proxy 
materials.
    8. By amending Sec.  240.14a-6 to:
    a. Redesignate paragraphs (a)(4), (a)(5) and (a)(6) as paragraphs 
(a)(5), (a)(6) and (a)(7) respectively;
    b. Add new paragraph (a)(4);
    c. Add a sentence at the end of Note 3; and
    d. Add paragraphs (p) and (q).
    The additions read as follows:


Sec.  240.14a-6  Filing requirements.

    (a) * * *

[[Page 60819]]

    (4) The name of a security holder nominee is included pursuant to 
Sec.  240.14a-11.
* * * * *
    Note 3. Solicitation in Opposition. * * * The inclusion of a 
security holder nominee in the registrant's proxy materials pursuant to 
Sec.  240.14a-11 does not constitute a ``solicitation in opposition,'' 
even if the registrant opposes the security holder nominee and solicits 
against the security holder nominee and in favor of a registrant 
nominee.
* * * * *
    (p) Solicitations subject to Sec.  240.14a-11. Solicitations that 
are published or sent or given to security holders in connection with 
Sec.  240.14a-11 must be filed with the Commission as specified in that 
section.
    (q) Security holder notice of intent to nominate a candidate for 
director under Sec.  240.14a-11. Any notice sent to a registrant by a 
security holder or group of security holders indicating an intent to 
nominate a candidate for director in accordance with the procedure set 
forth in Sec.  240.14a-11 must be filed with the Commission no later 
than two business days after it is first provided to the registrant. 
For purposes of Regulation 14A (Sec.  240.14a-1--103), the notice filed 
pursuant to this requirement shall be deemed a solicitation.
    9. By amending Sec.  240.14a-8 to:
    a. Revise paragraph (i)(8); and
    b. Add an Instruction to paragraph (i)(11).
    The revision and addition read as follows:


Sec.  240.14a-8  Security holder proposals.

* * * * *
    (i) * * *
    (8) Relates to election: If the proposal relates to an election for 
membership on the company's board of directors or analogous governing 
body, except that a company may not exclude a proposal that would 
subject the company to Sec.  240.14a-11 on the basis of this paragraph;
* * * * *
    (11) * * *
    Instruction to paragraph (i)(11): For purposes of this paragraph, a 
proposal requesting that the company become subject to the security 
holder nomination procedure set out in Sec.  240.14a-11 that is 
submitted by a more than 1% security holder may not be excluded on the 
basis that it duplicates a previously submitted proposal by a security 
holder that holds 1% or less of the registrant's securities. In this 
instance, the earlier submitted proposal by a security holder that 
holds 1% or less of the registrant's securities may be excluded under 
this paragraph.
* * * * *
    10. By adding Sec.  240.14a-11 to read as follows:


Sec.  240.14a-11  Security holder nominations.

    (a) Applicability. In connection with an annual meeting of security 
holders (or, in lieu of an annual meeting, a special meeting) at which 
directors are elected, a registrant will be required to include in its 
proxy statement and form of proxy the name of a person or persons 
nominated by a security holder or group of security holders for 
election to the board of directors and include in its proxy statement 
the disclosure about such nominee or nominees and the nominating 
security holder or holders that is specified in paragraphs (c)(7), 
(c)(8), (c)(9) and (c)(10) of this section and, if the registrant 
includes a statement supporting the registrant's nominee(s) and/or 
opposing the security holder nominee or nominees, at the election of 
the nominating security holder or nominating security holder group, a 
statement of support for the security holder nominee or nominees, of a 
length not to exceed 500 words, provided that:
    (1) Applicable state law does not prohibit the registrant's 
security holders from nominating a candidate or candidates for election 
as a director;
    (2) One or more of the following events has occurred during the 
calendar year in which the meeting that is the subject of the proxy 
statement is being held or during either of the preceding two calendar 
years:
    (i) At least one of the registrant's nominees for the board of 
directors for whom the registrant solicited proxies received 
``withhold'' votes from more than 35% of the votes cast at an annual 
meeting of security holders (or, in lieu of an annual meeting, a 
special meeting) held after January 1, 2004, at which directors were 
elected (provided, that this event will be deemed not to occur with 
regard to any contested election to which Sec.  240.14a-12(c) applies 
or an election to which this section applies); or
    (ii) A security holder proposal providing that the registrant 
become subject to Sec.  240.14a-11 that was submitted pursuant to Sec.  
240.14a-8 by a security holder or group of security holders that held 
more than 1% of the securities entitled to vote on that proposal for at 
least one year as of the date the proposal was submitted and provided 
evidence of such holding to the registrant, received more than 50% of 
the votes cast on that proposal at an annual meeting of security 
holders (or, in lieu of an annual meeting, a special meeting) held 
after January 1, 2004; and
    (3) No security holder nominee is required to be included on the 
registrant's proxy card, and no disclosure regarding such nominee is 
required to be included in the registrant's proxy statement, in the 
event of one or more of the following:
    (i) The nominee's candidacy or, if elected, board membership, would 
violate controlling state law or federal law or rules of a national 
securities exchange or national securities association applicable to 
the registrant (other than rules of a national securities exchange or 
national securities association regarding director independence);
    (ii) Any information required to be included in the notice to the 
registrant required pursuant to paragraph (c) of this section is not so 
included;
    (iii) Any representation required to be included in the notice to 
the registrant required pursuant to paragraph (c) of this section is 
false in any material respect; or
    (iv) A nominee is not required to be included pursuant to the 
provisions of paragraph (d) of this section limiting the number of 
nominees required to be included.
    Instructions to paragraph (a).
    1. For purposes of paragraph (a)(2)(ii) of this section, the amount 
of a person's security ownership and the duration of that ownership 
shall be calculated as of the date that person submits the proposal to 
the registrant.
    2. For purposes of paragraph (a)(2)(ii) of this section, only votes 
for and against a proposal shall be included in the calculation of the 
security holder vote on that proposal. Accordingly, abstentions and 
broker non-votes will not be included in this calculation.
    3. A nominating security holder will not be deemed an ``affiliate'' 
of the registrant under the Securities Act of 1933 (15 U.S.C 77a et 
seq..) or the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) 
solely as a result of nominating a director or soliciting for the 
election of such a director nominee or against a registrant nominee 
pursuant to this section. Where a security holder nominee is elected, 
and the nominating security holder or nominating security holder group 
does not have an agreement or relationship with that director, 
otherwise than relating to the director's nomination pursuant to Sec.  
240.14a-11, solicitation for the election of the director nominee or 
against a registrant nominee, or the election of the director nominee, 
the nominating security holder or nominating security holder group will

[[Page 60820]]

not be deemed an affiliate solely by virtue of having nominated that 
director.
    4. The registrant shall determine whether any of the events 
permitting exclusion of a security holder nominee has occurred and 
shall notify the nominating security holder or nominating security 
holder group whether the registrant will include or exclude the 
security holder nominee. In the event that a registrant determines that 
it shall exclude the nominee, the registrant shall provide such notice 
promptly, but in no case less than 30 calendar days before the date of 
the registrant's proxy statement released to security holders in 
connection with the previous year's annual meeting and, where the 
registrant did not hold an annual meeting in the previous year, or if 
the date of this year's annual meeting has been changed by more than 30 
days from the date of the previous year's meeting, the notice must be 
provided a reasonable time before the registrant mails its proxy 
materials for the current year. If the registrant determines that it is 
entitled to exclude the nominee, the notice must include (a) A 
description of the determination made by the registrant's board of 
directors, including an affirmative statement of its determination not 
to include that specific nominee; (b) a discussion of the specific 
requirement or requirements of Sec.  240.14a-11 that the registrant's 
board of directors have determined permit the registrant not to include 
that specific nominee; and (c) a discussion of the specific basis for 
the belief of the registrant's board of directors that the registrant 
is permitted to not include that specific nominee. The registrant also 
must include in its proxy statement for the meeting for which the 
nominee was submitted a statement that it has made such an exclusion 
and provide the information included in the notice to the nominating 
security holder with regard to the basis for its determination to 
exclude the nominee. The exclusion of a security holder nominee by a 
registrant where that exclusion is not permissible under Sec.  240.14a-
11(a)(3) shall be a violation of this section. If the registrant 
determines that it must include the security holder nominee, it must 
advise the nominating security holder or nominating security holder 
group of this determination and state whether the registrant intends to 
include in its proxy statement disclosure supporting the registrant's 
nominees and/or opposing the security holder nominee. If the registrant 
intends to include such a supporting statement and/or opposing 
statement, it must advise the nominating security holder or nominating 
security holder group that it may submit a statement of no more than 
500 words supporting the security holder nominee. The registrant also 
must advise the nominating security holder or nominating security 
holder group of the date by which this statement must be provided to 
the registrant, which shall be not less than 10 business days from the 
date of the registrant's notice to the security holder. A statement by 
the registrant that it recommends a vote for its nominees and/or 
against the nominating security holder or nominating security holder 
group's nominee or nominees will not be deemed an opposing or 
supporting statement for purposes of this requirement.
    5. If any of the events described in paragraph (a)(2) of this 
section occur, and the registrant did not hold an annual meeting the 
previous year, or if the date of the current year's annual meeting has 
been changed by more than 30 days from the date of the previous year's 
annual meeting, the registrant must disclose pursuant to Item 13 of 
Form 8-K (Sec.  249.308 of this chapter) the date by which a security 
holder or security holder group must submit the notice required 
pursuant to paragraph (c) of this section, which date shall be a 
reasonable time prior to the date the registrant mails its proxy 
materials for the meeting.
    (b) Nominating security holder eligibility. A security holder or 
group of security holders nominating a person or persons must satisfy 
the following requirements:
    (1) The security holder individually, or the security holder group 
in the aggregate, must beneficially own more than 5% of the 
registrant's securities that are eligible to vote for the election of 
directors at that annual meeting of securities (or, in lieu of such an 
annual meeting, a special meeting of security holders);
    (2) The security holder or each member of the security holder group 
must have held the securities that are used for purposes of determining 
the more than 5% ownership threshold required by paragraph (b)(1) of 
this section continuously for at least two years and intend to continue 
to hold those securities through the date of the subject election of 
directors;
    (3) In the case of a registrant that is not an open-end investment 
company registered under the Investment Company Act of 1940, the 
security holder or each member of the security holder group must meet 
the requirements set out in Sec.  240.13d-1(b) or (c) to file on 
Schedule 13G (Sec.  240.13d-102); and
    (4) In the case of a registrant that is not an open-end investment 
company registered under the Investment Company Act of 1940, the 
nominating security holder or the nominating security holder group must 
have reported its beneficial ownership on Schedule 13G (Sec.  240.13d-
102), including the certification required by Item 10(c) of Schedule 
13G, or have amended a previously filed Schedule 13G to include the 
certification required by Item 10(c) of Schedule 13G, before or on the 
date of sending the notice specified in paragraph (c) of this section. 
Notwithstanding the provisions of Schedule 13G, the Schedule 13G filed 
in satisfaction of this requirement must set forth information 
demonstrating compliance with the requirements of paragraphs (b)(1) and 
(b)(2) of this section and disclose the filing person's intention to 
nominate one or more directors under Sec.  240.14a-11.
    (c) Security holder notice. In order to have a nominee included in 
the registrant's proxy statement and proxy card, the nominating 
security holder must provide notice to the registrant of its intent to 
require that the registrant include that security holder's nominee on 
the registrant's proxy card no later than 80 days before the date that 
the registrant mailed its proxy materials for the prior year's annual 
meeting, except that, if the registrant did not hold an annual meeting 
during the prior year, or if the date of the meeting has changed more 
than 30 days from the prior year, then the nominating security holder 
must provide notice a reasonable time before the registrant mails its 
proxy materials, as specified by the registrant in a Form 8-K (Sec.  
249.308 of this chapter) filed pursuant to Item 13 of Form 8-K. This 
notice must include:
    (1) A representation that, to the knowledge of the nominating 
security holder or group, the nominee's candidacy or, if elected, board 
membership, would not violate controlling state law or federal law or 
rules of a national securities exchange or national securities 
association applicable to the registrant (other than rules of a 
national securities exchange or national securities association 
regarding director independence);
    (2) A representation that the nominating security holder or 
nominating security holder group satisfies the conditions in paragraph 
(b) of this section;
    (3) A representation that:
    (i) If the nominating security holder or any member of the 
nominating security holder group is a natural person, the

[[Page 60821]]

nominee is not the nominating security holder, a member of the 
nominating security holder group, or a member of the immediate family 
of the nominating security holder or any member of the nominating 
security holder group;
    (ii) If the nominating security holder or any member of the 
nominating security holder group is an entity, neither the nominee nor 
any immediate family member of the nominee has been an employee of the 
nominating security holder or any member of the nominating security 
holder group during the then-current calendar year nor during the 
immediately preceding calendar year;
    (iii) Neither the nominee nor any immediate family member of the 
nominee has accepted during the then-current calendar year or during 
the immediately preceding calendar year directly or indirectly any 
consulting, advisory, or other compensatory fee from the nominating 
security holder or any member of the nominating security holder group 
or any affiliate of any such holder or any such member, provided that 
compensatory fees do not include the receipt of fixed amounts of 
compensation under a retirement plan (including deferred compensation) 
for prior service with the nominating security holder or nominating 
security holder group member (provided that such compensation is not 
contingent in any way on continued service); and
    (iv) Such nominee:
    (A) Is not an executive officer or director (or person performing 
similar functions) of the nominating security holder or any member of 
the nominating security holder group, or of an affiliate of such holder 
or any such member; and
    (B) Does not control the nominating security holder or any member 
of the nominating security holder group (or in the case of a holder or 
member that is an investment company, an interested person of such 
holder or any such member as defined in section 2(a)(19) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19));
    Instruction to paragraph (c)(3). For purposes of paragraph (c)(3) 
of this section, ``immediate family'' shall include any person related 
to the nominee by blood, marriage, or adoption, not more remote than 
first cousin.
    (4) In the case of a registrant other than an investment company, a 
representation that the nominee meets the objective criteria for 
``independence'' of the national securities exchange or national 
securities association rules applicable to the registrant, if any, and, 
in the case of a registrant that is an investment company, a 
representation that the nominee is not an ``interested person'' of the 
registrant as defined in section 2(a)(19) of the Investment Company Act 
of 1940 (15 U.S.C. 80a-2(a)(19));
    Instruction to paragraph (c)(4). For this purpose, the nominee 
would be required to meet the definition of ``independence'' that 
generally is applicable to directors of the registrant and not any 
particular definition of independence applicable to members of the 
audit committee of the registrant's board of directors. To the extent a 
national securities exchange or national securities association rule 
imposes a standard regarding independence that requires a subjective 
determination by the board or a group or committee of the board (for 
example, requiring that the board of directors or any group or 
committee of the board of directors make a determination regarding the 
existence of factors material to a determination of a nominee's 
independence), that standard would not have to be satisfied.
    (5) A representation that neither the nominee nor the nominating 
security holder or, where there is a nominating security holder group, 
the members of the nominating security holder group, has a direct or 
indirect agreement with the registrant regarding the nomination of the 
nominee;
    (6) In the case of a registrant that is not an open-end investment 
company registered under the Investment Company Act of 1940, a copy of 
the Schedule 13G (Sec.  240.13d-102) filed by the nominating security 
holder or nominating security holder group in satisfaction of the 
requirement in paragraph (b)(4) of this section;
    (7) A statement from the nominee that the nominee consents to be 
named in the registrant's proxy statement and form of proxy and, if 
elected, to serve on the registrant's board of directors, for inclusion 
in the registrant's proxy statement;
    (8) Disclosure about the nominee providing all of the information 
necessary to comply with the disclosure requirements of Item 7(a), (b) 
and (c) and, for investment companies, Item 22(b) of Schedule 14A 
(Sec.  240.14a-101), as applicable, for inclusion in the registrant's 
proxy statement;
    (9) Any of the following information with regard to each nominating 
security holder or member of a nominating security holder group that is 
not included in the Schedule 13G (Sec.  240.13d-102), for inclusion in 
the registrant's proxy statement:
    (i) Name and business address;
    (ii) Present principal occupation or employment and the name, 
principal business and address of any corporation or other organization 
in which such employment is carried on;
    (iii) The amount of each class of securities of the registrant that 
the individual owns beneficially, directly or indirectly, determined in 
accordance with Sec.  240.13d-3; and
    (iv) Whether or not, during the past ten years, the individual has 
been convicted in a criminal proceeding (excluding traffic violations 
or similar misdemeanors) and, if so, the dates, the nature of the 
conviction, the name or other disposition of the case; and whether the 
individual has been involved in any other legal proceeding during the 
past five years, as specified in Item 401(f) of Regulation S-K (Sec.  
229.10 of this chapter);
    Instruction to paragraph (c)(9). Where the nominating security 
holder is a general or limited partnership, syndicate or other group, 
the information called for in Sec.  240.14a-11(c)(9) must be given with 
respect to (i) each partner of the general partnership; (ii) each 
partner who is, or functions as, a general partner of the limited 
partnership; (iii) each member of the syndicate or group; and (iv) each 
person controlling the partner or member. If the nominating security 
holder is a corporation or if a person referred to in (i), (ii), (iii) 
or (iv) of this Instruction is a corporation, the information called 
for in Sec.  240.14a-11(c)(9) must be given with respect to (a) each 
executive officer and director of the corporation; (b) each person 
controlling the corporation; and (c) each executive officer and 
director of any corporation or other person ultimately in control of 
the corporation.
    (10) The methods by which the nominating security holder or 
nominating security holder group may solicit security holders, 
including, at the election of the nominating security holder or 
nominating security holder group, any Web site address on which the 
nominating security holder or nominating security holder group may 
publish soliciting materials; and
    (11) In the case of a registrant that is an open-end investment 
company registered under the Investment Company Act of 1940, the 
following information with regard to each nominating security holder or 
member of a nominating security holder group, in addition to the 
information required by paragraph (c)(9) of this section:
    (i) The percentage of each class of securities of the registrant 
that the individual owns beneficially, directly or indirectly, 
determined in accordance with Sec.  240.13d-3, and the number of shares 
as to which the person has:
    (A) Sole power to vote or to direct the vote;

[[Page 60822]]

    (B) Shared power to vote or to direct the vote;
    (C) Sole power to dispose or to direct the disposition of such 
shares; and
    (D) Shared power to dispose or to direct the disposition of such 
shares; and
    Instruction to paragraph (c)(11)(i). For purposes of paragraph 
(c)(11)(i) of this section, any person, in determining the amount of 
outstanding securities of a class of equity securities, may rely upon 
information set forth in the investment company's most recent report on 
Form N-CSR (Sec. Sec.  249.331 and 274.128) filed with the Commission 
pursuant to the Securities Exchange Act of 1934 and the Investment 
Company Act of 1940, unless he or she knows or has reason to believe 
that the information contained therein is inaccurate.
    (ii) The following certification and signature, signed by each 
person on whose behalf the notice is filed or his or her authorized 
representative. If the notice is signed on behalf of a person by his or 
her authorized representative other than an executive officer or 
general partner of the filing person, evidence of the representative's 
authority to sign on behalf of such person shall be filed with the 
notice, provided, however, that a power of attorney for this purpose 
which is already on file with the Commission may be incorporated by 
reference. The name and any title of each person who signs the notice 
shall be typed or printed beneath his or her signature:

Certification

    By signing below, I certify that ----% of the securities referred 
to above have been held continuously for at least 2 years.

Signature

    After reasonable inquiry and to the best of my knowledge and 
belief, I certify that the information set forth in this statement is 
true, complete and correct.

-----------------------------------------------------------------------
Date
-----------------------------------------------------------------------
Signature
-----------------------------------------------------------------------
Name/Title

    Instruction to paragraph (c)(11)(ii). The percentage of securities 
listed in the certification in paragraph (c)(11)(ii) of this section 
shall be used both for the purpose of determining eligibility to submit 
a security holder nomination pursuant to this section and, where more 
than one eligible security holder or security holder group provides 
notice of its intention to submit a nomination pursuant to this 
section, for the purpose of determining the security holder or security 
holder group with the largest percentage of subject securities.
    Instruction to paragraph (c). Refer to Sec.  240.14a-6(q) with 
regard to the obligation of the nominating security holder or 
nominating security holder group to file certain of the information 
specified in this paragraph (c) with the Commission.
    (d) Number of security holder nominees.
    (1) The registrant is not required to include in its proxy 
statement and form of proxy more than:
    (i) One security holder nominee where the total number of members 
of the registrant's board of directors is eight or fewer;
    (ii) Two security holder nominees where the total number of members 
of the registrant's board of directors is greater than eight and less 
than 20; and
    (iii) Three security holder nominees where the total number of 
members of the registrant's board of directors is 20 or more;
    (2) Provided that, where the registrant has one or more directors 
currently serving on its board of directors who were elected as a 
security holder nominee pursuant to this section, and the term of that 
director or directors extends past the date of the meeting of security 
holders for which it is soliciting proxies, the registrant will not be 
required to include in the proxy statement or form of proxy more 
security holder nominees than could result in the total number of 
directors who were elected as security holder nominees pursuant to 
Sec.  240.14a-11 and serving on the board being greater than:
    (i) One where the total number of members of the board of directors 
is eight or fewer;
    (ii) Two where the total number of members of the board of 
directors is greater than eight and less than 20; and
    (iii) Three where the total number of members of the board of 
directors is 20 or more; and
    (3) In the event that more than one security holder or group of 
security holders is otherwise permitted to nominate a person or persons 
to a registrant's board of directors pursuant to Sec.  240.14a-11, the 
registrant shall include in the proxy statement and form of proxy the 
nominee or nominees of the security holder or security holder group 
with the largest two-year beneficial ownership at the time of the 
delivery of the notice specified in paragraph (c) of this section, as 
specified in the filed Schedule 13G (Sec.  240.13d-102), up to and 
including the total number required to be included by the registrant.
    Instructions to paragraph (d).
    1. If a nominee, a nominating security holder or any member of a 
nominating security holder group has any direct or indirect agreement 
with the registrant or any affiliate of the registrant regarding the 
nomination of a candidate for election as a member of the registrant's 
board of directors, any such nominee or any nominee of such nominating 
security holder or nominating security holder group shall not be 
included in calculating the number of nominees required under this 
section.
    2. For purposes of paragraph (d)(3) of this section, the registrant 
must rely on the beneficial ownership percentage reported in the 
nominating security holder's filed Schedule 13G, except where the 
registrant has reason to believe that the beneficial ownership reported 
in the Schedule 13G is inaccurate.
    (e) Liability for false or misleading statements. The registrant is 
not responsible for any information in the notice from the nominating 
security holder or nominating security holder group pursuant to 
paragraph (c) of this section or otherwise provided by the nominating 
security holder or nominating security holder group.
    (f) Exempt solicitations. Sections 240.14a-3 to 240.14a-6(o), 
240.14a-8, 240.14a-10 and 240.14a-12 to 240.14a-15 do not apply to the 
following:
    (1) Any solicitation by or on behalf of any security holder in 
connection with the formation of a nominating security holder group 
pursuant to Sec.  240.14a-11, provided that:
    (i) The total number of persons solicited is not more than 30; or
    (ii) Each written communication includes no more than:
    (A) A statement of each soliciting security holder's intent to form 
a nominating security holder group in order to nominate a director 
under Sec.  240.14a-11;
    (B) The percentage of securities that each soliciting security 
holder beneficially owns or the aggregate percentage owned by any group 
to which the security holder belongs; and
    (C) The means by which security holders may contact the soliciting 
party; and
    (iii) Any soliciting material published, sent or given to security 
holders in accordance with this paragraph is filed with the Commission 
by the soliciting party, under the registrant's Exchange Act file 
number, or, in the case of a registrant that is an investment company 
registered under the Investment Company Act of 1940, under the 
registrant's Investment Company Act file number, no later than the date

[[Page 60823]]

the material is first published, sent or given to security holders. The 
soliciting material must include a cover page in the form set forth in 
Schedule 14A (Sec.  240.14a-101) and the appropriate box on the cover 
page must be marked; and
    (2) Any solicitation by or on behalf of a nominating security 
holder or nominating security holder group in support of a nominee 
placed on the registrant's proxy card in accordance with Sec.  240.14a-
11, provided that:
    (i) The soliciting party does not, at any time during such 
solicitation, seek directly or indirectly, either on its own or 
another's behalf, the power to act as proxy for a security holder and 
does not furnish or otherwise request, or act on behalf of a person who 
furnishes or requests, a form of revocation, abstention, consent or 
authorization;
    (ii) Each written communication includes:
    (A) The identity of each nominating security holder and a 
description of his or her direct or indirect interests, by security 
holdings or otherwise;
    (B) A prominent legend in clear, plain language advising security 
holders that a security holder nominee is or will be included in the 
registrant's proxy statement and to read the registrant's proxy 
statement when it becomes available because it includes important 
information (or, if the registrant's proxy statement is publicly 
available, advising security holders of that fact and encouraging 
security holders to read the registrant's proxy statement because it 
includes important information). The legend also must explain to 
security holders that they can find the registrant's proxy statement, 
and any other relevant documents, at no charge on the Commission's Web 
site; and
    (iii) Any soliciting material published, sent or given to security 
holders in accordance with this paragraph must be filed by the 
nominating security holder with the Commission, under the registrant's 
Exchange Act file number, or, in the case of a registrant that is an 
investment company registered under the Investment Company Act of 1940, 
under the registrant's Investment Company Act file number, no later 
than the date the material is first published, sent or given to 
security holders. Three copies of the material must at the same time be 
filed with, or mailed for filing to, each national securities exchange 
upon which any class of securities of the registrant is listed and 
registered. The soliciting material must include a cover page in the 
form set forth in Schedule 14A (Sec.  240.14a-101) and the appropriate 
box on the cover page must be marked.
    Instruction to paragraph (f)(2). If the information required by 
paragraph (f)(2)(ii)(A) is presented in a Schedule 13G filed 
electronically with the Commission, the written communication will be 
deemed to satisfy the requirements of that paragraph if it states that 
the information is presented in a Schedule 13G, presents the file 
number and file date for the Schedule 13G, and presents a direct 
Internet address where that Schedule 13G may be located.
    11. By amending Sec.  240.14a-12 to add Instruction 3 to read as 
follows:


Sec.  240.14a-12  Solicitation before furnishing a proxy statement.

* * * * *
    Instructions to Sec.  240.14a-12:
* * * * *
    3. Solicitations by a nominating security holder or nominating 
security holder group that are made in connection with a Sec.  240.14a-
11 nomination will not be deemed a solicitation in opposition subject 
to Sec.  240.14a-12(c).
    12. Amend Sec.  240.14a-101 by:
    a. Adding on the cover page two boxes before the box ``Soliciting 
Material under Sec.  240.14a-12'';
    b. Adding paragraph (i) to Item 7; and
    c. 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), (h), and (i)''.
    The additions and revision read as follows:


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

SCHEDULE 14A INFORMATION
* * * * *
[ ] Soliciting Material under Sec.  240.14a-11
[ ] Nominating Security Holder Notice Under Sec.  240.14a-11(c)
* * * * *
    Item 7. Directors and executive officers. * * *
* * * * *
    (i) If a security holder nominee or nominees are submitted to the 
registrant and the registrant is not permitted to exclude the nominee 
or nominees pursuant to the provisions of Sec.  240.14a-11, the 
registrant must include the disclosure required from the nominating 
security holder under Sec.  240.14a-11(c)(7), (c)(8), (c)(9), (c)(10) 
and (c)(11), with regard to the nominee and the nominating security 
holder. In addition, if the registrant includes a statement supporting 
the registrant nominee(s) and/or opposing the security holder nominee, 
the registrant must also include, at the election of the nominating 
security holder or nominating security holder group, a statement of 
support for the security holder nominee, of a length not to exceed 500 
words, in accordance with Sec.  240.14a-11.
    Instruction to Item 7(i). The information disclosed pursuant to 
paragraph (i) will not be deemed incorporated by reference into any 
filing under the Securities Act or the Exchange Act, except to the 
extent that the registrant specifically incorporates that information 
by reference.
* * * * *
    13. Section 240.15d-11 is amended by revising paragraph (b) to read 
as follows:


Sec.  240.15d-11  Current reports on Form 8-K (Sec.  249.308 of this 
chapter).

* * * * *
    (b) This section shall not apply to foreign governments, foreign 
private issuers required to make reports on Form 6-K (17 CFR 249.306) 
pursuant to Sec.  240.15d-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file reports pursuant to Sec.  270.30b1-1 of this chapter under the 
Investment Company Act of 1940, except where such an investment company 
is required to file:
    (1) Notice of a blackout period pursuant to Sec.  245.104 of this 
chapter; or
    (2) Disclosure pursuant to Instruction 5 to Sec.  240.14a-11(a) of 
the date by which a security holder or security holder group must 
submit the notice required pursuant to Sec.  240.14a-11(c).
    14. By amending Sec.  240.16a-1 to revise paragraph (a)(1) and add 
``Note to Paragraph (a)(1)(ii)(K)'' to read as follows:


Sec.  240.16a-1  Definition of terms.

    (a) * * *
    (1) (i) Solely for purposes of determining whether a person is a 
beneficial owner of more than ten percent of any class of equity 
securities registered pursuant to section 12 of the Act (15 U.S.C. 
78l), the term ``beneficial owner'' means any person who is deemed a 
beneficial owner pursuant to Section 13(d) of the Act (15 U.S.C 78m) 
and the rules thereunder, except that the institutions or persons 
specified in paragraph (a)(1)(ii) of this section are not deemed the 
beneficial owner of securities of such class:
    (A) That are acquired by such institutions or persons without the 
purpose or effect of changing or influencing control of the issuer or 
engaging in any arrangement subject to Sec.  240.13d-3(b); and

[[Page 60824]]

    (B) With respect to the institutions or persons specified in 
paragraphs (a)(1)(ii)(A) through (a)(1)(ii)(J) of this section, that 
are held for the benefit of third parties or in customer or fiduciary 
accounts in the ordinary course of business (or in the case of an 
employee benefit plan specified in paragraph (a)(1)(ii)(F) of this 
section, that are allocated to plan participants where participants 
have voting power).
    (ii) (A) A broker or dealer registered under section 15 of the Act 
(15 U.S.C. 78o);
    (B) A bank as defined in section 3(a)(6) of the Act (15 U.S.C. 
78c(a)(6));
    (C) An insurance company as defined in section 3(a)(19) of the Act 
(15 U.S.C. 78c(a)(19));
    (D) An investment company registered under section 8 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-8);
    (E) Any person registered as an investment adviser under section 
203 of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3) or under 
the laws of any state;
    (F) An employee benefit plan as defined in section 3(3) of the 
Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. 
1001 et seq. (``ERISA'') that is subject to the provisions of ERISA, or 
any such plan that is not subject to ERISA that is maintained primarily 
for the benefit of the employees of a state or local government or 
instrumentality, or an endowment fund;
    (G) A parent holding company or control person, provided the 
aggregate amount held directly by the parent or control person, and 
directly and indirectly by their subsidiaries or affiliates that are 
not persons specified in paragraphs (a)(1)(ii)(A) through (J) of this 
section, does not exceed one percent of the securities of the subject 
class;
    (H) A savings association as defined in section 3(b) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813);
    (I) A church plan that is excluded from the definition of an 
investment company under section 3(c)(14) of the Investment Company Act 
of 1940 (15 U.S.C. 80a-3(c)(14);
    (J) A group, provided that all the members are persons specified in 
Sec.  240.16a-1(a)(1)(ii)(A) through (I); and
    (K) Members of a nominating security holder group formed in 
accordance with Sec.  240.14a-11.
    Note to paragraph (a)(1)(ii)(K). Members of a security holder group 
formed in order to nominate a director under Sec.  240.14a-11 are not 
deemed to have the purpose or effect of changing or influencing control 
of the issuer solely by virtue of such group membership or by virtue of 
a director nomination pursuant to Sec.  240.14a-11, a solicitation for 
the election of that director nominee or against that registrant 
nominee, or the election of that director nominee.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    15. The authority citation for Part 249 continues to read in part 
as follows:

    Authority: 15 U.S.C. 78a et seq., 7202, 7233, 7241, 7262, 7264, 
and 7265; and 18 U.S.C. 1350, unless otherwise noted.

* * * * *
    16. By amending Form 8-K (referenced in Sec.  249.308) to:
    a. Add a sentence at the end of General Instruction B.1; and
    b. Add Item 13 before the ``Signature'' section.
    The additions read as follows:

    Note: The text of Form 8-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 8-K

* * * * *

General Instructions

* * * * *
B. Events To Be Reported and Time for Filing of Reports
    1. * * * A report pursuant to Item 13 is to be filed promptly after 
the registrant determines the anticipated meeting date.
* * * * *

Information To Be Included in the Report

* * * * *
Item 13. Security Holder Nominations Pursuant to Exchange Act Rule 14a-
11
    If any of the events described in Sec.  240.14a-11(a)(2) occur, and 
the registrant did not hold an annual meeting the previous year, or if 
the date of this year's annual meeting has been changed by more than 30 
days from the date of the previous year's meeting, then the registrant 
is required to disclose the date by which a security holder or security 
holder group must submit the notice required pursuant to Sec.  240.14a-
11(c), which date shall be a reasonable time before the registrant 
mails its proxy materials for the meeting.
    17. By amending Item 4 to ``Part II--Other Information'' of Form 
10-Q (referenced in Sec.  249.308a) to:
    a. Revise paragraph (d); and
    b. Add paragraph (e).
    The revision and addition read as follows:

    Note: The text of Form 10-Q does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 10-Q

* * * * *

Part II--Other Information

* * * * *
Item 4. Submission of Matters to a Vote of Security Holders
* * * * *
    (d) A description of the terms of any settlement between the 
registrant and any other participant (as defined in Instruction 3 to 
Item 4 of Schedule 14A (Sec.  240.14a-101) of Regulation 14A under the 
Act) terminating any solicitation subject to Sec.  240.14a-12(c), 
including the cost or anticipated cost to the registrant.
    (e) If the meeting involved the election of directors or a vote on 
a security holder proposal under Sec.  240.14a-8 and, as a result of 
that vote, the registrant will become subject to the security holder 
nomination procedure in Sec.  240.14a-11, provide disclosure of that 
result and disclose that the registrant will be subject to Sec.  
240.14a-11 for the annual (or, in lieu of annual, special) meetings at 
which directors are elected during the remainder of the calendar year 
in which the subject vote was held, the following calendar year and the 
next calendar year up to and including the annual meeting (or special 
meeting in lieu of an annual meeting) during that calendar year, and 
state the date by which security holders must submit their nominations.
* * * * *
    18. By amending Item 4 to ``Part II--Other Information'' of Form 
10-QSB (referenced in Sec.  249.308b) to:
    a. Revise paragraph (d); and
    b. Add paragraph (e).
    The revision and addition read as follows:

    Note: The text of Form 10-QSB does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 10-QSB

* * * * *

Part II--Other Information

* * * * *
Item 4. Submission of Matters to a Vote of Security Holders
* * * * *
    (d) A description of the terms of any settlement between the 
registrant and any other participant (as defined in

[[Page 60825]]

Instruction 3 to Item 4 of Schedule 14A (Sec.  240.14a-101) of 
Regulation 14A under the Act) terminating any solicitation subject to 
Sec.  240.14a-12(c), including the cost or anticipated cost to the 
registrant.
    (e) If the meeting involved the election of directors or a vote on 
a security holder proposal under Sec.  240.14a-8 and, as a result of 
that vote, the registrant will become subject to the security holder 
nomination procedure in Sec.  240.14a-11, provide disclosure of that 
result and disclose that the registrant will be subject to Sec.  
240.14a-11 for the annual (or, in lieu of annual, special) meetings at 
which directors are elected during the remainder of the calendar year 
in which the subject vote was held, the following calendar year and the 
next calendar year up to and including the annual meeting (or special 
meeting in lieu of an annual meeting) during that calendar year, and 
state the date by which security holders must submit their nominations.
* * * * *
    19. By amending Item 4 to Part I of Form 10-K (referenced in Sec.  
249.310) to:
    a. Revise paragraph (d); and
    b. Add paragraph (e).
    The revision and addition read as follows:

    Note: The text of Form 10-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 10-K

* * * * *

Part I

* * * * *
Item 4. Submission of Matters to a Vote of Security Holders
* * * * *
    (d) A description of the terms of any settlement between the 
registrant and any other participant (as defined in Instruction 3 to 
Item 4 of Schedule 14A (Sec.  240.14a-101) of Regulation 14A under the 
Act) terminating any solicitation subject to Sec.  240.14a-12(c), 
including the cost or anticipated cost to the registrant.
    (e) If the meeting involved the election of directors or a vote on 
a security holder proposal under Sec.  240.14a-8 and, as a result of 
that vote, the registrant will become subject to the security holder 
nomination procedure in Sec.  240.14a-11, provide disclosure of that 
result and disclose that the registrant will be subject to Sec.  
240.14a-11 for the annual (or, in lieu of annual, special) meetings at 
which directors are elected during the remainder of the calendar year 
in which the subject vote was held, the following calendar year and the 
next calendar year up to and including the annual meeting (or special 
meeting in lieu of an annual meeting) during that calendar year, and 
state the date by which security holders must submit their nominations.
* * * * *
    20. By amending Item 4 to Part I of Form 10-KSB (referenced in 
Sec.  249.310b) to:
    a. Revise paragraph (d); and
    b. Add paragraph (e).
    The revision and addition read as follows:

    Note: The text of Form 10-KSB does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 10-KSB

* * * * *

Part I

* * * * *
Item 4. Submission of Matters to a Vote of Security Holders
* * * * *
    (d) A description of the terms of any settlement between the 
registrant and any other participant (as defined in Instruction 3 to 
Item 4 of Schedule 14A (Sec.  240.14a-101) of Regulation 14A under the 
Act) terminating any solicitation subject to Sec.  240.14a-12(c), 
including the cost or anticipated cost to the registrant.
    (e) If the meeting involved the election of directors or a vote on 
a security holder proposal under Sec.  240.14a-8 and, as a result of 
that vote, the registrant will become subject to the security holder 
nomination procedure in Sec.  240.14a-11, provide disclosure of that 
result and disclose that the registrant will be subject to Sec.  
240.14a-11 for the annual (or, in lieu of annual, special) meetings at 
which directors are elected during the remainder of the calendar year 
in which the subject vote was held, the following calendar year and the 
next calendar year up to and including the annual meeting (or special 
meeting in lieu of an annual meeting) during that calendar year, and 
state the date by which security holders must submit their nominations.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

    21. The authority citation for Part 274 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise 
noted.

* * * * *
    22. By amending Form N-SAR (referenced in Sec. Sec.  249.330 and 
274.101) by:
    a. Removing and reserving sub-item 77C;
    b. Removing and reserving the Instruction to sub-item 77C in 
Instructions to Specific Items (referenced in Sec. Sec.  249.330 and 
274.101); and
    c. Revising the Instruction to sub-item 102B in Instructions to 
Specific Items.
    The revision reads as follows:

    Note: The text of Form N-SAR does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-SAR

* * * * *

Instructions to Specific Items

* * * * *
Sub-Item 102B: Submission of Matters to a Vote of Security Holders
    If any matter has been submitted to a vote of security holders 
during the period covered by this report, through the solicitation of 
proxies or otherwise, furnish the following information:
    (a) The date of the meeting and whether it was an annual or special 
meeting.
    (b) If the meeting involved the election of directors, the name of 
each director elected at the meeting and the name of each other 
director whose term of office as a director continued after the 
meeting.
    (c) A brief description of each matter voted upon at the meeting 
and state the number of votes cast for, against or withheld, as well as 
the number of abstentions and broker non-votes, as to each such matter, 
including a separate tabulation with respect to each nominee for 
office.
    (d) A description of the terms of any settlement between the 
registrant and any other participant (as defined in Instruction 3 to 
Item 4 of Schedule 14A (Sec.  240.14a-101) of Regulation 14A under the 
1934 Act) terminating any solicitation subject to Rule 14a-12(c) under 
the 1934 Act (17 CFR 240.14a-12(c)), including the cost or anticipated 
cost to the registrant.
    (e) If the meeting involved the election of directors or a vote on 
a security holder proposal under Sec.  240.14a-8 under the 1934 Act (17 
CFR 240.14a-8) and, as a result of that vote, the registrant will 
become subject to the security holder nomination procedure

[[Page 60826]]

in Rule 14a-11 under the 1934 Act (17 CFR 240.14a-11), provide 
disclosure of that result and disclose that the registrant will be 
subject to Rule 14a-11 under the 1934 Act for the annual (or, in lieu 
of annual, special) meetings at which directors are elected during the 
remainder of the calendar year in which the subject vote was held, the 
following calendar year and the next calendar year up to and including 
the annual meeting (or special meeting in lieu of an annual meeting) 
during that calendar year, and state the date by which security holders 
must submit their nominations.

Instructions

    1. If any matter has been submitted to a vote of security holders 
otherwise than at a meeting of such security holders, corresponding 
information with respect to such submission shall be furnished. The 
solicitation of any authorization or consent (other than a proxy to 
vote at a stockholders' meeting) with respect to any matter shall be 
deemed a submission of such matter to a vote of security holders within 
the meaning of this item.
    2. Paragraph (a) need be answered only if paragraph (b) or (c) is 
required to be answered.
    3. Paragraph (b) need not be answered if (i) proxies for the 
meeting were solicited pursuant to Regulation 14A under the 1934 Act, 
(ii) there was no solicitation in opposition to the management's 
nominees as listed in the proxy statement, and (iii) all of such 
nominees were elected. If the registrant did not solicit proxies and 
the board of directors as previously reported to the Commission was re-
elected in its entirety, a statement to that effect in answer to 
paragraph (b) will suffice as an answer thereto.
    4. Paragraph (c) must be answered for all matters voted upon at the 
meeting, including both contested and uncontested elections of 
directors.
    5. If the registrant has furnished to its security holders proxy 
soliciting material containing the information called for by paragraph 
(d), the paragraph may be answered by reference to the information 
contained in such material.
    6. If the registrant has published a report containing all of the 
information called for by this item, the item may be answered by a 
reference to the information contained in such report.
    23. By amending Form N-CSR (referenced in Sec. Sec.  249.331 and 
274.128) by adding text to Item 8 to read as follows:

    Note: The text of Form N-CSR does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-CSR

* * * * *
Item 8. Submission of Matters to a Vote of Security Holders.
    If any matter has been submitted to a vote of security holders 
during the period covered by this report, through the solicitation of 
proxies or otherwise, furnish the following information:
    (a) The date of the meeting and whether it was an annual or special 
meeting.
    (b) If the meeting involved the election of directors, the name of 
each director elected at the meeting and the name of each other 
director whose term of office as a director continued after the 
meeting.
    (c) A brief description of each matter voted upon at the meeting 
and state the number of votes cast for, against or withheld, as well as 
the number of abstentions and broker non-votes, as to each such matter, 
including a separate tabulation with respect to each nominee for 
office.
    (d) A description of the terms of any settlement between the 
registrant and any other participant (as defined in Instruction 3 to 
Item 4 of Schedule 14A (Sec.  240.14a-101) of Regulation 14A under the 
Exchange Act) terminating any solicitation subject to Rule 14a-12(c) 
under the Exchange Act (17 CFR 240.14a-12(c)), including the cost or 
anticipated cost to the registrant.
    (e) If the meeting involved the election of directors or a vote on 
a security holder proposal under Sec.  240.14a-8 under the Exchange Act 
(17 CFR 240.14a-8) and, as a result of that vote, the registrant will 
become subject to the security holder nomination procedure in Rule 14a-
11 under the Exchange Act (17 CFR 240.14a-11), provide disclosure of 
that result and disclose that the registrant will be subject to Rule 
14a-11 under the Exchange Act for the annual (or, in lieu of annual, 
special) meetings at which directors are elected during the remainder 
of the calendar year in which the subject vote was held, the following 
calendar year and the next calendar year up to and including the annual 
meeting (or special meeting in lieu of an annual meeting) during that 
calendar year, and state the date by which security holders must submit 
their nomination.

Instructions

    1. If any matter has been submitted to a vote of security holders 
otherwise than at a meeting of such security holders, corresponding 
information with respect to such submission shall be furnished. The 
solicitation of any authorization or consent (other than a proxy to 
vote at a stockholders' meeting) with respect to any matter shall be 
deemed a submission of such matter to a vote of security holders within 
the meaning of this item.
    2. Paragraph (a) need be answered only if paragraph (b) or (c) is 
required to be answered.
    3. Paragraph (b) need not be answered if (i) proxies for the 
meeting were solicited pursuant to Regulation 14A under the Exchange 
Act, (ii) there was no solicitation in opposition to the management's 
nominees as listed in the proxy statement, and (iii) all of such 
nominees were elected. If the registrant did not solicit proxies and 
the board of directors as previously reported to the Commission was re-
elected in its entirety, a statement to that effect in answer to 
paragraph (b) will suffice as an answer thereto.
    4. Paragraph (c) must be answered for all matters voted upon at the 
meeting, including both contested and uncontested elections of 
directors.
    5. If the registrant has furnished to its security holders proxy 
soliciting material containing the information called for by paragraph 
(d), the paragraph may be answered by reference to the information 
contained in such material.
    6. If the registrant has published a report containing all of the 
information called for by this item, the item may be answered by a 
reference to the information contained in such report.
* * * * *

    Dated: October 14, 2003.

    By the Commission.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26351 Filed 10-22-03; 8:45 am]
BILLING CODE 8010-01-P