[Federal Register Volume 68, Number 229 (Friday, November 28, 2003)]
[Rules and Regulations]
[Pages 66992-67011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29723]



[[Page 66991]]

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Part V





Securities and Exchange Commission





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17 CFR Parts 228, 229, 240 et al.



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

  Federal Register / Vol. 68, No. 229 / Friday, November 28, 2003 / 
Rules and Regulations  

[[Page 66992]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229, 240, 249, 270 and 274

[Release Nos. 33-8340; 34-48825; IC-26262; File No. S7-14-03]
RIN 3235-AI90


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

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: Effective Date: January 1, 2004.
    Compliance Dates: Registrants must comply with these disclosure 
requirements in proxy or information statements that are first sent or 
given to security holders on or after January 1, 2004, and in Forms 10-
Q, 10-QSB, 10-K, 10-KSB, and N-CSR for the first reporting period 
ending after January 1, 2004. Registrants may comply voluntarily with 
these disclosure requirements before the compliance date.
    Comments: Comments regarding the ``collection of information'' 
requirements, within the meaning of the Paperwork Reduction Act of 
1995, of Regulations S-B and S-K, and Forms 10-Q, 10-QSB, 10-K, 10-KSB, 
and N-CSR should be received by January 1, 2004.

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

FOR FURTHER INFORMATION CONTACT: Lillian C. Brown, at (202) 942-2920, 
Andrew Thorpe, at (202) 942-2910, or Andrew Brady, at (202) 942-2900, 
in the Division of Corporation Finance, or with respect to investment 
companies, Christian L. Broadbent, at (202) 942-0721, in the Division 
of Investment Management, U.S. Securities and Exchange Commission, 450 
Fifth Street, NW., Washington DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Item 401\1\ of 
Regulation S-B \2\ and Item 401\3\ of Regulation S-K \4\ under the 
Securities Act of 1933,\5\ Items 7 and 22 of Schedule 14A \6\ under the 
Securities Exchange Act of 1934,\7\ Rule 30a-2\8\ under the Investment 
Company Act of 1940,\9\ Forms 10-Q \10\ and 10-QSB \11\ under the 
Exchange Act, and Form N-CSR \12\ under the Exchange Act and the 
Investment Company Act. Although we are not adopting amendments to 
Schedule 14C \13\ under the Exchange Act, the amendments will affect 
the disclosure provided in Schedule 14C, as Schedule 14C requires 
disclosure of some items of Schedule 14A. Similarly, although we are 
not adopting amendments to Forms 10-K \14\ and 10-KSB \15\ under the 
Exchange Act, the amendments to Item 401 of Regulations S-B and S-K 
will affect the disclosure under Forms 10-K and 10-KSB, as those forms 
require disclosure of the information required by Item 401 of 
Regulations S-K and S-B.
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    \1\ 17 CFR 228.401.
    \2\ 17 CFR 228.10 et seq.
    \3\ 17 CFR 229.401.
    \4\ 17 CFR 229.10 et seq.
    \5\ 15 U.S.C. 77a et seq.
    \6\ 17 CFR 240.14a-101.
    \7\ 15 U.S.C. 78a et seq.
    \8\ 17 CFR 270.30a-2.
    \9\ 15 U.S.C. 80a-1 et seq.
    \10\ 17 CFR 249.308a.
    \11\ 17 CFR 249.308b.
    \12\ 17 CFR 249.331 and 17 CFR 274.128.
    \13\ 17 CFR 240.14c-101.
    \14\ 17 CFR 249.310.
    \15\ 17 CFR 249.310b.
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I. Background

    On August 8, 2003, we proposed new disclosure standards intended to 
increase the transparency of nominating committee functions and the 
processes by which security holders may communicate with boards of 
directors of the companies in which they invest.\16\ The disclosure 
standards that we adopt today are, in most respects, those proposed on 
August 8, 2003. Overall, most commenters supported new disclosure 
standards relating to nominating committee functions and security 
holder communications with directors;\17\ however, as noted below, we 
received a number of comments and suggestions with regard to specific 
components of the proposed disclosure standards.\18\ We have revised 
some elements of the proposed disclosure standards in response to these 
comments and suggestions.
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    \16\ See Release No. 34-48301 (August 8, 2003) [68 FR 48724]. 
Comments received in response to the proposals, as well as a summary 
of these comments (``Summary of Comments'') may be found in File No. 
S7-14-03 and on our Web site at http://www.sec.gov.
    \17\ See Summary of Comments--File No. S7-14-03.
    \18\ See id.
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    The requirements we proposed on August 8, 2003,\19\ and are 
adopting today, follow in many respects the recommendations made by the 
Division of Corporation Finance in a report provided to the Commission 
on July 15, 2003.\20\ This report resulted from our April 14, 2003 
directive to the Division to review the proxy rules relating to the 
election of corporate directors.\21\ In preparing the report and 
developing its recommendations, the Division considered the input of 
members of the investing, business, legal, and academic 
communities.\22\ The majority of these

[[Page 66993]]

commenters supported our decision to direct the review and, reflecting 
concern over corporate director accountability and recent corporate 
scandals, generally urged us to adopt rules that would grant security 
holders greater access to the nomination process and greater ability to 
exercise their rights and responsibilities as owners of their 
companies.\23\ Many of the comments received in connection with the 
Division's review evidenced a growing concern among security holders 
that they lack sufficient input into decisions made by the boards of 
directors of the companies in which they invest.\24\ Two particular 
areas of concern related to the nomination of candidates for election 
as director and the ability of security holders to communicate 
effectively with members of boards of directors.\25\ We seek to address 
these concerns with the new disclosure standards we are adopting today.
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    \19\ See Release No. 34-48301 (August 8, 2003).
    \20\ The Division also recommended that we propose amendments to 
the proxy rules regarding the inclusion in company proxy materials 
of security holder nominees for election as directors. Our proposals 
regarding this issue were included in a separate release. See 
Release No. 34-48626 (October 14, 2003) [68 FR 60784]. As such, this 
adopting release does not address that issue directly. The 
Division's Staff Report to the Commission, detailing the results of 
its review of the proxy process related to the nomination and 
election of directors, can be found on our Web site at http://www.sec.gov. Staff Report: Review of the Proxy Process Regarding the 
Nomination and Election of Directors, Division of Corporation 
Finance (July 15, 2003).
    \21\ See Press Release No. 2003-46 (April 14, 2003).
    \22\ On May 1, 2003, we solicited public views on the Division's 
review of the proxy rules relating to the nomination and election of 
directors. 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 (``Summary of Comments'') may be found in 
File No. S7-10-03 and on our Web site, http://www.sec.gov. Summary 
of Comments in Response to the Commission's Solicitation of Public 
Views Regarding Possible Changes to the Proxy Rules (July 15, 2003).
    \23\ See Summary of Comments--File No. S7-10-03.
    \24\ See id.
    \25\ See id.
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II. New Disclosure Requirements

A. Disclosure Regarding Nominating Committee Processes

1. Discussion
    We are adopting new proxy statement disclosure requirements that 
will provide greater transparency regarding the nominating committee 
and the nomination process.\26\ This enhanced disclosure is intended to 
provide security holders with additional, specific information upon 
which to evaluate the boards of directors and nominating committees of 
the companies in which they invest. Further, we intend that increased 
transparency of the nomination process will make that process more 
understandable to security holders. In particular, we are adopting a 
number of specific and detailed disclosure requirements because we 
believe that disclosure in response to each of these requirements will 
assist security holders in understanding each of the processes and 
policies of nominating committees and boards of directors regarding the 
nomination of candidates for director.
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    \26\ Prior to the effectiveness of these amendments, companies 
must disclose whether they have a nominating committee and, if so, 
whether that committee considers nominees recommended by security 
holders and how any such recommendations may be submitted. See 
Paragraphs (d)(1) and (d)(2) of Item 7 of Exchange Act Schedule 14A. 
See also Release No. 34-15384 (December 6, 1978) [43 FR 58522], in 
which the Commission adopted these disclosure standards. In the 1978 
release proposing these disclosure requirements, the Commission 
stated generally its belief that the new disclosure requirements 
would facilitate improved accountability and, more specifically, 
that:
    [I]nformation relating to nominating committees would be 
important to security holders because a nominating committee can, 
over time, have a significant impact on the composition of the board 
and also can improve the director selection process by increasing 
the range of candidates under consideration and intensifying the 
scrutiny given to their qualifications. Additionally, the Commission 
believes that the institution of nominating committees can represent 
a significant step in increasing security holder participation in 
the corporate electoral process, a subject which the Commission will 
consider further in connection with its continuing proxy rule re-
examination.
    Release No. 34-14970 (July 18, 1978) [43 FR 31945].
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    Detailed disclosure regarding nomination processes will provide 
security holders with important information regarding the management 
and oversight of the companies in which they invest. The specific 
disclosure requirements we are adopting today will cause companies to 
provide security holders with that information. We believe that 
specific, detailed disclosure requirements are necessary and 
appropriate to assure that investors are provided with disclosure that 
presents the desired degree of clarity and transparency. In the absence 
of these specific disclosure requirements, we believe that disclosure 
could be at a level of generality that would not be sufficiently useful 
to security holders.
    Each of the requirements we are adopting today furthers the goal of 
providing the transparency that is necessary for security holders to 
understand the nomination process. For example, the rules we are 
adopting requiring disclosure of the following matters are necessary to 
give security holders a more complete overview of the nomination 
process for directors of the companies in which they invest:
    [sbull] A company's determination whether to have a nominating 
committee;
    [sbull] The nominating committee's charter, if any;
    [sbull] The nominating committee's processes for identifying and 
evaluating candidates; and
    [sbull] The minimum qualifications for a nominating committee-
recommended nominee and any qualities and skills that the nominating 
committee believes are necessary or desirable for board members to 
possess.
    In addition, as noted in the proposing release,\27\ we believe that 
information as to whether nominating committee members are independent 
within the requirements of listing standards applicable to a company is 
meaningful to security holders in evaluating the nomination process of 
a company, how that process works, and the seriousness with which the 
nomination process is considered by a company. Further, information 
regarding the persons who recommended each nominee and disclosure as to 
whether there are third parties that receive compensation related to 
identifying and evaluating candidates will provide important 
information as to the process followed by a company.
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    \27\ See Release No. 34-48301 (August 8, 2003).
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    The ability to participate in the nomination process is an 
important matter for security holders.\28\ Accordingly, we believe that 
it is important for security holders to understand the specific 
application of the nomination processes to candidates put forward by 
security holders. Disclosure as to whether and how they may participate 
in a company's nomination process, and the manner in which their 
candidates are evaluated, including differences between how their 
candidates and how other candidates are evaluated, therefore, 
represents important information for security holders. Finally, an 
additional, specific disclosure requirement regarding the treatment of 
candidates put forward by large security holders or groups of security 
holders that have a long-term investment interest is appropriate, as it 
will provide investors with information that is useful in assessing the 
actions of the nominating committee.
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    \28\ See Release No. 34-14970 (July 18, 1978). See also Summary 
of Comments `` File No. S7-10-03 and Summary of Comments `` File No. 
S7-14-03.
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2. Disclosure Requirements
    The amendments we are adopting today will expand the current proxy 
statement disclosure regarding a company's nominating or similar 
committee to include:
    [sbull] A statement as to whether the company has a standing 
nominating committee or a committee performing similar functions \29\ 
and, if the company does not have a standing nominating committee or 
committee performing similar functions, a statement of the basis for 
the view of the board of directors that it is appropriate for the 
company not to have such a committee and identification of each 
director who

[[Page 66994]]

participates in the consideration of director nominees;\30\
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    \29\ As noted earlier in this release, this disclosure currently 
is required under Paragraph (d)(1) of Item 7 of Exchange Act 
Schedule 14A.
    \30\ See new Paragraph (d)(2)(i) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] The following information regarding the company's director 
nomination process:\31\
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    \31\ For the remainder of our discussion of this disclosure 
requirement, the term ``nominating committee'' refers to a 
nominating committee or similar committee or group of directors 
fulfilling the role of a nominating committee. That group may 
comprise the full board. See the Instruction to new Paragraph 
(d)(2)(ii) of Item 7 of Exchange Act Schedule 14A. If the company 
has a standing nominating committee or a committee fulfilling the 
role of a nominating committee, Item 7(d)(1) of Exchange Act 
Schedule 14A requires identification of the members of that 
committee. If the company does not have such a standing committee, 
new Paragraph (d)(2)(i) of Item 7 of Exchange Act Schedule 14A will 
require identification of each director who participates in the 
consideration of director nominees.
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    [sbull] If the nominating committee has a charter, disclosure of 
whether a current copy of the charter is available to security holders 
on the company's Web site. If the nominating committee has a charter 
and a current copy of the charter is available to security holders on 
the company's Web site, disclosure of the company's Web site address. 
If the nominating committee has a charter and a current copy of the 
charter is not available to security holders on the company's Web site, 
inclusion of a copy of the charter as an appendix to the company's 
proxy statement at least once every three fiscal years. If a current 
copy of the charter is not available to security holders on the 
company's Web site, and is not included as an appendix to the company's 
proxy statement, identification of the prior fiscal year in which the 
charter was so included in satisfaction of the requirement;\32\
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    \32\ See new Paragraph (d)(2)(ii)(A) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] If the nominating committee does not have a charter, a 
statement of that fact;\33\
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    \33\ See new Paragraph (d)(2)(ii)(B) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] If the company is a listed issuer \34\ whose securities are 
listed on a national securities exchange registered pursuant to section 
6(a) of the Exchange Act \35\ or in an automated inter-dealer quotation 
system of a national securities association registered pursuant to 
section 15A(a) of the Exchange Act \36\ that has independence 
requirements for nominating committee members, disclosure as to whether 
the members of the nominating committee are independent, as 
independence for nominating committee members is defined in the listing 
standards applicable to the listed issuer;\37\
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    \34\ As defined in Exchange Act Rule 10A-3 [17 CFR 240.10A-3].
    \35\ 15 U.S.C. 78f(a).
    \36\ 15 U.S.C. 78o-3(a).
    \37\ See new Paragraph (d)(2)(ii)(C) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] If the company is not a listed issuer,\38\ disclosure as to 
whether each of the members of the nominating committee is independent. 
In determining whether a member is independent, the company must use a 
definition of independence of a national securities exchange registered 
pursuant to section 6(a) of the Exchange Act or a national securities 
association registered pursuant to section 15A(a) of the Exchange Act 
that has been approved by the Commission (as that definition may be 
modified or supplemented), and state which definition it used. Whatever 
definition the company chooses, it must apply that definition 
consistently to all members of the nominating committee and use the 
independence standards of the same national securities exchange or 
national securities association for purposes of nominating committee 
disclosure under this requirement and audit committee disclosure 
required under Item 7(d)(3)(iv) of Exchange Act Schedule 14A;\39\
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    \38\ As defined in Exchange Act Rule 10A-3.
    \39\ See new Paragraph (d)(2)(ii)(D) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] If the nominating committee has a policy with regard to the 
consideration of any director candidates recommended by security 
holders, a description of the material elements of that policy, which 
shall include, but need not be limited to, a statement as to whether 
the committee will consider director candidates recommended by security 
holders;\40\
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    \40\ See new Paragraph (d)(2)(ii)(E) of Item 7 of Exchange Act 
Schedule 14A. As adopted, this disclosure requirement specifies that 
the company's description of the material elements of its policy 
with regard to consideration of security holder candidates ``need 
not'' be limited to a statement as to whether the nominating 
committee will consider security holder-recommended candidates. This 
revision was made in response to a commenter's concern that the 
proposed requirement (that the disclosure ``shall not'' be limited 
to a statement as to whether the committee will consider security 
holder recommended candidates) implied that a company could not 
merely have a policy of considering security holder recommended 
candidates, but instead was required to put in place a more detailed 
policy with respect to consideration of such candidates. See 
Committee on Federal Regulation of Securities of the American Bar 
Association's section of Business Law (``ABA'').
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    [sbull] If the nominating committee does not have a policy with 
regard to the consideration of any director candidates recommended by 
security holders, a statement of that fact and a statement of the basis 
for the view of the board of directors that it is appropriate for the 
company not to have such a policy;\41\
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    \41\ See new Paragraph (d)(2)(ii)(F) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] If the nominating committee will consider candidates 
recommended by security holders, a description of the procedures to be 
followed by security holders in submitting such recommendations;\42\
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    \42\ Prior to the effectiveness of these amendments, this 
disclosure is required under Paragraph (d)(2) of Item 7 of Exchange 
Act Schedule 14A. As a result of the amendments to Item 7 of 
Exchange Act Schedule 14A that we are adopting today, this 
requirement will be moved to new Paragraph (d)(2)(ii)(G) of Item 7 
of Exchange Act Schedule 14A. In addition, we are adopting a new 
requirement in Regulations S-B and S-K, and a new reference to that 
requirement in Exchange Act Forms 10-Q and 10-QSB, that will require 
companies to disclose any material changes to the procedures that 
were previously disclosed pursuant to this item. See new Paragraph 
(b) of Item 5 of Part II to Exchange Act Forms 10-Q and 10-QSB, new 
Paragraph (g) of Item 401 of Exchange Act Regulation S-B, and new 
Paragraph (j) of Item 401 of Exchange Act Regulation S-K. In those 
instances where a material change is implemented during the last 
quarter of a company's fiscal year, companies will be required to 
include disclosure of such change in their Exchange Act Form 10-K or 
10-KSB. See Item 10 of Part III of Exchange Act Form 10-K, Item 9 of 
Part III of Exchange Act Form 10-KSB, new Paragraph (g) of Item 401 
of Exchange Act Regulation S-B, and new Paragraph (j) of Item 401 of 
Exchange Act Regulation S-K.
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    [sbull] A description of any specific, minimum qualifications that 
the nominating committee believes must be met by a nominating 
committee-recommended nominee for a position on the company's board of 
directors, and a description of any specific qualities or skills that 
the nominating committee believes are necessary for one or more of the 
company's directors to possess;\43\
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    \43\ See new Paragraph (d)(2)(ii)(H) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] A description of the nominating committee's process for 
identifying and evaluating nominees for director, including nominees 
recommended by security holders, and any differences in the manner in 
which the nominating committee evaluates nominees for director based on 
whether the nominee is recommended by a security holder;\44\
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    \44\ See new Paragraph (d)(2)(ii)(I) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] With regard to each nominee approved by the nominating 
committee for inclusion on the company's proxy card (other than 
nominees who are executive officers or who are directors standing for 
re-election), a statement as to which one or more of the following 
categories of persons or entities recommended that nominee: security 
holder, non-management director, chief executive officer, other 
executive officer, third-party search firm, or other, specified 
source;\45\
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    \45\ See new Paragraph (d)(2)(ii)(J) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] If the company pays a fee to any third party or parties to 
identify or evaluate or assist in identifying or

[[Page 66995]]

evaluating potential nominees, disclosure of the function performed by 
each such third party;\46\ and
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    \46\ See new Paragraph (d)(2)(ii)(K) of Item 7 of Exchange Act 
Schedule 14A.
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    [sbull] If the company's nominating committee received, by a date 
not later than the 120th calendar day before the date of the company's 
proxy statement released to security holders in connection with the 
previous year's annual meeting, a recommended nominee from a security 
holder that beneficially owned more than 5% of the company's voting 
common stock for at least one year as of the date the recommendation 
was made, or from a group of security holders that beneficially owned, 
in the aggregate, more than 5% of the company's voting common 
stock,\47\ with each of the securities used to calculate that ownership 
held for at least one year as of the date the recommendation was 
made,\48\ identification of the candidate and the security holder or 
security holder group that recommended the candidate and disclosure as 
to whether the nominating committee chose to nominate the candidate, 
provided, however, that no such identification or disclosure is 
required without the written consent of both the security holder or 
security holder group and the candidate to be so identified.\49\
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    \47\ Our use of a more than 5% beneficial ownership threshold to 
trigger this additional disclosure obligation means that 
recommendations generally will be made by security holders or groups 
that have a reporting obligation under Exchange Act Regulation 13D 
[17 CFR 240.13d-240.13d-102]. Recommending security holders, like 
other beneficial owners, will continue to report on Exchange Act 
Schedule 13G [17 CFR 240.13d-102] or Exchange Act Schedule 13D [17 
CFR 240.13d-101] based on their purpose or effect in acquiring or 
holding the company's securities. That determination is not intended 
to be affected by our adoption of this new disclosure obligation. In 
addition, we anticipate that security holders may communicate with 
each other in an effort to aggregate more than 5% of a company's 
securities before submitting a recommended candidate to a company's 
nominating committee. The determination as to what communications 
may be deemed solicitations, either subject to or exempt from the 
proxy rules, is based on facts and circumstances and is not intended 
to be affected by our adoption of this new disclosure obligation.
    \48\ Similar to the method used in Exchange Act Rule 14a-8 [17 
CFR 240.14a-8] with regard to security holder proponents, the 
percentage of securities held by a recommending security holder, as 
well as the holding period of those securities may be determined by 
the company, on its own, if the security holder is the registered 
holder of the securities. If not, the security holder can submit one 
of the following to the company to evidence the required ownership 
and holding period:
    (1) a written statement from the ``record'' holder of the 
securities (usually a broker or bank) verifying that, at the time 
the security holder made the recommendation, he or she had held the 
required securities for at least one year; or
    (2) if the security holder has filed a Schedule 13D, Schedule 
13G, Form 3 [17 CFR 249.103], Form 4 [17 CFR 249.104], and/or Form 5 
[17 CFR 249.105], or amendments to those documents or updated forms, 
reflecting ownership of the securities as of or before the date of 
the recommendation, a copy of the schedule and/or form, and any 
subsequent amendments reporting a change in ownership level, as well 
as a written statement that the security holder continuously held 
the required securities for the one-year period as of the date of 
the recommendation.
    See Instruction 3 to new Paragraph (d)(2)(ii)(L) of Item 7 of 
Item 7 of Exchange Act Schedule 14A.
    \49\ See new Paragraph (d)(2)(ii)(L) of Item 7 of Exchange Act 
Schedule 14A.
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3. Comments Regarding, and Revisions to, the Proposed Disclosure 
Requirements
    In response to our request for comment on the proposed nominating 
committee disclosure requirements, a majority of commenters who 
supported the proposed rules believed that increased disclosure about 
nominating committee processes would be effective in increasing 
security holder understanding of the nomination process,\50\ board 
accountability,\51\ board responsiveness,\52\ and a company's corporate 
governance policies.\53\ With regard to the particular components of 
the proposed disclosure standards, commenters provided more specific 
input, which we considered carefully in revising certain of the 
disclosure standards that we are adopting today.
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    \50\ See, e.g., American Federation of State, County, and 
Municipal Employees (``AFSCME''); Council of Institutional Investors 
(``CII''); Creative Investment Research, Inc. (``CIR''); Andrew 
Randall; Pennsylvania State Employees' Retirement System (``SERS'').
    \51\ See, e.g., J.A. Glynn & Co. (``J.A. Glynn''); Robert 
Schneeweiss.
    \52\ See, e.g., CII; CIR.
    \53\ See, e.g., American Community Bankers (``ACB''); California 
Public Employees' Retirement System (``CalPERS''); CIR; United 
Brotherhood of Carpenters and Joiners of America (``UBC'').
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a. Nominating Committee Charter
    Commenters generally were of the view that summary disclosure of 
the material terms of the nominating committee's charter within a 
company's proxy statement was unnecessary and would lead to excessively 
lengthy proxy statements.\54\ These commenters suggested that it would 
be adequate to identify where the charter could be found, provide the 
charter to security holders upon request, and/or attach the charter to 
the proxy statement once every three years (as is the case for audit 
committee charters).\55\
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    \54\ See, e.g., The Business Roundtable (``BRT''); Foley & 
Lardner (``Foley''); Independent Community Bankers Association 
(``ICBA''); International Paper Company (``Int'l Paper''); Jenkens & 
Gilchrist (``Jenkens''); McGuireWoods LLP (``McGuireWoods''); 
Committee on Securities Regulation of the Business Section of the 
New York State Bar Association (``NYSBAR''); Sullivan & Cromwell, 
LLP (``Sullivan''); Wells Fargo & Company (``Wells Fargo'').
    \55\ See, e.g., ICBA; Int'l Paper; McGuireWoods; NYSBAR.
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    The disclosure standard that we are adopting today does not include 
the proposed requirement that companies describe the material terms of 
the nominating committee charter. Companies will, instead, be required 
to disclose whether a current copy of the charter is available to 
security holders on the company's Web site. Where a company does not 
make the charter available on its Web site, the company would be 
required to include a copy of the charter as an appendix to its proxy 
statement at least once every three fiscal years and, in those proxy 
statements that do not include the charter as an appendix, the company 
would be required to identify in which of the prior years the charter 
was so included. We believe that this disclosure standard will provide 
security holders with the information regarding a company's nominating 
committee that was sought in the proposal, without unduly burdening 
companies.
b. Independence of Nominating Committee Members
    In response to the proposed disclosure requirement that listed 
issuers disclose any instance during the prior fiscal year in which any 
member of the nominating committee did not satisfy the definition of 
independence included in the listing standards to which the company is 
subject, a number of commenters suggested that we revise or delete this 
requirement.\56\ At least one of these commenters believed that 
independence determinations are interpretive matters and that board 
members could be unaware of developments that would impact 
independence.\57\ Another commenter suggested that we revise the 
disclosure requirement to conform to the recently adopted provision 
that requires companies to state whether members of their audit 
committees are independent, as defined in applicable listing 
standards.\58\ We believe that it is appropriate to use an approach 
consistent with the audit committee disclosure standards. Accordingly, 
the disclosure standard we are adopting will require companies to 
disclose whether each member of the nominating committee is 
independent, as independence for nominating committee members is 
defined in the

[[Page 66996]]

listing standards applicable to the listed issuer.
---------------------------------------------------------------------------

    \56\ See, e.g., ABA; Sullivan.
    \57\ See ABA.
    \58\ See Sullivan. This disclosure requirement is set forth in 
Paragraph (d)(3)(iv) of Item 7 of Exchange Act Schedule 14A.
---------------------------------------------------------------------------

c. Qualifications and Skills of Candidates and Overall Board 
Composition
    Commenters provided input with regard to the proposed requirement 
that companies describe the qualifications, qualities, skills, and 
overall composition that companies are seeking with regard to board 
membership. In this regard, some commenters noted that nominating 
committees' selection processes do not tend to be precise, and that the 
characteristics a nominating committee looks for may change as the 
composition of the board changes.\59\ In consideration of these 
comments, the disclosure requirements we are adopting today do not 
include the proposed requirement that companies describe ``any specific 
standards for the overall structure and composition of the company's 
board of directors.''\60\ We are adopting the remaining disclosure 
items substantially as proposed, as we believe that they will provide 
valuable information to security holders regarding the nomination 
process, without resulting in boilerplate disclosures.
---------------------------------------------------------------------------

    \59\ See, e.g., Foley; Jenkens; McGuireWoods; NYSBAR; Wells 
Fargo.
    \60\ Release No. 34-48301 (August 8, 2003).
---------------------------------------------------------------------------

    Many commenters that supported the disclosure requirements 
suggested that we expand the requirements to require companies to 
disclose the extent to which they take into consideration diversity, in 
particular race and gender, in nominating candidates.\61\ We have not 
included such a requirement in the standards we are adopting today, as 
we believe this particular consideration, as well as other 
considerations made by a company, will likely be addressed adequately 
by the new disclosure item requiring companies to disclose their 
criteria for considering board candidates. Further, we do not view it 
as appropriate to identify any specific criteria that a company must 
address in describing the qualities it looks for in board candidates.
---------------------------------------------------------------------------

    \61\ See, e.g., Boston Common Asset Management (``Boston''); 
Calvert Group Ltd. (``Calvert''); Christian Brothers Investment 
Services (``CBIS''); Nathan Cummings Foundation (``Cummings''); 
Domini Social Investments LLC (``Domini''); ISIS Asset Management 
(``ISIS''); J.A. Glynn; James McRitchie, Editor, CorpGov.net and 
PERSWatch.net, Letter dated September 13, 2003 (``McRitchie2''); 
Mehri & Skalet PLLC (``Mehri &Skalet''); Denise L. Nappier, 
Connecticut State Treasurer (``Nappier''); Social Investment Forum 
Ltd. (``SIF''); Socially Responsible Investment Coalition 
(``SRIC''); William C. Thompson, Jr., Controller of the City of New 
York (``Thompson''); The General Board of Pension and Health 
Benefits of the United Methodist Church (``UMC''); Walden Asset 
Management (``Walden''). See also Jesse Smith Noyes Foundation 
(``Noyes''). We also received a number of letters that are 
substantially similar in content that supported additional 
disclosure describing board consideration of diversity. See Letter 
Type A (``Letter A''); Letter Type B (``Letter B'').
---------------------------------------------------------------------------

d. Sources of nominees
    Some of the most extensive comment, particularly from the business 
and legal communities, arose from the proposal to require companies to 
identify the source of all director nominees, other than incumbent 
directors and executive officers.\62\ Generally speaking, these 
commenters were of the view that, as proposed, the required disclosure 
would be difficult to make in a clear and accurate manner because there 
are multiple ``sources'' for most nominees.\63\ In addition, these 
commenters objected to naming the specific source on the basis that 
this disclosure could have a ``chilling effect on the search 
process,''\64\ would be immaterial,\65\ and could imply that a nominee 
was unqualified to serve on the board based solely on the position held 
by the individual (e.g., the chief executive officer) who originally 
recommended the nominee.\66\ While some commenters recommended that we 
delete this provision, others recommended that we instead require 
disclosure of the general category of persons who recommended the 
nominee (e.g., management or security holders).\67\ Another commenter 
recommended that we, instead, require companies to disclose whether 
nominees are independent from the company and, in the case of nominees 
proposed by security holders, from the recommending security 
holders.\68\
---------------------------------------------------------------------------

    \62\ See, e.g., ABA; BRT; Intel Corporation (``Intel''); Leggett 
& Platt Inc. (``Leggett''); NYSBAR; Valero Energy Corporation 
(``Valero''); Wells Fargo.
    \63\ See id.
    \64\ American Society of Corporate Secretaries. See also, 
American Corporate Counsel Association (``ACCA''); Valero.
    \65\ See, e.g., BRT.
    \66\ See Sullivan.
    \67\ See Boston; Intel; Walden.
    \68\ See ABA.
---------------------------------------------------------------------------

    We continue to believe that information regarding the sources of 
company nominees is important for security holders; however, we have 
revised the disclosure standard to require companies to identify the 
category or categories of persons or entities that recommended each 
nominee. In this regard, we have retained the requirement that 
companies specifically note those instances where a nominee was 
recommended by the chief executive officer of the company. In providing 
the required disclosure, companies should consider what category of 
person initially recommended, or otherwise brought to the attention of 
the nominating committee, each candidate. In disclosing the category of 
persons or entities that initially recommended a candidate to the 
nominating committee, companies should ensure that they identify also 
any person or entity that caused a particular candidate to be 
recommended. For example, if the chief executive officer asks a third 
party to evaluate a potential candidate, and that third party 
ultimately recommends the candidate to the nominating committee, both 
the chief executive officer and the third party should be identified as 
recommending parties in the company's disclosure. We have provided for 
disclosure of more than one type of source for a nominee to address the 
possibility of multiple sources.
e. Additional Disclosure Regarding Nominees of Large, Long-Term 
Security Holders
    The additional disclosure requirement with regard to nominees 
recommended by large, long-term security holders elicited a great deal 
of comment from most categories of commenters. Generally, commenters 
from the business and legal communities recommended either deleting the 
disclosure requirement related to security holder recommendations 
altogether or increasing the beneficial ownership requirement to 5% or 
10% and/or increasing the holding period to two or more years.\69\ With 
regard to the 5% and 10% recommendations, at least one commenter noted 
that those recommending security holders would be required to report 
their beneficial ownership under Exchange Act Regulation 13D.\70\
---------------------------------------------------------------------------

    \69\ See, e.g., ACB; ACCA; Compass Bancshares, Inc. 
(``Compass''); Foley; ICBA; Intel; Int'l Paper; Jenkens; Leggett; 
NYSBAR; Sullivan; Wells Fargo.
    \70\ See Sullivan.
---------------------------------------------------------------------------

    Some of the reasons given by commenters for deleting the 
requirement were:
    [sbull] The requirement would give special status to larger 
security holders; \71\
---------------------------------------------------------------------------

    \71\ See id.
---------------------------------------------------------------------------

    [sbull] 3% security holders could use the disclosure requirement 
for their own ``special interests''; \72\
---------------------------------------------------------------------------

    \72\ Id. See also ABA.
---------------------------------------------------------------------------

    [sbull] There could be more than one triggering nomination, thus 
resulting in complex and confusing disclosure; \73\
---------------------------------------------------------------------------

    \73\ See ABA.
---------------------------------------------------------------------------

    [sbull] The requirement would create a bias to accept marginal 
director candidates; \74\
---------------------------------------------------------------------------

    \74\ See Sullivan.

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[[Page 66997]]

    [sbull] The requirements, specifically those regarding giving the 
reasons for rejecting nominees, would ``chill'' nominating committee 
discussions; \75\
---------------------------------------------------------------------------

    \75\ See, e.g., id.
---------------------------------------------------------------------------

    [sbull] The disclosure would not be material to security holders; 
\76\ and
---------------------------------------------------------------------------

    \76\ See id.
---------------------------------------------------------------------------

    [sbull] The disclosure would raise privacy issues for the 
nominating security holder and candidate.\77\
---------------------------------------------------------------------------

    \77\ See id.
---------------------------------------------------------------------------

    Conversely, this disclosure item also received strong support from 
security holders, many of whom recommended that we use a lower 
ownership percentage trigger or a trigger no more stringent than that 
proposed.\78\
---------------------------------------------------------------------------

    \78\ See, e.g., American Federation of Labor and Congress of 
Industrial Organizations (``AFL-CIO''); CII; International 
Brotherhood of Teamsters (``IBT''); ISIS; McRitchie2; Nappier; SERS; 
Trillium Asset Management (``Trillium''); UBC. See also AFSCME; 
Association of the Bar of the City of New York's Special Committee 
on Mergers, Acquisitions and Corporate Control Contests 
(``NYCBAR'').
---------------------------------------------------------------------------

    With regard to the requirement that the reasons for not nominating 
a candidate be given, many commenters believed that this requirement 
would be difficult to satisfy, as:
    [sbull] Nominating committee determinations are not always precise 
in nature;
    [sbull] The disclosure would expose candidates to ridicule; and/or
    [sbull] The disclosure would be an invasion of privacy for all 
parties involved in the process, including the nominating committee 
members, whose deliberations would be made public as a result of the 
disclosure requirement.\79\
---------------------------------------------------------------------------

    \79\ See, e.g., ABA; BRT; Foley; Jenkens; NYSBAR; Sullivan; 
Valero.
---------------------------------------------------------------------------

    Some commenters also expressed the view that this requirement would 
expose the company and nominating committee members to risk of 
litigation and would allow security holders to ``second guess'' the 
nominating committee's determinations.\80\ On the other hand, some 
commenters were of the view that we should retain the proposed 
disclosure standard and expand it to require companies to disclose the 
identity of rejected candidates, provided that the candidates consent 
to be so identified.\81\
---------------------------------------------------------------------------

    \80\ See, e.g., Compass; Foley; Jenkens.
    \81\ See CII; CIR; Cummings; SERS.
---------------------------------------------------------------------------

    After considering the comments, we continue to believe that 
disclosure of director recommendations made by large, long-term 
security holders would provide valuable information that would enable 
security holders to better understand the nomination process. We have 
re-evaluated the 3% threshold to trigger the additional disclosure 
requirement, however, and have determined that ownership of more than 
5% is a more appropriate threshold at which to require companies to 
provide additional disclosure.\82\ In this regard, we agree with 
commenters that a more than 5% ownership threshold has a significant 
advantage over a lesser ownership threshold, in that recommending 
security holders would be subject to the beneficial ownership reporting 
requirements of Exchange Act Regulation 13D. We anticipate that a more 
than 5% ownership threshold will, in many cases, simplify the process 
by which a company and the recommending security holder determine that 
the recommending security holder satisfies the ownership threshold to 
trigger the additional disclosure requirement and, where a security 
holder or group has reported its beneficial ownership prior to making a 
recommendation, will help to ensure that the company and its security 
holders have basic information about the recommending security holder. 
This will benefit the company by providing the nominating committee 
with additional information regarding the recommending security holder 
and, possibly, the recommended candidate. Further, security holders 
will benefit through having additional information upon which they can 
evaluate the nominating committee's response to the security holder 
recommendation.\83\
---------------------------------------------------------------------------

    \82\ On October 14, 2003, we proposed new rules regarding the 
inclusion of security holder nominees for director in company proxy 
materials. See Release No. 34-48626 (October 14, 2003). The issue of 
the appropriate ownership threshold, if any, for any such inclusion 
of security holder nominees for director is a separate issue from 
the appropriate ownership threshold for the disclosure we are 
adopting today and is not addressed in this release.
    \83\ In this regard, information available to our Office of 
Economic Analysis indicates that, of the companies listed on the New 
York Stock Exchange, Nasdaq Stock Market and American Stock Exchange 
as of December 31, 2002, 57% had at least one institutional security 
holder that beneficially owned 5% of the common equity or similar 
securities and 1.4% had five or more such security holders. This 
information was derived from filings on Exchange Act Form 13-F [17 
CFR 249.325] that indicated that the filing security holder had held 
its securities for at least one year.
---------------------------------------------------------------------------

    In addition, the new disclosure standard will require that 
companies make the specified disclosures, including identifying both 
the nominating security holder or security holder group and candidate, 
only in those instances where both parties have provided to the company 
their consent to be identified and, where the security holder or group 
members are not registered holders, the security holder or group 
members have provided proof of the required ownership and holding 
period to the company. A security holder or group that seeks to require 
a company to provide disclosure related to a recommendation would 
provide their written consent and proof of ownership to the company at 
the time of the recommendation. The company would not be obligated to 
request such materials where a security holder or group does not 
otherwise provide their consent and proof of ownership.\84\
---------------------------------------------------------------------------

    \84\ See Instruction 4 to new Paragraph (d)(2)(ii)(L) of Item 7 
of Exchange Act Schedule 14A.
---------------------------------------------------------------------------

    In consideration of the concerns expressed by commenters, including 
those with regard to boilerplate disclosure and privacy issues, the 
disclosure standard that we are adopting today does not include the 
proposed requirement that companies disclose the specific reasons for 
not nominating a candidate. The requirement will, however, require that 
companies identify the candidate in addition to the recommending 
security holder or group. While not required, a company could, of 
course, choose to explain why it did not nominate one or all of the 
security holder-recommended candidates.
    We also have added language to the disclosure requirement to 
clarify the date by which a security holder must submit a recommended 
nominee in order to trigger the additional disclosure requirement by 
the company--a security holder's recommendation would have to be 
received by a company's nominating committee by a date not later than 
the 120th calendar day before the date the company's proxy statement 
was released to security holders in connection with the previous year's 
annual meeting.\85\ We have added a new instruction clarifying that, 
where a company has changed its meeting date by more than 30 days, a 
security holder must make its recommendation by a date that is a 
reasonable time before the company begins to print and mail its proxy 
statement in order to trigger the additional disclosures.\86\
---------------------------------------------------------------------------

    \85\ 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.
    \86\ See Instruction 2 to new Paragraph (d)(2)(ii)(L) of Item 7 
of Exchange Act Schedule 14A. The new instruction is modeled after 
the approach used with regard to Exchange Act Rule 14a-8 security 
holder proposals, as set forth in Exchange Act Rule 14a-8(e)(2) [17 
CFR 240.14a-8(e)(2)].
---------------------------------------------------------------------------

    In addition, we have added a new instruction that responds to 
commenters' suggestion that we address how the percentage of securities 
owned by a nominating security holder would be calculated.\87\ In this 
regard we have clarified that the percentage of securities held by a 
recommending security holder may be determined by reference to the

[[Page 66998]]

company's most recently filed quarterly or annual report (or any 
subsequent current report), unless the party relying on such report 
knows or has reason to believe that the information included in the 
report is inaccurate.\88\
---------------------------------------------------------------------------

    \87\ See, e.g., ABA.
    \88\ See Instruction 1 to new Paragraph (d)(2)(ii)(L) of Item 7 
of Exchange Act Schedule 14A. The new instruction is modeled after 
Exchange Act Rule 13d-1(j) [17 CFR 240.13d-1(j)], which specifies on 
what basis beneficial holders may calculate the percentage of 
subject securities they hold for purposes of Exchange Act Regulation 
13D.
---------------------------------------------------------------------------

4. Interaction of the Disclosure Requirements With Recently Revised 
Market Listing Standards
    The New York Stock Exchange and the Nasdaq Stock Market have 
adopted revised listing standards that, among other requirements, 
require listed companies to have independent nominating committees.\89\ 
While these listing standard changes demonstrate the importance of the 
nomination process and the nominating committee, and represent a 
strengthening of the role and independence of the nominating committee, 
they do not require nominating committees to consider security holder 
nominees or companies to make the disclosures described in this 
release. The disclosure requirements we are adopting today will provide 
useful information to security holders regarding the nomination 
process, the manner of evaluating nominees, and the extent to which the 
boards of directors of the companies in which they invest have a 
process for considering, and do in fact consider, security holder 
recommendations. Accordingly, the disclosure requirements we are 
adopting today will operate in conjunction with the revised listing 
standards regarding nominating committees.
---------------------------------------------------------------------------

    \89\ See Release No. 34-48745 (November 4, 2003) [68 FR 64154]. 
While the NYSE standards include a requirement that listed companies 
have an independent nominating committee (NYSE section 303A(4)(a)), 
the Nasdaq standards provide that the nomination of directors may, 
alternatively, be determined by a majority of the independent 
directors (NASD Rule 4350(c)). In discussing the NYSE and Nasdaq 
standards, our references to independent nominating committees 
encompass this alternative under the Nasdaq standards.
---------------------------------------------------------------------------

    A number of commenters from the business and legal communities 
recommended that we delay adoption of the proposed disclosure standards 
in order to allow the new listing standards regarding nominating 
committees to take effect.\90\ We agree with these commenters that the 
new listing standards represent a significant strengthening of the 
nomination process; however, we believe that the disclosure standards 
that we adopt today are a necessary complement to those listing 
standards and, accordingly, do not believe such a delay is necessary or 
appropriate.
---------------------------------------------------------------------------

    \90\ See, e.g., ABA; ACB; ACCA; BRT; CSX Corporation; Foley; 
ICBA; Jenkens; Valero.
---------------------------------------------------------------------------

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

1. Discussion
    We are adopting new disclosure standards with regard to security 
holder communications with board members. These disclosure standards 
are intended to improve the transparency of board operations, as well 
as security holder understanding of the companies in which they 
invest.\91\
---------------------------------------------------------------------------

    \91\ In Exchange Act Release No. 34-48745 (November 4, 2003), 
the Commission approved a new NYSE listing standard that addresses 
security holder communications with board members. This standard 
provides that: ``In order that interested parties may be able to 
make their concerns known to non-management directors, a company 
must disclose a method for such parties to communicate directly and 
confidentially with the presiding director [of the non-management 
directors] or with non-management directors as a group.'' See NYSE 
Section 303A(3). This method could be analogous to the method in the 
NYSE listing standards required by Exchange Act Rule 10A-3 regarding 
audit committees. See Commentary to NYSE Section 303A(3). Exchange 
Act Rule 10A-3(b)(2) requires listing standards relating to audit 
committees to require that ``[e]ach audit committee * * * establish 
procedures for the receipt, retention and treatment of complaints 
regarding accounting, internal accounting controls or auditing 
matters, including procedures for the confidential, anonymous 
submission by employees of the issuer of concerns regarding 
questionable accounting or auditing matters.''
---------------------------------------------------------------------------

    In response to our May 1, 2003 solicitation of input into the proxy 
process review by the Division of Corporation Finance, representatives 
of the business community commented that disclosure regarding the means 
by which security holders may communicate directly with the board of 
directors would address issues of accountability and responsiveness 
without extensive disruption or costs.\92\ Comments from investors and 
investor advocacy groups also indicated the view that this disclosure 
would be helpful;\93\ however, these commenters also noted that 
disclosure alone would not address all issues related to accountability 
and responsiveness.\94\
---------------------------------------------------------------------------

    \92\ See Summary of Comments--File No. S7-10-03.
    \93\ See id.
    \94\ See id.
---------------------------------------------------------------------------

    We received similar comment with regard to the proposed disclosure 
requirements, with no clear consensus as to whether the proposed rules 
would be an effective means to improve board accountability, board 
responsiveness, and corporate governance policies.\95\ Some commenters 
believed the disclosure would be useful to security holders, including 
one commenter who expressed the view that the proposed disclosure would 
provide security holders with important information that provides an 
understanding of a company's process for communications with the 
board.\96\ Conversely, other commenters did not believe that the 
proposed rules would be an effective means to improve board 
accountability, board responsiveness, and corporate governance policies 
and expressed the view that the disclosure would not be useful to 
security holders.\97\ Overall, we continue to believe that the 
disclosure will provide security holders with useful information about 
their ability to communicate with board members. Accordingly, we are 
adopting, substantially as proposed, the disclosure standards related 
to security holder communications with board members.
---------------------------------------------------------------------------

    \95\ See Summary of Comments--File No. S7-14-03.
    \96\ See CIR.
    \97\ See, e.g., ABA; BRT; Les Greenberg, Chairman, Committee of 
Concerned Shareholders, Letter dated August 9, 2003 (``CCS1''); 
Valero.
---------------------------------------------------------------------------

2. Disclosure Requirements
    We are adopting a number of specific and detailed disclosure 
requirements regarding communications by security holders with boards 
of directors because we believe that these requirements will provide 
security holders with a better understanding of the manner in which 
security holders can engage in these communications. In particular, we 
believe that the disclosure requirements, including whether a board has 
a process by which security holders can communicate with it, are 
necessary to give security holders a better picture of a critical 
component of the board's interaction with security holders. Detailed 
disclosure regarding that process at a company, if it exists, will be 
important to security holders in evaluating the nature and quality of 
the communications process. Further, we believe that the level of 
specificity in the new disclosure standards will discourage boilerplate 
disclosure.
    Companies will be required to provide the following disclosure with 
regard to their processes for security holder communications with board 
members:
    [sbull] A statement as to whether or not the company's board of 
directors provides a process for security holders to send 
communications to the board of directors and, if the company does not 
have such a process for security holders to send communications to the 
board of

[[Page 66999]]

directors, a statement of the basis for the view of the board of 
directors that it is appropriate for the company not to have such a 
process; \98\
---------------------------------------------------------------------------

    \98\ See new Paragraph (h)(1) of Item 7 of Exchange Act Schedule 
14A.
---------------------------------------------------------------------------

    [sbull] If the company has a process for security holders to send 
communications to the board of directors:
    [sbull] a description of the manner in which security holders can 
send communications to the board and, if applicable, to specified 
individual directors; \99\ and
---------------------------------------------------------------------------

    \99\ See new Paragraph (h)(2)(i) of Item 7 of Exchange Act 
Schedule 14A.
---------------------------------------------------------------------------

    [sbull] If all security holder communications are not sent directly 
to board members, a description of the company's process for 
determining which communications will be relayed to board members; 
\100\ and
---------------------------------------------------------------------------

    \100\ See new Paragraph (h)(2)(ii) of Item 7 of Exchange Act 
Schedule 14A.
---------------------------------------------------------------------------

    [sbull] A description of the company's policy, if any, with regard 
to board members' attendance at annual meetings and a statement of the 
number of board members who attended the prior year's annual 
meeting.\101\
---------------------------------------------------------------------------

    \101\ See new Paragraph (h)(3) of Item 7 of Exchange Act 
Schedule 14A.
---------------------------------------------------------------------------

3. Comments Regarding, and Revisions to, the Proposed Disclosure 
Requirements
a. Scope of the Disclosure Requirement
    We received a number of comments suggesting that we clarify the 
application of the disclosure requirements to communications with the 
board by officers, directors, employees, and agents of the company who 
also own company securities.\102\ We do not believe that all 
communications from officers, directors, employees, and agents of the 
company are the types of communications that the disclosure standards 
should capture. We have, therefore, added a general instruction to the 
new disclosure requirements clarifying that:
---------------------------------------------------------------------------

    \102\ See, e.g., Wells Fargo.
---------------------------------------------------------------------------

    [sbull] Communications from an officer or director of the company 
will not be viewed as security holder communications for purposes of 
the disclosure requirement; \103\ and
---------------------------------------------------------------------------

    \103\ See Instruction 1 to new Paragraph (h) of Item 7 of 
Exchange Act Schedule 14A.
---------------------------------------------------------------------------

    [sbull] Communications from an employee or agent of the company 
will be viewed as security holder communications for purposes of the 
disclosure requirement only if those communications are made solely in 
such employee's or agent's capacity as a security holder.\104\
---------------------------------------------------------------------------

    \104\ See id.
---------------------------------------------------------------------------

    In response to our request for comment as to whether the new 
disclosure standard should apply to communications made in connection 
with security holder proposals submitted pursuant to Exchange Act Rule 
14a-8, one commenter suggested that it would be ``inappropriate'' to 
exclude Exchange Act Rule 14a-8 proposals from the new disclosure 
standard; \105\ however, other commenters suggested that Exchange Act 
Rule 14a-8 communications should be expressly excluded.\106\ In 
particular, one commenter noted that, ``[b]oth the security holder 
proponent and the company are subject to specific, detailed 
requirements, conditions and deadlines, including regulation of the 
content of statements about the proposal * * * There is no need to 
impose another disclosure requirement on this process.'' \107\ We agree 
that the current disclosure requirements with regard to security holder 
proposals are adequate to inform security holders of how they may 
communicate with boards via that mechanism. Accordingly, we have 
expressly excluded security holder proposals submitted pursuant to 
Exchange Act Rule 14a-8, and communications made in connection with 
such proposals, from the definition of ``security holder 
communications'' for purposes of the new disclosure standard.\108\
---------------------------------------------------------------------------

    \105\ AFSCME.
    \106\ See NYSBAR; Valero.
    \107\ NYSBAR.
    \108\ See Instruction 2 to new Paragraph (h) of Item 7 of 
Exchange Act Schedule 14A.
---------------------------------------------------------------------------

b. Process for Communicating With Board Members
    We proposed a standard that would have required companies to 
identify those directors to whom security holders could send 
communications. Commenters noted that they did not believe that it 
would be appropriate to include such a requirement on the basis that 
named directors could then be targeted for inappropriate correspondence 
and that some companies may not include specified recipients of 
security holder communications in their communications procedures.\109\
---------------------------------------------------------------------------

    \109\ See NYSBAR.
---------------------------------------------------------------------------

    In consideration of these concerns, we have revised the disclosure 
requirement to specify that companies should describe how security 
holders can send communications to the board and, if applicable, to 
specified individual directors.\110\ We also have added a new 
instruction providing that, in lieu of describing in the proxy 
statement the manner in which security holders may communicate with 
board members, the manner in which the company determines those 
communications that will be forwarded to board members, the company's 
policy regarding director attendance at annual meetings, and the number 
of directors who attended the prior year's annual meeting, such 
information may instead be placed on the company's Web site, provided 
that the company discloses in its proxy statement the Web site address 
where such information may be found.\111\
---------------------------------------------------------------------------

    \110\ See new Paragraph (h)(2)(i) of Item 7 of Exchange Act 
Schedule 14A.
    \111\ See the Instruction to new Paragraphs (h)(2) and (h)(3) of 
Item 7 of Exchange Act Schedule 14A.
---------------------------------------------------------------------------

    Commenters also expressed concern about the proposed disclosure 
item related to companies' policies with regard to ``filtering'' 
communications.\112\ Some commenters suggested that extensive 
disclosure of a company's process for determining which communications 
are forwarded to board members would imply that a company was 
improperly blocking communications from security holders.\113\ Such a 
filtering process is necessary, in the opinion of these commenters, 
because many security holder communications are related to company 
products and services, are solicitations, or otherwise relate to 
improper or irrelevant topics.\114\ At least one commenter posited that 
the proposed disclosure item does not relate directly to company 
processes to facilitate communications with directors and should be 
deleted as unnecessary.\115\ Another commenter suggested that we revise 
the disclosure requirement to clarify that purely ministerial 
activities, such as organizing and collating security holder 
communications, need not be disclosed.\116\ Other commenters noted 
that, should we retain the disclosure requirement, we should not expand 
it to include the identity of the party that is responsible for 
filtering communications.\117\
---------------------------------------------------------------------------

    \112\ See, e.g., ABA; BRT; Intel; NYSBAR; Sullivan.
    \113\ See Sullivan. See also ABA.
    \114\ See, e.g., Wells Fargo.
    \115\ See ABA.
    \116\ See Sullivan.
    \117\ See, e.g., NYSBAR; Wells Fargo.
---------------------------------------------------------------------------

    In consideration of these comments, the disclosure item we are 
adopting today does not include the requirement that companies identify 
the department or other group within the company that is responsible 
for determining which communications are forwarded to directors. We 
also have added an instruction to clarify that a company's process for 
collecting and organizing security holder communications, as well

[[Page 67000]]

as similar or related activities, need not be disclosed, provided that 
the company's process is approved by a majority of the independent 
directors.\118\
---------------------------------------------------------------------------

    \118\ See the Instruction to new Paragraph (h)(2)(ii) of Item 7 
of Exchange Act Schedule 14A.
---------------------------------------------------------------------------

c. Material Actions Taken by the Board of Directors as a Result of 
Security Holder Communications
    Many commenters expressed concern with regard to the proposal that 
would have required companies to describe any material action taken by 
the board of directors during the preceding fiscal year as a result of 
security holder communications.\119\ Most of these commenters suggested 
deleting this disclosure requirement on the basis that it would be too 
difficult to tie board actions to specific security holder 
recommendations.\120\ One commenter suggested that the disclosure 
requirement was too vague and companies would be unsure as to what 
actions must be disclosed.\121\ In consideration of these concerns, the 
disclosure requirements we are adopting today do not include the 
proposed requirement related to material actions taken in response to 
security holder communications.
---------------------------------------------------------------------------

    \119\ See, e.g., ABA; ACB; ACCA; Warren J. Archer (``Archer''); 
BRT; DKW Law Group; Domini; Foley; Intel; Int'l Paper; Jenkens; 
NYCBAR; NYSBAR.
    \120\ See, e.g., ABA; BRT; Domini; Foley; Intel; Int'l Paper; 
Jenkens; NYCBAR; NYSBAR.
    \121\ See NYSBAR.
---------------------------------------------------------------------------

d. Director Attendance at Annual Meetings
    In the proposing release, we asked whether there were alternative 
ways to achieve our objectives. We further solicited comment on whether 
we should provide guidance to companies or otherwise address 
appropriate procedures for companies to implement with regard to 
security holder communications with board members. We also noted that 
the term ``communications'' was meant to be broadly construed. Several 
commenters suggested that we require companies to disclose whether they 
have a policy regarding attendance by directors at annual meetings and 
provide information about annual meeting attendance by directors.\122\ 
We believe that such a disclosure requirement would further our broad 
objective to provide investors with information about a company's 
communications policies and general responsiveness to investors' 
concerns.
---------------------------------------------------------------------------

    \122\ See Amalgamated Bank and its Long View Funds 
(``Amalgamated''); Boston; CBIS; CII; Granary Foundation 
(``Granary''); Letter B; Maine Retirement System; McRitchie2; SERS; 
SIF; Walden. See also Connie Hansen.
---------------------------------------------------------------------------

    Directors' attendance at annual meetings can provide investors with 
an opportunity to communicate with directors about issues affecting the 
company. We are adopting a requirement that companies disclose their 
policy with regard to director attendance at annual meetings and the 
number of directors who attend the annual meetings, as that disclosure 
will give security holders a more complete picture of a company's 
policies related to opportunities for communicating with directors.

C. Related Disclosure in Quarterly and Annual Reports

    In response to our request for comment regarding whether material 
changes to a company's process for security holders to submit nominees 
for election as director to the company should be disclosed in periodic 
or current reports, a number of commenters indicated the need to 
provide security holders with more current information regarding that 
process.\123\ These commenters expressed the concern that the 
procedures described in a company's proxy statement could change during 
the course of a fiscal year, and the absence of information regarding 
those changes could impair significantly security holders' 
opportunities to submit recommended nominees.\124\ In response to these 
comments, we are adopting new disclosure standards that will require 
companies to report any material changes to the procedures for security 
holder nominations in the Exchange Act Form 10-Q, 10-QSB, 10-K, or 10-
KSB filed for the period in which the material change occurs.\125\ We 
also are including an instruction clarifying that, for purposes of this 
disclosure obligation, adoption of procedures by which security holders 
may recommend nominees to a company's board of directors, where the 
company previously disclosed that it did not have in place such 
procedures, will constitute a material change.\126\
---------------------------------------------------------------------------

    \123\ See, e.g., AFL-CIO; AFSCME; Amalgamated; CalPERS; CII; 
CIR; Cummings; IBT; Int'l Paper; McRitchie2; SERS; SIF; Smith; 
Trillium; UBC.
    \124\ See id.
    \125\ See new Paragraph (b) of Item 5 of Part II to Exchange Act 
Forms 10-Q and 10-QSB, new Paragraph (g) of Item 401 of Exchange Act 
Regulation S-B, and new Paragraph (j) of Exchange Act Regulation S-
K. In those instances where a material change is implemented during 
the last quarter of a company's fiscal year, companies will be 
required to include disclosure of the change in their Exchange Act 
Form 10-K or 10-KSB. See Item 10 of Part III of Exchange Act Form 
10-K, Item 9 of Part III of Exchange Act Form 10-KSB, new Paragraph 
(g) of Item 401 of Exchange Act Regulation S-B, and new Paragraph 
(j) of Item 401 of Exchange Act Regulation S-K.
    \126\ See Instruction 2 to new Paragraph (g) of Item 401 of 
Exchange Act Regulation S-B and new Paragraph (j) of Item 401 of 
Exchange Act Regulation S-K.
---------------------------------------------------------------------------

D. Investment Companies

    The new disclosure requirements regarding board nominating 
committees and security holders' communications with members of boards 
will apply to proxy statements of investment companies.\127\ Investment 
companies currently are required to comply with Exchange Act Schedule 
14A when soliciting proxies, including proxies relating to the election 
of directors.\128\ Item 22(b)(14)(iv) of Exchange Act Schedule 14A 
requires investment companies to disclose the same information about 
nominating committees that currently is required for operating 
companies by Item 7(d)(2).\129\ As with operating companies, the 
enhanced transparency provided by the amendments is intended to provide 
security holders with additional, specific information upon which to 
evaluate the boards of directors and nominating committees of the 
investment companies in which they invest. Commenters generally 
supported the application of the proposed disclosure requirements to 
investment companies.\130\
---------------------------------------------------------------------------

    \127\ See Paragraphs (e) of Item 7 and (b) of Item 22 of 
Exchange Act Schedule 14A. The disclosure requirements will apply to 
business development companies as well as investment companies 
registered under the Investment Company Act of 1940 (``Investment 
Company Act),'' except where otherwise noted. 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].
    \128\ See Investment Company Act Rule 20a-1 [17 CFR 270.20a-1] 
(requiring investment companies to comply with Regulation 14A [17 
CFR 240.14a-1--240.14a-101]), Schedule 14A, and all other rules and 
regulations adopted pursuant to section 14(a) of the Exchange Act 
[15 U.S.C. 78n] that would be applicable to a proxy solicitation if 
it were made in respect of a security registered pursuant to section 
12 of the Exchange Act [15 U.S.C. 78l]).
    \129\ Investment companies are subject to Items 7 and 22(b) of 
Exchange Act Schedule 14A when soliciting proxies regarding the 
election of directors. Currently, in lieu of the disclosure required 
by Paragraphs (a)-(d)(2) of Item 7, investment companies must 
provide the information required by Paragraph (b) of Item 22. See 
Paragraph (e) of Item 7. We are amending Paragraph (e) of Item 7 to 
apply the disclosure requirements regarding nominating committees in 
Paragraph (d)(2) of Item 7 to investment companies, and deleting the 
current disclosure requirement regarding nominating committees in 
Paragraph (b)(14)(iv) of Item 22 as duplicative.
    \130\ See, e.g., ABA; AFL-CIO; Investment Company Institute 
(``ICI'').
---------------------------------------------------------------------------

    The rules that we are adopting will require disclosure as to 
whether or not

[[Page 67001]]

the members of an investment company's nominating committee are 
``interested persons'' of the company as defined in section 2(a)(19) of 
the Investment Company Act,\131\ rather than independent under the 
listing standards of a national securities exchange or national 
securities association, as in the case of operating companies.\132\ We 
are requiring disclosure with respect to the section 2(a)(19) test for 
investment companies because that test is tailored to capture the broad 
range of affiliations with investment advisers, principal underwriters, 
and others that are relevant to ``independence'' in the case of 
investment companies. Commenters generally supported the use of this 
test for independence in the case of investment companies.\133\ 
Similarly, with respect to the instruction that states that in 
describing a company's process for determining which communications 
will be relayed to board members, collecting and organizing security 
holder communications need not be disclosed provided that the company's 
process is approved by a majority of the independent directors, we are 
specifying in the case of investment companies that the approval 
required is of a majority of the directors who are not ``interested 
persons'' under section 2(a)(19).\134\
---------------------------------------------------------------------------

    \131\ 15 U.S.C 80a-2(a)(19).
    \132\ New Paragraph (b)(14)(ii) of Item 22 of Exchange Act 
Schedule 14A.
    \133\ See, e.g., ABA; ICI.
    \134\ See the Instruction to new Paragraph (h)(2)(ii) of Item 7 
of Exchange Act Schedule 14A.
---------------------------------------------------------------------------

    As with operating companies, investment companies will be required 
to state which one or more of certain categories of persons or entities 
recommended each nominee who is approved by the nominating committee 
for inclusion on the company's proxy card.\135\ However, in recognition 
of the fact that investment companies are generally externally managed 
by an investment adviser, the categories will include the following: 
security holder, director, chief executive officer, other executive 
officer, or employee of the investment company's investment adviser, 
principal underwriter, or any affiliated person of the investment 
adviser or principal underwriter. With respect to the disclosure 
requirement regarding nominees recommended by large, long-term security 
holders, we are adopting an instruction clarifying that, for a 
registered investment company, the percentage of securities held by a 
recommending security holder may be determined by reference to the 
company's most recent report on Form N-CSR.\136\
---------------------------------------------------------------------------

    \135\ See new Paragraph (d)(2)(ii)(J) of Item 7 of Exchange Act 
Schedule 14A.
    \136\ See Instruction 1 to new Paragraph (d)(2)(ii)(L) of Item 7 
of Exchange Act Schedule 14A. In the case of business development 
companies, which are not required to file reports on Form N-CSR, the 
percentage of securities would be determined by reference to the 
company's reports on Exchange Act Forms 10-K and 10-Q.
---------------------------------------------------------------------------

    Finally, as with operating companies, we are requiring a registered 
investment company to provide disclosure regarding material changes to 
the procedures for security holder nominations of directors. This 
information will be provided in Form N-CSR.\137\
---------------------------------------------------------------------------

    \137\ See new Item 9 of Form N-CSR. We are renumbering current 
Items 9 and 10 as Items 10 and 11, and are adopting a conforming 
change to Rule 30a-2 under the Investment Company Act to reflect the 
renumbering of Item 10. Because business development companies file 
reports on Forms 10-K and 10-Q rather than Form N-CSR, they would 
provide the required disclosure on these forms.
---------------------------------------------------------------------------

III. Paperwork Reduction Act

A. Background

    The amendments to Exchange Act Schedule 14A contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995.\138\ We published a notice requesting comment on 
the collection of information requirements in the proposing release, 
and we submitted these requirements to the Office of Management and 
Budget for review in accordance with the PRA.\139\ The titles for the 
collections of information are:
---------------------------------------------------------------------------

    \138\ 44 U.S.C. 3501 et seq.
    \139\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (1) ``Proxy Statements--Regulation 14A (Commission Rules 14a-1 
through 14a-15 and Schedule 14A)'' (OMB Control No. 3235-0059);
    (2) ``Information Statements--Regulation 14C (Commission Rules 14c-
1 through 14c-7 and Schedule 14C)'' \140\ (OMB Control No. 3235-0057);
---------------------------------------------------------------------------

    \140\ Exchange Act Schedule 14C requires disclosure of some 
items of Exchange Act Schedule 14A. Therefore, while we are not 
amending the text of Exchange Act Schedule 14C, the amendments to 
Exchange Act Schedule 14A must also be reflected in the PRA burdens 
for Exchange Act Schedule 14C.
---------------------------------------------------------------------------

    (3) ``Rule 20a-1 under the Investment Company Act of 1940, 
Solicitations of Proxies, Consents and Authorizations'' (OMB Control 
No. 3235-0158); \141\
---------------------------------------------------------------------------

    \141\ Investment Company Act Rule 20a-1 requires registered 
investment companies to comply with Exchange Act Regulation 14A or 
14C, as applicable. Therefore, the annual responses to Investment 
Company Act Rule 20a-1 reflect the number of proxy and information 
statements that are filed by registered investment companies.
---------------------------------------------------------------------------

    (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) ``Regulation S-K'' (OMB Control No. 3235-0071);
    (9) ``Regulation S-B'' (OMB Control No. 3235-0417); and
    (10) ``Form N-CSR'' (OMB Control No. 3235-0570).\142\
---------------------------------------------------------------------------

    \142\ The changes to the collections of information entitled 
``Regulation S-B'' and ``Regulation S-K'' are reflected in our 
estimates for Forms 10-Q, 10-QSB, 10-K and 10-KSB. Therefore, we are 
not changing the burden estimates for those titles.
---------------------------------------------------------------------------

    These regulations, forms and schedules were adopted pursuant to the 
Securities Act, Exchange Act and Investment Company Act and set forth 
the disclosure requirements for annual and quarterly reports and proxy 
and information statements filed by companies to ensure that investors 
are informed.\143\ The hours and costs associated with preparing, 
filing, and sending these forms and schedules constitute reporting and 
cost burdens imposed by each collection of information. An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number.
---------------------------------------------------------------------------

    \143\ The proxy rules apply 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 [15 U.S.C. 78o], and 
therefore are not covered by the proxy rules. In addition, companies 
that are not listed on a national securities exchange or the Nasdaq 
Stock Market may not hold annual meetings and therefore would not be 
required to file a proxy or information statement.
---------------------------------------------------------------------------

B. Summary of Amendments

    Under the amendments, we are expanding the disclosure that 
currently is required in company proxy or information statements 
regarding the activities of a company's nominating committee. The new 
disclosure requirements also will require disclosure in proxy or 
information statements regarding the policies and procedures regarding 
security holder communications with boards of directors. We are 
adopting new requirements for disclosure of company policies with 
regard to board members' attendance at annual meetings and the number 
of board members who attended the prior year's annual meeting, as well 
as disclosure in periodic reports of any material changes to company 
procedures for security holder nominations. Compliance with the 
disclosure requirements will be mandatory. There will be no mandatory

[[Page 67002]]

retention period for the information disclosed, and responses to the 
disclosure requirements will not be kept confidential.

C. Responses to Request for Comments

    We requested comment on the PRA analysis contained in the proposing 
release. While we received only two comment letters specifically 
addressing our PRA analysis, we received several comment letters 
responding to the proposals in general.\144\ Although we are adopting 
the disclosure amendments substantially as proposed, we have made some 
additions and subtractions to the disclosure requirements in the final 
rules that will have the net effect of reducing the amount of required 
disclosures. In response to comments, we are adding a requirement for 
companies to provide updates in periodic reports regarding material 
changes to the procedures for security holder nominations. We also are 
adding a requirement for companies to describe in proxy and information 
statements their policies regarding director attendance at annual 
meetings and the number of directors who attended the prior year's 
annual meeting. After considering the comments, we are not adopting 
certain of the proposed disclosure requirements. For example, the 
amendments will not require companies to describe:
---------------------------------------------------------------------------

    \144\ See discussion of comments in Part II of this release and 
Summary of Comments--S7-14-03.
---------------------------------------------------------------------------

    [sbull] The material terms of their nominating committee charters;
    [sbull] Any specific standards for the overall structure and 
composition of the board of directors;
    [sbull] The specific reasons for the nominating committee's 
determination not to include a security holder candidate as a nominee; 
and
    [sbull] Any material action taken by the board of directors as a 
result of communications from security holders.
    The majority of commenters did not comment on the hours and cost 
burdens for companies that will result from the amendments; however, we 
received two comment letters that specifically addressed the paperwork 
burdens in the proposing release.\145\ One commenter noted that given 
the number of unlisted companies, it is difficult to estimate the 
compliance burden.\146\ One commenter believed that the proposing 
release underestimated the disclosure burden for the proposed rules, 
and that the burden could be as high as 12 hours for the first year and 
4 hours for following years.\147\
---------------------------------------------------------------------------

    \145\ See ABA; Stoecklein Law Group (``Stoecklein'').
    \146\ See ABA.
    \147\ See Stoecklein. Using those numbers as inputs into our 
model, the annual incremental disclosure burden over a three-year 
time period would be an average of 5 hours per schedule. 
Accordingly, using the commenter's assumptions, the annual 
incremental paperwork burden for all companies to prepare the 
disclosure would be approximately 32,595 hours of company personnel 
time and a cost of approximately $3,259,500 for the services of 
outside professionals.
---------------------------------------------------------------------------

    The actual paperwork burden for some companies could be 5 hours per 
schedule; however, in devising the estimates we considered a number of 
factors. For example, large companies may incur a greater paperwork 
burden than small companies, the pre-existing disclosure requirements 
may enable companies to streamline the collection of information 
necessary for the new disclosure, and the amendments contain more 
simplified disclosure requirements from the proposals, which will lower 
the paperwork burden. After considering these factors, we do not 
believe that 5 hours per schedule is an accurate burden estimate. 
However, after considering the comments indicating that we may have 
underestimated slightly the burden, we are not reducing our burden 
estimates for proxy and information statements, even though the 
amendments will reduce the amount of disclosure from that which would 
have been required by the proposals.

D. Paperwork Burden Estimates

    As a result of the changes described above, the reporting and cost 
burden estimates for the collections of information have changed. While 
we are not changing the paperwork burden estimates for proxy and 
information statements, we are adding collection of information 
requirements in periodic reports under the Exchange Act.
1. Proxy and Information Statements
    For purposes of the PRA, we estimated the annual incremental 
paperwork burden for proxy and information statements under the new 
disclosure requirements to be approximately 19,557 hours of company 
personnel time and a cost of approximately $1,955,700 for the services 
of outside professionals.\148\ That estimate included 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.\149\ Because the 
current rules already require a company to collect and disclose 
information about the composition, functions, policies and procedures 
of its nominating committee, we factored the pre-existing burdens into 
our estimates for the new disclosure requirements.
---------------------------------------------------------------------------

    \148\ For convenience, the estimated PRA hour burdens have been 
rounded to the nearest whole number.
    \149\ In connection with other recent rulemakings, we have had 
discussions with several private law firms to estimate an hourly 
rate of $300 as the cost of outside professionals that assist 
companies in preparing these disclosures.
---------------------------------------------------------------------------

    We derived the paperwork burden estimates by estimating the total 
amount of time it will take a company to prepare and review the 
disclosure. We estimated that, over a three-year time period, the 
annual incremental disclosure burden will be an average of 3 hours per 
schedule. This estimate was based on two assumptions:
    [sbull] Companies spend a greater amount of time preparing the 
disclosure in year one and will become more efficient in preparing the 
disclosure over the following two years; \150\ and
---------------------------------------------------------------------------

    \150\ We estimated that it will take 6 hours to prepare the 
disclosure in year one, 3.13 hours in year two, and 2.03 hours in 
year three.
---------------------------------------------------------------------------

    [sbull] Not all proxy and information statements involve action to 
be taken with respect to the election of directors, and therefore will 
not require companies to provide the disclosure.\151\
---------------------------------------------------------------------------

    \151\ We estimate that 20% of all proxy and information 
statements do not include disclosure about directors, and therefore 
would not include the disclosure required by the amendments. This 
estimate is based on the proportion of preliminary proxy statements 
to definitive proxy statements filed in our 2002 fiscal year (2,555/
8,692=29%), which has been adjusted downward by 9% to reflect the 
fact that some preliminary proxy statements contain disclosure about 
directors. This estimate is based on the rationale that preliminary 
proxy statements are less likely to contain disclosure about 
directors because registrants do not file preliminary proxy 
statements for security holder meetings where the matters to be 
acted upon involve only the election of directors or other specified 
matters. See Exchange Act Rule 14a-6 [17 CFR 240.14a-6].
---------------------------------------------------------------------------

    This estimate represents the average burden for all companies, both 
large and small, that are subject to the proxy rules. We expect that 
the disclosure burden could be greater for larger companies and lower 
for smaller companies. Table 1, below, illustrates the incremental 
annual compliance burden of the collection of information in hours and 
in cost for proxy and information statements under the Exchange Act and 
Investment Company Act.

[[Page 67003]]



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

2. Periodic Reports
    For purposes of the PRA, we estimate the annual incremental 
paperwork burden for Exchange Act periodic reports under the new 
disclosure requirements to be approximately 1,311 hours of company 
personnel time and a cost of approximately $131,100 for the services of 
outside professionals. We estimate that, over a three-year time period, 
the annual incremental disclosure burden would be an average of 0.01 
hours per Form 10-K and Form 10-KSB, 0.04 hours per Form 10-Q and Form 
10-QSB, and 0.03 hours per Form N-CSR.\152\ This estimate was based on 
the following two assumptions:
---------------------------------------------------------------------------

    \152\ For example, the average burden per form for Form 10-K is 
calculated as follows: [(8,484 Form 10-Ks x 5% frequency of 
disclosure x 0.25 hours)/8,484 Form 10-Ks] = .01. The calculation 
for Form 10-Q is as follows: [(23,743 Form 10-Qs x 15% frequency of 
disclosure x 0.25 hours)/23,743 Form 10-Qs] = .04. The calculation 
for Form N-CSR is as follows: [(7,400 Form N-CSRs x 10% frequency of 
disclosure x 0.25 hours)/7,400 Form N-CSRs] = .03. The discrepancy 
in quotients is due to the fact that operating companies report on a 
quarterly basis, while registered management investment companies 
report on a semi-annual basis.
---------------------------------------------------------------------------

    [sbull] Each year, 20% of reporting companies will change 
materially the procedures by which security holders may recommend 
nominees to the board of directors; \153\ and
---------------------------------------------------------------------------

    \153\ Under our assumptions, 5% of operating companies will 
provide the disclosure each quarter (for a total of 20%), while 10% 
of registered management investment companies will provide the 
information semi-annually (for a total of 20%).
---------------------------------------------------------------------------

    [sbull] It will take .25 hours to prepare the disclosure regarding 
material changes to security holder nomination procedures.
    Table 2, below, illustrates the incremental annual compliance 
burden of the collection of information in hours and in cost for 
periodic reports under the Exchange Act and Investment Company Act.

                                                Table 2: Calculation of Incremental PRA Burden Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Annual      Incremental      Incremental        75% company      25% professional     $300 prof. cost
                                                responses     hours/form         burden      -----------------------------------------------------------
                                              -----------------------------------------------
                                                   (A)            (B)         (C)=(A) x (B)     (D)=(C) x 0.75      (E)=(C) x 0.25      (F)=(E) x $300
--------------------------------------------------------------------------------------------------------------------------------------------------------
10-K.........................................        8,484            0.01             84.84                  64               21.21           $6,000.00
10-KSB.......................................        3,820            0.01             38.20                  29                9.55            3,000.00
10-Q.........................................       23,743            0.04            949.72                 712              237.43           71,000.00
10-QSB.......................................       11,299            0.04            451.96                 339              112.99           34,000.00
N-CSR........................................        7,400            0.03            222.00                 167               55.50           17,000.00
    Total....................................  ...........  ..............  ................               1,311  ..................         $131,000.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

E. Request for Comment

    We request comment in order to (a) evaluate whether the collections 
of information are necessary for the proper performance of our 
functions, including whether the information will have practical 
utility, (b) evaluate the accuracy of our estimate of the burden of the 
collections of information, (c) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected, and (d) evaluate whether there are ways to minimize the 
burden of the collections of information on those who respond, 
including through the use of automated collection techniques or other 
forms of information technology.\154\
---------------------------------------------------------------------------

    \154\ Comments are requested pursuant to 44 U.S.C. 
3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments concerning 
the accuracy of this burden estimate and any suggestions for reducing 
this burden. Persons who desire to submit comments on the collection of 
information requirements should direct their comments to the OMB, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
send a copy of the comments to Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549, 
with reference to File No. S7-14-03. Requests for materials submitted 
to the OMB by us with regard to this collection of information should 
be in writing, refer to File No. S7-14-03, and be submitted to the 
Securities and Exchange Commission, Office of Filings and Information 
Services, Branch of Records Management, 450 Fifth Street, NW., 
Washington, DC 20549. Because the OMB is required to make a decision 
concerning the collections of information between 30 and 60 days after 
publication, your comments are best assured of having their full effect 
if the OMB receives them within 30 days of publication.

IV. Cost-Benefit Analysis

A. Background

    On August 8, 2003 we proposed new disclosure requirements intended 
to increase the transparency of nominating committee functions and the 
processes by which security holders may communicate with boards of 
directors of the companies in which they invest.\155\ These proposals 
followed substantially the recommendations made by the Division of 
Corporation Finance in a staff report dated July 15, 2003.\156\ In

[[Page 67004]]

preparing this report and developing its recommendations, the Division 
considered the input of members of the investing, business, legal, and 
academic communities.\157\
---------------------------------------------------------------------------

    \155\ See Release No. 34-48301 (August 8, 2003).
    \156\ See Staff Report: Review of the Proxy Process Regarding 
the Nomination and Election of Directors, Division of Corporation 
Finance (July 15, 2003). The Division's Staff Report, detailing the 
results of its review of the proxy process related to the nomination 
and election of directors, can be found on our Web site at http://www.sec.gov.
    \157\ On May 1, 2003, the Commission solicited public views on 
the Division's review of the proxy rules relating to the nomination 
and election of directors. See Release No. 34-47778 (May 1, 2003). 
In addition to receiving written comments, the Division spoke with a 
number of interested parties representing security holders, the 
business community, and the legal community. Each of the comment 
letters received, memoranda documenting the Division's meetings, and 
a summary of the comments are included on the Commission's Web site, 
http://www.sec.gov, in comment file number S7-10-03. Summary of 
Comments in Response to the Commission's Solicitation of Public 
Views Regarding Possible Changes to the Proxy Rules (July 15, 2003).
---------------------------------------------------------------------------

    The Commission is adopting the amendments substantially as 
proposed. The disclosures are designed to build upon existing 
disclosure requirements to elicit a more detailed discussion of the 
policies, procedures, and activities of nominating committees as well 
as the means by which security holders can communicate with boards of 
directors. We recognize that the amendments will create costs and 
benefits to the economy. We are sensitive to the costs and benefits 
imposed by our rules, and we have identified certain costs and benefits 
of the amendments.

B. Benefits

    The primary benefit of the amendments will be to assist security 
holders in better understanding the policies and procedures that 
companies maintain to nominate directors and to enable security holders 
to communicate with directors. In the proposing release, we requested 
comment on the potential benefits of the proposed rules and have 
considered the responses. Two commenters in support of the proposals 
indicated that the rules would provide useful information with little 
cost.\158\ Other commenters believed that the proposed rules would 
provide little or no benefit.\159\ Commenters also suggested that the 
proposed rules would not provide meaningful disclosure \160\ or that 
the disclosure would be boilerplate.\161\
---------------------------------------------------------------------------

    \158\ See AFL-CIO; IBT.
    \159\ See, e.g., CCS1; Eliot Cohen; Phillip Goldstein, 
Opportunity Partners L.P., Kimball & Winthrop, Inc. (``Goldstein''); 
James McRitchie, Editor, CorpGov.net and PERSWatch.net, Letter dated 
August 17, 2003 (``McRitchie1'').
    \160\ See, e.g., J. Robert Brown, Jr., Professor, University of 
Denver College of Law (``Brown''); BRT; CCS1; Goldstein; Stoecklein.
    \161\ See, e.g., ACB; Brown; Granary; Letter B; McRitchie1; 
Nappier; Stoecklein; Valero.
---------------------------------------------------------------------------

    To address the commenters' concerns, the amendments are drafted in 
a manner designed to avoid boilerplate and to elicit meaningful 
disclosure. The more precise disclosure requirements will promote more 
transparent disclosure among a cross-section of public companies 
because they will have greater certainty as to the required disclosure. 
In addition, increasing the amount and quality of information available 
to investors concerning board policies and procedures also may improve 
investor confidence because investors may be able to identify the 
degree to which companies are responsive to security holder concerns. 
One commenter noted that the proposed disclosure would provide 
potential investors and potential directors with the ability to compare 
companies before they choose to invest or agree to be considered for 
directorship.\162\ By providing greater transparency of board policies, 
we anticipate that the new requirements will allow investors to make 
more informed choices when deciding how to invest.
---------------------------------------------------------------------------

    \162\ See Eleanor Bloxham, President, The Value Alliance and 
Corporate Governance Alliance.
---------------------------------------------------------------------------

    To the extent that security holders would prefer to invest in 
companies with boards that maintain policies and procedures that 
provide greater security holder oversight, companies may have 
incentives to adopt more meaningful policies and procedures regarding 
director nominations and security holder communications. The amendments 
also may encourage companies to consider their existing policies in 
relation to policies adopted by other companies and could facilitate 
competition among companies to adopt policies that reduce costs to 
security holders. For example, if security holder board nominees are 
given adequate consideration through the nomination process, a security 
holder may choose to submit its candidate to the nominating committee 
rather than incur the expense of soliciting proxies to support the 
nominee. Moreover, disclosure of the manner in which security holders 
can send communications to the board may encourage a less costly 
communications process for providing recommendations to the board than 
the current process embodied in Exchange Act Rule 14a-8.

C. Costs

    The amendments will impose new disclosure requirements on companies 
subject to the proxy rules.\163\ The new requirements are designed to 
build upon existing disclosure requirements regarding the composition, 
functions, policies, and procedures of company nominating committees. 
Thus, the task of complying with the new disclosure requirements could 
be performed by the same person or group of persons responsible for 
compliance under the current rules. One commenter believed that the 
costs would be different on a company-by-company basis and that the 
disclosure requirements would not result in substantial additional 
costs for companies that already disclose and have a security holder 
communications process.\164\ For companies that do not have a system in 
place, the commenter believed that the proposal would burden company 
resources by requiring a person to administer the communications 
system.\165\ One commenter believed that both the cost of submitting 
candidates to the nominating committee and the probable benefits are 
minimal.\166\ This commenter noted that, even if a nominating committee 
were composed entirely of independent directors, it would not likely 
nominate a candidate recommended by security holders.\167\
---------------------------------------------------------------------------

    \163\ The proxy rules apply to domestic companies with equity 
securities registered under section 12 of the Exchange Act and to 
investment companies registered under the Investment Company Act.
    \164\ See ABA.
    \165\ See id.
    \166\ See Robert C. Pozen.
    \167\ See id.
---------------------------------------------------------------------------

    For purposes of the PRA, we estimate the annual incremental 
paperwork burden for all companies to prepare the new disclosure to be 
approximately 20,868 hours of company personnel time (2.4 hours per 
company),\168\ which translates into an estimated cost of $1,774,000 
($204 per company).\169\ We also estimate a cost of approximately 
$2,086,700 for the services of outside professionals ($240 per 
company).\170\ The figures above include the estimated burdens for 
investment companies. For investment companies, we estimate the 
incremental burden to be 2,548 hours of company personnel time (2.4 
hours per company),\171\ which translates into an estimated cost of 
$216,580 ($204 per company). We also estimate a cost for investment 
companies of approximately $255,050 for the services of outside 
professionals ($240 per company).\172\

[[Page 67005]]

On balance, we believe these estimates are reasonable.
---------------------------------------------------------------------------

    \168\ 20,868 hours/ 8,692 companies = 2.4 hours per company.
    \169\ 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 (October 2001).
    \170\ $2,086,700/8,692 companies = $240 per company. In 
connection with other recent rulemakings, we have had discussions 
with several private law firms to estimate an hourly rate of $300 as 
the cost of outside professionals that assist companies in preparing 
these disclosures.
    \171\ 2,548 hours/1,058 companies = 2.4 hours per company.
    \172\ $255,050/1,058 companies = $240 per company.
---------------------------------------------------------------------------

    To the extent that the new disclosures influence corporate 
behavior, however, the costs would extend beyond a disclosure burden. 
For example, companies may incur additional costs in instituting more 
responsive policies and procedures regarding director nominations and 
security holder communications. We have not included these costs in our 
analysis of the additional disclosure requirement, but have sought 
comment regarding such costs and related matters. After considering the 
comments, which are summarized below, we continue to believe that the 
amendments provide useful information to investors. The amendments do 
not require a company to adopt any particular policies and procedures. 
To the extent that a company voluntarily incurs the expense of adopting 
more responsive board policies, we believe that those costs are 
justified by the benefits of such policies.
    In response to our request for comment, one commenter noted that 
the initial cost of implementing and maintaining procedures would be 
high.\173\ This commenter identified the indirect cost of the increase 
in the amount of time that must be spent monitoring corporate 
activities, which may detract from effective management of the 
company.\174\ The commenter identified costs such as legal fees 
associated with structuring and reviewing policies, the cost of 
management time related to structuring policies, fees paid to 
accountants for managerial and financial statement creation and review, 
opportunity costs related to missed business opportunities, and other 
costs.\175\
---------------------------------------------------------------------------

    \173\ See CIR.
    \174\ See id.
    \175\ See id.
---------------------------------------------------------------------------

    One commenter believed that the rules could be ``extremely costly, 
time-consuming and potentially disruptive. ''\176\ This commenter 
explained that the rules could increase significantly the number of 
communications that are sent to board members and the more corporate 
directors must divide their time, the less effectively they will 
discharge their competing functions.\177\ Two commenters believed that 
the disclosure requirements would increase the burden on boards and 
discourage service.\178\
---------------------------------------------------------------------------

    \176\ See Foley.
    \177\ See id.
    \178\ See CIR; Foley.
---------------------------------------------------------------------------

D. Small Business Issuers

    Although the new rules apply to small business issuers, we do not 
anticipate any disproportionate impact on small business issuers. Like 
other issuers, small business issuers should incur relatively minor 
compliance costs to fulfill their disclosure obligations, and should 
find it unnecessary to hire extra personnel. Several commenters 
supported requiring small companies to provide the disclosure.\179\
---------------------------------------------------------------------------

    \179\ See CalPERS; CII; Granary; Letter B; McRitchie2; SERS; 
SIF; Trillium.
---------------------------------------------------------------------------

    Other commenters recommended granting outright relief to small 
businesses or deferring application of the rules to small businesses 
until the Commission evaluates the impact of the rules.\180\ One 
commenter suggested that small companies that have established 
procedures could comply voluntarily.\181\ These commenters sought 
relief for small businesses for several reasons. One commenter 
recommended that we not apply the rules to small businesses because it 
will ``waste the money of small publicly held companies, create 
confusion * * * and provide no useful service to security holders. 
''\182\ This commenter noted that there does not appear to be a 
significant number of instances where major security holders of small 
publicly held companies were unable to communicate with boards of 
directors, particularly because major security holders are in 
management and/or on the board.\183\ Further, this commenter was of the 
view that, because major unaffiliated security holders potentially can 
impact the trading price of small business securities, management and 
the board ``take the views of major unaffiliated security holders very 
seriously. ''\184\ This commenter also noted that the board and 
security holders will not agree on every aspect of running the company 
and it is not clear why small businesses need to set up a procedure for 
every communication with security holders.\185\
---------------------------------------------------------------------------

    \180\ See ABA; Archer; Foley; Stoecklein.
    \181\ See ABA.
    \182\ See Archer.
    \183\ See id.
    \184\ See id.
    \185\ See id.
---------------------------------------------------------------------------

    One commenter noted that increasing the incremental cost to small 
businesses by a certain number of hours and assuming that the staff is 
available already is flawed.\186\ One commenter believed that the 
benefits of increased disclosure would not outweigh a small business 
issuer's need to reduce expenses.\187\ This commenter noted that, as 
regulatory requirements increase, small businesses will have to hire 
additional staff or reduce the number of hours spent managing the 
company.\188\
---------------------------------------------------------------------------

    \186\ See id.
    \187\ See Stoecklein.
    \188\ See id.
---------------------------------------------------------------------------

    After reviewing these comments, we are convinced that issues 
relating to corporate accountability and security holder rights affect 
small companies as much as they affect large companies. The concerns 
raised by the commenters addressed primarily the cost of establishing 
and maintaining new board policies and procedures--not the cost of the 
disclosure required by the amendments. A small business issuer is not 
required to adopt new policies and procedures under the amendments. 
Thus, we do not believe that applying the rules to small business 
issuers would be inconsistent with the policies underlying the small 
business issuer disclosure system.

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

    Section 23(a)(2) of the Exchange Act \189\ 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 amendments are intended to make information 
about the functions of a company's nominating committee of the board of 
directors, as well as the ability of security holders to communicate 
with the board of directors, more transparent to investors. We 
anticipate that the new rules will provide increased information upon 
which to evaluate the functioning of boards of directors and make 
investment decisions. The rules may affect competition because they 
will allow companies to consider their existing policies in relation to 
policies adopted by other companies. As a result, companies may compete 
to adopt policies that effectively balance security holder and director 
interests and, therefore, attract investors.
---------------------------------------------------------------------------

    \189\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    We have identified one possible area where the rules could 
potentially place a burden on competition. The new disclosure will 
enable investors to compare companies' policies and procedures for 
director nominations and communications with directors. To the

[[Page 67006]]

extent that investors may place a premium on a company that provides 
security holders with favorable director nomination and communication 
procedures, a company will be at a disadvantage to other companies that 
maintain more favorable procedures.
    Section 2(b) of the Securities Act,\190\ section 3(f) of the 
Exchange Act \191\ and section 2(c) of the Investment Company Act \192\ 
require us, when engaging in rulemaking that requires us to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation. We believe the disclosure will make information about the 
operation of a company's director nomination process more transparent. 
In addition, disclosure regarding the means by which security holders 
may communicate directly with a company's board of directors may 
increase security holder involvement in the companies in which they 
invest. As a result, we believe that investors may be able to evaluate 
a company's board of directors more effectively and make more informed 
investment decisions. We believe that, as a consequence of these 
developments, there may be some positive impact on the efficiency of 
markets and capital formation. The possibility of these effects, their 
magnitude if they were to occur, and the extent to which they will be 
offset by the costs of the new rules, are difficult to quantify.
---------------------------------------------------------------------------

    \190\ 15 U.S.C. 77b(b).
    \191\ 15 U.S.C. 78c(f).
    \192\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    We requested comment on these matters in the proposing release. We 
received no comments in response to these requests.

VI. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis has been prepared in 
accordance with the Regulatory Flexibility Act.\193\ This FRFA involves 
amendments to Items 7 and 22 of Exchange Act Schedule 14A, Item 5 of 
Exchange Act Forms 10-Q and 10-QSB, Form N-CSR, and Item 401 of 
Regulations S-B and S-K. The amendments will expand the disclosure that 
currently is required in company filings regarding the functions of a 
company's nominating committee. In addition, the amendments will 
require disclosure regarding the policies and procedures regarding 
security holder communications with boards of directors. An Initial 
Regulatory Flexibility Analysis was prepared in accordance with the 
Regulatory Flexibility Act \194\ in conjunction with the proposing 
release. The proposing release included the IRFA and solicited comments 
on it.
---------------------------------------------------------------------------

    \193\ 5 U.S.C. 601.
    \194\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Need for the Amendments

    The amendments are designed to address the growing concern among 
security holders over the accountability of corporate directors and the 
lack of sufficient security holder input into decisions made by the 
boards of directors of the companies in which they invest. Currently, 
companies must state whether they have a nominating committee and, if 
so, must identify the members of the nominating committee, state the 
number of committee meetings held, and briefly describe the functions 
performed by such committees.\195\ In addition, if a company has a 
nominating or similar committee, it must state whether the committee 
considers nominees recommended by security holders and, if so, must 
describe how security holders may submit recommended nominees.\196\ The 
amendments are designed to build upon existing disclosure requirements 
to elicit a more detailed discussion of the policies and procedures of 
nominating committees as well as the means by which security holders 
can communicate with boards of directors.
---------------------------------------------------------------------------

    \195\ See Paragraph (d)(1) of Item 7 of Exchange Act Schedule 
14A.
    \196\ See Paragraph (d)(2) of Item 7 of Exchange Act Schedule 
14A, prior to adoption of these amendments.
---------------------------------------------------------------------------

    The amended disclosure requirements are designed to enhance 
transparency of the policies of boards of directors, with the goal of 
providing security holders a better understanding of the functions and 
activities of the boards of the companies in which they invest. For 
example, the amendments relating to nominating committees will require 
disclosure about the source of director candidates and the level of 
scrutiny accorded to each candidate. The amendments relating to 
security holder communications with directors may strengthen the 
association among security holders and directors by providing security 
holders with a better understanding of the means by which they may 
communicate with board members. For example, the amended disclosure 
will inform security holders of the manner in which to send 
communications to the board. Moreover, the amendments aim to enable 
investors to better evaluate a company's responsiveness to security 
holder issues and inquiries by illuminating the degree of director 
involvement with security holder concerns.

B. Significant Issues Raised by Public Comment

    The Initial Regulatory Flexibility Analysis appeared in the 
proposing release. We requested comment on any aspect of the IRFA, 
including the number of small entities that would be affected by the 
proposals, the nature of the impact, how to quantify the number of 
small entities that would be affected, and how to quantify the impact 
of the proposals. While we did not receive any comments that responded 
directly to the IRFA, we did receive comments addressing the impact on 
small business issuers. Several commenters supported requiring small 
companies to provide the disclosure.\197\ In that regard, commenters 
stated, ``enhanced disclosure would be of great value to all types of 
investors.''\198\ Other commenters recommended granting outright relief 
to small businesses or deferring application of the rules to small 
businesses until the Commission evaluates the impact of the rules.\199\ 
One commenter suggested that small companies that have established 
procedures could comply voluntarily.\200\
---------------------------------------------------------------------------

    \197\ See CalPERS; CII; Granary; Letter B; McRitchie2; SERS; 
SIF; Trillium.
    \198\ See Letter B; McRitchie2.
    \199\ See ABA; Archer; Foley; Stoecklein.
    \200\ See ABA.
---------------------------------------------------------------------------

    Those commenters who sought relief for small businesses did so for 
several reasons. One commenter recommended that we not apply the rules 
to small businesses because it will ``waste the money of small publicly 
held companies, create confusion * * * and provide no useful service to 
security holders.''\201\ This commenter noted that there does not 
appear to be a significant number of instances where major security 
holders of small publicly held companies were unable to communicate 
with boards of directors, particularly because major security holders 
are in management and/or on the board.\202\ Further, this commenter was 
of the view that, because major unaffiliated security holders 
potentially can impact the trading price of small business securities, 
management and the board ``take the views of major unaffiliated 
security holders very seriously.''\203\ This commenter also noted that 
the board and security holders will not agree on every aspect of 
running the company and it is not clear why small businesses

[[Page 67007]]

need to set up a procedure for every communication with security 
holders.\204\
---------------------------------------------------------------------------

    \201\ See Archer.
    \202\ See id.
    \203\ See id.
    \204\ See id.
---------------------------------------------------------------------------

    One commenter noted that increasing the incremental cost to small 
businesses by a certain number of hours and assuming that the staff is 
available already is flawed.\205\ One commenter believed that the 
benefits of increased disclosure would not outweigh a small business 
issuer's need to reduce expenses.\206\ This commenter noted that, as 
regulatory requirements increase, small businesses will have to hire 
additional staff or reduce the number of hours spent managing the 
company.\207\
---------------------------------------------------------------------------

    \205\ See id.
    \206\ See Stoecklein.
    \207\ See id.
---------------------------------------------------------------------------

    After reviewing these comments, we are convinced that issues 
relating to corporate accountability and security holder rights affect 
small companies as much as they affect large companies. The concerns 
raised by the commenters addressed primarily the cost of establishing 
and maintaining new board policies and procedures `` not the cost of 
the disclosure required by the amendments. A small business issuer is 
not required to adopt new policies and procedures under the amendments. 
Thus, we do not believe that applying the rules to small business 
issuers would be inconsistent with the policies underlying the small 
business issuer disclosure system. Like other issuers, small business 
issuers should incur relatively minor compliance costs to fulfill their 
disclosure obligations, and should find it unnecessary to hire extra 
personnel. To the extent small businesses decide to adopt such 
policies, they are likely to do so because they believe the benefits 
justify the costs.

C. Small Entities Subject to the Amendments

    The amendments will affect companies that are small entities. 
Exchange Act Rule 0-10(a) \208\ defines a company, other than an 
investment company, to be a ``small business'' or ``small 
organization'' for purposes of the Regulatory Flexibility Act if it had 
total assets of $5 million or less on the last day of its most recent 
fiscal year. An investment company is considered to be a ``small 
business'' if it, together with other investment companies in the same 
group of related investment companies, has net assets of $50 million or 
less as of the end of its most recent fiscal year.\209\ As discussed 
below, we believe that the amendments will affect approximately 805, or 
32%, of the small entities that are operating companies. We believe 
that the amendments also will affect approximately 50 of the small 
entities that are investment companies.
---------------------------------------------------------------------------

    \208\ 17 CFR 240.0-10(a).
    \209\ Id.
---------------------------------------------------------------------------

    The Commission received 8,692 separate proxy and information 
statements in its 2002 fiscal year. We estimate that 6,954, or 80%, of 
those filings involved the election of directors, and therefore will be 
affected by the new disclosure requirements.\210\ Furthermore, we 
estimate that 5,257 companies are ``listed issuers'' (as defined in 
Exchange Act Rule 10A-3) that are subject to the proxy rules.\211\ 
Because the relevant listing standards of national securities exchanges 
and Nasdaq require that listed issuers hold annual meetings, and state 
law provides for the election of directors at annual meetings, we 
estimate that at least 5,257 proxy and information statements involve 
elections of directors.\212\ Of these proxy and information statements, 
less than 225 relate to operating companies and less than 25 relate to 
investment companies that constitute ``small entities.'' \213\ 
Therefore, we deduced that 1,697 proxy and information statements 
relate to the election of directors for companies that are not ``listed 
issuers.''\214\ We estimate that approximately 580 of the proxy and 
information statements for operating companies that are not ``listed 
issuers'' will be filed by small entities affected by the new 
rules.\215\ We also estimate that approximately 25 of the proxy and 
information statements for investment companies that are not ``listed 
issuers'' will be filed by small entities affected by the new 
disclosure requirements. Therefore, we estimate that the amendments 
will, in total, affect approximately 855 small entities.\216\
---------------------------------------------------------------------------

    \210\ We estimate that 20% of all proxy and information 
statements do not include disclosure about directors, and therefore 
would not include the disclosure required by the amendments. This 
estimate is based on the proportion of preliminary proxy statements 
to definitive proxy statements filed in our 2002 fiscal year (2,555/
8,692=29%), which has been adjusted downward by 9% to reflect the 
fact that some preliminary proxy statements contain disclosure about 
directors. This estimate is based on the rationale that preliminary 
proxy statements are less likely to contain disclosure about 
directors because registrants do not file preliminary proxy 
statements for security holder meetings where the matters to be 
acted upon involve only the election of directors or other specified 
matters. See Exchange Act Rule 14a-6.
    \211\ We derived this estimate from the database provided by the 
Center for Research in Securities Prices at the University of 
Chicago, the Standard & Poors Research Insight Compustat Database 
(``Compustat''), and SEC Form 1392.
    \212\ See, e.g., Rule 302.00 of NYSE listing standards and Rule 
4350(e) of Nasdaq listing standards.
    \213\ Data obtained from Compustat indicates that there are less 
than 225 listed operating companies that are small entities. 
Information compiled by the Commission staff indicates that there 
are less than 25 listed investment companies that are small 
entities.
    \214\ 6,536-5,257=1,697.
    \215\ This estimate is based on the proportion of small entities 
that are reporting companies (2,500) to the total domestic companies 
quoted on the OTCBB or the Pink Sheets (7,317). We derived the 
latter figure from individuals within the organization called http://www.pinksheets.com and from the OTCBB Web site at http://www.otcbb.com.
    \216\ The calculation for the total number of small entities is 
as follows: 225 listed operating companies + 25 listed investment 
companies + 580 non-listed operating companies + 25 non-listed 
investment companies = 855.
---------------------------------------------------------------------------

    We requested comment on the number of small entities that would be 
impacted by our proposals, including any available empirical data. We 
received no responses to this request.

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The amendments are expected to result in some additional costs to 
comply with the disclosure requirements. Because the current rules 
already require a company to collect and disclose information about the 
composition, functions, policies and procedures of its nominating 
committee, the disclosure should not impose significant new costs for 
the collection of information. Thus, the task of complying with the 
nominating committee disclosure could be performed by the same person 
or group of persons responsible for compliance under the current rules 
at a minimal incremental cost. Moreover, if a small entity were to 
maintain a process for security holders to send communications to its 
board of directors, company personnel would be aware of such procedures 
and the disclosure burden also would be minimal. If a small entity does 
not maintain such a process, then the disclosure will consist of a 
statement that the board does not have a communications process and a 
statement of the specific basis for the view of the board of directors 
that it is appropriate for the company not to have such a 
communications process.
    To the extent that the new rules influence corporate behavior, 
however, the costs will extend beyond a disclosure burden. For example, 
companies may incur additional costs in instituting more responsive 
policies and procedures regarding director nominations and security 
holder communications. The new disclosure

[[Page 67008]]

requirements, however, do not mandate any specific procedures.
    For purposes of the PRA, we estimated that it will take an average 
of approximately 3 hours per year for companies, large and small, to 
comply with the new disclosure requirements. We estimated that 75% of 
the compliance burden will be carried by the company internally and 
that 25% of the compliance burden will be carried by outside 
professionals retained by the company. Thus, we estimate the annual 
incremental paperwork burden for a company subject to the proxy rules 
will be 2.4 hours per company, which translates into an estimated cost 
of $204 per company,\217\ and a cost of approximately $240 per company 
for the services of outside professionals.\218\ A cost of $444 per 
small entity may not, however, constitute a significant economic 
impact. That conclusion is based on our analysis of 1,245 small 
entities available on the Compustat database. We found that the average 
revenue of those small entities is $2.07 million per company. 
Therefore, on average, the estimated $444 compliance expense will 
constitute approximately .02% of a small entity's revenues, based on 
the Compustat data.
---------------------------------------------------------------------------

    \217\ 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 (October 2001).
    \218\ In connection with other recent rulemakings, we have had 
discussions with several private law firms to estimate an hourly 
rate of $300 as the cost of outside professionals that assist 
companies in preparing these disclosures.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. In 
connection with the proposals, we considered the following 
alternatives:
    (a) The establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
    (b) The clarification, consolidation, or simplification of 
disclosure for small entities;
    (c) The use of performance rather than design standards; and
    (d) An exemption for small entities from coverage under the 
proposals.
    The Commission has considered a variety of reforms to achieve its 
regulatory objectives. As one possible approach, we considered 
requiring companies to include the security holder's proxy card and 
materials in the company mailing. Alternatively, we considered amending 
or reinterpreting Exchange Act Rule 14a-8(i)(8) \219\ to allow security 
holder proposals requesting access to the company's proxy card for the 
purpose of making nominations. We believe that the current disclosure 
requirements are the most cost-effective approach to address specific 
concerns related to small entities because the proposals build on 
existing disclosure requirements.
---------------------------------------------------------------------------

    \219\ 17 CFR 240.14a-8(i)(8).
---------------------------------------------------------------------------

    We have drafted the new disclosure rules to require clear and 
straightforward disclosure of a company's policies and procedures 
regarding the nomination of directors and security holder 
communications. Separate disclosure requirements for small entities 
would not yield the disclosure that we believe to be necessary to 
achieve our objectives. In addition, the informational needs of 
investors in small entities are typically as great as the needs of 
investors in larger companies. Therefore, it did not seem appropriate 
to develop separate requirements for small entities involving 
clarification, consolidation, or simplification of the disclosure.
    We have used design rather than performance standards in connection 
with the new requirements for two reasons. First, based on our past 
experience, we believe the disclosure will be more useful to investors 
if there are enumerated informational requirements. The mandated 
disclosures may be likely to result in a more focused and comprehensive 
discussion. Second, more precise disclosure requirements will promote 
more consistent disclosure among a cross-section of public companies 
because they will have greater certainty as to the required disclosure. 
In addition, more precise disclosure requirements will improve our 
ability to enforce the rules. Therefore, adding to the disclosure 
requirements in existing proxy and information statements appears to be 
the most effective method of eliciting the disclosure.

VII. Statutory Basis and Text of Amendments

    The amendments are being adopted pursuant to sections 2,\220\ 
6,\221\ 7,\222\ 10,\223\ and 19 \224\ of the Securities Act, sections 
3(b),\225\ 12, 13,\226\ 14, 15, 23(a)\227\ and 36 \228\ of the Exchange 
Act, as amended, and sections 8,\229\ 20(a),\230\ 30,\231\ 31,\232\ and 
38 \233\ of the Investment Company Act, as amended.
---------------------------------------------------------------------------

    \220\ 15 U.S.C. 77b.
    \221\ 15 U.S.C. 77f.
    \222\ 15 U.S.C. 77g.
    \223\ 15 U.S.C. 77j.
    \224\ 15 U.S.C. 77s.
    \225\ 15 U.S.C. 78c(b).
    \226\ 15 U.S.C. 78m.
    \227\ 15 U.S.C. 78w(a).
    \228\ 15 U.S.C. 78mm.
    \229\ 15 U.S.C. 80a-8.
    \230\ 15 U.S.C. 80a-20(a).
    \231\ 15 U.S.C. 80a-29.
    \232\ 15 U.S.C. 80a-30.
    \233\ 15 U.S.C. 80a-37.
---------------------------------------------------------------------------

List of Subjects

17 CFR Parts 228, 229, 240 and 249

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of the Amendments

0
In accordance with the foregoing, the Securities and Exchange 
Commission amends Title 17, chapter II of the Code of Federal 
Regulations as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

0
1. The general authority citation for Part 228 is revised to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29, 
80a-30, 80a-37, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350.
* * * * *

0
2. Amend Sec.  228.401 by adding paragraph (g) to read as follows:


Sec.  228.401 (Item 401)  Directors, Executive Officers, Promoters and 
Control Persons.

* * * * *
    (g) Describe any material changes to the procedures by which 
security holders may recommend nominees to the registrant's board of 
directors, where those changes were implemented after the registrant 
last provided disclosure in response to the requirements of Item 
7(d)(2)(ii)(G) of Schedule 14A (Sec.  240.14a-101), or this Item.

    Instructions to paragraph (g) of Item 401:
    1. The disclosure required in paragraph (g) need only be 
provided in a registrant's quarterly or annual reports.
    2. For purposes of paragraph (g), adoption of procedures by 
which security holders may recommend nominees to the registrant's 
board of directors, where the registrant's most recent disclosure in 
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A 
(Sec.  240.14a-101), or this Item, indicated that the registrant did 
not have in place such procedures, will constitute a material 
change.

[[Page 67009]]

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONVERVATIONS ACT OF 1975--REGULATION S-K

0
3. The general authority citation for Part 229 is revised to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 
78mm, 79e, 79j, 79n, 79t, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 
U.S.C. 1350, unless otherwise noted.
* * * * *

0
4. Amend Sec.  229.401 by adding paragraph (j) to read as follows:


Sec.  229.401 (Item 401)  Directors, executive officers, promoters and 
control persons.

* * * * *
    (j) Describe any material changes to the procedures by which 
security holders may recommend nominees to the registrant's board of 
directors, where those changes were implemented after the registrant 
last provided disclosure in response to the requirements of Item 
7(d)(2)(ii)(G) of Schedule 14A (Sec.  240.14a-101), or this Item.

    Instructions to paragraph (j) of Item 401:
    1. The disclosure required in paragraph (j) need only be 
provided in a registrant's quarterly or annual reports.
    2. For purposes of paragraph (j), adoption of procedures by 
which security holders may recommend nominees to the registrant's 
board of directors, where the registrant's most recent disclosure in 
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A 
(Sec.  240.14a-101), or this Item, indicated that the registrant did 
not have in place such procedures, will constitute a material 
change.

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

0
5. The general authority citation for part 240 is revised to read 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, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *

0
6. Amend Sec.  240.14a-101 by:
0
a. Revising paragraph (d)(2) of Item 7;
0
b. Revising the reference ``paragraphs (a) through (d)(2)'' in 
paragraph (e) of Item 7 to read ``paragraphs (a) through (d)(1) and 
(d)(2)(ii)(D)'';
0
c. Adding paragraph (h) to Item 7;
0
d. Revising the reference ``paragraphs (d)(3), (f) and (g)'' in the 
introductory text of paragraph (b) of Item 22 to read ``paragraphs 
(d)(2) (other than (d)(2)(ii)(D)), (d)(3), (f), (g), and (h)'';
0
e. Revising the last sentence of the introductory text of paragraph 
(b)(14) of Item 22;
0
f. Revising paragraph (b)(14)(ii) of Item 22;
0
g. Removing the semi-colon and ``and'' from the end of paragraph 
(b)(14)(iii) of Item 22 and in their place adding a period;
0
h. Removing paragraph (b)(14)(iv) of Item 22; and
0
i. Adding an Instruction directly after paragraph (b)(14)(iii) of Item 
22.
    The additions and revisions read as follows:


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

Schedule 14A Information

* * * * *
    Item 7. Directors and executive officers.
* * * * *
    (d)(1) * * *
    (2)(i) If the registrant does not have a standing nominating 
committee or committee performing similar functions, state the basis 
for the view of the board of directors that it is appropriate for 
the registrant not to have such a committee and identify each 
director who participates in the consideration of director nominees;
    (ii) Provide the following information regarding the 
registrant's director nomination process:
    (A) If the nominating committee has a charter, disclose whether 
a current copy of the charter is available to security holders on 
the registrant's Web site. If the nominating committee has a charter 
and a current copy of the charter is available to security holders 
on the registrant's Web site, provide the registrant's Web site 
address. If the nominating committee has a charter and a current 
copy of the charter is not available to security holders on the 
registrant's Web site, include a copy of the charter as an appendix 
to the registrant's proxy statement at least once every three fiscal 
years. If a current copy of the charter is not available to security 
holders on the registrant's Web site, and is not included as an 
appendix to the registrant's proxy statement, identify in which of 
the prior fiscal years the charter was so included in satisfaction 
of this requirement;
    (B) If the nominating committee does not have a charter, state 
that fact;
    (C) If the registrant is a listed issuer (as defined in Sec.  
240.10A-3) whose securities are listed on a national securities 
exchange registered pursuant to section 6(a) of the Act (15 U.S.C. 
78f(a)) or in an automated inter-dealer quotation system of a 
national securities association registered pursuant to section 
15A(a) of the Act (15 U.S.C. 78o-3(a)) that has independence 
requirements for nominating committee members, disclose whether the 
members of the nominating committee are independent, as independence 
for nominating committee members is defined in the listing standards 
applicable to the listed issuer;
    (D) If the registrant is not a listed issuer (as defined in 
Sec.  240.10A-3), disclose whether each of the members of the 
nominating committee is independent. In determining whether a member 
is independent, the registrant must use a definition of independence 
of a national securities exchange registered pursuant to section 
6(a) of the Act (15 U.S.C. 78f(a)) or a national securities 
association registered pursuant to section 15A(a) of the Act (15 
U.S.C. 78o-3(a)) that has been approved by the Commission (as that 
definition may be modified or supplemented), and state which 
definition it used. Whatever definition the registrant chooses, it 
must apply that definition consistently to all members of the 
nominating committee and use the independence standards of the same 
national securities exchange or national securities association for 
purposes of nominating committee disclosure under this requirement 
and audit committee disclosure required under paragraph (d)(3)(iv) 
of Item 7 of Schedule 14A (Sec.  240.14a-101);
    (E) If the nominating committee has a policy with regard to the 
consideration of any director candidates recommended by security 
holders, provide a description of the material elements of that 
policy, which shall include, but need not be limited to, a statement 
as to whether the committee will consider director candidates 
recommended by security holders;
    (F) If the nominating committee does not have a policy with 
regard to the consideration of any director candidates recommended 
by security holders, state that fact and state the basis for the 
view of the board of directors that it is appropriate for the 
registrant not to have such a policy;
    (G) If the nominating committee will consider candidates 
recommended by security holders, describe the procedures to be 
followed by security holders in submitting such recommendations;
    (H) Describe any specific, minimum qualifications that the 
nominating committee believes must be met by a nominating committee-
recommended nominee for a position on the registrant's board of 
directors, and describe any specific qualities or skills that the 
nominating committee believes are necessary for one or more of the 
registrant's directors to possess;
    (I) Describe the nominating committee's process for identifying 
and evaluating nominees for director, including nominees recommended 
by security holders, and any differences in the manner in which the 
nominating committee evaluates nominees for director based on 
whether the nominee is recommended by a security holder;
    (J) With regard to each nominee approved by the nominating 
committee for inclusion on the registrant's proxy card (other than 
nominees who are executive officers or who are directors standing 
for re-election), state which one or more of the following 
categories of persons or entities recommended that nominee: security 
holder,

[[Page 67010]]

non-management director, chief executive officer, other executive 
officer, third-party search firm, or other, specified source. With 
regard to each such nominee approved by a nominating committee of an 
investment company, state which one or more of the following 
additional categories of persons or entities recommended that 
nominee: security holder, director, chief executive officer, other 
executive officer, or employee of the investment company's 
investment adviser, principal underwriter, or any affiliated person 
of the investment adviser or principal underwriter;
    (K) If the registrant pays a fee to any third party or parties 
to identify or evaluate or assist in identifying or evaluating 
potential nominees, disclose the function performed by each such 
third party; and
    (L) If the registrant's nominating committee received, by a date 
not later than the 120th calendar day before the date of the 
registrant's proxy statement released to security holders in 
connection with the previous year's annual meeting, a recommended 
nominee from a security holder that beneficially owned more than 5% 
of the registrant's voting common stock for at least one year as of 
the date the recommendation was made, or from a group of security 
holders that beneficially owned, in the aggregate, more than 5% of 
the registrant's voting common stock, with each of the securities 
used to calculate that ownership held for at least one year as of 
the date the recommendation was made, identify the candidate and the 
security holder or security holder group that recommended the 
candidate and disclose whether the nominating committee chose to 
nominate the candidate, provided, however, that no such 
identification or disclosure is required without the written consent 
of both the security holder or security holder group and the 
candidate to be so identified.
    Instructions to paragraph (d)(2)(ii)(L):
    1. For purposes of Item 7(d)(2)(ii)(L), the percentage of 
securities held by a nominating security holder may be determined 
using information set forth in the registrant's most recent 
quarterly or annual report, and any current report subsequent 
thereto, filed with the Commission pursuant to this Act (or, in the 
case of a registrant that is an investment company registered under 
the Investment Company Act of 1940, the registrant's most recent 
report on Form N-CSR (Sec. Sec.  249.331 and 274.128)), unless the 
party relying on such report knows or has reason to believe that the 
information contained therein is inaccurate.
    2. For purposes of the registrant's obligation to provide the 
disclosure specified in Item 7(d)(2)(ii)(L), where the date of the 
annual meeting has been changed by more than 30 days from the date 
of the previous year's meeting, the obligation under that Item will 
arise where the registrant receives the security holder 
recommendation a reasonable time before the registrant begins to 
print and mail its proxy materials.
    3. For purposes of Item 7(d)(2)(ii)(L), the percentage of 
securities held by a recommending security holder, as well as the 
holding period of those securities, may be determined by the 
registrant if the security holder is the registered holder of the 
securities. If the security holder is not the registered owner of 
the securities, he or she can submit one of the following to the 
registrant to evidence the required ownership percentage and holding 
period:
    A. A written statement from the ``record'' holder of the 
securities (usually a broker or bank) verifying that, at the time 
the security holder made the recommendation, he or she had held the 
required securities for at least one year; or
    B. If the security holder has filed a Schedule 13D (Sec.  
240.13d-101), Schedule 13G (Sec.  240.13d-102), Form 3 (Sec.  
249.103), Form 4 (Sec.  249.104), and/or Form 5 (Sec.  249.105), or 
amendments to those documents or updated forms, reflecting ownership 
of the securities as of or before the date of the recommendation, a 
copy of the schedule and/or form, and any subsequent amendments 
reporting a change in ownership level, as well as a written 
statement that the security holder continuously held the securities 
for the one-year period as of the date of the recommendation.
    4. For purposes of the registrant's obligation to provide the 
disclosure specified in Item 7(d)(2)(ii)(L), the security holder or 
group must have provided to the registrant, at the time of the 
recommendation, the written consent of all parties to be identified 
and, where the security holder or group members are not registered 
holders, proof that the security holder or group satisfied the 
required ownership percentage and holding period as of the date of 
the recommendation.
    Instruction to paragraph (d)(2)(ii): For purposes of Item 
7(d)(2)(ii), the term ``nominating committee'' refers not only to 
nominating committees and committees performing similar functions, 
but also to groups of directors fulfilling the role of a nominating 
committee, including the entire board of directors.
* * * * *
    (h)(1) State whether or not the registrant's board of directors 
provides a process for security holders to send communications to 
the board of directors and, if the registrant does not have such a 
process for security holders to send communications to the board of 
directors, state the basis for the view of the board of directors 
that it is appropriate for the registrant not to have such a 
process;
    (2) If the registrant has a process for security holders to send 
communications to the board of directors:
    (i) Describe the manner in which security holders can send 
communications to the board and, if applicable, to specified 
individual directors; and
    (ii) If all security holder communications are not sent directly 
to board members, describe the registrant's process for determining 
which communications will be relayed to board members; and
    Instruction to paragraph (h)(2)(ii): For purposes of the 
disclosure required by this paragraph, a registrant's process for 
collecting and organizing security holder communications, as well as 
similar or related activities, need not be disclosed provided that 
the registrant's process is approved by a majority of the 
independent directors or, in the case of a registrant that is an 
investment company, a majority of the directors who are not 
``interested persons'' of the investment company as defined in 
section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 
80a-2(a)(19)).
    (3) Describe the registrant's policy, if any, with regard to 
board members' attendance at annual meetings and state the number of 
board members who attended the prior year's annual meeting.
    Instruction to paragraphs (h)(2) and (h)(3): In lieu of 
providing the information required by paragraphs (h)(2) and (h)(3) 
in the proxy statement, the registrant may instead provide the 
registrant's Website address where such information appears.
    Instructions to paragraph (h):
    1. For purposes of this paragraph, communications from an 
officer or director of the registrant will not be viewed as 
``security holder communications.'' Communications from an employee 
or agent of the registrant will be viewed as ``security holder 
communications'' for purposes of this paragraph only if those 
communications are made solely in such employee's or agent's 
capacity as a security holder.
    2. For purposes of this paragraph, security holder proposals 
submitted pursuant to Sec.  240.14a-8, and communications made in 
connection with such proposals, will not be viewed as ``security 
holder communications.''
* * * * *
    Item 22. Information required in investment company proxy 
statement.
* * * * *
    (b) * * *
    (14) * * * Identify the other standing committees of the Fund's 
board of directors, and provide the following information about each 
committee, including any separately designated audit committee and 
any nominating committee:
* * * * *
    (ii) The members of the committee and, in the case of a 
nominating committee, whether or not the members of the committee 
are ``interested persons'' of the Fund as defined in section 
2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(19)); and
* * * * *
    Instruction to paragraph (b)(14): For purposes of Item 
22(b)(14), the term ``nominating committee'' refers not only to 
nominating committees and committees performing similar functions, 
but also to groups of directors fulfilling the role of a nominating 
committee, including the entire board of directors.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
7. The general authority citation for Part 249 is revised to read as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C. 
1350, unless otherwise noted.
* * * * *

[[Page 67011]]


0
8. Amend Form 10-Q (referenced in Sec.  249.308a), Item 5 of Part II--
Other Information by:
0
a. Designating the existing text in Item 5 as paragraph (a);
0
b. Removing the period at the end of newly designated paragraph (a) and 
in its place adding ``; and''; and
0
c. Adding paragraph (b).
    The addition reads 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 5. Other Information.

* * * * *
    (b) Furnish the information required by Item 401(j) of 
Regulation S-K (Sec.  229.401).
* * * * *


0
9. Amend Form 10-QSB (referenced in Sec.  249.308b), Item 5 to Part 
II--Other Information by:
0
a. Designating the existing text in Item 5 as paragraph (a);
0
b. Removing the period at the end of newly designated paragraph (a) and 
in its place adding ``; and''; and
0
c. Adding paragraph (b).
    The addition reads 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 5. Other Information.

* * * * *
    (b) Furnish the information required by Item 401(g) of 
Regulation S-B (Sec.  228.401).
* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
10. The authority citation for part 270 continues to read in part as 
follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *

0
11. Amend Sec.  270.30a-2 by:
0
a. Revising the reference ``Item 10(a)(2)'' in paragraph (a) to read 
``Item 11(a)(2)''; and
0
b. Revising the reference ``Item 10(b)'' in paragraph (b) to read 
``Item 11(b).''

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

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

0
12. 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.
* * * * *

0
13. Amend Form N-CSR (referenced in Sec. Sec.  249.331 and 274.128) by:
0
a. Revising the reference ``10(a)(1)'' in General Instruction D and 
paragraphs (c) and (f)(1) of Item 2 to read ``11(a)(1)'';
0
b. Redesignating Items 9 and 10 as Items 10 and 11;
0
c. Adding new Item 9; and
0
d. Revising the reference ``Item 10'' in the heading of the Instruction 
to newly redesignated Item 11 to read ``Item 11.''
    The addition reads as follows:

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

Form N-CSR

* * * * *
    Item 9. Submission of Matters to a Vote of Security Holders.
    Describe any material changes to the procedures by which 
shareholders may recommend nominees to the registrant's board of 
directors, where those changes were implemented after the registrant 
last provided disclosure in response to the requirements of Item 
7(d)(2)(ii)(G) of Schedule 14A (17 CFR 240.14a-101), or this Item.
    Instruction: For purposes of this Item, adoption of procedures 
by which shareholders may recommend nominees to the registrant's 
board of directors, where the registrant's most recent disclosure in 
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A 
(17 CFR 240.14a-101), or this Item, indicated that the registrant 
did not have in place such procedures, will constitute a material 
change.
* * * * *

    By the Commission.

    Dated: November 24, 2003.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-29723 Filed 11-26-03; 8:45 am]
BILLING CODE 8010-01-P