[Federal Register Volume 74, Number 116 (Thursday, June 18, 2009)]
[Proposed Rules]
[Pages 29024-29090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-14090]



[[Page 29023]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 200, 232, 240 et al.



Facilitating Shareholder Director Nominations; Proposed Rule

  Federal Register / Vol. 74, No. 116 / Thursday, June 18, 2009 / 
Proposed Rules  

[[Page 29024]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 232, 240, 249 and 274

[Release Nos. 33-9046; 34-60089; IC-28765; File No. S7-10-09]
RIN 3235-AK27


Facilitating Shareholder Director Nominations

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing changes to the federal proxy rules to remove 
impediments to the exercise of shareholders' rights to nominate and 
elect directors to company boards of directors. The new rules would 
require, under certain circumstances, a company to include in the 
company's proxy materials a shareholder's, or group of shareholders', 
nominees for director. The proposal includes certain requirements, key 
among which are a requirement that use of the new procedures be in 
accordance with state law, and provisions regarding the disclosures 
required to be made concerning nominating shareholders or groups and 
their nominees. In addition, the new rules would require companies to 
include in their proxy materials, under certain circumstances, 
shareholder proposals that would amend, or that request an amendment 
to, a company's governing documents regarding nomination procedures or 
disclosures related to shareholder nominations, provided the proposal 
does not conflict with the Commission's disclosure rules--including the 
proposed new rules. We also are proposing changes to certain of our 
other rules and regulations--including the existing exemptions from our 
proxy rules and the beneficial ownership reporting requirements--that 
may be affected by the new proposed procedures.

DATES: Comments should be received on or before August 17, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-10-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number S7-10-09. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/final.shtml). Comments are 
also available for public inspection and copying in the Commission's 
Public Reference Room, 100 F Street, NE., Washington, DC 20549, on 
official business days between the hours of 10 a.m. and 3 p.m. All 
comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Lillian Brown, Tamara Brightwell, or 
Eduardo Aleman, Division of Corporation Finance, at (202) 551-3200, or, 
with regard to investment companies, Kieran G. Brown, Division of 
Investment Management, at (202) 551-6784, U.S. Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are proposing new Rule 82a of Part 200 
Subpart D--Information and Requests,\1\ and new Rules 14a-11,\2\ 14a-
18,\3\ and 14a-19,\4\ new Regulation 14N \5\ and Schedule 14N,\6\ and 
amendments to Rule 13 \7\ of Regulation S-T,\8\ Rules 13a-11,\9\ 13d-
1,\10\ 14a-2,\11\ 14a-4,\12\ 14a-6,\13\ 14a-8,\14\ 14a-9,\15\ 14a-
12,\16\ and 15d-11,\17\ Schedule 14A,\18\ and Form 8-K,\19\ under the 
Securities Exchange Act of 1934.\20\ Although we are not proposing 
amendments to Schedule 14C \21\ under the Exchange Act, the proposed 
amendments would affect the disclosure provided in Schedule 14C, as 
Schedule 14C requires disclosure of some items of Schedule 14A.
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    \1\ 17 CFR 200.82a.
    \2\ 17 CFR 240.14a-11.
    \3\ 17 CFR 240.14a-18.
    \4\ 17 CFR 240.14a-19.
    \5\ 17 CFR 240.14n et seq.
    \6\ 17 CFR 240.14n-101.
    \7\ 17 CFR 232.13.
    \8\ 17 CFR 232.10 et seq.
    \9\ 17 CFR 240.13a-11.
    \10\ 17 CFR 240.13d-1.
    \11\ 17 CFR 240.14a-2.
    \12\ 17 CFR 240.14a-4.
    \13\ 17 CFR 240.14a-6.
    \14\ 17 CFR 240.14a-8.
    \15\ 17 CFR 240.14a-9.
    \16\ 17 CFR 240.14a-12.
    \17\ 17 CFR 240.15d-11.
    \18\ 17 CFR 240.14a-101.
    \19\ 17 CFR 249.308.
    \20\ 15 U.S.C. 78a et seq.
    \21\ 17 CFR 240.14c-101.
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Table of Contents

Facilitating Shareholder Director Nominations

I. The Need for Reforms to the Federal Proxy Rules
    A. Overview
    B. Shareholder Participation in the Nomination and Election 
Process
    1. Existing Shareholder Options
    2. Recent Corporate Governance and Other Reforms
II. Recent Commission Consideration of the Proxy Rules and 
Regulations Addressing the Election of Directors
    A. 2003 Review of the Proxy Process and Subsequent Rulemaking
    B. 2007 Rulemaking Concerning Shareholder Proposals Seeking To 
Establish Bylaw Procedures for Shareholder Director Nominations
III. Proposed Changes to the Proxy Rules
    A. Introduction
    B. Proposed Exchange Act Rule 14a-11
    1. Overview
    2. Application of Exchange Act Rule 14a-11
    3. Eligibility To Use Exchange Act Rule 14a-11
    4. Shareholder Nominee Requirements
    5. Maximum Number of Shareholder Nominees To Be Included in 
Company Proxy Materials
    6. Notice and Disclosure Requirements
    7. Requirements for a Company That Receives a Notice From a 
Nominating Shareholder or Group
    8. Application of the Other Proxy Rules to Solicitations by the 
Nominating Shareholder or Group
    C. Amendments to Exchange Act Rule 14a-8(i)(8)
    1. Background
    2. Proposed Amendment to Rule 14a-8(i)(8)
    3. Disclosure Requirements
    4. Codification of Prior Staff Interpretations
    D. Other Rule Changes
    1. Beneficial Ownership Reporting Requirements
    2. Exchange Act Section 16
    E. Application of the Liability Provisions in the Federal 
Securities Laws to Statements Made by a Nominating Shareholder or 
Nominating Shareholder Group
    F. General Request for Comment
IV. Paperwork Reduction Act
    A. Background
    B. Summary of Proposed Amendments

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    C. Paperwork Reduction Act Burden Estimates
    1. Proposed Rule 14a-11
    2. Proposed Amendment to Rule 14a-8(i)(8)
    3. Proposed Schedule 14N and Proposed Exchange Act Rules 14a-18 
and 14a-19
    4. Proposed Amendments to Exchange Act Form 8-K
    5. Form ID Filings
    D. Revisions to PRA Reporting and Cost Burden Estimates
    E. Solicitation of Comment
V. Cost-Benefit Analysis
    A. Background
    B. Benefits
    1. Reduction in Costs Related to Shareholder Nominations
    2. Improved Disclosure of Shareholder Nominated Director 
Candidates
    3. Potential Improved Board Performance and Company Performance
    4. Enhanced Ability for Shareholders and Companies To Adopt 
Procedures
    C. Costs
    1. Costs Related to Potential Adverse Effects on Company and 
Board Performance
    2. Costs Related to Potential Complexity of Proxy Process
    3. Costs Related to Preparing Disclosure, Printing and Mailing 
and Costs of Additional Solicitations
    D. Small Business Issuers
    E. Request for Comment
VI. Consideration of Burden on Competition and Promotion of 
Efficiency, Competition and Capital Formation
VII. Initial Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Rules
    D. Reporting, Recordkeeping and Other Compliance Requirements
    E. Duplicative, Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    G. Solicitation of Comment
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Statutory Basis and Text of Proposed Amendments

I. The Need for Reforms to the Federal Proxy Rules

A. Overview

    The nation and the markets have recently experienced, and remain in 
the midst of, one of the most serious economic crises of the past 
century. This crisis has led many to raise serious concerns about the 
accountability and responsiveness of some companies and boards of 
directors to the interests of shareholders, and has resulted in a loss 
of investor confidence. These concerns have included questions about 
whether boards are exercising appropriate oversight of management, 
whether boards are appropriately focused on shareholder interests, and 
whether boards need to be more accountable for their decisions 
regarding such issues as compensation structures and risk management. 
In light of the current economic crisis and these continuing concerns, 
the Commission has determined to revisit whether and how the federal 
proxy rules may be impeding the ability of shareholders to hold boards 
accountable through the exercise of their fundamental right to nominate 
and elect members to company boards of directors.
    Regulation of the proxy process and disclosure is a core function 
of the Commission and is one of the original responsibilities that 
Congress assigned to the Commission in 1934. Section 14(a) of the 
Exchange Act \22\ stemmed from a Congressional belief that ``[f]air 
corporate suffrage is an important right that should attach to every 
equity security bought on a public exchange.'' \23\ The Congressional 
committees recommending passage of Section 14(a) proposed that ``the 
solicitation and issuance of proxies be left to regulation by the 
Commission'' \24\ and explained that Section 14(a) would give the 
Commission the ``power to control the conditions under which proxies 
may be solicited.'' \25\ Congress thus recognized a federal interest in 
the way public corporations handle the proxy process, and granted the 
Commission authority to prescribe rules to regulate the solicitation of 
proxies ``as necessary or appropriate in the public interest or for the 
protection of investors.'' \26\
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    \22\ 15 U.S.C. 78n(a).
    \23\ H.R. Rep. No. 1383, 73d Cong., 2d Sess., 13. See also Mills 
v. Electric Auto-Lite Co., 396 U.S. 375, 381 (1970); J. I. Case Co. 
v. Borak, 377 U.S. 426, 431 (1964).
    \24\ S. Rep. No. 792, 73d Cong., 2d Sess., 12 (1934).
    \25\ H.R. Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934). The 
same report demonstrated a congressional intent to prevent 
frustration of the ``free exercise of the voting rights of 
stockholders.'' Id. Courts have found that the relevant legislative 
history also demonstrates an ``intent to bolster the intelligent 
exercise of shareholder rights granted by state corporate law.'' 
Roosevelt v. E.I. Du Pont de Nemours & Co., 958 F.2d 416, 421 (D.C. 
Cir. 1992); see Borak, 377 U.S. at 431.
    \26\ 15 U.S.C. 78n(a).
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    Responding to the Commission's mandate from Congress, the 
Commission has actively overseen the development of the proxy process 
since 1934. The Commission has monitored the process and has considered 
changes when it appeared that the process was not functioning in a 
manner that adequately protected the interests of investors.\27\ At the 
same time, the Commission has been mindful of the traditional role of 
the states in regulating corporate governance. For example, Exchange 
Act Rule 14a-8,\28\ the shareholder proposal rule, explicitly provides 
that a company is permitted to exclude a shareholder proposal if it 
``is not a proper subject for action by shareholders under the laws of 
the jurisdiction of the company's organization'' \29\ or ``[i]f the 
proposal would, if implemented, cause the company to violate any state, 
federal, or foreign law to which it is subject.'' \30\
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    \27\ For example, as discussed in further detail below, the 
Commission has considered changes to the proxy rules in recent 
years. See Security Holder Director Nominations, Release No. 34-
48626 (October 14, 2003) [68 FR 60784] (``2003 Proposal''); 
Shareholder Proposals, Release No. 34-56160 (July 27, 2007) [72 FR 
43466] (``Shareholder Proposals Proposing Release''); Shareholder 
Proposals Relating to the Election of Directors, Release No. 34-
56161 (July 27, 2007) [72 FR 43488] (``Election of Directors 
Proposing Release''); and Shareholder Proposals Relating to the 
Election of Directors, Release No. 34-56914 (December 6, 2007) [72 
FR 70450] (Election of Directors Adopting Release''). When we refer 
to the ``2007 Proposals'' and the comments received in 2007, we are 
referring to the Shareholder Proposals Proposing Release and the 
Election of Directors Proposing Release and the comments received on 
those proposals, unless otherwise specified.
    \28\ 17 CFR 240.14a-8.
    \29\ 17 CFR 240.14a-8(i)(1).
    \30\ 17 CFR 240.14a-8(i)(2).
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    In identifying the rights that the proxy process should protect, 
the Commission has sought to take as a touchstone the rights of 
shareholders under state corporate law. As Chairman Ganson Purcell 
explained to a committee of the House of Representatives in 1943:

    The rights that we are endeavoring to assure to the stockholders 
are those rights that he has traditionally had under State law, to 
appear at the meeting; to make a proposal; to speak on that proposal 
at appropriate length; and to have his proposal voted on.\31\
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    \31\ Securit[ies] and Exchange Commission Proxy Rules: Hearings 
on H.R. 1493, H.R. 1821, and H.R. 2019 before the House Committee on 
Interstate and Foreign Commerce, 78th Cong., 1st Sess. 172 (1943) 
(statement of SEC Chairman Ganson Purcell).

This principle has given rise to a shorthand that explains much of the 
Commission's activity in regulating the proxy process. The proxy rules 
seek to improve the corporate proxy process so that it functions, as 
nearly as possible, as a replacement for an actual in-person meeting of 
shareholders.
    Refining the proxy process so that it replicates, as nearly as 
possible, the annual meeting is particularly important given that the 
proxy process has become the primary way for shareholders to learn 
about the matters to be decided by the shareholders and to make their 
views known to company management.\32\ Our recent examinations

[[Page 29026]]

of the proxy process and the comments that we have received in the 
course of these examinations suggest that the director nomination and 
shareholder proposal processes are two areas in which our current proxy 
rules pose impediments to the exercise of shareholders' rights.\33\ 
These proposed amendments are intended to remove impediments so 
shareholders may more effectively exercise their rights under state law 
to nominate and elect directors at meetings of shareholders.
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    \32\ See, e.g., Securit[ies] and Exchange Commission Proxy 
Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the 
House Comm. on Interstate and Foreign Commerce, 78th Cong., 1st 
Sess., at 17-19 (1943) (Statement of the Honorable Ganson Purcell, 
Chairman, Securities and Exchange Commission) (Explaining the 
initial Commission rules requiring the inclusion of shareholder 
proposals in the company proxy materials: ``We give [a stockholder] 
the right in the rules to put his proposal before all of his fellow 
stockholders along with all other proposals * * * so that they can 
see then what they are and vote accordingly. * * * The rights that 
we are endeavoring to assure to the stockholders are those rights 
that he has traditionally had under State law, to appear at the 
meeting; to make a proposal; to speak on that proposal at 
appropriate length; and to have his proposal voted on. But those 
rights have been rendered largely meaningless through the process of 
dispersion of security ownership through[out] the country. * * * 
[T]he assurance of these fundamental rights under State laws which 
have been, as I say, completely ineffective * * * because of the 
very dispersion of the stockholders' interests throughout the 
country[;] whereas formerly * * * a stockholder might appear at the 
meeting and address his fellow stockholders[, t]oday he can only 
address the assembled proxies which are lying at the head of the 
table. The only opportunity that the stockholder has today of 
expressing his judgment comes at the time he considers the execution 
of his proxy form, and we believe * * * that this is the time when 
he should have the full information before him and ability to take 
action as he sees fit.''); see also S. Rep. 792. 73d Cong., 2d 
Sess., 12 (1934) (``[I]t is essential that [the stockholder] be 
enlightened not only as to the financial condition of the 
corporation, but also as to the major questions of policy, which are 
decided at stockholders' meetings.'').
    \33\ See, e.g., Unofficial Transcript of the Roundtable 
Discussion on Proposals for Shareholders, May 25, 2007, comments of 
Leo E. Strine Jr., Vice Chancellor, Court of Chancery of the State 
of Delaware (Vice Chancellor Strine), at 112, available at: http://www.sec.gov/news/openmeetings/2007/openmtg_trans052507.pdf 
(observing that it is ``a little bit perverse'' that ``a bylaw 
dealing with the election process that might well have been viable 
under state law was kept off the ballot when you could have 
something that was precatory mandated to be on the ballot'').
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    There are many competing policy arguments about the effect that 
shareholder-nominated directors or shareholder-proposed nomination 
procedures might have on a company and its governance. Some commenters 
believe that the presence of shareholder-nominated directors would make 
boards more accountable to the shareholders who own the company and 
that this accountability would improve corporate governance and make 
companies more responsive to shareholder concerns.\34\ Some commenters 
further express the belief that, absent an effective way for 
shareholders to exercise rights to nominate and elect directors that 
state corporate law presumes shareholders have, the election of 
directors is a self-sustaining process of the board determining its 
members, with little actual input from shareholders.\35\ Commenters 
have noted that without competition for director elections, directors 
are effectively unaccountable to shareholders and may lose sight of 
their proper role as representatives of the company.\36\
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    \34\ See, e.g., comment letters on the 2007 Proposals (SEC File 
Nos. S7-16-07 and S7-17-07) from James McRitchie, Corporate 
Governance (October 1, 2007) (``McRitchie 2007''); and Stephen 
Abrecht, Executive Director, SEIU Master Trust (October 1, 2007) 
(``SEIU'').
    \35\ See, e.g., 2004 Roundtable Submission of Lucian Bebchuk: 
Lucian Arye Bebchuk, The Case for Shareholder Access to the Ballot, 
59 The Business Lawyer 43, 49 (2003) (``Bebchuk 2003 Article'') 
(``Suppose that there is a widespread concern among shareholders 
that a board with a majority of independent directors is failing to 
serve shareholder interests. It is precisely under such 
circumstances that the nominating committee cannot be relied on to 
make desirable replacements of members of the board or even of 
members of the committee itself--at least not unless shareholders 
have adequate means of applying pressure on the committee.'').
    \36\ See, e.g., comment letter on 2007 Proposals (SEC File Nos. 
S7-16-07 and S7-17-07) from William Apfel, et al., Walden Asset 
Management (September 11, 2007).
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    Similarly, foreign investors have noted the lack of accountability 
of directors in the United States compared with other countries, 
stating among other things that ``[t]he harsh reality is that U.S. 
corporate governance practices are on a relative decline compared to 
other leading markets.'' \37\ In that vein, the Committee on Capital 
Markets Regulation has observed that this ``difference creates an 
important potential competitiveness problem for U.S. companies.'' \38\ 
Other commenters have expressed concern that the relative inability of 
shareholders of U.S. companies to participate in the selection of 
directors compared with shareholders of their foreign competitors 
creates a competitiveness problem for U.S. companies.\39\
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    \37\ Comment letter on 2007 Proposals (SEC File Nos. S7-16-07 
and S7-17-07) from Michael O'Sullivan, President, Australian Council 
of Super Investors, et al. (October 2, 2007). See also Michelle 
Edkins, Acting Chairman, International Corporate Governance Network 
Shareholder Rights Committee (October 2, 2007) and Knut Kjer, CEO, 
Norges Bank Investment Management, et al. (September 28, 2007).
    \38\ Committee on Capital Markets Regulation, Interim Report 
(November 30, 2006) at 109, available at: http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf.
    \39\ See comment letter on 2007 Proposals (SEC File Nos. S7-16-
07 and S7-17-07) from Carl Levin, United States Senator, (September 
27, 2007) at page 6.
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    Academic literature also has highlighted the roles of boards of 
directors at companies that have demonstrated corporate governance 
failings. Such literature points to a link between board accountability 
and company performance.\40\ In recognition of this link, Congress 
passed the Sarbanes-Oxley Act of 2002 to help strengthen corporate 
governance at public companies.\41\ Commenters additionally have argued 
that competition for board seats might lead companies to nominate 
directors who are better qualified and more independent.\42\
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    \40\ See, e.g., Michael E. Murphy, The Nominating Process for 
Corporate Boards of Directors--A Decision-Making Analysis, 5 
Berkeley Bus. L.J. 131 (2008).
    \41\ See, e.g., Section 301 of the Sarbanes-Oxley Act of 2002, 
inserting Section 10A(m) to the Exchange Act, which directed the 
Commission to promulgate rules requiring the national securities 
exchanges to ``prohibit the listing of any security of an issuer 
that is not in compliance'' with the Act's audit committee 
provisions. As a consequence, listed companies are now required to 
have audit committees composed solely of independent directors.
    \42\ See generally Bebchuk 2003 Article. See also In re Oracle 
Corp. Derivative Litigation, 824 A.2d 917, 941 (Del. Ch. 2003) 
(``The recent reforms enacted by Congress and by the stock exchanges 
reflect a narrower conception of who they believe can be an 
independent director. These definitions, however, are blanket labels 
that do not take into account the decision at issue. Nonetheless, 
the definitions recognize that factors other than the ones 
explicitly identified in the new exchange rules might compromise a 
director's independence, depending on the circumstances.'').
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    On the other side of the debate, some commenters have raised 
concerns that shareholder-nominated directors could impede the proper 
functioning of companies and cause inefficiencies. For example, some 
argue that a shareholder-nominated director may be beholden to and 
focused solely on the concerns of the nominating shareholder or group, 
with the potential result being that a small number of shareholders 
could impose their unique concerns on the company and the rest of 
shareholders.\43\ Additionally, some commenters have suggested that the 
presence of a shareholder-nominated director could disrupt the 
functioning of the board and could even lead to the company moving in a 
direction that does not reflect the interests of its shareholders 
overall.\44\ Others have raised concerns that the possibility of a 
contested election could deter qualified candidates from seeking to 
serve as members of a board.\45\
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    \43\ See, e.g., comment letters on 2007 Proposals from Thomas 
Wilson, President, The Allstate Corporation (October 2, 2007) and 
David T. Hirschmann, Senior Vice President, U.S. Chamber of Commerce 
(October 2, 2007).
    \44\ See, e.g., comment letter on 2007 Proposals from Anne M. 
Mulcahy, Chairman, Business Roundtable Corporate Governance Task 
Force, Business Roundtable (October 1, 2007) (``Mulcahy, BRT'').
    \45\ Id.

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[[Page 29027]]

    We recognize that there are long-held and deeply felt views on both 
sides of these issues. The action we take today is focused on removing 
burdens that the federal proxy process currently places on the ability 
of shareholders to exercise their basic rights to nominate and elect 
directors. If we adopted rules to remove those burdens, we believe that 
these rules would facilitate shareholders' ability to participate more 
fully in the debates surrounding these issues. To the extent 
shareholders have the right to nominate directors at meetings of 
shareholders, the federal proxy rules should not impose unnecessary 
barriers to the exercise of this right.\46\ The SEC's mission is 
investor protection, and we believe that investors are best protected 
when they can exercise the rights they have as shareholders, without 
unnecessary obstacles imposed by the federal proxy rules.
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    \46\ See, e.g., Unofficial Transcript of the Roundtable on the 
Federal Proxy Rules and State Corporation Law (May 7, 2007), 
comments of R. Franklin Balotti, Director, Richards, Layton & 
Finger, P.A., at 14-17, available at: http://www.sec.gov/spotlight/proxyprocess/proxy-transcript050707.pdf; Unofficial Transcript of 
the Roundtable on the Federal Proxy Rules and State Corporation Law 
(May 7, 2007), comments of Vice Chancellor Strine, at 18-23; and 
Unofficial Transcript of the Roundtable on the Federal Proxy Rules 
and State Corporation Law (May 7, 2007), comments of Stanley Keller, 
Edwards Angell Palmer & Dodge LLP, at 142-143.
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    Based on the staff's and Commission's review of the proxy 
solicitation process and the extensive public input that we have 
received over the past several years on the topic of shareholders' 
ability to meaningfully exercise their rights to vote for and nominate 
directors of the companies in which they invest, we have decided to 
propose changes to the current proxy rules relating to the nomination 
of directors. First, we believe that we can and should structure the 
proxy rules to better facilitate the exercise of shareholders' rights 
to nominate and elect directors. The right to nominate is inextricably 
linked to, and essential to the vitality of, a right to vote for a 
nominee.\47\ The failure of the proxy process to adequately facilitate 
shareholder nomination rights has a direct and practical effect on the 
right to elect directors.\48\ As noted, the proxy rules have been 
designed to improve the proxy process so that it functions, as nearly 
as possible, as a replacement for an in-person meeting of shareholders. 
This is important because the proxy process today represents 
shareholders' principal means of participating effectively at an annual 
or special meeting of shareholders.\49\ Based on the feedback we have 
received over the last few years, it appears that the federal proxy 
process may not be adequately replicating the conditions of the 
shareholder meeting. Second, we believe that parts of the federal proxy 
process may unintentionally frustrate voting rights arising under state 
law, and thereby fail to provide fair corporate suffrage. These two 
potential shortcomings in our regulations provide compelling reasons 
for us to reform the proxy process and our disclosure requirements 
relating to director nominations.\50\ The comments received on the 
Commission's recent proposals on this topic in 2003 and in 2007, as 
well as the Roundtables held by the Commission in 2004 and 2007, helped 
form the basis for our beliefs.\51\
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    \47\ See, e.g., Durkin v. Nat'l Bank of Olyphant, 772 F.2d 55, 
59 (3d Cir. 1985) (stating that ``the unadorned right to cast a 
ballot in a contest for office, a vehicle for participatory 
decisionmaking and the exercise of choice, is meaningless without 
the right to participate in selecting the contestants. As the 
nominating process circumscribes the range of the choice to be made, 
it is a fundamental and outcome-determinative step in the election 
of officeholders. To allow for voting while maintaining a closed 
candidate selection process thus renders the former an empty 
exercise. This is as true in the corporate suffrage context as it is 
in civic elections, where federal law recognizes that access to the 
candidate selection process is a component of constitutionally-
mandated voting rights. See United States v. Classic, 313 U.S. 299, 
316-317, 85 L.Ed. 1368, 61 S.Ct. 1031 (1941) (article I, section 2, 
right to choose congressional representatives includes the right to 
participate in primary elections); Smith v. Allwright, 321 U.S. 649, 
661-662, 88 L.Ed. 987, 64 S.Ct. 757 (1944) (fifteenth amendment 
prohibition of race-based abridgement of voting rights applies to 
primary as well as general elections). Banks do not exist for the 
purpose of creating an aristocracy of directors and officers which 
can continue in office indefinitely, immune from the wishes of the 
shareholder-owners of the corporation. And there is no more 
justification for precluding shareholders from nominating candidates 
for their board of directors than there would be for public 
officials to deny citizens the right to vote because of their race, 
poverty or sex. Cf. U.S. Const. amends. XV, XXIV, and XIX.'' id. at 
59 (emphasis added)); and Hubbard v. Hollywood Park Realty 
Enterprises, Inc., 1991 Del. Ch. LEXIS 9 (Del. Ch. Jan. 14, 1991) 
(quoting Durkin).
    \48\ Shoen v. Amerco, 885 F.Supp. 1332, 1342 (D. Nev. 1994) 
(``unadorned right to cast a ballot in a contest for office, after 
all, is meaningless without the right to participate in selecting 
the contestants'' (internal quotation marks omitted)).
    \49\ Historically, a shareholder's voting rights generally were 
exercised at a shareholder meeting. As discussed above, in passing 
the Securities Exchange Act, Congress understood that many companies 
had become held nationwide through dispersed ownership, at least in 
part facilitated by stock exchange listing of shares. Although 
voting rights in public companies technically continued to be 
exercised at a meeting, the votes cast at the meeting were by proxy 
and the voting decision was made during the proxy solicitation 
process. This structure persists to this day.
    \50\ The Commission's proxy rules have required shareholder 
proposals on certain matters to be included in company proxy 
materials since 1940 (see Release No. 34-2376 (January 12, 1940)), 
subject to amendment from time to time pursuant to the Commission's 
dynamic regulation of the proxy process.
    \51\ See 2003 Proposal; Shareholder Proposals Proposing Release; 
Election of Directors Proposing Release; and Election of Directors 
Adopting Release. See also, Section II, below, regarding the 
Commission's consideration of the proxy rules.
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B. Shareholder Participation in the Nomination and Election Process

1. Existing Shareholder Options
    Many commenters have noted that current procedures available for 
director nominations afford little practical ability for shareholders 
to participate effectively in the nomination process and, through that 
process, exercise their rights and responsibilities as owners of their 
companies.\52\ If shareholders are dissatisfied with their company's 
performance and believe that the problem lies with the ineffectiveness 
of the company's board of directors, the existing proxy process 
provides shareholders with three principal options to attempt to effect 
change.\53\ First, shareholders can mount a proxy contest in accordance 
with our proxy rules. Second, shareholders can use the shareholder 
proposal procedure in Rule 14a-8 to submit proposals and have a vote on 
topics that are important to them. Third, shareholders can conduct a 
``withhold vote'' or ``vote no'' campaign against one or more 
directors.\54\
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    \52\ See, e.g., 2003 Staff Report and summary of comments in 
response to the Commission's May 1, 2003 solicitation of comments.
    \53\ Commenters on the 2003 Proposal discussed the range of 
options currently available. See, e.g., comment letters from 
Ashland, Inc. (December 17, 2003) (``Ashland''); Conoco-Phillips 
(December 31, 2003); Delphi Corporation (December 10, 2003); Emerson 
Electric Co. (December 15, 2003); Financial Services Roundtable 
(December 22, 2003); Kerr-McGee Corporation (December 22, 2003) 
(``Kerr-McGee''); Independent Community Bankers of America (December 
22, 2003); Letter Type D; Malcom S. Morris (November 6, 2003) 
(``Morris''); Office Depot, Inc. (December 22, 2003) (``Office 
Depot''); Valero Energy Corporation (December 18, 2003) 
(``Valero''); and Wachtell Lipton Rosen & Katz (November 14, 2003) 
(``Wachtell''). Cf. Blasius, 564 A.2d at 659 (``Generally, 
shareholders have only two protections against perceived inadequate 
business performance. They may sell their stock (which, if done in 
sufficient numbers, may so affect security prices as to create an 
incentive for altered managerial performance), or they may vote to 
replace incumbent board members.'').
    \54\ In the case of plurality voting, shareholders may vote in 
the election of directors for, or withhold authority to vote for, 
each nominee rather than vote for, against or abstain, as is the 
case for other matters to be voted on by shareholders. See Exchange 
Act Rule 14a-4(b)(2).
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    Shareholders also can use options that exist outside of the proxy 
process. For example, shareholders can sell their shares (sometimes 
referred to as the ``Wall Street Walk''); they can engage in a dialogue 
with management (including recommending a candidate to the

[[Page 29028]]

nominating committee); or they can propose a board nominee at a 
shareholder meeting. Each of these options has drawbacks that limit its 
effectiveness.\55\
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    \55\ See, e.g., comment letter on the 2003 Proposal from The 
Corporate Library (December 22, 2003) (``Corporate Library'') 
(``Shareholders can sell the stock at what they perceive to be a 
substantial discount. Or they can run their own slate of candidates, 
paying 100 percent of the costs, which may come to hundreds of 
thousands or even millions of dollars, for only a pro rata share of 
any increase in shareholder value as a result of the contested 
election. Meanwhile, management will spend the shareholders' money 
to fight them. This is not a level playing field. It is close to 
perpendicular.'').
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a. Options Using the Proxy Process
    Shareholders' existing options under the proxy rules to exercise 
their ownership rights are often criticized. The chief complaint from 
shareholders about the existing options is the high cost involved in 
mounting a proxy contest under the Commission's proxy rules. Because 
this cost must be borne by the shareholders undertaking the contest, 
the option generally is not used outside the corporate-control context, 
where the cost may be better justified.\56\ A shareholder or group of 
shareholders that is dissatisfied with the leadership of a company 
generally, but is not seeking a change in control must, as a result of 
our proxy rules, nevertheless undertake a proxy contest, along with its 
related expenses and other burdens, to put nominees before the 
shareholders for a vote. The shareholder proposal process in Rule 14a-
8, under which a company may be required to include a shareholder 
proposal in the company proxy materials, also has been criticized as an 
ineffective tool for exercising ownership rights, as Rule 14a-8 is not 
available for proposals that relate to director elections.\57\ With 
regard to withhold vote and vote no campaigns, because some companies 
use plurality voting for board elections and therefore candidates can 
be elected regardless of whether they receive more than 50% of the 
shareholder vote, withhold vote campaigns may be limited in their 
effectiveness. In addition, restrictions under the proxy rules may 
limit the effectiveness of withhold vote and vote no campaigns because 
shareholders cannot solicit proxy authority through these campaigns.
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    \56\ See, e.g., Corporate Library. See also Bebchuk 2003 Article 
at 46. Surveying data from contested elections from 1996 to 2002, 
Professor Bebchuk concludes that ``the safety valve of potential 
ouster via the ballot is currently not working. In the absence of an 
attempt to acquire the company, the prospect of being removed in a 
proxy contest is far too remote to provide directors with incentives 
to serve shareholders.'' The principal reason the costs could be 
better justified in the corporate control context is because 
benefits that are expected to arise from a successful contest are 
internalized by the shareholder undertaking the contest.
    \57\ Exchange Act Rule 14a-8(i)(8).
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    Further, in any vote for the election of directors, customary 
election processes may serve to amplify the practical effect that the 
proxy rules have in impeding shareholder nominees.\58\ In particular, 
as noted with regard to withhold vote campaigns, for companies using 
plurality rather than majority voting for board elections, nominees 
generally can be elected as director regardless of whether they receive 
a majority of the shareholder vote.\59\ Therefore, in an election in 
which there are the same number of nominees as there are board 
positions open, each nominee receiving even a single vote will be 
elected, regardless of the number of votes withheld from a nominee.
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    \58\ See, e.g., Unofficial Transcript of the Security Holder 
Director Nominations Roundtable (March 10, 2004) (``2004 Roundtable 
Transcript''), comments of Ira M. Millstein, Weil, Gotshal & Manges, 
available at: http://www.sec.gov/spotlight/dir-nominations/transcript03102004.txt.
    \59\ Under plurality voting, the nominee with the greatest 
number of votes is elected. But see footnote 69, below (noting that 
some companies using a plurality standard have adopted policies 
requiring incumbent directors to resign if they receive less than 
majority support). Shareholders at companies using majority voting, 
or some other voting method other than plurality voting, may be 
better able to express dissatisfaction with a company's nominee or 
nominees. As discussed, in recent years, many companies have adopted 
a majority voting standard.
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b. Options Outside the Proxy Process
    Shareholders also are critical of the options available to them 
outside the proxy process. The ``Wall Street Walk'' is not an optimal 
solution because it may not be practical for large institutional 
shareholders and others who follow a passive management or indexing 
strategy, and it may require investors to lock in a loss.\60\ Selling 
shares may be very costly for these types of investors because they may 
face liquidity issues as a result of the size of their holdings and may 
be forced to sell their holdings in a manner that results in capital 
gains and therefore is not tax efficient. In addition, while selling 
shares may depress the stock price, leading to higher cost of capital 
for the firm and thus may ultimately spur management changes,\61\ the 
investor who sold its shares will not benefit from any improvement that 
follows the management change.
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    \60\ See 2003 Summary of Comments, text at notes 9-10. Although 
the AFL-CIO noted that active managers of mutual funds can sell 
their shares in a company with an ``ineffective or unresponsive 
board,'' pension fund managers, including the AFL-CIO and 
Amalgamated Bank Longview Fund, noted that the issue of director 
accountability is more important to them because they may manage 
index funds that are necessarily long-term investors who cannot 
easily sell. See comment letters from American Federation of Labor 
and Congress of Industrial Organizations (December 19, 2003) (``AFL-
CIO'') and Amalgamated Bank LongView Funds (December 21, 2003) 
(``LongView''). See also 2004 Roundtable Transcript, comments of 
Richard H. Moore, Treasurer of North Carolina.
    \61\ See 2004 Roundtable Transcript, comments of Peter J. 
Wallison, American Enterprise Institute.
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    Engaging management in a dialogue also may not be an effective 
option for shareholders because company management may be unresponsive 
to investor concerns.\62\ While shareholders can recommend an 
individual for nomination as director to a company's nominating 
committee, we understand these recommendations are rarely accepted by 
nominating committees.\63\ Moreover, in some cases, shareholders may 
not be able to exercise their state law rights effectively because they 
have had difficulty gaining access to members of company boards and 
their committees.\64\
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    \62\ See, e.g., comment letters on the 2003 Proposal from Lucian 
A. Bebchuk (December 22, 2003) (``Bebchuk''); California Public 
Employees' Retirement System (``CalPERS''); California State 
Teachers' Retirement System (``CalSTRS'') (December 4, 2003); 
Charles Capito (October 20, 2003); Council of Institutional 
Investors (``CII'') (December 12, 2003); Creative Investment 
Research (``CIR'') (December 22, 2003); Corporate Library; and Aaron 
Rosenthal (October 20, 2003).
    \63\ See, e.g., Division of Corporation Finance, U.S. Securities 
and Exchange Commission, Staff Report: Review of the Proxy Process 
Regarding the Nomination and Election of Directors (July 15, 2003), 
available at: http://www.sec.gov/news/studies/proxyreport.pdf; see 
also, comment letter on the 2003 Proposal from CII; and Michael E. 
Murphy, The Nominating Process for Corporate Boards of Directors--A 
Decision-Making Analysis, 5 Berkeley Bus. L.J. 131 (2008).
    \64\ See, e.g., comment letter on the 2003 Proposal from CII; 
comment letter on 2007 Proposals from SEIU. See also Michael E. 
Murphy, The Nominating Process for Corporate Boards of Directors--A 
Decision-Making Analysis, 5 Berkeley Bus. L.J. 131 (2008). See also 
Division of Corporation Finance, U.S. Securities and Exchange 
Commission, Staff Report: Review of the Proxy Process Regarding the 
Nomination and Election of Directors (July 15, 2003), available at: 
http://www.sec.gov/news/studies/proxyreport.pdf.
---------------------------------------------------------------------------

    Finally, given the near universal use of proxy voting and the 
inability of shareholders to use the company proxy to vote for 
shareholder nominees, it can be futile to nominate a director in person 
at a shareholder meeting.\65\
---------------------------------------------------------------------------

    \65\ See Unofficial Transcript of the Roundtable Discussion 
Regarding the Federal Proxy Rules and State Corporation Law (May 7, 
2007), comments of Vice Chancellor Strine at 79 (commenting that 
``this annual meeting thing could be a fix'' where the most active 
shareholder institutions gain representation on the board through 
other means such as through litigation settlement); see generally, 5 
Fletcher Cyclopedia of Corporations Sec.  2049.10 (Perm. Ed.) (``In 
large corporations, the shareholders' meeting is now only a 
necessary formality; the shareholders' expression can only be had by 
the statutory device of proxies and solicitation of proxies.'').

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[[Page 29029]]

2. Recent Corporate Governance and Other Reforms
    Over the past several years there have been a number of changes in 
corporate governance practices and the federal securities laws that may 
have mitigated some of the concerns expressed by commenters in 2003 and 
2007 but, in our view, have not sufficiently addressed the central 
problem that we are seeking to solve--shareholders' limited ability to 
exercise their rights to nominate directors and have the nominations 
disclosed to and considered by the shareholders. For example, some 
commenters on the 2003 Proposal urged the Commission to defer action in 
order to assess the effectiveness of the then recently-enacted 
Sarbanes-Oxley Act of 2002 and other reforms, including enhanced 
director independence requirements and expansion of the nominating 
committee function at public companies.\66\ Other commenters, while 
praising these reforms, doubted that they would be sufficient to 
address the problems that they hoped would be remedied through reform 
of the proxy process itself.\67\ In particular, commenters in 2003 
argued that objective independence standards for directors and the use 
of independent nominating committees, without more, may not counteract 
the perceived tendency of some boards to defer to management, given 
factors such as the significant personal relationships that can exist 
between directors and officers.\68\ Therefore, shareholders may still 
want, but currently may not be able, to effectively nominate and elect 
directors that satisfy independence concerns specific to the companies 
in which they invest.
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    \66\ See, e.g., comment letter from American Bar Association 
(January 7, 2004) (``ABA'').
    \67\ 2004 Roundtable Transcript, comments of Nell Minow and 
Ralph V. Whitworth.
    \68\ See generally, Bebchuk. See also In re Oracle Corp., 824 
A.2d at 941. See footnote 42, above.
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    Since the 2003 Proposal, a number of other changes in the 
governance landscape have occurred, including a significant movement by 
larger companies toward majority voting rather than plurality voting in 
director elections,\69\ and changes in state law to more expressly 
indicate that corporate governing documents may set out shareholders' 
right to nominate directors.\70\ The Commission also has adopted 
changes to our rules, including enhanced disclosure requirements 
concerning nominating committees \71\ and changes to our proxy rules to 
facilitate the use of electronic shareholder forums.\72\ While these 
and other changes have been significant, after considering the views 
discussed throughout the release, we believe the federal proxy process 
could still be improved to further remove impediments to the exercise 
of shareholders' rights under state law to nominate directors.
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    \69\ The Corporate Library reports that as of December 2008, 
49.5 percent of companies in the S&P 500 had made the switch to 
majority voting for director elections and another 18.4 percent had, 
while retaining a plurality standard, adopted a policy requiring 
that a director that does not receive majority support must submit 
his or her resignation. On the other hand, the plurality voting 
standard is still the standard at the majority of smaller companies 
in the Russell 1000 and 3000 indices, with 54.5 percent of companies 
in the Russell 1000 and 74.9 percent of the companies in the Russell 
3000 still using a straight plurality voting standard. The Corporate 
Library Analyst Alert, December 2008. See also Broadridge letter 
dated March 27, 2009 and attached analysis in response to File No. 
SR-NYSE-2006-92 (stating that in calendar year 2007, 373 NYSE-listed 
companies had a majority vote standard for the election of 
directors).
    \70\ In CA, Inc. v. AFSCME, 953 A.2d 227 (Del. 2008), the 
Delaware Supreme Court held that shareholders can propose and adopt 
a bylaw regulating the process by which directors are elected. In 
light of this ruling, Delaware recently amended the Delaware General 
Corporation Law to add new Section 112, effective August 1, 2009, 
clarifying that the bylaws of a Delaware corporation may provide 
that, if the corporation solicits proxies with respect to an 
election of directors, the corporation may be required to include in 
its solicitation materials one or more individuals nominated by a 
stockholder in addition to the individuals nominated by the board of 
directors. The obligation of the corporation to include such 
stockholder nominees will be subject to the procedures and 
conditions set forth in the bylaw adopted under Section 112. 
Delaware also added new Section 113, which will allow a Delaware 
corporation's bylaws to include a provision that the corporation, 
under certain circumstances, will reimburse a stockholder for the 
expenses incurred in soliciting proxies in connection with an 
election of directors. In addition, the American Bar Association's 
Committee on Corporate Laws, which is responsible for the Model 
Business Corporation Act, is considering similar changes to the 
Model Act. See American Bar Association, Section of Business Law, 
``Corporate Laws Committee To Address Current Governance Issues,'' 
April 29, 2009 (noting that Delaware's recent statutory amendments 
``are being actively considered by the Committee'') (available at: 
http://www.abanet.org/abanet/media/release/news_release.cfm?releaseid=662). Thirty states have adopted all or 
substantially all of the Model Act as their general corporation 
statute.
    Also, in 2007, North Dakota amended its corporate code to permit 
five percent shareholders to provide a company notice of intent to 
nominate directors and require the company to include each such 
shareholder nominee in its proxy statement and form of proxy. N.D. 
Cent. Code Sec.  10-35-08 (2009); see North Dakota Publicly Traded 
Corporations Act, N.D. Cent. Code section 10-35 et al. (2007).
    \71\ See Disclosure Regarding Nominating Committee Functions and 
Communications Between Security Holders and Boards of Directors, 
Release No. 33-8340 (December 11, 2003) [68 FR 69204].
    \72\ See Electronic Shareholder Forums, Release No. 34-57172 
(January 18, 2008) [73 FR 4450] (``Electronic Shareholder Forums 
Release'').
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II. Recent Commission Consideration of the Proxy Rules and Regulations 
Addressing the Election of Directors\73\
---------------------------------------------------------------------------

    \73\ The Commission also has considered the topic on at least 
three earlier occasions--in 1942, 1977, and 1992. For a discussion, 
see 2003 Proposal.
---------------------------------------------------------------------------

A. 2003 Review of the Proxy Process and Subsequent Rulemaking

    In April 2003, the Commission directed the Division of Corporation 
Finance to review the proxy rules and regulations and interpretations 
regarding procedures for the nomination and election of corporate 
directors\74\ and on May 1, 2003, the Commission solicited public input 
with respect to the Division's review.\75\ Commenters generally 
supported the Commission's decision to review the proxy rules and 
regulations with respect to director nominations and elections and, in 
July 2003, the Division of Corporation Finance provided to the 
Commission its report and recommended changes to the proxy rules 
related to the nomination and election of directors.\76\
    The Division recommended proposed changes in two areas: (1) 
Disclosure related to nominating committee functions and shareholder 
communications with boards of directors; and (2) enhanced shareholder 
access to the proxy process relating to the nomination of 
directors.\77\ The Commission proposed and adopted the recommended 
disclosure requirements concerning nominating committee functions and 
shareholder communications with boards of directors.\78\ In addition, 
in October 2003, the Commission proposed rules that would have created 
a mechanism for nominees of long-term shareholders, or groups of long-
term shareholders, with significant shareholdings to be included in 
company proxy materials.\79\

[[Page 29030]]

The proposed new rules were intended to address perceived inadequacies 
in the proxy process with respect to director nominations and 
elections.\80\ The proposal generated significant public comment, with 
shareholders generally supporting adoption of rules that would 
facilitate their right to nominate directors and companies and their 
advisors generally opposing such rules because of concerns that a 
requirement to include shareholder director nominees in the company's 
proxy materials would impede the proper functioning of boards and cause 
inefficiencies.\81\ The Commission did not adopt final rules based on 
the proposal.
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    \74\ See Press Release No. 2003-46 (April 14, 2003).
    \75\ See Release No. 34-47778 (May 1, 2003) [68 FR 24530] and 
comment file number S7-10-03.
    \76\ See Staff Report: Review of the Proxy Process Regarding the 
Nomination and Election of Directors, Division of Corporation 
Finance (July 15, 2003) (``2003 Staff Report''), available at: 
http://www.sec.gov/news/studies/proxyrpt.htm. See also Summary of 
Comments in Response to the Commission's Solicitation of Public 
Views Regarding Possible Changes to the Proxy Rules (July 15, 2003), 
attached as Appendix A to the Staff Report.
    \77\ See 2003 Staff Report.
    \78\ Disclosure Regarding Nominating Committee Functions and 
Communications Between Security Holders and Boards of Directors, 
Release No. 33-8340 (December 11, 2003) [68 FR 69204].
    \79\ See 2003 Proposal. The proposal would have required 
shareholders to have held the requisite amount of securities to meet 
the ownership threshold for two years as of the date of the 
nomination.
    \80\ See 2003 Proposal (explaining that the proposal would 
``apply only in those instances where criteria suggest that the 
company has been unresponsive to security holder concerns as they 
relate to the proxy process'').
    \81\ See 2003 Summary of Comments.
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B. 2007 Rulemaking Concerning Shareholder Proposals Seeking to 
Establish Bylaw Procedures for Shareholder Director Nominations

    One of the means that shareholders use to express their views on 
the management and affairs of a company is through shareholder 
proposals, which are addressed in Rule 14a-8. Rule 14a-8 provides 
shareholders with an opportunity to place a proposal in a company's 
proxy materials for a vote at an annual or special meeting of 
shareholders. Under this rule, a company generally is required to 
include the proposal unless the shareholder has not complied with the 
rule's procedural requirements or the proposal falls within one of the 
rule's 13 substantive bases for exclusion. One of the substantive bases 
that a company may rely on in excluding a shareholder proposal is Rule 
14a-8(i)(8), which addresses shareholder proposals concerning director 
elections.\82\ This provision frequently is referred to as the 
``election exclusion.'' In interpreting this provision, the Commission 
took the position in 2007 that Rule 14a-8(i)(8) permits exclusion of a 
proposal that would establish a procedure that may result in contested 
elections to the board.\83\
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    \82\ Rule 14a-8(i)(8) provides that a company need not include a 
proposal that ``relates to a nomination or an election for 
membership on the company's board of directors or analogous 
governing body or a procedure for such nomination or election[.]''
    \83\ See Election of Directors Adopting Release (citing 
Commission statements made in Release No. 34-12598 (July 7, 1976) 
(``[T]he principal purpose of [Rule 14a-8(i)(8)] is to make clear, 
with respect to corporate elections, that Rule 14a-8 is not the 
proper means for conducting campaigns or effecting reforms in 
elections of that nature, since other proxy rules, including Rule 
14a-[12], are applicable thereto.'')). See also Division of 
Corporation Finance no-action letters to Citigroup, Inc. (January 
31, 2003) and AOL Time Warner (February 29, 2003). As noted in the 
Election of Directors Proposing Release, in each of 1993 and 1995, 
the Division issued one letter that took a contrary view. See Dravo 
Corp. (February 21, 1995); and Pinnacle West Capital Corp. (March 
26, 1993) (not permitting exclusion under Rule 14a-8(i)(8) of 
proposals seeking to include qualified nominees in the company's 
proxy statement).
---------------------------------------------------------------------------

    In 2006, the U.S. Court of Appeals for the Second Circuit, in 
American Federation of State, County and Municipal Employees, Employees 
Pension Plan v. American International Group, Inc.,\84\ held that AIG 
could not rely on Rule 14a-8(i)(8) to exclude a shareholder proposal 
that, if adopted, would have amended AIG's bylaws to require the 
company, under specified circumstances, to include shareholder nominees 
for director in the company's proxy materials at subsequent meetings. 
The Second Circuit interpreted the language of the rule \85\ and the 
Commission's statements in adopting the rule in 1976 as limiting the 
election exclusion ``to shareholder proposals used to oppose 
solicitations dealing with an identified board seat in an upcoming 
election and reject[ing] the somewhat broader interpretation that the 
election exclusion applies to shareholder proposals that would 
institute procedures making such election contests more likely.'' \86\ 
The effect of the AFSCME decision was to permit the bylaw proposal to 
be included in company proxy materials and, had the bylaw been approved 
by shareholders, for subsequent election contests conducted under it to 
take place in the company's proxy materials without compliance with the 
disclosure requirements applicable to election contests under the 
Commission's other proxy rules.\87\ The Commission was concerned that 
the Second Circuit's decision resulted in uncertainty and confusion 
with respect to the appropriate application of Rule 14a-8(i)(8), and 
that it could lead to contested elections for directors without the 
disclosure otherwise required under the proxy rules for contested 
elections.\88\ This concern led the Commission to reopen the issue of 
shareholder involvement in the nomination and election process.\89\
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    \84\ 462 F.3d 121 (2d Cir. 2006) (AFSCME).
    \85\ At the time of the AFSCME decision, Rule 14a-8(i)(8) 
provided that a company need not include a proposal that ``relates 
to an election for membership on the company's board of directors or 
analogous governing body.'' See id. at 125. This language was 
amended in 2007. See Election of Directors Adopting Release.
    \86\ 462 F.3d at 128.
    \87\ Exchange Act Rule 14a-12(c) [17 CFR 240.14a-12(c)] defines 
an election contest as ``[s]olicitations by any person or group of 
persons for the purposes of opposing a solicitation subject to this 
regulation by any other person or group of persons with respect to 
the election or removal of directors at any annual or special 
meeting of security holders * * *.'' Items 4(b) and 5(b) of Exchange 
Act Schedule 14A set out special disclosure requirements for 
solicitations subject to Rule 14a-12(c).
    \88\ See Election of Directors Proposing Release. In this 
regard, the Commission was concerned that shareholders and companies 
would be unable to know with certainty whether a proposal that could 
result in an election contest may be excluded under Rule 14a-
8(i)(8), depending on where the company was incorporated or 
conducting business, and that the staff would be severely limited in 
their ability to interpret Rule 14a-8 in responding to companies' 
notices of intent to exclude shareholder proposals.
    \89\ Although the Second Circuit's decision was binding only 
within that Circuit, it created uncertainty elsewhere about the 
continuing validity of the interpretation of Rule 14a-8(i)(8). After 
the AFSCME decision and prior to the Commission's codification of 
the interpretation in December 2007, the staff of the Division of 
Corporation Finance received three no-action requests seeking to 
exclude similar proposals under Rule 14a-8(i)(8). In Hewlett-Packard 
(January 22, 2007), the staff took a position of ``no view'' on the 
company's request for no-action relief. A second request for no-
action relief was submitted by Reliant Energy. Subsequent to the 
staff of the Division of Corporation Finance taking a ``no view'' 
position on Hewlett-Packard's request, Reliant Energy filed a 
complaint in the U.S. District Court for the Southern District of 
Texas seeking a declaratory judgment that the company could properly 
omit a similar proposal that it had received for inclusion in its 
proxy materials. During the pendency of this litigation and prior to 
the staff's response to Reliant's no-action request, the shareholder 
withdrew the proposal and the company therefore withdrew its no-
action request. (See Reliant Energy, Inc. (February 23, 2007)). A 
third request for no-action relief from UnitedHealth Group, Inc. was 
withdrawn after the company agreed to include the proposal in its 
proxy materials. (See UnitedHealth Group, Inc. (March 29, 2007)).
---------------------------------------------------------------------------

    In May 2007, the Commission hosted three roundtables on the proxy 
process during which a number of individuals and representatives from 
the public and private sector focused on the relationship between the 
proxy rules and state corporate law,\90\ proxy voting mechanics,\91\ 
and shareholder proposals.\92\ Following the roundtables, in July 2007, 
the Commission published for comment two alternative proposals 
addressing the election exclusion in Rule 14a-8. The first would have 
amended Rule 14a-8 to enable

[[Page 29031]]

shareholders to include proposals on shareholder director nomination 
bylaws in company proxy materials where certain conditions were 
met.\93\ The conditions that could be included in such a proposal would 
not have been limited under the rule proposal so long as they complied 
with applicable state law and governing corporate documents. As noted 
in the proposing release, the goal underlying the proposal was to 
better align the proxy rules with shareholders' rights under state law, 
in particular the right to nominate directors. The Commission's 
alternative proposal sought to amend Rule 14a-8 so that a shareholder 
nomination bylaw proposal could be excluded by a company.\94\ The 
Commission adopted this proposal in December 2007 to provide certainty 
to companies and shareholders in light of the AFSCME decision.\95\ The 
Commission did not take final action on the first proposal, with the 
exception of the portion of the first proposal intended to facilitate 
the creation and use of electronic shareholder forums, which the 
Commission adopted in January 2008.\96\
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    \90\ Roundtable on the Federal Proxy Rules and State Corporation 
Law (May 7, 2007). Materials related to the roundtable, including an 
archived broadcast and a transcript of the roundtable, are available 
at: http://www.sec.gov/spotlight/proxyprocess.htm.
    \91\ Roundtable on Proxy Voting Mechanics (May 24, 2007). 
Materials related to the roundtable, including an archived broadcast 
and a transcript of the roundtable, are available at: http://www.sec.gov/spotlight/proxyprocess.htm.
    \92\ Roundtable on Proposals of Shareholders (May 25, 2007). 
Materials related to the roundtable, including an archived broadcast 
and a transcript of the roundtable, are available at: http://www.sec.gov/spotlight/proxyprocess.htm.
    \93\ See Shareholder Proposals Proposing Release.
    \94\ See Election of Directors Proposing Release.
    \95\ See Election of Directors Adopting Release.
    \96\ See Electronic Shareholder Forums Release.
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III. Proposed Changes to The Proxy Rules

A. Introduction

    We are proposing amendments to the proxy rules to require companies 
to include disclosures about shareholder nominees for director in the 
companies' proxy materials, under certain circumstances, so long as the 
shareholders are not seeking to change the control \97\ of the issuer 
or to gain more than a limited number of seats on the board. These 
proposed amendments build on the Commission's 2003 and 2007 proposals. 
They also reflect our experience with, and continued consideration of, 
the issue of shareholder involvement in the proxy process, the 
interaction between the proxy rules and state law, and the extensive 
comment that we have received over the past six years on these topics. 
As stated previously, due to dispersed ownership, director elections 
are largely conducted by proxy rather than in person and, as a result, 
impediments that the Federal proxy rules create to shareholders 
nominating directors through the proxy process translate into the 
inability of shareholders to effectively exercise their rights to 
nominate and to elect those directors. We believe the proposed rule 
changes will provide shareholders with a greater voice and an avenue to 
exercise the rights they have to effect change on the boards of the 
companies in which they invest that they no longer can exercise 
effectively through attending a shareholder meeting in person.
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    \97\ A change in control could include any number of 
extraordinary transactions, including a sale of substantially all of 
the company's assets. See, e.g., Item 14(a) of Schedule 14A.
---------------------------------------------------------------------------

    The Commission's proposals would provide shareholders with two ways 
to more fully exercise their rights to nominate directors. First, we 
are proposing a new proxy rule (Exchange Act Rule 14a-11) that would, 
under certain circumstances, require companies to include shareholder 
nominees for director in the companies' proxy materials. This 
requirement would apply unless state law or a company's governing 
documents\98\ prohibits shareholders from nominating directors.\99\ In 
this regard, state law or a company's governing documents may provide 
for nomination or disclosure rights in addition to those provided 
pursuant to Rule 14a-11 (e.g., a company could choose to provide a 
right for shareholders to have their nominees disclosed in the 
company's proxy materials regardless of share ownership--in that 
instance, the company's provision would apply for certain shareholders 
who would not otherwise have their nominees included in the company's 
proxy materials pursuant to Rule 14a-11). Second, we are proposing an 
amendment to Exchange Act Rule 14a-8(i)(8), the election exclusion, to 
preclude companies from relying on Rule 14a-8(i)(8) to exclude from 
their proxy materials shareholder proposals by qualifying shareholders 
that would amend, or that request an amendment to, a company's 
governing documents regarding nomination procedures or disclosures 
related to shareholder nominations, provided the proposal does not 
conflict with proposed Rule 14a-11.
---------------------------------------------------------------------------

    \98\ Under state law, a company's governing documents may have 
various names. When we refer to governing documents throughout the 
release, we generally are referring to a company's charter, articles 
of incorporation, certificate of incorporation, and/or bylaws, as 
applicable.
    \99\ We are not aware of any law in any state or in the District 
of Columbia that prohibits shareholders from nominating directors. 
Nonetheless, should any such law be enacted in the future, then this 
condition would not be satisfied.
---------------------------------------------------------------------------

Request for Comment
    A.1. Does the Commission need to facilitate shareholder director 
nominations or remove impediments to help make the proxy process better 
reflect the rights a shareholder would have at a shareholder meeting?
    A.2. Should the Commission adopt revisions to the proxy rules to 
facilitate the inclusion of shareholder nominees in company proxy 
materials, or are the existing means that are available to shareholders 
to exercise their rights to nominate directors adequate? How have 
changes in corporate governance over the past six years, including the 
move by many companies away from plurality voting to majority voting, 
affected a shareholder's ability to place nominees in company proxy 
materials? How have other developments, as well as ongoing developments 
such as some states adopting statutes allowing companies to reimburse 
shareholders who conduct director election contests and enabling 
companies to include in their bylaws provisions for inclusion of 
shareholder director nominees in company proxy materials, affected a 
shareholder's ability to nominate directors? Have other changes in law 
or practice created a greater or lesser need for such a rule?
    A.3. Would the proposed amendments enable shareholders to effect 
change in a company's board of directors? Please explain and provide 
any empirical data in support of any arguments or analyses.
    A.4. What would be the costs and benefits to companies and 
shareholders if the Commission adopted new proxy rules that would 
facilitate the inclusion of shareholder director nominees in company 
proxy materials? What would be the costs and benefits to companies if 
the Commission adopted the proposed amendment to Rule 14a-8(i)(8)?
    A.5. What direct or indirect effect, if any, would the proposed 
changes to the proxy rules have on companies' corporate governance 
policies relating to the election of directors?
    A.6. Could the proposed amendments to the proxy rules be modified 
to better meet the Commission's stated intent? If so, how? Please 
explain and provide empirical data or other specific information in 
support of any arguments or analyses. Please identify and discuss any 
other rules that would need to be amended.
    A.7. We note concerns regarding investor confidence. Would amending 
the proxy rules as proposed help restore investor confidence? Why or 
why not? Please explain and provide empirical data or other specific 
information in support of any arguments or analyses.
    A.8. We also note concerns about board accountability and 
shareholder participation in the proxy process. Would the proposed 
amendments to the proxy rules address concerns about board 
accountability and shareholder

[[Page 29032]]

participation on the one hand, and board dynamics, on the other? If so, 
how? If not, why not? Please explain and provide empirical data in 
support of any arguments or analyses.
    A.9. Would adoption of only proposed Rule 14a-11 meet the 
Commission's stated objectives? If so, why? If not, why not? What 
modifications to the proposed rule and related disclosure requirements 
would be necessary, if any?
    A.10. Would adoption of only the proposed amendment to Rule 14a-
8(i)(8) and the related disclosure requirements meet the Commission's 
stated objectives? If so, why? If not, why not? What modifications to 
the proposed rule amendment and related disclosure requirements would 
be necessary, if any?
    A.11. Would other revisions to our proxy rules achieve the same or 
similar objectives as the Commission's proposal? For example, 
regardless of what other action the Commission may take in this area, 
should we adopt new disclosure requirements and liability provisions to 
address recent changes in some state laws concerning the inclusion of 
shareholder nominees for director in company proxy materials pursuant 
to a company's governing documents?
    A.12. Are there any states that prohibit, or permit companies to 
prohibit, shareholders from nominating a candidate or candidates for 
election as director?

B. Proposed Exchange Act Rule 14a-11

1. Overview
    As discussed, currently, a shareholder or group of shareholders 
must undertake a proxy contest and incur the related expenses to have 
any reasonable chance at successfully putting director nominees before 
the shareholders for a vote. A board's nominees, on the other hand, are 
listed in the company's proxy materials, which are funded out of 
corporate assets.
    We believe it is an appropriate time for us to revisit whether and 
how the federal proxy rules may be impeding the ability of shareholders 
to exercise their fundamental rights to nominate and elect board 
members. As mentioned above, we are aware of the concerns and questions 
about the accountability and responsiveness of some companies and 
boards of directors to the interests of shareholders, particularly in 
the current market environment. Additionally, based on the comments 
received in response to our solicitation of public input on the topic 
in prior releases and roundtables, we have learned that shareholders 
face significant obstacles to efficiently exercising their right to 
determine the leadership of the companies in which they invest. Much of 
the public input that we have received suggests that including 
shareholder nominees for director in company proxy materials would be 
the most direct and effective method of facilitating shareholders' 
rights in connection with the nomination and election of 
directors.\100\
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    \100\ See 2003 Summary of Comments.
---------------------------------------------------------------------------

    On the other hand, the business community and many of its legal 
advisors have expressed concern that mandating shareholder access to 
company proxy materials could turn every election of directors into a 
contest, which would be costly and disruptive to companies and could 
discourage some qualified board candidates from agreeing to appear on a 
company's slate of nominees. Because the composition of the board of 
directors is fundamental to a company's governance, the current filing 
and other requirements applicable to shareholders who wish to propose 
an alternate slate are, in the view of these commenters, more 
appropriate than including shareholder nominees for director in company 
proxy materials.\101\
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    \101\ See id.
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    In light of the erosion of investor confidence that has taken place 
over the past several months, and after further consideration of the 
issue, we have determined to propose a rule that would require 
companies to include disclosure about shareholder nominees for director 
in company proxy materials under specified conditions.\102\ These 
nominees would then also be included on a company's form of proxy in 
accordance with the requirements of Rule 14a-4.\103\ Rule 14a-11 would 
not apply where shareholders relying on the rule are seeking to change 
the control of the issuer or to gain more than a limited number of 
seats on the board of directors. In this regard, we believe that 
shareholders who are seeking such a change should continue to use the 
procedures currently available for election contests.
---------------------------------------------------------------------------

    \102\ See proposed Exchange Act Rule 14a-11.
    \103\ See proposed amendment to Rule 14a-4.
---------------------------------------------------------------------------

2. Application of Exchange Act Rule 14a-11
    Proposed Rule 14a-11 would apply to all companies subject to the 
Exchange Act proxy rules \104\ (including investment companies 
registered under Section 8 of the Investment Company Act of 1940),\105\ 
other than companies that are subject to the proxy rules solely because 
they have a class of debt registered under Section 12 of the Exchange 
Act. As proposed, a company would be subject to Rule 14a-11 unless 
applicable state law or a company's governing documents prohibits 
shareholders from nominating candidates for the board of directors. 
When a company's governing documents do prohibit nomination rights, 
shareholders who want to amend the provision may seek to do so by 
submitting a shareholder proposal.\106\
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    \104\ Exchange Act Rule 3a12-3 [17 CFR 240.3a12-3] exempts 
foreign private issuers from the Commission's proxy rules. As such, 
the proposed rule would not apply to foreign private issuers.
    \105\ 15 U.S.C. 80a et seq. Investment companies currently are 
required to comply with the proxy rules under the Exchange Act when 
soliciting proxies, including proxies relating to the election of 
directors. See Investment Company Act Rule 20a-1 [17 CFR 270.20a-1] 
(requiring registered investment companies to comply with 
regulations adopted pursuant to Section 14(a) of the Exchange Act 
that would be applicable to a proxy solicitation if it were made in 
respect of a security registered pursuant to Section 12 of the 
Exchange Act).
    \106\ A company generally would not be permitted to exclude such 
a shareholder proposal under our proposed amendment to Rule 14a-
8(i)(8), discussed in Section III.C., below.
---------------------------------------------------------------------------

    In the 2003 Proposal, the Commission proposed to make the new 
requirement concerning shareholder director nominations operative for a 
company only after the occurrence of one or both of two possible 
triggering events. The first triggering event was that at least one of 
the company's nominees for the board of directors for whom the company 
solicited proxies received withhold votes from more than 35% of the 
votes cast at an annual meeting of shareholders at which directors were 
elected (provided, that this triggering event could not occur in a 
contested election to which Rule 14a-12(c) would apply or an election 
to which the proposed shareholder nomination procedure would have 
applied). The second proposed triggering event was that a shareholder 
proposal submitted under Rule 14a-8 providing that the company become 
subject to the proposed shareholder nomination procedure was submitted 
for a vote of shareholders at an annual meeting by a shareholder or 
group of shareholders that (1) held more than 1% of the company's 
securities entitled to vote on the proposal and (2) held those 
securities for one year as of the date the proposal was submitted, and 
the proposal received more than 50% of the votes cast on that proposal 
at that meeting.\107\
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    \107\ Only votes for and against a proposal would have been 
included in the calculation of the shareholder vote.
---------------------------------------------------------------------------

    Today's proposal does not require a triggering event. Instead, Rule 
14a-11 would apply to all companies subject to

[[Page 29033]]

Exchange Act Section 14(a), other than companies that are subject to 
the proxy rules solely because they have a class of debt registered 
under Exchange Act Section 12. Accordingly, a company would be required 
to disclose the nominee or nominees of any shareholder or shareholder 
group meeting the proposed eligibility standards and other conditions 
in Rule 14a-11, discussed below. Our decision not to include triggering 
events in the current proposal reflects our concern that the federal 
proxy rules may be impeding the exercise of shareholders' ability under 
state law to nominate directors at all companies, not just those with 
demonstrated governance issues. In addition, we note that many 
commenters on the 2003 Proposal expressed concern about that proposal's 
complexity \108\ and indicated that the multi-year process created by 
the trigger requirement could make it more difficult for shareholders 
to efficiently effect change in the composition of boards of 
directors.\109\ Finally, in light of our concerns about restoring 
investor confidence to the greatest number of shareholders as quickly 
as possible, we do not want to add a layer of complexity and delay to 
the operation of the proposed rule that would frustrate our stated 
objectives.
---------------------------------------------------------------------------

    \108\ See 2003 Summary of Comments and Letter Type I from 5,858 
individuals or entities.
    \109\ See 2003 Summary of Comments; see also comment letter from 
American Federation of State, County, and Municipal Employees 
(September 24, 2003) (``AFSCME 2003'').
---------------------------------------------------------------------------

Request for Comment
    B.1. Would adoption of Rule 14a-11 conflict with any state law, 
federal law, or rule of a national securities exchange or national 
securities association? To the extent you indicate that the rule would 
conflict with any of these provisions, please be specific in your 
discussion of those provisions that you believe would conflict. How 
should the Commission address these conflicts? Should the rule also 
address conflicts with a company's country of incorporation where the 
company is organized in a non-U.S. jurisdiction but does not meet the 
definition of foreign private issuer? Should the rule also explicitly 
refer to conflicts with laws of U.S. possessions or territories?
    B.2. Should Rule 14a-11 apply as proposed? Is it appropriate for 
proposed Rule 14a-11 to be unavailable where state law or a company's 
governing documents prohibit shareholders from nominating candidates 
for director? Would the proposed rule effectively facilitate 
shareholders' basic rights, particularly the right to nominate 
directors?
    B.3. As proposed, Rule 14a-11 would apply to all companies subject 
to the proxy rules, other than companies that are subject to the proxy 
rules solely because they have a class of debt registered under 
Exchange Act Section 12. What effect, if any, will this application 
have on any particular group of companies (e.g., on smaller reporting 
companies)? Are there modifications that would accommodate the needs of 
a particular group of companies (e.g., smaller reporting companies) 
while accomplishing the goals of the proposal? Would it instead be more 
appropriate to exclude from operation of the procedure smaller 
reporting companies, either on a temporary basis through staggered 
compliance dates based on company size, or on a permanent basis? Should 
any other groups of companies be excluded from operation of the rule 
(e.g., companies subject to the proxy rules for less than a specified 
period of time (e.g., one year, two years, or three years))? If so, for 
what period of time should the companies be excluded from operation of 
the rule (e.g., one year, two years, three years, permanently)?
    B.4. Should proposed Rule 14a-11 apply to registered investment 
companies? Are there any aspects of the proposed nomination procedure 
that should be modified in the case of registered investment companies?
    B.5. Should companies that are subject to the proxy rules solely 
because they have a class of debt registered under Exchange Act Section 
12 be excluded from application of Rule 14a-11, as proposed? Please 
explain why or why not.
    B.6. As proposed, Rule 14a-11 would apply to companies that have 
voluntarily registered a class of equity securities pursuant to 
Exchange Act Section 12(g). Should companies that have registered on a 
voluntary basis be subject to Rule 14a-11? If so, should nominating 
shareholders of these companies be subject to the same ownership 
eligibility thresholds as those shareholders of companies that were 
required to register a class of equity securities pursuant to Section 
12? Should we adjust any other aspects of Rule 14a-11 for companies 
that have voluntarily registered a class of equity securities pursuant 
to Section 12(g)?
    B.7. Should proposed Rule 14a-11 be inapplicable to a company that 
has or adopts a provision in its governing documents that provides for 
or prohibits the inclusion of shareholder director nominees in the 
company proxy materials? Should the Commission's rules respond to 
variations in shareholder director nomination disclosures and 
procedures adopted, for example, under state corporate laws that 
specify that a company's governing documents may address the use of a 
company's proxy materials for shareholder nominees to the board of 
directors? Would it be more appropriate to only permit companies to 
comply with governing document provisions or state laws where those 
provisions or laws provide shareholders with greater nomination or 
proxy disclosure rights than those provided under proposed Rule 14a-11? 
Should Rule 14a-11 provide that a company's governing documents may 
render the rule inapplicable to a company only if the shareholders have 
approved, as contrasted to the board implementing without shareholder 
approval, a provision in the company's governing documents addressing 
the inclusion of shareholder nominees in company proxy materials? 
Should Rule 14a-11 be inapplicable if such shareholder-approved 
provisions are more restrictive than Rule 14a-11? Should Rule 14a-11 be 
inapplicable if such shareholder-approved provisions are less 
restrictive than Rule 14a-11? Or both?
    B.8. The New York Stock Exchange has filed with the Commission a 
proposed rule change to amend NYSE Rule 452 and corresponding Section 
402.08 of the Listed Company Manual to eliminate broker discretionary 
voting for the election of directors. The Commission published the 
proposed rule change, as amended on February 26, 2009, for comment in 
the Federal Register on March 6, 2009.\110\ If the amendment to Rule 
452 is approved, what would be its effect on operation of proposed Rule 
14a-11? Would any changes to Rule 14a-11 be required? Please be 
specific in your response.
---------------------------------------------------------------------------

    \110\ See Release No. 34-59464 (February 26, 2009) [74 FR 9864].
---------------------------------------------------------------------------

    B.9. Should proposed Rule 14a-11 exempt companies where state law 
or the company's governing documents require that directors be elected 
by a majority of shares present in person or represented by proxy at 
the meeting and entitled to vote? What specific issues would arise in 
an election where state law or the company's governing documents 
provided for other than plurality voting (e.g., majority voting)? What 
specific issues would arise in an election that is conducted by 
cumulative voting? Would these issues need to be addressed in revisions 
to the proposed rule text? If so, how?
    B.10. Should companies be able to take specified steps or actions, 
such as

[[Page 29034]]

adopting a majority vote standard or bylaw specifying procedures for 
the inclusion of shareholder nominees in company proxy materials, to 
prevent application of proposed Rule 14a-11 where it otherwise would 
apply? If so, what such steps or actions would be appropriate and why 
would they be appropriate? For example, should companies that agree 
with a shareholder proponent not to exclude a shareholder proposal 
submitted by an eligible shareholder pursuant to Rule 14a-8 be exempted 
from application of the proposed rule for a specified period of time? 
Should a company that implements any shareholder proposals that receive 
a majority of votes cast in a given year be exempted?
    B.11. Should companies subject to Rule 14a-11 be permitted to 
exclude certain shareholder proposals that they otherwise would be 
required to include? If so, what categories of proposals? For example, 
should the company be able to exclude proposals that are non-binding, 
proposals that relate to corporate governance matters generally, 
proposals that relate to the structure or composition of boards of 
directors, or other proposals?
    B.12. One concern that has been raised about the effectiveness of 
the present proxy rules is the high cost to a shareholder to conduct a 
solicitation to nominate a director. Should the proposed rule provide 
that it does not apply to a company whose governing documents include a 
provision for reimbursement of expenses incurred by a participant or 
participants in the course of a solicitation in opposition as defined 
in Rule 14a-12(c)? If so, should the rule specify what manner of 
reimbursement would be sufficient for proposed Rule 14a-11 not to 
apply?
    B.13. Should Rule 14a-11 be widely available, as proposed, or 
should application of the rule be limited to companies where specific 
events have occurred to trigger operation of the rule? If so, what 
events should trigger operation of the rule?
    B.14. If the Commission were to include triggering events in Rule 
14a-11, would either of the triggering events proposed in 2003 and 
described above be appropriate? In responding, please discuss how any 
changes in corporate governance practices over the past six years have 
affected the usefulness of the triggering events proposed in 2003. For 
example, over the past six years many companies have adopted majority 
voting. If the triggering events proposed in 2003 are not appropriate, 
are there alternative events that the Commission should consider in 
place of, or in addition to, the above events? For example, should 
application of Rule 14a-11 be triggered by other factors such as 
economic performance (e.g., lagging a peer index for a specified number 
of consecutive years), being delisted by an exchange, being sanctioned 
by the Commission or other regulators, being indicted on criminal 
charges, having to restate earnings, having to restate earnings more 
than once in a specified period, or failing to take action on a 
shareholder proposal that received a majority shareholder vote?
    B.15. In the 2003 Proposal, the rule proposed would have been 
triggered by withhold votes for one or more directors of more than 35% 
of the votes cast. Is it appropriate to apply such a trigger to current 
proposed Rule 14a-11? If so, what would be an appropriate percentage 
and why? Would it be appropriate to base this trigger on votes cast 
rather than votes outstanding? Please provide a basis for any alternate 
recommendations, including numeric data, where available. Is the 
percentage of withhold votes the appropriate standard in all cases? For 
example, what standard is appropriate for companies that do not use 
plurality voting? If your comments are based upon data with regard to 
withhold votes for individual directors, please provide such data in 
your response.
    B.16. If the Commission were to include a triggering event 
requirement, for what period of time after a triggering event should 
Rule 14a-11 apply (e.g., one year, two years, three years, or 
permanently)? Should there be a means other than the adoption of a 
provision in the company's governing documents for the company or 
shareholders to terminate application of the requirement at a company? 
If so, what other means would be appropriate?
    B.17. What would be the possible consequences of the use of 
triggering events? Would the withhold vote trigger result in more 
campaigns seeking withhold votes? How would any such consequences 
affect the operation and governance of companies?
    B.18. If the proposed requirement applied only after a specified 
triggering event, how would the company make shareholders aware when a 
triggering event has occurred? If the rule became operative based on 
the occurrence of triggering events, should the rule require additional 
disclosures in a company's Exchange Act Form 10-Q,\111\ 10-K,\112\ or 
8-K \113\ or, in the case of a registered investment company, Form N-
CSR? \114\ For example, the rule could require the following:
---------------------------------------------------------------------------

    \111\ 17 CFR 249.308a.
    \112\ 17 CFR 249.310.
    \113\ 17 CFR 249.308.
    \114\ 17 CFR 249.331 and 17 CFR 274.128.
---------------------------------------------------------------------------

     A company would be required to disclose the shareholder 
vote with regard to the directors receiving a withhold vote or a 
shareholder proposal, either of which may result in a triggering event, 
in its quarterly report on Form 10-Q for the period in which the matter 
was submitted to a vote of shareholders or, where the triggering event 
occurred during the fourth quarter of the fiscal year, on Form 10-K; 
\115\ and
---------------------------------------------------------------------------

    \115\ Item 4 of Part II to Exchange Act Form 10-Q and Item 4 of 
Part I to Exchange Act Form 10-K currently require that companies 
disclose the results of the voting on all matters submitted to a 
vote of shareholders during the period covered by the report. We 
could add a provision to these items that would require disclosure 
of specific information relating to the application of Rule 14a-11 
or a shareholder director nomination process provided for under 
applicable state law or in a company's governing documents.
---------------------------------------------------------------------------

     A company would be required to include in that Form 10-Q 
or 10-K information disclosing that it would be subject to Rule 14a-11 
as a result of such vote, if applicable.
    B.19. Should the company's disclosure regarding the applicability 
of Rule 14a-11 be filed or made public in some other manner? If so, 
what manner would be appropriate?
    B.20. Should companies be exempted from complying with Rule 14a-11 
for any election of directors in which another party commences or 
evidences its intent to commence a solicitation in opposition subject 
to Rule 14a-12(c) prior to the company mailing its proxy materials? 
What should be the effect if another party commences a solicitation in 
opposition after the company has mailed its proxy materials?
    B.21. If a triggering event is required and companies are exempted 
from complying with Rule 14a-11 because another party has commenced or 
evidenced its intent to commence a solicitation in opposition subject 
to Rule 14a-12(c), should the period in which Rule 14a-11 applies be 
extended to the next year? What should be the effect if another party 
commences a solicitation in opposition after the company has mailed its 
proxy materials?
    B.22. What provisions, if any, would the Commission need to make 
for the transition period after adoption of a rule based on this 
proposal? Would it be necessary to adjust the timing requirements of 
the rule depending on the effective date of the rule (e.g., if the 
rules are adopted shortly before a proxy season)?
    B.23. Should the Commission consider rulemaking under Section 19(c) 
of the Exchange Act to amend the

[[Page 29035]]

listing standards of registered exchanges to require that shareholders 
have access to the company's proxy materials to nominate directors 
under the requirements and procedures described in connection with 
proposed Rule 14a-11 to reflect, for example, changes the Sarbanes-
Oxley Act made to director and independence requirements, among other 
matters?
3. Eligibility To Use Exchange Act Rule 14a-11
    In seeking to balance shareholders' ability to participate more 
fully in the nomination and election process against the potential cost 
and disruption to companies subject to the proposed new rule, we are 
proposing that only holders of a significant, long-term interest in a 
company be able to rely on Rule 14a-11 to have disclosure about their 
nominees for director included in company proxy materials. We are 
proposing that the requirement for a company to include a shareholder's 
nominee or nominees for director in the company's proxy materials and 
on its form of proxy be based on a minimum ownership threshold, which 
would be tiered according to company size. Assuming the other 
conditions of proposed Rule 14a-11 are met, companies would not be able 
to exclude a shareholder nominee or nominees if the nominating 
shareholder or group:
     Beneficially owns, as of the date of the shareholder 
notice on Schedule 14N, either individually or in the aggregate: \116\
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    \116\ The manner in which a nominating shareholder or group 
would establish its eligibility to use proposed Rule 14a-11 is 
discussed further, below.
---------------------------------------------------------------------------

     For large accelerated filers as defined in Exchange Act 
Rule 12b-2,\117\ and registered investment companies with net assets of 
$700 million or more, at least 1% of the company's securities that are 
entitled to be voted on the election of directors at the annual meeting 
of shareholders (or, in lieu of such an annual meeting, a special 
meeting of shareholders); \118\
---------------------------------------------------------------------------

    \117\ 17 CFR 240.12b-2.
    \118\ See proposed Rule 14a-11(b)(1)(i).
---------------------------------------------------------------------------

     For accelerated filers as defined in Rule 12b-2, and 
registered investment companies with net assets of $75 million or more 
but less than $700 million, at least 3% of the company's securities 
that are entitled to be voted on the election of directors at the 
annual meeting of shareholders (or, in lieu of such an annual meeting, 
a special meeting of shareholders); \119\ and
---------------------------------------------------------------------------

    \119\ See proposed Rule 14a-11(b)(1)(ii).
---------------------------------------------------------------------------

     For non-accelerated filers as defined in Rule 12b-2, and 
registered investment companies with net assets of less than $75 
million, at least 5% of the company's securities that are entitled to 
be voted on the election of directors at the annual meeting of 
shareholders (or, in lieu of such an annual meeting, a special meeting 
of shareholders); \120\
---------------------------------------------------------------------------

    \120\ See proposed Rule 14a-11(b)(1)(iii).
---------------------------------------------------------------------------

     Has beneficially owned the securities that are used for 
purposes of determining the ownership threshold continuously for at 
least one year as of the date of the shareholder notice on Schedule 14N 
(in the case of a shareholder group, each member of the group must have 
held the securities that are used for purposes of determining the 
ownership threshold for at least one year as of the date of the 
shareholder notice on Schedule 14N); \121\ and
---------------------------------------------------------------------------

    \121\ See proposed Rule 14a-11(b)(2). The one-year holding 
period requirement applies only to the securities that are used for 
purposes of determining the ownership threshold.
---------------------------------------------------------------------------

     Represents that it intends to continue to own those 
securities through the date of the annual or special meeting.\122\
---------------------------------------------------------------------------

    \122\ Id. Pursuant to proposed Rule 14a-18(b), the nominating 
shareholder or group would be required to include in its notice to 
the company of the intent to nominate a representation that the 
nominating shareholder or group satisfies the conditions in Rule 
14a-11(b).
---------------------------------------------------------------------------

    The issue of the appropriate eligibility ownership threshold 
generated a great deal of comment when proposed in the 2003 
Proposal.\123\ While some commenters believed that all shareholders, 
regardless of the amount of shares owned, should be able to include 
nominees in the company proxy materials for the purpose of nominating 
one or more directors, others advocated share ownership thresholds 
ranging from the $2,000 threshold required to submit a Rule 14a-8 
proposal to share ownership percentages such as 3%, 5% or 10% of a 
company's outstanding common stock.\124\ Those who advocated no 
threshold or a nominal dollar amount argued that the imposition of a 
threshold would discriminate against smaller investors or unfairly 
advantage larger shareholders who already may have the resources to run 
their own slates using the existing rules for contested elections.\125\ 
Those who advocated a larger share ownership threshold argued that a 
nominating shareholder should have a substantial, long-term stake in 
the company in order to require the use of company funds to nominate a 
candidate.\126\ In addition, advocates of a larger share ownership 
threshold pointed out that the composition of the board of directors is 
critical to a corporation's functions and, accordingly, shareholders 
should have to evidence a significant financial interest by satisfying 
a substantial ownership threshold in order to require a company to 
include in its proxy materials a shareholder director nominee or 
nominees.\127\
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    \123\ See 2003 Summary of Comments; comment letter on the 
Shareholder Proposals Proposing Release from California Public 
Employees' Retirement System (September 26, 2007) (``CalPERS 2007'') 
(noting that a 2003 analysis of the holdings of three of the largest 
public pension funds showed that their combined ownership exceeded 
2% in only one instance, and exceeded 1.5% in only 12 instances).
    \124\ See 2003 Summary of Comments.
    \125\ See id.
    \126\ See id.
    \127\ See id.
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    The tiered beneficial ownership thresholds that we are proposing 
represent an effort to balance the varying considerations and address 
the possibility that certain companies could be impacted 
disproportionately based on their size.\128\ In determining the 
proposed ownership thresholds, we considered two different samples of 
data on security ownership as an indicator of the ownership of 
securities that are entitled to be voted on the election of directors. 
First, we considered the current ownership make-up of a sample provided 
by an outside source of 5,327 companies that have held meetings between 
January 1, 2008 and April 15, 2009.\129\ In this sample, roughly 26% of 
the firms are classified as large accelerated filers, 35% are 
classified as accelerated filers, and 38% are classified as non-
accelerated filers. The second sample is derived from CDA Spectrum and 
is based on filings of Forms 13F in the third quarter of 2008.\130\ In 
this sample, roughly 26% of the firms are classified as large 
accelerated filers, 33% are classified as accelerated filers, and 40% 
are classified as non-accelerated filers.\131\
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    \128\ In this regard, we believe that the relative resource 
requirement for larger issuers to fund and administer the process 
would be smaller. Therefore, the thresholds we are proposing will 
more likely result in more large accelerated and accelerated filers 
receiving qualifying nominations than non-accelerated filers.
    \129\ The staff received beneficial ownership information for 
these companies aggregated at various thresholds and matched the 
information on market value of the float (obtained from Datastream). 
The sample excludes mutual funds.
    \130\ Institutional investment managers who exercise investment 
discretion over $100 million or more in Section 13(f) securities 
must report their holdings on Form 13F with the SEC. The sample 
includes 6,700 companies that are referenced in the Form 13F form 
that have common equity and are traded on NYSE, NYSE Amex Equities, 
or NASDAQ. Of these we were able to match the information on the 
market value of float (obtained from Datastream) for 5,877 
observations.
    \131\ Under Rule 12b-2, a large accelerated filer must have an 
aggregate worldwide market value of the voting and non-voting common 
equity held by its non-affiliates of $700 million or more, and an 
accelerated filer must have an aggregate worldwide market value of 
the voting and non-voting common equity held by its non-affiliates 
of $75 million or more but less than $700 million. Filers that do 
not meet the criteria for accelerated or large accelerated filer 
status are classified as non-accelerated filers.

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[[Page 29036]]

    In the first sample, nearly all (above 99%) of large accelerated 
filers have at least one shareholder that could meet the 1% threshold 
individually, while a somewhat greater number of large accelerated 
filers (also above 99%) have two or more shareholders that each have 
held at least 0.5% of the shares outstanding for the appropriate period 
and, thus, could more easily aggregate their securities in order to 
meet the 1% ownership requirement. In the CDA sample, 98% of large 
accelerated filers have at least one shareholder that could meet the 1% 
threshold individually, while 99% of large accelerated filers have two 
or more shareholders that each have held at least 0.5% of the shares 
outstanding for the appropriate period. By contrast, based on the first 
sample, using an ownership threshold of 3% would reduce the number of 
large accelerated filers where a single shareholder could make a 
nomination to 77% of large accelerated filers and reduce the number of 
large accelerated filers that have two or more shareholders that have 
held at least 1.5% of the shares for the appropriate period to 89%. 
Using the CDA sample these numbers would drop to 96% and 97% 
respectively.
    With regard to accelerated filers, roughly 85% of filers have at 
least one shareholder that could meet the 3% threshold individually, 
while roughly 92% of accelerated filers have two or more shareholders 
that each have held at least 1.5% of the shares outstanding for the 
appropriate period and, thus, could more easily aggregate their 
securities in order to meet the 3% ownership requirement. In the CDA 
sample, 91% of accelerated filers have at least one shareholder that 
could meet the 3% threshold individually, while 93% of accelerated 
filers have two or more shareholders that each have held at least 1.5% 
of the shares outstanding for the appropriate period. By contrast, 
based on the first sample, using an ownership threshold of 5% would 
reduce the number of accelerated filers where a single shareholder 
could make a nomination to 58% of accelerated filers. Further, 78% of 
accelerated filers have two or more shareholders that have held at 
least 2.5% of the shares for the appropriate period. Using the CDA 
sample these numbers would drop to 66% and 88% respectively.
    With regard to non-accelerated filers, roughly 59% of filers in the 
first sample have at least one shareholder that could meet the 5% 
threshold individually, while roughly 71% of non-accelerated filers 
have two or more shareholders that each have held at least 2.5% of the 
shares outstanding for the appropriate period and, thus, could more 
easily aggregate their securities in order to meet the 5% ownership 
requirement. In the CDA sample, 41% of non-accelerated filers have at 
least one shareholder that could meet the 5% threshold individually, 
while 49% of non-accelerated filers have two or more shareholders that 
each have held at least 2.5% of the shares outstanding for the 
appropriate period. By contrast, based on the first sample, using an 
ownership threshold of 7% would reduce the number of non-accelerated 
filers where a single shareholder could make a nomination to 41% of 
non-accelerated filers. Further, only 43% of non-accelerated filers 
have two or more shareholders that have held at least 4% and 62% have 
two or more shareholders that have held at least 3% of the shares for 
the appropriate period.\132\ Using the CDA sample these numbers would 
drop to 33%, 37% and 45% respectively.
---------------------------------------------------------------------------

    \132\ The staff did not have information regarding the 
beneficial ownership for the 3.5% threshold.
---------------------------------------------------------------------------

    With regard to registered investment companies, we are proposing 
tiered thresholds based on the net assets of the companies.\133\ 
Consistent with our approach to reporting companies (other than 
registered investment companies), the tiered beneficial ownership 
thresholds that we are proposing represent an effort to balance the 
various competing views and address the possibility that certain 
registered investment companies could be impacted disproportionately 
based on their size. Because registered investment companies are not 
classified as large accelerated filers, accelerated filers, and non-
accelerated filers, we propose to base the tiers on the net assets of 
the companies.\134\ In particular, we are proposing tiers for 
registered investment companies that are based on the worldwide market 
value levels used by reporting companies (other than registered 
investment companies) to determine filing status.\135\ Under the 
proposal, the amount of net assets of a registered investment company 
for these purposes would be the amount of net assets of the company as 
of the end of the company's second fiscal quarter in the fiscal year 
immediately preceding the fiscal year of the meeting, as disclosed in 
the company's Form N-CSR filed with the Commission, except that, for a 
series investment company the amount of net assets would be the 
company's net assets as of June 30 of the calendar year immediately 
preceding the calendar year of the meeting, as disclosed in a Form 8-K 
filed in connection with the meeting where directors are to be 
elected.\136\
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    \133\ In the case of a registered investment company, in 
determining the securities that are entitled to be voted on the 
election of directors for purposes of establishing whether the 
applicable threshold has been met, the nominating shareholder or 
group may rely on information set forth in the following documents, 
unless the nominating shareholder or group knows or has reason to 
know that the information contained therein is inaccurate: (1) In 
the case of a series company, a Form 8-K that would be required to 
be filed in connection with the meeting where directors are to be 
elected (for a further discussion of Form 8-K filing requirements 
for registered investment companies, see footnote 138, below, and 
accompanying text); or (2) in the case of other registered 
investment companies, the company's most recent annual or semi-
annual report filed with the Commission on Form N-CSR. See 
Instruction 1 to proposed Rule 14a-11(b).
    \134\ See Instruction 2 to proposed Rule 14a-11(b). For 
registered investment companies that are organized in series form, 
we are proposing that the net assets thresholds apply to the company 
as a whole, and not on a series by series basis, because directors 
are elected for the company by the shareholders of all series rather 
than separately for each series of the company. See Investment 
Company Act Rule 18f-2(g) [17 CFR 270.18f-2(g)].
    \135\ See footnote 131, above.
    \136\ See Instructions 2 and 3 to proposed Rule 14a-11(b).
---------------------------------------------------------------------------

    The requirement that the net asset determination for investment 
companies other than series investment companies be made as of the end 
of the company's second fiscal quarter in the fiscal year immediately 
preceding the fiscal year of the meeting is similar to the requirements 
for reporting companies (other than registered investment companies), 
which determine large accelerated filer, accelerated filer, and non-
accelerated filer status as of the end of the fiscal year, using the 
market value of the issuer's common equity as of the last business day 
of the immediately preceding second fiscal quarter.\137\ However, we 
have chosen a single date, June 30 of the calendar year immediately 
preceding the calendar year of the meeting, for series investment 
companies, due to the fact that different series of a series company 
may have different fiscal year and semi-annual period ending dates. 
Moreover, although registered investment companies generally are not 
required to file Form 8-K, we are proposing to require a registered 
investment company that is a series company to file Form 8-K within 
four business days after the company determines the anticipated meeting 
date, disclosing the company's net assets as of June 30 of the

[[Page 29037]]

calendar year immediately preceding the calendar year of the meeting 
and the total number of the company's shares that are entitled to vote 
for the election of directors (or if votes are to be cast on a basis 
other than one vote per share, then the total number of votes entitled 
to be voted and the basis for allocating such votes) at the annual 
meeting of shareholders (or, in lieu of such an annual meeting, a 
special meeting of shareholders) as of the end of the most recent 
calendar quarter.\138\ Registered investment companies, including 
series investment companies, currently disclose net asset and 
outstanding share information in their annual and semi-annual reports 
filed on Form N-CSR, but we believe that the additional Form 8-K filing 
is necessary for series companies because a series company may file 
multiple Form N-CSRs with respect to different series covering 
different fiscal year and semi-annual period ending dates and is 
required to disclose net asset and outstanding share information on a 
series by series basis, rather than for the company as a whole.
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    \137\ See Rule 12b-2.
    \138\ See proposed General Instruction B.1 and proposed Item 
5.07(b) of Form 8-K; proposed Rules 13a-11(b)(3) and 15d-11(b)(3); 
and Instruction 3 to proposed Rule 14a-11(b).
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    The purpose of the proposed rule would be to remove impediments the 
federal proxy rules create to shareholders' exercise of their rights to 
nominate and elect members of boards of directors. At the same time, we 
recognize that there are competing concerns that also need to be taken 
into account, such as the potential cost and disruption to the company 
of a rule with no shareholder eligibility requirements. To balance 
those interests, we are proposing a rule that includes shareholder 
eligibility requirements. In particular, we are proposing eligibility 
requirements based on the duration of ownership and minimum ownership 
levels.
    With respect to duration of ownership eligibility criteria, we 
believe that long-term shareholders are more likely to have interests 
that are better aligned with other shareholders and are less likely to 
use the rule solely for short-term gain. We are proposing a one year 
holding requirement for each nominating shareholder or member of a 
nominating group rather than the two year requirement proposed in 2003. 
The holding period generated less comment in 2003 than the ownership 
threshold, with the majority of commenters that addressed the topic 
supporting the proposed holding period.\139\ Some commenters, however, 
advocated either lowering the holding period to one year,\140\ or 
raising it (e.g., to 5 years).\141\ Some of these commenters suggested 
that the two year holding period was too onerous.\142\ After further 
consideration, we believe that a one year holding requirement would be 
sufficient to appropriately limit use of Rule 14a-11 to long-term 
shareholders without placing an undue burden on shareholders seeking to 
use the rule. In addition, a one year requirement is consistent with 
the existing eligibility requirement for shareholders to submit 
proposals under Rule 14a-8.
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    \139\ See 2003 Summary of Comments; see also comment letters 
from AFL-CIO; Alliance Capital Management L.P. (December 15, 2003) 
(``Alliance Capital''); American Society of Corporate Secretaries 
(December 22, 2003) (``ASCS''); Henry A. McKinnell, Chairman, The 
Business Roundtable (December 22, 2003) (``McKinnell, BRT''); United 
States Chamber of Commerce (December 19, 2003) (``Chamber''); Carl 
T. Hagberg (December 22, 2003); Committee on Securities Regulation, 
New York State Bar Association (December 22, 2003) (``NYS Bar''); 
State Teachers Retirement System of Ohio (December 18, 2003) (``STRS 
Ohio''); Sullivan & Cromwell LLP (December 22, 2003) (``Sullivan''); 
T. Rowe Price Associates, Inc. (December 24, 2003) (``T. Rowe''); 
Valero; and Wachtell.
    \140\ See 2003 Summary of Comments; see also comment letters 
from CalPERS; CIR; Gary K. Duberstein (December 22, 2003) 
(``Duberstein''); Gary Tannahill (December 6, 2003) (``Tannahill''); 
and Wolf Haldenstein Adler Freeman & Herz LLP (December 19, 2003) 
(``Wolf Haldenstein'').
    \141\ See 2003 Summary of Comments; see also letters from 
Compass Bancshares, Inc. (December 22, 2003) (``Compass''); and W. 
Paul Fitzgerald, Director, EMC Corporation (December 19, 2003), Gail 
Deegan, Director, EMC Corporation (December 22, 2003), and Alfred 
Zeien, Director, EMC Corporation (December 22, 2003) (collectively, 
``EMC Corporation'').
    \142\ See 2003 Summary of Comments; see also comment letters 
from CalPERS; CIR; Duberstein; Tannahill; and Wolf Haldenstein.
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    With regard to a minimum ownership level as a shareholder 
eligibility requirement, we believe it is important that any 
shareholder or group that intends to submit a nominee to a company for 
inclusion in the company's proxy materials continue to have a 
significant economic interest in the company. Therefore, we have 
proposed the requirement that a nominating shareholder or group provide 
a statement as to the nominating shareholder's or group's intent to 
continue to hold the requisite amount of securities through the date of 
the meeting. Commenters in 2003 generally supported a holding 
requirement through the date of the meeting,\143\ with some suggesting 
an even longer holding period (e.g., through the term of the nominee's 
service on the board, if elected).\144\ We continue to believe that a 
requirement to hold the securities through the date of the meeting is 
appropriate to demonstrate the nominating shareholder's commitment to 
the director nominee and the election process; however, we also have 
proposed a disclosure requirement under which a nominating shareholder 
or group would state their intent with respect to continued ownership 
of their shares after the election.\145\
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    \143\ See 2003 Summary of Comments; see also comment letters 
from America's Community Bankers (December 18, 2003) (``ACB''); 
Alliance Capital; ASCS; Blackwell Sanders Peper Martin LLP (December 
22, 2003) (``Blackwell Sanders''); McKinnell, BRT; CalPERS; Chamber; 
CIR; Compass; FedEx Corporation (December 19, 2003) (``FedEx''); 
Intel Corporation (December 22, 2003) (``Intel''); International 
Paper Company (December 22, 2003) (``International Paper''); Peter 
O. Clauss and J. Peter Wolf of Pepper Hamilton, LLP (December 16, 
2003) (``Clauss & Wolf''); Sullivan; Tannahill; Valero; Wachtell; 
and Wells Fargo & Company (December 19, 2003) (``Wells Fargo'').
    \144\ See 2003 Summary of Comments; see also comment letters 
from ACB; McKinnell, BRT; Chamber; Compass; FedEx; Intel; 
International Paper; Clauss & Wolf; Sullivan; Valero; Wachtell; and 
Wells Fargo.
    \145\ See proposed Rule 14a-18(f) and proposed Item 5(b) of 
Schedule 14N.
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    In addition, to rely on proposed Rule 14a-11 to have disclosure 
about their nominee or nominees included in the company proxy 
materials, a nominating shareholder or group must:
     Not acquire or hold the securities for the purpose of or 
with the effect of changing control of the company or to gain more than 
a limited number of seats on the board;
     Provide and file with the Commission a notice to the 
company on proposed new Schedule 14N \146\ of the nominating 
shareholder's or group's intent to require that the company include 
that nominating shareholder's or group's nominee in the company's proxy 
materials by the date specified by the company's advance notice 
provision or, where no such provision is in place, no later than 120 
calendar days before the date that the company mailed its proxy 
materials for the prior year's annual meeting,\147\ except that if the 
company did not hold an annual meeting during the prior year, or if the 
date of the meeting has changed by more than 30 days from the prior 
year, then the nominating shareholder or group must provide notice a 
reasonable time before the company mails its proxy materials, as 
specified by the company in a Form 8-K filed within four business days 
after the company determines the anticipated meeting date pursuant to 
proposed Item 5.07; \148\ and
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    \146\ See Section III.B.6. for a discussion of Schedule 14N and 
the disclosure required to be filed.
    \147\ 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.
    \148\ See proposed Instruction 2 to paragraph (a) of Rule 14a-11 
and proposed General Instruction B.1. to Form 8-K. A late filing of 
such form would result in the registrant losing eligibility to file 
on Form S-3.

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[[Page 29038]]

     Include in the shareholder notice on Schedule 14N 
disclosure about the amount and percentage of securities owned by the 
nominating shareholder or group, length of ownership of such 
securities, and the nominating shareholder's or group's intent to 
continue to hold the securities through the date of the meeting as well 
as intent with respect to continued ownership after the election, a 
certification that the nominating shareholder or group is not seeking 
to change the control of the company or to gain more than a limited 
number of seats on the board of directors, and disclosure meeting the 
requirements of Rule 14a-18.\149\
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    \149\ See proposed Exchange Act Rules 14a-18 and 14n-1. See 
discussion in Section III.B.5. regarding proposed Rule 14a-11(d), 
which limits the number of nominees a company would be required to 
include in its proxy materials.
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Request for Comment
    C.1. Are the proposed shareholder eligibility criteria for Rule 
14a-11 necessary or appropriate? If not, why not? Should there be any 
restrictions regarding which shareholders can use proposed Rule 14a-11 
to nominate directors for inclusion in company proxy materials? Should 
those restrictions be consistent with the requirements of Rule 14a-8 or 
should they be more extensive than the minimum requirements in Rule 
14a-8?
    C.2. The proposed eligibility threshold is based on the percentage 
of securities owned and entitled to vote on the election of directors. 
This threshold is based on current Rule 14a-8 and reflects our intent 
to focus on those shareholders eligible to vote for directors. Is the 
proposed threshold appropriate or could it be better focused to 
accomplish our objective? For example, should eligibility instead be 
based on record ownership? Should eligibility be based on the value of 
shares owned? If so, on what date should the value be measured? What 
would be an appropriate value amount? Is there another standard or 
criteria? Is submission of the nomination the correct date on which to 
make these eligibility determinations? If not, what date should be 
used?
    C.3. For companies that have more than one class of securities 
entitled to vote on the election of directors, does the rule provide 
adequate guidance on how to determine whether a shareholder meets the 
requisite ownership thresholds? Should the rule specifically address 
how to make this determination if one class of securities has greater 
voting rights than another class?
    C.4. What other criteria or alternatives should the Commission 
consider to determine the eligibility standards for shareholders to 
nominate directors?
    C.5. Is it appropriate to use a tiered approach to the ownership 
threshold for reporting companies (other than registered investment 
companies)? If so, is it appropriate and workable to use large 
accelerated filer, accelerated filer, and non-accelerated filer to 
define the three tiers? Are there aspects of the definitions of these 
groups that do not work with the proposed rule? Should we instead 
define the tiers strictly by public float or strictly by market 
capitalization? If so, what should the public float or market 
capitalization thresholds be (e.g., 5% for companies with less than 
$75,000,000 in public float; 3% for companies with more than 
$75,000,000 but less than $700,000,000 in public float; 1% for 
companies with greater than $700,000,000 in public float)?
    C.6. Is the 1% standard that we have proposed for large accelerated 
filers appropriate? Should the standard be lower (e.g., $2,000 or 0.5%) 
or higher (e.g., 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 
25%)? Is the 3% standard that we have proposed for accelerated filers 
appropriate? Should the standard be lower (e.g., 1% or 2%) or higher 
(e.g., 4%, 5%, 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)? Is the 5% 
standard that we have proposed for non-accelerated filers appropriate? 
Should the standard be lower (e.g., 1%, 2%, 3%, or 4%) or higher (e.g., 
6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)?
    C.7. Should groups of shareholders composed of a large number of 
beneficial holders, but who collectively own a percentage of shares 
below the proposed thresholds, be permitted to have a nominee included 
in the company proxy materials? If so, what would be a sufficiently 
large group? Would a group composed of over 1%, 3%, 5% or 10% of the 
number of beneficial holders be sufficient? Should there be different 
disclosure requirements for a large shareholder group?
    C.8. Is it appropriate to use a tiered approach to the ownership 
threshold for registered investment companies? Should the tiers and 
ownership percentages for registered investment companies be similar to 
those for reporting companies other than registered investment 
companies, as proposed, or should they be different? Is it appropriate 
and workable to base the tiers on a registered investment company's net 
assets? Should another measure be used instead? Should the 
determination of which tier a series investment company belongs to be 
made on a series by series basis, rather than for the company as a 
whole? Should the levels of net assets for each category be higher or 
lower? If so, why?
    C.9. Should the determination of which tier a series investment 
company is in be based on the company's net assets as of June 30 of the 
calendar year immediately preceding the calendar year of the meeting, 
as disclosed in a Form 8-K filed in connection with the meeting at 
which directors are to be elected? Should the determination of which 
tier other registered investment companies are in be based on the net 
assets of the company as of the end of the company's second fiscal 
quarter in the fiscal year immediately preceding the fiscal year of the 
meeting, as disclosed in the company's Form N-CSR? If not, as of what 
date should net assets be determined for these purposes? Should all 
registered investment companies use a single date for purposes of 
making this determination?
    C.10. Should a registered investment company that is a series 
company be required to file a Form 8-K disclosing the company's net 
assets as of June 30 of the calendar year immediately preceding the 
calendar year of the meeting and the total number of shares of the 
company that are entitled to vote for the election of directors (or if 
votes are to be cast on a basis other than one vote per share, then the 
total number of votes entitled to be voted and the basis for allocating 
such votes) at the annual meeting of shareholders (or, in lieu of such 
an annual meeting, a special meeting of shareholders) as of the end of 
the most recent calendar quarter? If not, how should shareholders of a 
series company determine whether they meet the applicable ownership 
threshold?
    C.11. Is the 1% standard that we have proposed for registered 
investment companies with net assets of $700 million or more 
appropriate? Should the standard be lower (e.g., $2,000 or 0.5%) or 
higher (e.g., 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)? 
Is the 3% standard that we have proposed for registered investment 
companies with net assets of $75 million or more, but less than $700 
million, appropriate? Should the standard be lower (e.g., 1% or 2%) or 
higher (e.g., 4%, 5%, 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)? Is the 5% 
standard that we have proposed for registered investment companies with 
net assets of less than $75 million appropriate? Should the standard be 
lower (e.g., 1%, 2%, 3%, or 4%) or higher (e.g., 6%, 7%, 8%, 9%, 10%,

[[Page 29039]]

15%, 20%, or 25%)? Should the determination of whether a shareholder or 
shareholder group beneficially owns a sufficient percentage of a series 
company's securities to nominate a director be made on a series by 
series basis, rather than for the company as a whole (i.e., should a 
shareholder be permitted to take advantage of the nomination process 
contained in proposed Rule 14a-11 if he or she owns the applicable 
percentage of shares of a series of the company, but does not own the 
applicable percentage of the company as a whole)? Should closed-end 
investment companies be subject to the same standards as open-end 
investment companies? As proposed, business development companies would 
be treated in the same manner as reporting companies (other than 
registered investment companies).\150\ Should business development 
companies be subject to the same tiered approach as reporting companies 
(other than registered investment companies)? Why or why not?
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    \150\ Business development companies are a category of closed-
end investment companies 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].
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    C.12. In determining the securities that are entitled to be voted 
on the election of directors of a registered investment company for 
purposes of establishing whether the applicable threshold has been met, 
should the nominating shareholder or group be permitted to rely on 
information set forth in a Form 8-K filed in connection with the 
meeting where directors are to be elected (in the case of a series 
company) or the company's most recent annual or semi-annual report 
filed with the Commission on Form N-CSR (in the case of other 
investment companies), unless the nominating shareholder or group knows 
or has reason to know that the information contained therein is 
inaccurate?
    C.13. Voting rights for some registered investment companies are 
based on the net asset value of the shareholder's securities rather 
than the number of securities. Does the rule provide adequate guidance 
on how to determine whether a shareholder meets the requisite ownership 
threshold in such a case? Should the rule specifically address how to 
make the ownership threshold determination in cases where different 
securities of the same investment company have different voting rights 
on a per share basis?
    C.14. Should there be a restriction on shareholder eligibility that 
is based on the length of time securities have been held? If so, is one 
year the proper standard? Should the standard be longer (e.g., two 
years, three years, four years, or five years)? Should the standard be 
shorter (e.g., six months)? Should the standard be measured by a 
different date (e.g., one year as of the date of the meeting, rather 
than the date of the notice)?
    C.15. Should eligibility be conditioned on meeting the required 
ownership threshold by holding a net long position for the required 
time period? If the Commission were to adopt such a requirement, would 
this require other modifications to the proposal?
    C.16. As proposed, a nominating shareholder would be required to 
represent its intent to hold the securities until the date of the 
election of directors. Is it appropriate to include such a requirement? 
What should be the remedy if the nominating shareholder or group 
represents its intent to hold the securities through the date of the 
meeting for the election of directors and fails to do so? Should the 
company be permitted to exclude any nominations from that nominating 
shareholder or member of a group for some period of time afterward 
(e.g., one year, two years, three years)? If the nominating shareholder 
or group fails to hold the securities through the date of the meeting, 
what, if anything, should the effect be on the election? Should the 
nominee submitted by the shareholder or group be disqualified?
    C.17. We are proposing that a nominating shareholder represent an 
intent to hold through the date of the meeting because we believe it is 
important that the nominating shareholder or group have a significant 
economic interest in the company. Is it appropriate to require the 
shareholder to provide a statement regarding its intent with regard to 
continued ownership of the securities beyond the election of directors? 
Should a nominating shareholder be required to represent that it will 
hold the securities beyond the election if the nominating shareholder's 
nominee is elected (e.g., for six months after the election, one year 
after the election, or two years after the election)? Would the answer 
be different if the nominating shareholder's nominee is not elected?
    C.18. In the 2003 Proposal the Commission solicited comment on 
whether the rule should include a provision that would deny eligibility 
for any nominating shareholder or group that has had a nominee included 
in the company materials where that nominee did not receive a 
sufficient percentage of the votes. Commenters were mixed in their 
responses \151\ so we have not proposed a requirement in this regard, 
but are again requesting comment as to whether the rule should include 
a provision denying eligibility for any nominating shareholder or group 
who has had a nominee included in the company materials where that 
nominee did not receive a sufficient percentage of the votes (e.g., 5%, 
10%, 15%, 25%, or 35%) within a specified period of time in the past 
(e.g., one year, two years, three years, four years, five years). If 
there should be such an eligibility standard, how long should the 
prohibition last (e.g., one year, two years, three years)? Similarly, 
we are again requesting comment (see also Request for Comment D.16.) as 
to whether the rule should include a provision that would deny 
eligibility for any nominee that has been included in the company proxy 
materials within a specified period of time in the past (e.g., one 
year, two years, three year, four years, five years) where that nominee 
did not receive at least a specified percentage of the votes (e.g., 5%, 
10%, 15%, 25%, or 35%). How long should any such prohibition last 
(e.g., one year, two years, three years)?
---------------------------------------------------------------------------

    \151\ See 2003 Summary of Comments; see also comment letters 
from CalPERS, CII, and CIR (objecting to resubmission standards); 
and comment letters from ASCS, Blackwell Sanders, Investment Company 
Institute (December 22, 2003) (``ICI''), The New York City Bar 
Association (December 22, 2003) (``NYC Bar''), and Wells Fargo 
(expressing support for a resubmission standard).
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    C.19. As proposed, shareholders may aggregate their holdings in 
order to meet the ownership eligibility requirement. The shares held by 
each member of a group that are used to satisfy the ownership threshold 
must meet the minimum holding period. Should shareholders be allowed to 
aggregate their holdings in order to meet the ownership eligibility 
requirement to nominate directors?
    C.20. If shareholders should be able to aggregate their holdings, 
is it appropriate to require that all members of a nominating 
shareholder group whose shares are used to satisfy the ownership 
threshold to meet the minimum holding period individually? If 
aggregation is not appropriate, what ownership threshold would be 
appropriate for an individual shareholder?
    C.21. If a nominating shareholder sells any shares of the company 
that are in excess of the amount needed to satisfy the ownership 
threshold, should that shareholder not be eligible under the rule? 
Would it matter when the nominating shareholder sold the shares in 
relation to the nomination process?

[[Page 29040]]

    C.22. Would shareholder groups effectively be able to form to 
satisfy the ownership thresholds? If not, what impediments exist? What, 
if anything, would be appropriate to lessen or eliminate such 
impediments?
    C.23. What would be an appropriate method of establishing the 
beneficial ownership level of a nominating shareholder or group? What 
would be sufficient evidence of ownership? For example, if the 
nominating shareholder is not the registered holder of the securities, 
should the nominating shareholder be required to provide a written 
statement from the ``record'' holder of the securities (usually a 
broker or bank), verifying that at the time the nominating shareholder 
submitted its notice to the company, the nominating shareholder 
continuously held the securities for at least one year?
    C.24. Should the Commission limit use of the rule, as proposed, to 
shareholders that are not seeking to change the control of the company 
or to gain more than a limited number of seats on the board of 
directors? Why or why not? Would it be appropriate to require the 
shareholder to represent that it will not seek to change the control of 
a company or to gain more than a limited number of seats on the board 
for a period of time beyond the election of directors? How should the 
rules address the possibility that a nominating shareholder's or 
group's intent may change over time?
4. Shareholder Nominee Requirements
a. The Nomination Must Be Consistent With Applicable Law and Regulation
    A company would not be required to include a shareholder nominee in 
its proxy materials if the nominee's candidacy or, if elected, board 
membership would violate controlling state law,\152\ federal law,\153\ 
or rules of a national securities exchange or national securities 
association (other than rules of a national securities exchange or 
national securities association that set forth requirements regarding 
the independence of directors), and such violation could not be 
cured.\154\ Because compliance with independence standards can depend 
on the overall make-up of a board, we have excluded independence 
standards from this requirement and have, instead, proposed a separate 
provision addressing independence standards. The nominating shareholder 
or group would be required to make a representation that the 
shareholder nominee is in compliance with the generally applicable 
independence requirements of a national securities exchange or national 
securities association that sets forth objective standards.\155\ The 
representation would not be required in instances where a company is 
not subject to the requirements of a national securities exchange or a 
national securities association. We recognize that exchange rules 
regarding director independence generally include some standards that 
depend on an objective determination of facts and other standards that 
depend on subjective determinations.\156\ As proposed, however, to 
comply with Rule 14a-11 the nominating shareholder or group would only 
be required to represent that the nominee meets the objective criteria 
for ``independence'' in any generally applicable national securities 
exchange or national securities association rules.\157\ For this 
purpose, the nominee would be required to meet the definition of 
``independent'' that is applicable to directors of the company 
generally and not any particular definition of independence applicable 
to members of the audit committee of the company's board of directors. 
To the extent a rule imposes a standard regarding independence that 
requires a subjective determination by the board or a group or 
committee of the board (for example, requiring that the board of 
directors or any group or committee of the board of directors make a 
determination that the nominee has no material relationship with the 
listed company), this element of an independence standard would not 
have to be satisfied.
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    \152\ Rule 14a-11, as proposed, would permit a company to 
exclude a shareholder nominee from its proxy materials if the 
nominee's candidacy or, if elected, board membership would violate 
controlling state or federal law. If a company's governing documents 
permit the inclusion of shareholder nominees in the company's proxy 
materials but impose more restrictive eligibility standards or 
mandate more extensive disclosures than those required by Rule 14a-
11, the company could not exclude a nominee submitted by a 
shareholder in compliance with Rule 14a-11 on the grounds that the 
shareholder or the nominee fails to meet the more restrictive 
standards included in the company's governing documents. In other 
words, companies may not opt out of Rule 14a-11 by adopting 
alternate requirements for inclusion of shareholder nominees for 
director in the company's proxy materials.
    \153\ For example, in response to our 2003 Proposal, one 
commenter noted that without such a requirement, a shareholder could 
nominate and have elected a director who was employed by a company's 
competitor thereby ``potentially causing the company to violate 
Section 8 of the Clayton Act of 1914.'' See 2003 Summary of 
Comments; see also comment letter from McKinnell, BRT.
    \154\ This requirement is set forth in proposed Exchange Act 
Rule 14a-11(a)(2). Pursuant to proposed Exchange Act Rule 14a-18(a), 
the notice to the company by the nominating shareholder or group 
would be required to include a representation that, to the knowledge 
of the nominating shareholder or group, the nominee's candidacy or, 
if elected, board membership would not violate any of the specified 
provisions.
    \155\ Compliance with these existing independence standards 
would be established through the inclusion in the notice to the 
company by the nominating shareholder or group of a representation 
that the nominee satisfies the existing standard. This 
representation is required in proposed Exchange Act Rule 14a-18(c). 
In the case of a registered investment company or a business 
development company, a nominating shareholder or group would be 
required to represent that its nominee is not an ``interested 
person'' of the company as defined in Section 2(a)(19) of the 
Investment Company Act. [15 U.S.C. 80a-2(a)(19)].
    \156\ See proposed Rule 14a-18(c) and the Instruction to 
paragraph (c). For example, the NYSE listing standards include both 
subjective and objective components in defining an ``independent 
director.'' As an example of a subjective determination, Section 
303A.02(a) of the NYSE Listed Company Manual provides that no 
director will qualify as ``independent'' unless the board of 
directors ``affirmatively determines that the director has no 
material relationship with the listed company (either directly or as 
a partner, shareholder or officer of an organization that has a 
relationship with the company).'' Section 303A.02(b) of the NYSE 
Listed Company Manual provides that a director is not independent if 
the director has any of several specified relationships with the 
company. On the other hand, Section 303A.02(b) provides that a 
director is not independent if he or she has any of several 
specified relationships with the company that can be determined by a 
``bright-line'' objective test. For example, a director is not 
independent if ``the director has received, or has an immediate 
family member who has received, during any twelve-month period 
within the last three years, more than $120,000 in direct 
compensation from the listed company, other than director and 
committee fees and pension or other forms of deferred compensation 
for prior service (provided such compensation is not contingent in 
any way on continued service).''
    \157\ See Instruction to proposed Rule 14a-18(c).
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    Specifically, as proposed, each nominating shareholder or each 
member of the nominating shareholder group would be required to 
represent in its notice to the company on Schedule 14N \158\ that, to 
the knowledge of the nominating shareholder or group, the nominee, in 
the case of a registrant other than an investment company, satisfies 
the standards of a national securities exchange or national securities 
association regarding director independence that apply to the company, 
if any, except that, where a rule imposes a standard regarding 
independence that requires a subjective determination by the board or a 
group or committee of the board, this element of an independence 
standard would not have to be satisfied.\159\ Where a

[[Page 29041]]

company is not subject to the standards of a national securities 
exchange or national securities association, the representation would 
not be required.
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    \158\ See proposed Rule 14n-101.
    \159\ See proposed Rule 14a-18(a). We note that our proposal 
addresses only the requirements under Rule 14a-11 to be included in 
a company's proxy materials--the proposal would not preclude a 
nominee from ultimately being subject to the subjective 
determination test of independence for board committee positions. A 
company could include disclosure in its proxy materials advising 
shareholders that the shareholder nominee for director would not 
meet the company's subjective criteria, as appropriate.
---------------------------------------------------------------------------

    The proposals would require any nominating shareholder or group of 
shareholders of a registered investment company or a business 
development company to represent that its nominee to the board of the 
company is not an ``interested person'' of the company as defined in 
Section 2(a)(19) of the Investment Company Act,\160\ rather than 
representing that the nominee satisfies the generally applicable 
objective standards of a national securities exchange or national 
securities association regarding director independence.\161\ We are 
proposing to incorporate the Section 2(a)(19) test rather than the test 
applied to other companies because the Section 2(a)(19) 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.
---------------------------------------------------------------------------

    \160\ 15 U.S.C. 80a-2(a)(19).
    \161\ See proposed Rule 14a-18(c).
---------------------------------------------------------------------------

    Some commenters on the 2003 Proposal stated that nominating 
committees should be able to apply their own director qualifications 
criteria to shareholder nominees; \162\ however, a nominee required to 
be included by the company pursuant to Exchange Act Rule 14a-11 would 
be, notwithstanding the conditions in the proposal, the nominating 
shareholder's or group's nominee, not the company's nominee. Therefore, 
we do not believe it is appropriate that shareholder nominees be 
required to meet the nominating committee's or board's criteria.
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    \162\ See 2003 Summary of Comments; see also comment letters 
from ABA; Agilent Technologies, Inc. (December 19, 2003) 
(``Agilent''); McKinnell, BRT; Chamber; Richard Hall (December 22, 
2003) (``Hall''); ICI; Intel; NYC Bar; Software & Information 
Industry Association (December 22, 2003) (``SIIA''); Sullivan; 
Valero; and Wells Fargo.
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b. Relationships Between the Nominee, the Nominating Shareholder or 
Group, and the Company
    We recognize that a shareholder nomination process presents the 
potential risk of nominating shareholders or groups acting merely as a 
surrogate for the company or its management in order to block usage of 
the rule by another nominating shareholder or group. To balance the 
benefits of the new rule against these concerns, we propose that the 
nominating shareholder or group be required to represent that no 
relationships or agreements between the nominee and the company and its 
management, and between the nominating shareholder or group and the 
company and its management exist.\163\ Specifically, as proposed, each 
nominating shareholder or each member of the nominating shareholder 
group would be required to represent in its notice to the company on 
Schedule 14N that neither the nominee nor the nominating shareholder 
(or any member of the nominating shareholder group, if applicable) has 
an agreement with the company regarding the nomination of the 
nominee.\164\ This representation, along with the required disclosure, 
would provide some assurance to shareholders that certain shareholders 
or groups are not receiving special treatment by the company or acting 
on the company's behalf.\165\ This proposed requirement also was 
included in the 2003 proposal. Commenters generally supported the 
proposed requirement,\166\ though some suggested that the Commission 
provide an exception for negotiations and other communications between 
the nominating shareholder or group and the company regarding potential 
nominees.\167\ Accordingly, we have proposed a clarifying instruction 
to proposed Rule 14a-18(d), which states that negotiations with the 
nominating committee of the company to have the nominee included on the 
company's proxy card as a management nominee, where those negotiations 
are unsuccessful, or negotiations that are limited to whether the 
company is required to include the shareholder nominee for director on 
the company's proxy card in accordance with Rule 14a-11, would not be 
considered a direct or indirect agreement with the company for purposes 
of the rule.\168\
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    \163\ This representation would be required in the nominating 
shareholder's notice to the company on Schedule 14N, pursuant to 
proposed Exchange Act Rule 14a-18(d). Instruction 2 to proposed 
Exchange Act Rule 14a-11(d) clarifies that if a nominee, nominating 
shareholder or any member of a nominating group has an agreement 
with the company or an affiliate of the company regarding the 
nomination of a candidate for election, any nominee or nominees from 
such shareholder or group shall not be counted in calculating the 
number of shareholder nominees for purposes of proposed Rule 14a-
11(d).
    \164\ See proposed Rule 14a-18(d).
    \165\ The nominating shareholder and each member of the 
nominating shareholder group would be subject to liability pursuant 
to a proposed amendment to Rule 14a-9 with respect to the 
representation and disclosure included in the company's proxy 
materials.
    \166\ See 2003 Summary of Comments; see also comment letters 
from McKinnell, BRT; CalPERS; CII; CIR; and Wells Fargo.
    \167\ See 2003 Summary of Comments; see also comment letters 
from McKinnell, BRT and Wells Fargo.
    \168\ See proposed Instruction 1 to Rule 14a-18(d).
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    The Commission also recognizes that some commenters feel that 
inclusion of shareholder nominees for director in company proxy 
materials could have a disruptive effect on board dynamics and board 
operation.\169\ For example, we have heard from some commenters 
concerns about the possibility of ``special interest'' or ``single 
issue'' directors that would advance the interests of the nominating 
shareholder over the interests of shareholders as a group.\170\ In 
response to this concern, in 2003, the Commission proposed a limitation 
on relationships between a nominating shareholder or group and the 
director nominee that is included in company proxy materials. For 
example, where the nominating shareholder or members of the nominating 
shareholder group were natural persons, the nominating shareholder or 
group would not have been able to nominate themselves or any member of 
the nominating shareholder group, or any member of the immediate family 
of the nominating shareholder or any member of the group. In addition, 
a nominating shareholder would not have been able to nominate an 
individual who had been employed by, or whose immediate family member 
had been employed by, the nominating shareholder or any member of the 
nominating shareholder group, or who had accepted consulting, advisory, 
or other compensatory fees from the nominating shareholder or any 
member of the nominating shareholder group. A number of commenters 
expressed concern about these requirements,\171\ and questioned the

[[Page 29042]]

fairness and wisdom of the limitations.\172\ These commenters did not 
believe that it was fair to subject shareholder nominees for director 
to a different standard than board nominees \173\ and felt that the 
requirements would inhibit significant holders from seeking seats on 
boards,\174\ thus excluding particularly desirable director candidates 
from being nominated under the rule.\175\ While some commenters 
supported the proposed limitations (e.g., to address the special 
interest concern),\176\ others noted that any nominees that were 
included in the company's proxy materials would still have to be 
elected by the shareholders and, if elected, would be subject to State 
law fiduciary duties.\177\
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    \169\ See, e.g., comment letter on 2007 Proposals from Mulcahy, 
BRT.
    \170\ See comment letters on 2007 Proposals from Keith F. 
Higgins, Committee Chair, American Bar Association, Section of 
Business Law (October 2, 2007) (``ABA 2007''); and Mulcahy, BRT. See 
also 2003 Summary of Comments and comment letters from ABA; ASCS; 
McKinnell, BRT; Blackwell Sanders; Sullivan; and Valero.
    \171\ See 2003 Summary of Comments; see also comment letters 
from BellTel Retirees Inc. (January 12, 2004); AFL-CIO; Association 
for Investment Management and Research (December 22, 2003); 
Association of US West Retirees (January 13, 2004); CalPERS; 
CalSTRS; CII; CIR; Corporate Library; Domini Social Investments LLC 
(December 22, 2003); Duberstein; State Board of Administration of 
Florida (December 19, 2003); Mark S. Gardiner (December 22, 2003); 
Hermes Pensions Management Limited (December 22, 2003); Alan G. 
Hevesi, Comptroller, State of New York (December 19, 2003) 
(``Hevesi''); Institutional Shareholder Services (December 18, 
2003); Lawndale Capital Management, LLC (December 22, 2003) 
(``Lawndale''); LongView; LSV Asset Management (December 22, 2003); 
James McRitchie, Editor, Corporate Governance (November 16, 2003, 
December 22, 2003, and March 29, 2004) (``McRitchie 2003''); State 
Retirement and Pension System of Maryland (December 16, 2003); STRS 
Ohio; Ohio Public Employees Retirement System (December 22, 2003); 
Relational Investors LLC (December 21, 2003) (``Relational''); Kurt 
Schacht, J.D., CFA, Wyser-Pratte & Co. (November 13, 2003); San 
Diego City Employees' Retirement System (December 17, 2003); Social 
Investment Forum Ltd. (December 22, 2003); and Tannahill.
    \172\ See 2003 Summary of Comments; see also comment letters 
from CalPERS; CII; Hevesi; Lawndale; and Relational.
    \173\ See id.
    \174\ See 2003 Summary of Comments; see also comment letters 
from CalPERS; CII; Lawndale; McRitchie 2003; and Relational.
    \175\ See 2003 Summary of Comments; see also comment letter from 
Richard Moore, North Carolina Treasurer; Sean Harrigan, President, 
CalPERS; and Alan G. Hevesi, New York State Comptroller, on behalf 
of National Coalition for Corporate Reform (December 18, 2003) 
(``NCCR'').
    \176\ See 2003 Summary of Comments; see also comment letters 
from ABA; ASCS; Blackwell Sanders; Hall; and Sullivan.
    \177\ See 2003 Summary of Comments; see also comment letters 
from CalPERS and NCCR.
---------------------------------------------------------------------------

    After further consideration and review of the comments on the 2003 
Proposal, we have determined not to propose limitations on the 
relationships between a nominating shareholder or group and their 
director nominee or nominees. We agree with those commenters that 
opposed the proposed limitations and believe that such limitations may 
not be appropriate or necessary. Rather, we believe that Rule 14a-11, 
as proposed, should facilitate exercises of state law rights and afford 
a shareholder or group meeting the proposed standards the ability to 
propose a nominee for director that, in the nominating shareholder's 
view, better represents the interests of shareholders than those put 
forward by the nominating committee or board. We note that once a 
nominee is elected to the board of directors, that director will be 
subject to state law fiduciary duties and owe the same duty to the 
corporation as any other director on the board.
c. Nominating Shareholder or Group Will Not Be Deemed Affiliates of the 
Company
    It is our view that the mere use of proposed Rule 14a-11, by 
itself, should not be deemed to establish a relationship between the 
nominating shareholder or group and the company that would result in 
that holder or group being deemed an ``affiliate'' of the company for 
purposes of the federal securities laws. Accordingly, proposed Rule 
14a-11(a) would include an instruction making clear that a nominating 
shareholder will not be deemed an ``affiliate'' of the company under 
the Securities Act of 1933 \178\ or the Exchange Act solely as a result 
of nominating a director or soliciting for the election of such a 
director nominee or against a company nominee pursuant to Rule 14a-
11.\179\ In addition, where a shareholder nominee is elected, and the 
nominating shareholder or group does not have an agreement or 
relationship with that director, other than relating to the nomination, 
the nominating shareholder or group would not be deemed an affiliate 
solely by virtue of having nominated that director under the proposed 
rules.\180\
---------------------------------------------------------------------------

    \178\ 15 U.S.C. 77a et seq.
    \179\ This safe harbor is set forth in Instruction 1 to proposed 
Rule 14a-11(a). The safe harbor is intended to operate such that the 
determination of whether a shareholder or group is an ``affiliate'' 
of the company would continue to be made based upon all of the facts 
and circumstances regarding the relationship of the shareholder or 
group to the company, but a shareholder or group will not be deemed 
an affiliate ``solely'' by virtue of having nominated that director.
    \180\ See Instruction 1 to proposed Rule 14a-11(a).
---------------------------------------------------------------------------

Request for Comment
    D.1. Is it appropriate to use compliance with state law, federal 
law, and listing standards as a condition for eligibility?
    D.2. Should there be any other or additional limitations regarding 
nominee eligibility? Would any such limitations undercut the stated 
purposes of the proposed rule? Are any such limitations necessary? If 
so, why?
    D.3. Should there be requirements regarding independence of the 
nominee and nominating shareholder or group and the company and its 
management? If so, are the proposed limitations appropriate? What other 
or additional limitations would be appropriate? If these limitations 
generally are appropriate, are there instances where they should not 
apply? Should the fact that the nominee is being nominated by a 
shareholder or group, combined with the absence of any agreement with 
the company or its management, be a sufficient independence 
requirement?
    D.4. How should any independence standards be applied? Should the 
nominee and the nominating shareholder or group have the full burden of 
determining the effect of the nominee's election on the company's 
compliance with any independence requirements, even though those 
consequences may depend on the outcome of any election and may relate 
to the outcome of the election with regard to nominees other than 
shareholder nominees? Should the rules specify that the nominating 
shareholder or group may rely on information disclosed in the company's 
Commission filings in making this determination? How should the 
independence standards be applied when the entity is not a 
corporation--for example, a limited partnership?
    D.5. Where a company is subject to an independence standard of a 
national securities exchange or national securities association that 
includes a subjective component (e.g., subjective determinations by a 
board of directors or a group or committee of the board of directors), 
should the shareholder nominee be subject to those same requirements as 
a condition to nomination?
    D.6. As proposed, a nominating shareholder or group would be 
required to represent that the shareholder nominee satisfies generally 
applicable objective standards of a national securities exchange or 
national securities association that are applicable to directors of the 
company generally and not any particular definition of independence 
applicable to members of the audit committee of the company's board of 
directors. Should the proposal clarify that the nominee must meet the 
applicable objective standards of the company's primary listing 
exchange?
    D.7. Should the company or its nominating committee have any role 
in determining whether a shareholder nominee satisfies the generally 
applicable objective standards for director independence of any 
exchange on which the company's securities are listed?
    D.8. If a company has more stringent independence requirements than 
the listing standards applicable to the company, should the company's 
requirements apply? Or should the listing standards apply?
    D.9. If a company is not subject to an independence standard, 
should shareholder nominees to the board of directors under Rule 14a-11 
be required to provide disclosure concerning whether they would be 
independent? If so, what standard should apply? Should

[[Page 29043]]

the nominating shareholder or group be able to select the standard?
    D.10. Should we apply the ``interested person'' standard of Section 
2(a)(19) of the Investment Company Act with respect to the 
representation that a shareholder nominee be independent from a company 
that is a registered investment company? Should the ``interested 
person'' standard also apply to shareholder nominees for election to 
the board of directors of a business development company? Should we 
instead apply a different independence standard to registered 
investment companies or business development companies, such as the 
definition of independence in Exchange Act Rule 10A-3? \181\
---------------------------------------------------------------------------

    \181\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

    D.11. As proposed, the rule includes a safe harbor providing that 
nominating shareholders will not be deemed ``affiliates'' solely as a 
result of using Rule 14a-11. This safe harbor would apply not only to 
the nomination of a candidate, but also where that candidate is 
elected, provided that the nominating shareholder or group does not 
have an agreement or relationship with that director otherwise than 
relating to the nomination. Is it appropriate to provide such a safe 
harbor for shareholder nominations? Should the safe harbor continue to 
apply where the nominee is elected? If so, should the nomination and 
election of the shareholder's nominee be a consideration in determining 
whether the shareholder is an affiliate, or should the safe harbor be 
``absolute''?
    D.12. Should the Commission include a similar safe harbor provision 
for nominating shareholders that submit a nominee for inclusion in a 
company's proxy materials pursuant to an applicable state law provision 
or a company's governing documents rather than using proposed Rule 14a-
11? Why or why not?
    D.13. Should the eligibility criteria include a prohibition on any 
affiliation between nominees and nominating shareholders or groups? If 
so, what limitations would be appropriate? For example, should there be 
a prohibition on the nominee being the nominating shareholder or a 
member of the nominating shareholder group, a member of the immediate 
family of the nominating shareholder or any member of the nominating 
shareholder group, or an employee of the nominating shareholder or any 
member of the nominating shareholder group? Would such a limitation 
unnecessarily restrict access by shareholders to the proxy process?
    D.14. Should eligibility criteria include a prohibition on 
agreements between companies and its management and nominating 
shareholders, as proposed? Would such a prohibition inhibit desirable 
negotiations between shareholders and boards or nominating committees 
regarding nominees for directors? Should the prohibition provide an 
exception to permit such negotiations, as proposed? If so, what should 
the relevant limitations be?
    D.15. Should the nominee be required to make any of the 
representations (e.g., the independence representation), either in 
addition to or instead of, the nominating shareholder or group? If so, 
should these representations be included in the shareholder notice on 
Schedule 14N or in some other document?
    D.16. Should there be a nominee eligibility criterion that would 
exclude an otherwise eligible nominee where that nominee has been 
included in the company's proxy materials as a candidate for election 
as director but received a minimal percentage of the vote? If so, what 
would be the appropriate percentage (e.g., 5%, 10%, 15%, 25%, or 35%)? 
If so, for how long should the nominee be excluded (e.g., 1 year, 2 
years, 3 years, 4 years, 5 years, permanently)?
5. Maximum Number of Shareholder Nominees To Be Included in Company 
Proxy Materials
    We do not intend for proposed Rule 14a-11 to be available for any 
shareholder or group that is seeking to change the control of the 
issuer or to gain more than a limited number of seats on the board. The 
existing procedures regarding contested elections of directors are 
intended to continue to fulfill that purpose.\182\ We also note that by 
allowing shareholder nominees to be included in a company's proxy 
materials, the cost of the solicitation is essentially shifted from the 
individual shareholder or group to the company and thus, all of the 
shareholders. We do not believe that an election contest conducted by a 
shareholder to change the control of the issuer or to gain more than a 
limited number of seats should be funded out of corporate assets. 
Further, extensive changes in board membership, or the possibility of 
such changes as a result of additional nominees being included in the 
proxy statement, have the potential to be disruptive to the board, 
while also potentially being confusing to shareholders. Amending our 
rules to provide for the inclusion of shareholder nominees for 
directors in a company's proxy materials is a significant change. Given 
the novelty of such a change, we believe it is appropriate to take an 
incremental approach as a first step and reassess at a later time to 
determine whether additional changes would be appropriate.
---------------------------------------------------------------------------

    \182\ See, e.g., Exchange Act Rule 14a-12(c).
---------------------------------------------------------------------------

    As proposed, a company would be required to include no more than 
one shareholder nominee or the number of nominees that represents 25 
percent of the company's board of directors, whichever is greater.\183\ 
Where a company has a director (or directors) currently serving on its 
board of directors who was elected as a shareholder nominee pursuant to 
Rule 14a-11, and the term of that director extends past the date of the 
meeting of shareholders for which the company is soliciting proxies for 
the election of directors, the company would not be required to include 
in its proxy materials more shareholder nominees than could result in 
the total number of directors serving on the board that were elected as 
shareholder nominees being greater than one shareholder nominee or 25 
percent of the company's board of directors, whichever is greater.\184\ 
We believe this limitation is appropriate to reduce the possibility of 
a nominating shareholder or group using the proposed new rule as a 
means to effect a change in control of a company or to gain more than a 
limited number of seats on the board by repeatedly nominating 
additional candidates for director. We note that in the 2003 Proposal, 
the Commission proposed to require companies to include a set number of 
nominees, rather than a percentage of the board, as proposed 
today.\185\ We believe that using a percentage in the rule will promote 
ease of use and alleviate any concerns that a company may increase its 
board size in an effort

[[Page 29044]]

to reduce the effect of a shareholder nominee elected to the board.
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    \183\ See proposed Rule 14a-11(d)(1). According to information 
from RiskMetrics, based on a sample of 1,431 public companies, in 
2007, the median board size was 9, with boards ranging in size from 
4 to 23 members. Approximately 40% of the boards in the sample had 8 
or fewer directors, approximately 60% had between 9 and 19 
directors, and less than 1% had 20 or more directors.
    \184\ See proposed Rule 14a-11(d)(2). Depending on board size, 
25% of the board may not result in a whole number. In those 
instances, the maximum number of shareholder nominees for director 
that a registrant will be required to include in its proxy materials 
will be the closest whole number below 25%. See Instruction 1 to 
paragraph (d).
    \185\ Comments on the 2003 Proposal provided a range of views 
regarding the appropriate number of shareholder nominees. Commenters 
that supported the use of a percentage, or combination of a set 
number and a percentage, to determine the number of shareholder 
nominees suggested percentages ranging from 20% to 35%. See 2003 
Summary of Comments.
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    Proposed Rule 14a-11(d)(3) would address situations where more than 
one shareholder or group would be eligible to have its nominees 
included in the company's form of proxy and disclosed in its proxy 
statement pursuant to the proposed rule. In those situations, the 
company would be required to include in its proxy statement and form of 
proxy the nominee or nominees of the first nominating shareholder or 
group from which it receives timely notice of intent to nominate a 
director pursuant to the rule, up to and including the total number of 
shareholder nominees required to be included by the company.\186\ Where 
the first nominating shareholder or group from which the company 
receives timely notice does not nominate the maximum number of 
directors allowed under the rule, the nominee or nominees of the next 
nominating shareholder or group from which the company receives timely 
notice of intent to nominate a director pursuant to the rule would be 
included in the company's proxy materials, up to and including the 
total number of shareholder nominees required to be included by the 
company.
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    \186\ This requirement is set forth in proposed Rule 14a-
11(d)(3).
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    Although in 2003 we proposed a standard under which the largest 
shareholder or group would have their nominee or nominees included in 
the company proxy materials and the limited number of shareholders that 
commented did not generally object to such a standard,\187\ after 
further consideration we believe that such a standard might be 
difficult for companies to administer because it would lack certainty. 
By using a first-in standard, a company would be able to begin 
preparing its materials and coordinating with the nominating 
shareholder or group immediately upon receiving an eligible nomination 
rather than waiting to see whether another nomination from a larger 
nominating shareholder or group is submitted before the notice 
deadline. This approach also may be fairer to the shareholder whose 
notice is received first and may provide certainty to the shareholder 
because it eliminates the possibility that the shareholder's nominee 
will be excluded as a result of a larger shareholder subsequently 
submitting a nominee.
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    \187\ See 2003 Summary of Comments.
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Request for Comment
    E.1. Is it appropriate to include a limitation on the number of 
shareholder director nominees? If not, how would the proposed rules be 
consistent with our intention not to allow Rule 14a-11 to become a 
vehicle for changes in control?
    E.2. If there should be a limitation, is the proposed maximum 
percentage of shareholder nominees for director that we have proposed 
appropriate? If not, should the maximum percentage be higher (e.g., 
30%, 35%, 40%, or 45%) or lower (e.g., 10%, 15%, or 20%)? Should the 
percentage vary depending on the size of the board? Should the 
limitation be the greater or lesser of a specified number of nominees 
or percentage of the total number of directors on the board? Is it 
appropriate to permit more than one shareholder nominee regardless of 
the size of the company's board of directors?
    E.3. In instances where 25% of the board does not result in a whole 
number, the maximum number of shareholder nominees for director that a 
registrant will be required to include in its proxy materials will be 
the closest whole number below 25%. Is it appropriate to round down in 
this instance? Should we instead round up to the nearest whole number 
above 25%? Is a rounding rule necessary?
    E.4. Should the proposed rule address situations where the 
governing documents provide a range for the number of directors on the 
board rather than a fixed number of board seats? If so, what changes to 
the rule would be necessary?
    E.5. The proposal contemplates taking into account incumbent 
directors who were nominated pursuant to proposed Rule 14a-11 for 
purposes of determining the maximum number of shareholder nominees. Is 
that appropriate? Should there be a different means to account for such 
incumbent directors?
    E.6. Should the procedure address situations in which, due to a 
staggered board, fewer director positions are up for election than the 
maximum permitted number of shareholder nominees? If so, how? Should 
the maximum number be based on the number of directors to be elected 
rather than to the overall board size?
    E.7. Should any limitation on shareholder nominees take into 
account incumbent directors who were nominated outside of the Rule 14a-
11 process, such as pursuant to an applicable state law provision, a 
company's governing documents, or a proxy contest? If so, should such 
directors be counted as ``shareholder nominees'' for purposes of 
determining the 25%?
    E.8. Should any limitation on shareholder nominees take into 
account shareholder nominees for director that a company includes in 
its proxy materials other than pursuant to Rule 14a-11 (e.g., 
voluntarily)?
    E.9. Should Rule 14a-11 provide an exception for controlled 
companies or companies with a contractual obligation that permits a 
certain shareholder or group of shareholders to appoint a set number of 
directors? Should a nominating shareholder or group only be permitted 
to submit nominees for director based upon the number of director seats 
the nominating shareholder is entitled to vote on? For example, if a 
board consists of 10 directors and the company is contractually 
obligated to permit a certain shareholder or shareholders to appoint 
five directors to the board, should shareholders entitled to vote on 
the remaining five director slots be limited to submitting nominees 
based on a board size of five rather than 10, meaning that a nominating 
shareholder may submit one nominee for inclusion in the company's proxy 
materials?
    E.10. We have proposed a limitation that permits the nominating 
shareholder or group that first provides notice to the company to 
include its nominee or nominees in the company's proxy materials where 
there is more than one eligible nominating shareholder or group. Is 
this appropriate? If not, should there be different criteria for 
selecting the shareholder nominees (e.g., largest beneficial ownership, 
length of security ownership, random drawing, allocation among eligible 
nominating shareholders or groups, etc.)? Rather than using criteria 
such as that proposed, should companies have the ability to select 
among eligible nominating shareholders or groups? If so, what criteria 
should the company be required to use in doing so?
    E.11. If the Commission adopts a ``first-in'' approach, should the 
first shareholder or group get to nominate up to the total number of 
nominees required to be included by the company or, where there is more 
than one nominating shareholder or group and more than one slot for 
nominees, should the slots be allocated among proposing shareholders 
according to, for example, the order in which the shareholder or group 
provided notice to the company?
    E.12. Under the proposal, where the first nominating shareholder or 
group to deliver timely notice to the company does not nominate the 
maximum number of directors allowed under the rule, the nominee or 
nominees of the next nominating shareholder or group to deliver timely 
notice of intent to nominate a director pursuant to the rule would be 
included in the company's proxy materials, up to and including the

[[Page 29045]]

total number of shareholder nominees required to be included by the 
company. Should the rule specify how to determine which of a second 
nominating shareholder's or group's nominees are to be selected where 
there are more nominees than available spots under the rule? Should 
Rule 14a-11 provide that only one nominating shareholder or group may 
have their nominee or nominees included in the company proxy materials, 
regardless of whether they nominate the maximum number allowed under 
the rule?
    E.13. Would the ``first-in'' approach result in an undue advantage 
to the first shareholder or group to submit a nomination? Would such an 
approach result in a race to be the first in?
6. Notice and Disclosure Requirements
    To submit a nominee for inclusion in the company's proxy statement 
and form of proxy, proposed Rule 14a-11 would require that the 
nominating shareholder or group provide a notice on Schedule 14N to the 
company of its intent to require that the company include that 
shareholder's or group's nominee or nominees in the company's proxy 
materials.\188\ The shareholder notice on Schedule 14N would also be 
required to be filed with the Commission.
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    \188\ See proposed Rule 14a-11(c), Rule 14a-18 and Rule 14n-1.
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    The notice would be required to be provided to the company and 
filed by the date specified by the company's advance notice provision 
or, where no such provision is in place, no later than 120 calendar 
days before the date that the company mailed its proxy materials for 
the prior year's annual meeting. We are proposing 120 calendar days 
before the date that the company mailed its proxy materials for the 
prior year's annual meeting as the standard where a company does not 
have an advance notice provision because we believe that 120 days would 
provide adequate time for companies to take the steps necessary to 
include or, where appropriate, to exclude a shareholder nominee for 
director that is submitted pursuant to Rule 14a-11. If the company did 
not hold an annual meeting during the prior year, or if the date of the 
meeting has changed by more than 30 calendar days from the prior year, 
however, then the nominating shareholder must provide notice a 
reasonable time before the company mails its proxy materials. The 
company would be required to disclose the date by which the shareholder 
must submit the required notice in a Form 8-K filed pursuant to 
proposed Item 5.07 within four business days after the company 
determines the anticipated meeting date.\189\
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    \189\ See proposed Instruction 2 to Rule 14a-11(a) and proposed 
Rule 14a-18. This would be similar to the requirement currently 
included in Rule 14a-5(f), which specifies that, where the date of 
the next annual meeting is advanced or delayed by more than 30 
calendar days from the date of the annual meeting to which the proxy 
statement relates, the company must disclose the new meeting date in 
the company's earliest possible quarterly report on Form 10-Q. 
Although registered investment companies generally are not required 
to file Form 8-K, we are proposing to require them to file a Form 8-
K disclosing the date by which the shareholder notice must be 
provided if the company did not hold an annual meeting during the 
prior year, or if the date of the meeting has changed by more than 
30 calendar days from the prior year. See proposed Exchange Act 
Rules 13a-11(b)(2) and 15d-11(b)(2).
---------------------------------------------------------------------------

    The notice would be filed with the Commission on proposed new 
Exchange Act Schedule 14N on the date the notice is sent to the 
company.\190\ The new Schedule 14N would require: \191\
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    \190\ In this regard, we propose to amend Rule 13(a)(4) of 
Regulation S-T to provide that a Schedule 14N will be deemed to be 
filed on the same business day if it is filed on or before 10 p.m. 
Eastern Standard Time or Eastern Daylight Saving Time, whichever is 
currently in effect. This will allow nominating shareholders 
additional time to file the notice on Schedule 14N and transmit the 
notice to the company.
    \191\ In the 2003 Proposal, the Commission proposed to rely on 
disclosure obtained in a Schedule 13G. The Schedule 13G filing 
requirement is triggered when a shareholder or group owns more than 
5% of the company's securities. In the current proposal, we are 
proposing ownership thresholds for many companies that are different 
from the more than 5% threshold proposed in 2003. We nevertheless 
believe uniform disclosure for all companies, regardless of size, 
would be appropriate. Therefore, we are proposing a new filing 
requirement on Schedule 14N, to require certain disclosures 
regarding the nominating shareholder and nominee that would not 
otherwise be required to be filed.
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     The name and address of the nominating shareholder or each 
member of the nominating shareholder group;
     Information regarding the amount and percentage of 
securities beneficially owned and entitled to vote at the meeting;
     A written statement from the ``record'' holder of the 
shares beneficially owned by the nominating shareholder or each member 
of the nominating shareholder group (usually a broker or bank) 
verifying that, as of the date of the shareholder notice on Schedule 
14N, the shareholder continuously held the securities for at least one 
year; \192\
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    \192\ This requirement would be applicable only where the 
nominating shareholder is not the registered holder of the shares 
and where the shareholder has not filed a Schedule 13D, Schedule 
13G, Form 3, Form 4, and/or Form 5, or amendments to those 
documents. See Item 5(a) to proposed Schedule 14N.
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     A written statement of the nominating shareholder's or 
group's intent to continue to own the requisite shares through the 
shareholder meeting at which directors are elected. Additionally, the 
nominating shareholder or group would provide a written statement 
regarding the nominating shareholder's or group's intent with respect 
to continued ownership after the election; \193\ and
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    \193\ See proposed Rule 14a-18(f), proposed Item 5(b) of 
Schedule 14N, proposed Item 7(e) of Schedule 14A, and proposed Item 
22(b)(18) of Schedule 14A.
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     A certification that to the best of the nominating 
shareholder's or group's knowledge and belief, the securities are not 
held for the purpose of, or with the effect of, changing the control of 
the issuer or gaining more than a limited number of seats on the board 
of directors.\194\
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    \194\ See Item 8 of proposed Schedule 14N.

We believe that these disclosures would assist shareholders in making 
an informed voting decision with regard to any nominee or nominees put 
forth by the nominating shareholder or group, in that the disclosures 
would enable shareholders to gauge the nominating shareholder's or 
group's interest in the company, longevity of ownership, and intent 
with regard to continued ownership in the company. These disclosures 
also would be important to the company in determining whether the 
nominating shareholder or group is eligible to rely on Rule 14a-11 to 
include a nominee or nominees in the company's proxy materials.
    The shareholder notice on Schedule 14N also would include 
representations concerning the nominating shareholder's or group's 
eligibility to use Rule 14a-11, as well as disclosure about the 
nominating shareholder or group and the nominee for director. The 
disclosure provided by the nominating shareholder or group would be 
similar to the disclosure currently required in a contested election 
and would be included by the company in its proxy materials. This 
disclosure would be required pursuant to proposed new Exchange Act Rule 
14a-18. Specifically, the shareholder notice on Schedule 14N would be 
required to include:
     A representation that the nominating shareholder or group 
is eligible to submit a nominee under Rule 14a-11; \195\
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    \195\ The eligibility standards for nominating shareholders are 
set forth in proposed Rule 14a-11(b). Pursuant to Rule 14a-18(b), 
the nominating shareholder would be required to include a 
representation in the notice that the nominating shareholder or 
group satisfies the conditions in Rule 14a-11(b).
---------------------------------------------------------------------------

     A representation that, to the knowledge of the nominating 
shareholder or group, the candidate's

[[Page 29046]]

nomination or initial service on the board, if elected, would not 
violate controlling state law, federal law, or applicable listing 
standards (other than a standard relating to independence); \196\
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    \196\ Proposed Rule 14a-11(a)(2) requires that the nomination 
and initial board service not violate these standards. This 
representation would be included in the nominating shareholder's 
notice pursuant to proposed Rule 14a-18(a).
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     A representation that, to the knowledge of the nominating 
shareholder or group, the nominee meets the objective criteria for 
independence from the company that are set forth in applicable rules of 
a national securities exchange or national securities association \197\ 
or, in the case of a registered investment company or business 
development company, that the nominee to the board is not an 
``interested person'' of the company as defined in Section 2(a)(19) of 
the Investment Company Act; \198\
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    \197\ The representation is not required if the company is not 
subject to the rules of a national securities exchange or national 
securities association.
    \198\ This representation would be included in the nominating 
shareholder's notice pursuant to proposed Rule 14a-18(c). The 
criteria for independence would be those generally applicable to 
directors, and not particular independence requirements, such as the 
requirements for audit committee members. See the Instruction to 
Rule 14a-18(c).
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     A representation that neither the nominee nor the 
nominating shareholder (or any member of the nominating shareholder 
group, if applicable) has an agreement with the company regarding the 
nomination of the nominee; \199\
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    \199\ This representation would be included in the nominating 
shareholder's notice pursuant to proposed Rule 14a-18(d).
---------------------------------------------------------------------------

     A statement from the nominee that the nominee consents to 
be named in the company's proxy statement and to serve on the board if 
elected, for inclusion in the company's proxy statement; \200\
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    \200\ This statement would be included in the nominating 
shareholder's notice pursuant to proposed Rule 14a-18(e).
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     A statement that the nominating shareholder or each member 
of the nominating shareholder group intends to continue to own the 
requisite amount of securities through the date of the meeting; \201\
---------------------------------------------------------------------------

    \201\ See proposed Rule 14a-18(f).
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     Disclosure about the nominee complying with the 
requirements of Item 4(b), Item 5(b), and Items 7(a), (b) and (c) and, 
for investment companies, Item 22(b) of Exchange Act Schedule 14A, for 
inclusion in the company's proxy statement; \202\
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    \202\ This information would be included in the nominating 
shareholder's notice pursuant to proposed Rule 14a-18(g). This 
information would identify the nominee, describe certain legal 
proceedings, if any, related to the nominee, and describe certain of 
the nominee's transactions and relationships with the company. See 
Items 7(a), (b), and (c) of Schedule 14A. This information also 
would include biographical information and disclosure about certain 
interests of the nominee. See Item 5(b) of Schedule 14A. With 
respect to a nominee for director of a registered investment company 
or business development company, the disclosure would include 
certain basic information about the nominee and any arrangement or 
understanding between the nominee and any other person pursuant to 
which he was selected as a nominee; information about the positions, 
interests, and transactions and relationships of the nominee and his 
immediate family members with the company and persons related to the 
company; information about the amount of equity securities of funds 
in a fund complex owned by the nominee; and information describing 
certain legal proceedings related to the nominee, including legal 
proceedings in which the nominee is a party adverse to, or has a 
material interest adverse to, the company or any of its affiliated 
persons. See paragraph (b) of Item 22 of Schedule 14A.
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     Disclosure about the nominating shareholder or members of 
a nominating shareholder group consistent with the disclosure currently 
required pursuant to Item 4(b) and Item 5(b) of Schedule 14A in a 
contested election; \203\
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    \203\ This information would be submitted in the nominating 
shareholder's notice pursuant to proposed Rule 14a-18(h).
---------------------------------------------------------------------------

     Disclosure about whether the nominating shareholder or 
member of a nominating shareholder group has been involved in any legal 
proceeding during the past five years, as specified in Item 401(f) of 
Regulation S-K. Disclosure pursuant to this section need not be 
provided if provided in response to Items 4(b) and 5(b) of Schedule 
14A; \204\
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    \204\ See proposed Rule 14a-18(i). Similar information is 
required for a nominee in response to Items 4(b) and 5(b) of 
Schedule 14A. We believe that it is appropriate to require similar 
disclosure of information from the nominating shareholder or group.
---------------------------------------------------------------------------

     The following disclosure regarding the nature and extent 
of the relationships between the nominating shareholder or group and 
nominee and the company or any affiliate of the company:
     Any direct or indirect material interest in any contract 
or agreement between the nominating shareholder or group or the nominee 
and the company or any affiliate of the company (including any 
employment agreement, collective bargaining agreement, or consulting 
agreement);
     Any material pending or threatened litigation in which the 
nominating shareholder or group or nominee is a party or a material 
participant and that involves the company, any of its officers or 
directors, or any affiliate of the company; and
     Any other material relationship between the nominating 
shareholder or group or the nominee and the company or any affiliate of 
the company not otherwise disclosed; \205\
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    \205\ See proposed Rule 14a-18(j).
---------------------------------------------------------------------------

     Disclosure of any Web site address on which the nominating 
shareholder or group may publish soliciting materials; \206\ and
---------------------------------------------------------------------------

    \206\ This information would be included in the nominating 
shareholder's notice pursuant to proposed Rule 14a-18(k).
---------------------------------------------------------------------------

     If desired to be included in the company's proxy 
statement, any statement in support of the shareholder nominee or 
nominees, which may not exceed 500 words.\207\
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    \207\ See proposed Rule 14a-18(l). The 500 words would be 
counted in the same manner as words are counted under Rule 14a-8. 
Any statements that are, in effect, arguments in support of the 
nomination would constitute part of the supporting statement. 
Accordingly, any ``title'' or ``heading'' that meets this test would 
be counted toward the 500-word limitation. Inclusion of a Web site 
address in the supporting statement would not violate the 500-word 
limitation; rather, the Web site address would be counted as one 
word for purposes of the 500-word limitation. We note that in the 
2003 Proposal the Commission proposed that a company would be 
required to include a nominating shareholder's or group's supporting 
statement in the company's proxy materials in instances where the 
company made a statement opposing the nominating shareholder's 
nominee or nominees and/or supporting company nominees. Most 
commenters thought that a nominating shareholder's or group's 
supporting statement should be included in company proxy materials 
irrespective of whether the company includes its own supporting 
statement or statement in opposition to a shareholder nominee. See 
2003 Summary of Comments.
---------------------------------------------------------------------------

    We note that the disclosure requirements we have proposed here are 
substantially similar to the requirements the Commission proposed in 
the 2003 Proposal. In both cases, the requirements focus on obtaining 
disclosure similar to what would be obtained in an election contest. In 
the 2003 Proposal, because the Commission proposed a 5% ownership 
threshold, nominating shareholders or groups would have been required 
to file a Schedule 13G, so the Commission also proposed to require 
certain disclosures and representations from the nominating shareholder 
and nominee on Schedule 13G rather than create a new schedule. Under 
the tiered ownership threshold we are proposing, a nominating 
shareholder or group may hold less than 5% of the company's securities 
and would not be required to file a Schedule 13G. Accordingly, because 
we believe that uniform disclosure regardless of company size would be 
appropriate, we are proposing a new Schedule 14N that would require the 
same disclosures and representations from the nominating shareholder 
and nominee regardless of the percentage of the company's securities 
held by the nominating shareholder or group.

[[Page 29047]]

    The Schedule 14N would be filed with the Commission in the 
following manner: \208\
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    \208\ The requirement to file a Schedule 14N with the Commission 
is set forth in proposed Rule 14n-1 and proposed Rule 14a-18.
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     The filing would include a cover page in the form set 
forth in proposed Schedule 14N with the appropriate box on the cover 
page marked to specify that the filing relates to a Rule 14a-11 
nomination; \209\
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    \209\ The Schedule 14N also would be used for disclosure 
concerning the inclusion of shareholder nominees in company proxy 
materials when made pursuant to an applicable state law provision or 
a company's governing documents, as set out in proposed Rule 14a-19.
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     The filing would be made under the subject company's 
Exchange Act file number (or in the case of a registered investment 
company, under the subject company's Investment Company Act file 
number); and
     The filing would be made on the date the notice is first 
transmitted to the company.
    In order to file the Schedule 14N on EDGAR, a nominating 
shareholder or group and any nominee that does not already have EDGAR 
filing codes, and to which the Commission has not previously assigned a 
user identification number, which we call a ``Central Index Key (CIK)'' 
code, would need to obtain the codes by filing electronically a Form ID 
\210\ at https://www/filermanagement.edgarfiling.sec.gov. The applicant 
also would be required to submit a notarized authenticating document. 
If the authenticating document is prepared before the applicant makes 
the Form ID filing, the authenticating document may be uploaded as a 
Portable Document Format (PDF) attachment to the electronic filing. An 
applicant also may submit the authenticating document by faxing it to 
the Commission within two business days before or after electronically 
filing the Form ID.\211\
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    \210\ 17 CFR 239.63; 249.446; and 274.402.
    \211\ The authenticating document would need to be manually 
signed by the applicant over the applicant's typed signature, 
include the information contained in the Form ID, and confirm the 
authenticity of the Form ID. If the authenticating document is filed 
after electronically filing the Form ID, it would need to include 
the accession number assigned to the electronically filed Form ID as 
a result of its filing. See 17 CFR 232.10(b)(2).
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    The Schedule 14N would be required to be amended promptly for any 
material change in the facts set forth in the originally-filed Schedule 
14N. In this regard, we would view withdrawal of a nominating 
shareholder or group, or of a director nominee, and the reasons for any 
such withdrawal, as a material change. For example, such a withdrawal 
could be material because it may result in a group no longer meeting 
the required ownership threshold under Rule 14a-11. The nominating 
shareholder or group also would be required to file a final amendment 
to the Schedule disclosing within 10 days of the final results of the 
election being announced by the company the nominating shareholder's or 
group's intention with regard to continued ownership of their shares. 
The nominating shareholder would previously have disclosed their intent 
with regard to continued ownership of the company's securities in its 
original notice on Schedule 14N. Filing of the amendment to the 
Schedule 14N would provide shareholders with information as to whether 
the outcome of the election may have altered the intent of the 
shareholder and what further plans with regard to the company the 
nominating shareholder may have.
    The Schedule 14N, as filed with the Commission, as well as any 
amendments to the Schedule 14N, would be subject to the liability 
provisions of Exchange Act Rule 14a-9 pursuant to proposed new 
paragraph (c) to the rule.\212\
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    \212\ For further discussion, see Section III.E.
---------------------------------------------------------------------------

    In a traditional proxy contest, shareholders would receive the 
disclosure required by Items 4(b), 5(b), and Item 7 (or Item 22, as 
applicable) of Schedule 14A as discussed above. The proposed Schedule 
14N disclosure requirements are somewhat more expansive in that they 
also would include the disclosures concerning ownership amount, length 
of ownership, intent to continue holding the shares through the date of 
the meeting, and a certification that the nominating shareholder or 
group is not seeking to change the control of the issuer or to gain 
more than a limited number of seats on the board of directors. In 
addition, the proposed disclosure requirements would include 
representations concerning the nominating shareholder's or group's 
eligibility to rely on Rule 14a-11 to include a nominee or nominees in 
the company's proxy statement, as well as representations concerning 
the nominee's eligibility, and disclosure regarding the nature and 
extent of the relationships between the nominating shareholder or group 
and nominee and the company or any affiliate of the company. Today's 
proposed disclosure requirements are not as extensive, however, as 
those in the Shareholder Proposals Proposing Release that were not 
adopted. In that instance, a shareholder that was relying on a company 
bylaw to include a nominee for director in a company's proxy materials 
would have had to provide the following disclosures in addition to what 
we are proposing today:
     A description of the following items that occurred during 
the 12 months prior to the formation of any plans or proposals, or 
during the pendency of any proposal or nomination:
     Any material transaction of the shareholder with the 
company or any of its affiliates, and
     Any discussion regarding the proposal between the 
shareholder and a proxy advisory firm;
     Any holdings of more than 5% of the securities of any 
competitor of the company (i.e., any enterprise with the same SIC 
code); and
     Any meetings or contacts, including direct or indirect 
communication by the shareholder, with the management or directors of 
the company that occurred during the 12-month period prior to the 
formation of any plans or proposals, or during the pendency of the 
proposal.\213\
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    \213\ These disclosures would have applied to either a 
shareholder proponent of a proposal to amend a company's bylaws to 
establish procedures for inclusion in the company's proxy materials 
of shareholder nominees for director or to a nominating shareholder 
under such an adopted bylaw. A shareholder proponent of a bylaw 
proposal would also have been required to disclose background 
information about the proposing shareholder including qualifications 
and background relevant to the plans or proposals, and any interests 
or relationships of such shareholder proponent that are not shared 
generally by the other shareholders of the company and that could 
have influenced the decision by such proponent to submit a proposal.
---------------------------------------------------------------------------

    Based on the comments we received on the Shareholder Proposals 
Proposing Release, we believe that requiring such extensive disclosure 
may be impractical and may serve as a deterrent to shareholders' 
exercise of their right to nominate directors. We believe that the 
disclosure we propose today would provide transparency and facilitate 
shareholders' ability to make an informed voting decision on a 
shareholder director nominee or nominees without being unnecessarily 
burdensome on nominating shareholders or groups. We believe that the 
proposed disclosure would be particularly important because the 
nominating shareholder or group would not be bound by the same 
fiduciary duties applicable to the members of a board's nominating 
committee in selecting director nominees.
Request for Comment
    F.1. Are the proposed content requirements of the shareholder 
notice on Schedule 14N appropriate? Are there matters included in the 
notice that should be eliminated (e.g., should the

[[Page 29048]]

nominating shareholder be required to provide disclosure of its 
intention with regard to continued ownership of the shares after the 
election, as is proposed)?
    F.2. Are there additional matters that should be included? For 
example, is there additional information that should be included with 
regard to the nominating shareholder or group or with regard to the 
shareholder nominee?
    F.3. Are the required representations appropriate? Should there be 
additional representations (e.g., should the nominee be required to 
make a representation concerning their understanding of their duties 
under state law if elected and their ability to act in the best 
interest of the company and all shareholders)? Should any of the 
proposed representations be eliminated?
    F.4. Is five years a sufficient time period for information about 
whether the nominating shareholder or member of a nominating 
shareholder group has been involved in any legal proceeding? Should it 
instead be ten years?
    F.5. What should be the consequence of a nominating shareholder or 
group including materially false information or a materially false 
representation in the nominating shareholder's or group's notice on 
Schedule 14N to the company, whether before inclusion of a nominee in 
the company's proxy materials, after inclusion of a nominee in the 
company's proxy materials but before the election, or after a nominee 
has been included in the company's proxy materials and elected? Should 
it make a difference whether the false information or representation 
was provided knowingly? Should it make a difference whether the false 
information or representation was material?
    F.6. What should be the consequence to the nominating shareholder 
or group of submitting the notice on Schedule 14N to the company after 
the deadline? What should be the consequence of filing the notice on 
Schedule 14N with the Commission after the deadline? Should a late 
submission to the company or late filing with the Commission render the 
nominating shareholder or group ineligible to have a nominee included 
in the company's proxy materials under Rule 14a-11 with respect to the 
upcoming meeting, as is currently proposed?
    F.7. The proposed instructions to Rule 14a-11 address how to 
provide disclosure where the nominating shareholder is a ``general or 
limited partnership, syndicate or other group.'' Is this sufficiently 
broad to address any nominating shareholders that may use the rule?
    F.8. Should a company's advance notice provision govern the timing 
of the submission of shareholder nominations for directors? If not, 
should the Commission adopt a specific deadline instead? Should the 
Commission make no reference to advance notice provisions as they may 
apply to proxy solicitations and adopt a generally applicable federal 
standard? Would such an approach better enable consistent exercise by 
shareholders of their voting and nominating rights across public 
companies? If the Commission were to establish a federal standard, 
would 120 calendar days before the date that the company mailed its 
proxy materials for the prior year's annual meeting be appropriate? 
Should it be longer (e.g., 150 or 180 calendar days before the date 
that the company mailed its proxy materials for the prior year's annual 
meeting), or shorter (e.g., 90 calendar days before the date that the 
company mailed its proxy materials for the prior year's annual 
meeting)?
    F.9. In the absence of an advance notice provision, the nominating 
shareholder or group would be required to submit the notice to the 
company and file with the Commission no later than 120 calendar days 
before the date that the company mailed its proxy materials for the 
prior year's annual meeting. Is this deadline appropriate and workable? 
If not, what should be the deadline (e.g., 80, 90, 100, 150, or 180 
calendar days before the date that the company mailed its proxy 
materials for the prior year's annual meeting)?
    F.10. Should there be a specified range of time in which a 
shareholder is permitted to submit a nominee (e.g., no earlier than 150 
days before and no later than 120 days before the date the company 
mailed its proxy materials the previous year)? Should a different range 
be used (e.g., should the submission of nominations be limited to no 
earlier than 120 days and no later than 90 days; no earlier than 180 
days and no later than 150 days; or no earlier than 180 days and no 
later than 120 days before the date the company mailed its proxy 
statement the previous year)? Does permitting submission of a nominee 
at any time prior to 120 days before the company mailed its proxy 
materials the previous year skew the process in favor of certain 
shareholders? If so, why? If not, why? If a different date range would 
be more workable, please tell us the range and why.
    F.11. The proposed notice requirements address both regularly 
scheduled annual meetings and circumstances where a company may not 
have held an annual meeting in the prior year or has moved the date of 
the meeting more than 30 days from the prior year. Under these 
circumstances, what is the appropriate date by which a nominating 
shareholder must submit the notice to the company? Should the 
Commission adopt a specific deadline for non-regularly scheduled 
meetings, or rely on a ``reasonable time'' standard? If a ``reasonable 
time'' standard is adopted, should the company be required to file the 
Form 8-K announcing the deadline any minimum number of days in advance 
of the deadline? If so, how many days notice should the company provide 
and why? What deadline should apply when a company holds a special 
meeting in lieu of an annual meeting?
    F.12. As proposed, an instruction to Form 8-K would specify that a 
company would be required to file a report pursuant to Item 5.07 within 
four business days of determining the anticipated meeting date if the 
company did not hold an annual meeting the previous year or if the 
annual meeting has been changed by more than 30 calendar days from the 
date of the previous year's meeting. Is such an instruction necessary? 
Should the company be required to file the Item 5.07 Form 8-K in less 
than four business days (e.g., two business days) or more than four 
business days (e.g., seven business days, 10 business days)?
    F.13. Should a registered investment company be required to 
disclose on Form 8-K the date by which a shareholder or shareholder 
group must submit the notice to the company of its intent to require 
its nominees on the company's proxy card? Should this date also be 
required to be disclosed on the company's Web site, if it has one? 
Should registered investment companies instead be permitted to provide 
this disclosure in a different manner?
    F.14. As proposed, a shareholder's or group's notice of intent to 
submit a nomination for director is required to be filed with the 
Commission on Schedule 14N. Is such a filing appropriate? Should 
additional or lesser information be filed with the Commission? Should a 
shareholder or group be required to send the notice to the company 
without filing the notice on Schedule 14N?
    F.15. When should the notice on Schedule 14N be filed with the 
Commission? Is it sufficient to require the Schedule 14N to be filed at 
the time it is provided to the company? Should an abbreviated version 
of the Schedule 14N be filed sooner, before the nominating shareholder 
or group provides notice to the company, such as at the time a 
shareholder or group first decides to make a nomination, when the

[[Page 29049]]

nominating shareholder first identifies a nominee for director, or some 
other time? Should it be filed later?
    F.16. The notice on Schedule 14N would be required to be amended 
promptly for any material change in the facts set forth in the 
originally-filed Schedule 14N. Should the nominating shareholder or 
group be required to amend the Schedule 14N for any material change in 
the facts? Why or why not?
    F.17. The nominating shareholder or group would be required to file 
a final amendment to the Schedule disclosing, within 10 days of the 
final results of the election being announced by the company, the 
nominating shareholder's or group's intention with regard to continued 
ownership of their shares. Should the nominating shareholder or group 
be required to amend the Schedule 14N to disclose their intent 
regarding continued ownership? Why or why not?
    F.18. In situations where a nominating shareholder or group 
beneficially owns more than 5% of the company's securities, should we 
permit a combined Schedule 13G/Schedule 14N filing? Should we permit a 
combined Schedule 13D/Schedule 14N filing? Why or why not?
    F.19. Should a nominating shareholder or group be required to file 
Schedule 14N on EDGAR, as proposed?
    F.20. Should the notice be required to include a description of the 
following items that occurred during the 12 months prior to the 
formation of any plans or proposals with respect to the nomination, or 
during the pendency of any nomination: (i) Any material transaction of 
the shareholder with the company or any of its affiliates, and (ii) any 
discussion regarding the nomination between the shareholder and a proxy 
advisory firm?
    F.21. Should the nominating shareholder or group and/or nominee be 
required to disclose any holdings of more than 5% of the securities of 
any competitor of the company (i.e., any enterprise with the same SIC 
code)?
    F.22. Should the nominating shareholder or group and/or nominee be 
required to disclose any meetings or contacts, including direct or 
indirect communication by the shareholder, with the management or 
directors of the company that occurred during the 12-month period prior 
to the formation of any plans or proposals with respect to a 
nomination?
7. Requirements for a Company That Receives a Notice From a Nominating 
Shareholder or Group
a. Inclusion of a Shareholder Director Nominee
    Upon receipt of a shareholder's or group's notice of its intent to 
require the company to include in its proxy materials a shareholder 
nominee or nominees pursuant to Rule 14a-11, the company would 
determine whether any of the events permitting exclusion of the 
shareholder nominee or nominees has occurred.\214\ If not, the company 
would notify in writing the nominating shareholder or group no later 
than 30 calendar days before the company files its definitive proxy 
statement and form of proxy with the Commission that it will include 
the nominee or nominees. The company would be required to provide this 
notice in a manner that provides evidence of timely receipt by the 
nominating shareholder or group.
---------------------------------------------------------------------------

    \214\ See proposed Rule 14a-11(f).
---------------------------------------------------------------------------

    The company would then include disclosure regarding the shareholder 
nominee or nominees and the nominating shareholder or group in the 
company's proxy statement \215\ and include the name of the nominee on 
the company's form of proxy that is included with the proxy 
statement.\216\ With regard to the company's form of proxy, the company 
could identify any shareholder nominees as such and recommend how 
shareholders should vote for, against, or withhold votes on those 
nominees and management nominees on the form of proxy.\217\ The company 
would otherwise be required to present the nominees in an impartial 
manner in accordance with Rule 14a-4. Under the current rules, a 
company may provide shareholders with the option to vote for or 
withhold authority to vote for the company's nominees as a group, 
provided that shareholders also are given a means to withhold authority 
for specific nominees in the group. In our view, this option would not 
be appropriate where the company's form of proxy includes shareholder 
nominees, as grouping the company's nominees may make it easier to vote 
for all of the company's nominees than to vote for the shareholder 
nominees in addition to some of the company nominees. Accordingly, when 
a shareholder nominee is included, the proposed rules would not permit 
a company to provide shareholders the option of voting for or 
withholding authority to vote for the company nominees as a group, but 
would instead require that each nominee be voted on separately.\218\
---------------------------------------------------------------------------

    \215\ Under the proposed rules, inclusion of a shareholder 
nominee in the company's proxy materials would not require the 
company to file a preliminary proxy statement provided that the 
company was otherwise qualified to file directly in definitive form. 
In this regard, the proposed rules make clear that inclusion of a 
shareholder nominee would not be deemed a solicitation in 
opposition. See proposed revisions to Rule 14a-6(a)(4) and Note 3 to 
that rule.
    \216\ These requirements are set forth in proposed Rule 14a-
11(a), proposed Rule 14a-18(g)-(l) and proposed amendments to Rule 
14a-4(b)(2). In addition, we are proposing to add paragraph (e) to 
Item 7 of Schedule 14A (and, for registered investment companies and 
business development companies, paragraph (18) to Item 22(b) of 
Schedule 14A) to state that the registrant must include the 
disclosure required from the nominating shareholder under proposed 
Rule 14a-11(a).
    \217\ This would be similar to the current practice with regard 
to shareholder proposals submitted pursuant to Rule 14a-8 where 
companies identify the shareholder proposals and provide a 
recommendation to shareholders as to how they should vote on those 
proposals.
    \218\ See proposed Rule 14a-4(b)(2)(iv). We anticipate that 
companies would continue to be able to solicit discretionary 
authority to vote a shareholder's shares for the company nominees, 
as well as to cumulate votes for the company nominees in accordance 
with applicable state law, where such state law provides for 
cumulative voting.
---------------------------------------------------------------------------

    A company also would be required to include in its proxy statement, 
if desired by the nominating shareholder or group, a statement by the 
nominating shareholder or group in support of the shareholder nominee 
or nominees. In this regard, we believe that not only should a company 
be able to include a statement in support of the company nominees in 
its proxy statement, provided that it complies with Rule 14a-9, we also 
are of the view that a nominating shareholder or group should be 
afforded a similar opportunity. Accordingly, we are proposing to 
require a company to include a nominating shareholder's or group's 
statement of support for the shareholder nominee or nominees, so long 
as the statement of support does not exceed 500 words.\219\ This 
statement must be provided to the company in the shareholder notice on 
Schedule 14N.\220\
---------------------------------------------------------------------------

    \219\ See proposed Rule 14a-11(a). In counting the 500 words, 
any statements that are, in effect, arguments in support of the 
proposal would be viewed as part of the supporting statement. 
Accordingly, any ``title'' or ``heading'' that meets this test would 
be counted toward the 500-word limitation. Inclusion of a website 
address in the supporting statement would not violate the 500-word 
limitation; rather, the website address would be counted as one word 
for purposes of the 500-word limitation.
    \220\ See proposed Rule 14a-18(l).
---------------------------------------------------------------------------

    In addition, both the company and the nominating shareholder or 
group would be able to solicit in favor of their nominees outside the 
proxy statement (for example, on a designated website), provided that 
such solicitations were made within the parameters of the

[[Page 29050]]

applicable proxy rules. Any written soliciting materials published, 
sent or given by the nominating shareholder or group outside the 
company's proxy statement would be required to be filed with the 
Commission in accordance with proposed Rule 14a-2(b)(7) or (b)(8) on 
the date of first use.
b. Excluding a Shareholder Director Nomination That Does Not Comply 
With the Requirements of Rule 14a-11
    A company may determine that it is not required under proposed Rule 
14a-11 to include a nominee from a nominating shareholder or group in 
its proxy materials if it determines any of the following:
     Proposed Rule 14a-11 is not applicable to the company;
     The nominating shareholder or group has not complied with 
the requirements of Rule 14a-11;
     The nominee does not meet the requirements of Rule 14a-11;
     Any representation required to be included in the notice 
to the company is false or misleading in any material respect; or
     The company has received more nominees than it is required 
to include by proposed Rule 14a-11 and the nominating shareholder or 
group is not entitled to have its nominee included under the criteria 
proposed in Rule 14a-11(d)(3).\221\
---------------------------------------------------------------------------

    \221\ See proposed Rule 14a-11(a).
---------------------------------------------------------------------------

    The nominating shareholder or group would need to be notified of 
the company's determination not to include the shareholder nominee in 
sufficient time to consider the validity of any determination to 
exclude the nominee.\222\ In this regard, we note the time-sensitive 
nature of Rule 14a-11 and the interpretive issues that may arise in 
applying the new rule. Accordingly, the rules that we are proposing, 
which set out the process by which a company would determine whether to 
include a shareholder nominee and notify the nominating shareholder or 
group, include a proposed procedure by which companies would send a 
notice to the Commission where the company intends not to include a 
shareholder nominee in its proxy materials, and could seek staff 
advice--through a no-action request--with respect to that 
determination.\223\ This procedure is modeled after the staff no-action 
process used in connection with shareholder proposals under Rule 14a-8.
---------------------------------------------------------------------------

    \222\ See proposed Rule 14a-11(f).
    \223\ See proposed Rule 14a-11(f)(7)-(14). As is the case with 
regard to the Rule 14a-8 staff no-action process, we encourage 
companies and shareholders to attempt to resolve disputes 
independently. To the extent that a company and nominating 
shareholder or group are able to resolve an issue at any point 
during the staff no-action process, the company would withdraw its 
request for a no-action position from the staff.
---------------------------------------------------------------------------

    In addition, we have proposed a process by which a nominating 
shareholder or group may remedy certain eligibility or procedural 
deficiencies in a nomination.\224\ The various time deadlines set out 
in the proposed process were determined by considering the appropriate 
balance between companies' needs in meeting printing and filing 
deadlines for their shareholder meetings with shareholders' need for 
adequate time to satisfy the requirements of the rule. In doing so, we 
considered the timing requirements and deadlines in Rule 14a-8 when 
crafting the requirements and deadlines for Rule 14a-11; however, due 
to the potential complexity of the nomination process, we determined 
that it would be appropriate to provide additional time for the 
process. For example, once a nominating shareholder submits a nominee 
pursuant to Rule 14a-11, the company must consider the nominee 
submitted and make a determination as to whether to include the nominee 
or submit a no-action request pursuant to Rule 14a-11(f). A nominating 
shareholder will be afforded time to respond to the no-action request, 
and the staff will need time to process the request. In addition, a 
company may need time after receipt of the no-action response from the 
staff to finalize the proxy materials.
---------------------------------------------------------------------------

    \224\ See proposed Rule 14a-11(f)(3)-(6).
---------------------------------------------------------------------------

    The following process would apply when a company receives a 
shareholder nomination under Rule 14a-11:
     Upon receipt of a shareholder's or shareholder group's 
notice of intent to nominate a director or directors, the company would 
determine whether any of the eligibility requirements have not been 
satisfied by the nominating shareholder or group or nominee or nominees 
and whether the company will seek to exclude the shareholder nominee or 
nominees; \225\
---------------------------------------------------------------------------

    \225\ See proposed Rule 14a-11(f)(1)-(3). See also proposed Rule 
14a-11(a) detailing circumstances permitting exclusion of 
shareholder nominee or nominees. Where a company receives more than 
one nominee from an eligible nominating shareholder or group and 
some of those nominees are eligible to be placed in the company's 
proxy materials, the company's determination that one or more of the 
nominating shareholder's or group's nominees are not eligible will 
not affect the company's obligation to place the eligible nominee or 
nominees in its proxy materials.
---------------------------------------------------------------------------

     If the company determines that the eligibility 
requirements have not been satisfied by the nominating shareholder or 
group or nominee or nominees and it seeks to exclude the shareholder 
nominee or nominees, the company would notify in writing the nominating 
shareholder or group of this determination, at the business address, 
facsimile number and/or e-mail address provided in the nominating 
shareholder's or group's notice to the company. This notice must be 
postmarked or transmitted electronically no later than 14 calendar days 
after it receives the shareholder notice of intent to nominate. The 
company should provide this notice in a manner that provides evidence 
of receipt by the nominating shareholder or group; \226\
---------------------------------------------------------------------------

    \226\ See proposed Rule 14a-11(f)(3).
---------------------------------------------------------------------------

     The company's notice to the nominating shareholder or 
group that it has determined that the company may exclude a shareholder 
nominee or nominees would be required to include an explanation of the 
company's basis for determining that it may exclude the nominee or 
nominees; \227\
---------------------------------------------------------------------------

    \227\ See proposed Rule 14a-11(f)(4).
---------------------------------------------------------------------------

     The nominating shareholder or group would have 14 calendar 
days after receipt of the written notice of deficiency to respond to 
that notice and correct any eligibility or procedural deficiencies 
identified in that notice. The nominating shareholder's or group's 
response must be postmarked, or transmitted electronically, no later 
than 14 calendar days from the date the shareholder received the 
company's notice. As with the company's notice, the nominating 
shareholder or group should provide the response in a manner that 
provides evidence of its receipt by the company; \228\
---------------------------------------------------------------------------

    \228\ See proposed Rule 14a-11(f)(5). We believe it is necessary 
to impose a time limit for a nominating shareholder's response to a 
notice of deficiency due to the potential time-sensitive nature of 
the nomination process and a company's preparation of its proxy 
materials for filing.
---------------------------------------------------------------------------

     Neither the composition of a nominating shareholder group 
nor a shareholder nominee could be changed as a means to correct a 
deficiency identified in the company's notice to the nominating 
shareholder or group--those matters would be required to remain as they 
were described in the notice to the company (we believe that to allow 
otherwise could serve to undermine the purpose of the notice deadline 
provided for in the rule); however, where a nominating shareholder or 
group inadvertently submits a number of nominees that exceeds the 
maximum number required to be included by the company, the nominating 
shareholder or group may specify which nominee or

[[Page 29051]]

nominees are not to be included in the company's proxy materials; \229\
---------------------------------------------------------------------------

    \229\ See proposed Rule 14a-11(f)(6).
---------------------------------------------------------------------------

     If, upon review of the nominating shareholder's response, 
the company determines that the company still may exclude a shareholder 
nominee or nominees, after providing the requisite notice of and time 
for the nominating shareholder or group to remedy any eligibility or 
procedural deficiencies in the nomination, the company would be 
required to provide notice of the basis for its determination to the 
Commission no later than 80 calendar days before it files its 
definitive proxy statement and form of proxy with the Commission. The 
Commission staff could permit the company to make its submission later 
than 80 days before the company files its definitive proxy statement 
and form of proxy if the company demonstrates good cause for missing 
the deadline; \230\
---------------------------------------------------------------------------

    \230\ See proposed Rule 14a-11(f)(7). This would be similar to 
the procedures the company must follow if it intends to exclude a 
shareholder proposal under Rule 14a-8. See Rule 14a-8(j). Given the 
similarities in the processes, we are proposing an 80-day deadline 
for Rule 14a-11(f).
---------------------------------------------------------------------------

     The company's notice to the Commission would include: (a) 
Identification of the nominating shareholder or each member of the 
nominating shareholder group, as applicable; (b) the name of the 
nominee or nominees; (c) an explanation of the company's basis for 
determining that it may exclude the nominee or nominees; and (d) a 
supporting opinion of counsel when the company's basis for excluding a 
nominee or nominees relies on a matter of state law; \231\
---------------------------------------------------------------------------

    \231\ See proposed Rule 14a-11(f)(8).
---------------------------------------------------------------------------

     Unless otherwise provided in Rule 14a-11 (e.g., the 
nominating shareholder's or group's obligation to demonstrate that it 
responded to a company's notice of deficiency, where applicable, within 
14 calendar days after receipt of the notice of deficiency), the burden 
would be on the company to demonstrate that it may exclude a nominee or 
nominees; \232\
---------------------------------------------------------------------------

    \232\ See proposed Rule 14a-11(f)(9).
---------------------------------------------------------------------------

     The company would be required to file its notice of its 
intent to exclude with the Commission and simultaneously provide a copy 
to the nominating shareholder or each member of the nominating 
shareholder group; \233\
---------------------------------------------------------------------------

    \233\ See proposed Rule 14a-11(f)(10).
---------------------------------------------------------------------------

     The nominating shareholder or group could submit a 
response to the company's notice to the Commission. This response would 
be postmarked or transmitted electronically no later than 14 calendar 
days after the nominating shareholder's or group's receipt of the 
company's notice to the Commission. The nominating shareholder or group 
would be required to provide a copy of its response to the Commission 
simultaneously to the company; \234\
---------------------------------------------------------------------------

    \234\ See proposed Rule 14a-11(f)(11). A nominating shareholder 
group may, but is not required to, respond to a company's notice to 
the staff.
---------------------------------------------------------------------------

     The Commission staff would, at its discretion, provide an 
informal statement of its views (a no-action letter) to the company and 
the nominating shareholder or group; \235\
---------------------------------------------------------------------------

    \235\ See proposed Rule 14a-11(f)(12). The staff's no-action 
responses to submissions made pursuant to proposed Rule 14a-11(f) 
would reflect only informal views. The staff determinations reached 
in these no-action letters would not, and cannot, adjudicate the 
merits of a company's position with respect to exclusion of a 
shareholder nominee under Rule 14a-11. Accordingly, a discretionary 
staff determination would not preclude an interested person from 
pursuing a judicial determination regarding the application of Rule 
14a-11.
---------------------------------------------------------------------------

     The company would provide the nominating shareholder or 
group with notice, no later than 30 calendar days before it files its 
definitive proxy statement and form of proxy with the Commission, of 
whether it will include or exclude the shareholder nominee or nominees; 
\236\
---------------------------------------------------------------------------

    \236\ See proposed Rule 14a-11(f)(13).
---------------------------------------------------------------------------

     All materials submitted to the Commission in relation to 
Rule 14a-11(f) would be publicly available upon submission; \237\ and
---------------------------------------------------------------------------

    \237\ See proposed Rule 82a, which would state that materials 
filed with the Commission pursuant to proposed Rule 14a-11(f), 
written communications related thereto received from any person, and 
each related no-action letter or other written communication issued 
by the staff of the Commission, shall be made available to any 
person upon request for inspection or copying. This rule would be 
similar to Rule 82, which applies to no-action requests related to 
shareholder proposals.
---------------------------------------------------------------------------

     The company or any nominating shareholder or group could 
request that the staff seek the Commission's views with respect to a 
determination of the staff under Rule 14a-11(f). The staff, upon such a 
request or on its own motion, would generally present questions to the 
Commission that involve matters of substantial importance and where the 
issues are novel or highly complex, although the granting of a request 
for an informal statement by the Commission is entirely within its 
discretion.\238\
---------------------------------------------------------------------------

    \238\ See Commission Rules of Informal and Other Procedures Rule 
202.1(d).
---------------------------------------------------------------------------

    The process generally would operate as follows:

------------------------------------------------------------------------
                Due date                         Action required
------------------------------------------------------------------------
Date set by company's advance notice     Nominating shareholder or group
 provision or, in the absence of such a   must provide and file notice
 provision, 120 days before the           on Schedule 14N.
 anniversary of the date that the
 company mailed the prior year's proxy
 materials.
Within 14 calendar days after the        Company must notify the
 company's receipt of the nominating      nominating shareholder or
 shareholder's or group's notice on       group of any determination not
 Schedule 14N.                            to include the nominee or
                                          nominees.
Within 14 calendar days after the        Nominating shareholder must
 nominating shareholder's or group's      respond to the company's
 receipt of the company's deficiency      deficiency notice.
 notice.
No later than 80 calendar days before    Company must provide notice of
 the company files its definitive proxy   its intent to exclude the
 statement and form of proxy with the     nominating shareholder's or
 Commission.                              group's nominee or nominees
                                          and the basis for its
                                          determination to the
                                          Commission.
Within 14 calendar days of the           Nominating shareholder or group
 nominating shareholder's or group's      could submit a response to the
 receipt of the company's notice to the   company's notice to the
 Commission.                              Commission staff.
As soon as practicable.................  Commission staff would, at its
                                          discretion, provide an
                                          informal statement of its
                                          views to the company and the
                                          nominating shareholder or
                                          group.
No later than 30 calendar days before    Company must provide the
 the company files its definitive proxy   nominating shareholder or
 statement and form of proxy with the     group with notice of whether
 Commission.                              it will include or exclude the
                                          shareholder's nominee or
                                          nominees.
------------------------------------------------------------------------

BILLING CODE 8010-01-P

[[Page 29052]]

[GRAPHIC] [TIFF OMITTED] TP18JN09.000

BILLING CODE 8010-01-C
Request for Comment
    G.1. Under proposed Rule 14a-11(a) a company would not be required 
to include a shareholder nominee where: (1) Applicable state law or the 
company's governing documents prohibit the company's shareholders from 
nominating a candidate for director; (2) the nominee's candidacy or, if 
elected, board membership, would violate controlling state law, federal 
law or rules of a national securities exchange or national securities 
association; (3) the nominating shareholder or group does not meet the 
rule's eligibility requirements; (4) the nominating shareholder's or 
group's notice is deficient, (5) any representation in the nominating 
shareholder's or group's notice is false in any material respect, or 
(6) the nominee is not required to be included in the company's proxy 
materials due to the proposed limitation on the number of nominees 
required to be included. Proposed Rule 14a-11(f)(1) provides that the 
company shall determine whether any of these events have occurred. Will 
companies be able to make this determination? Why or why not?
    G.2. As proposed, neither the composition of a nominating 
shareholder group nor a shareholder nominee could be changed as a means 
to correct a deficiency identified in the company's notice to the 
nominating shareholder or group. Should we permit the nominating 
shareholder group to change its composition to correct an identified 
deficiency, such as a failure of the group to meet the requisite 
ownership threshold? Should the nominating shareholder or group be 
permitted to submit a replacement shareholder nominee in the event that 
it is determined that a nominee does not meet the eligibility criteria?
    G.3. As proposed, inclusion of a shareholder nominee in the 
company's proxy materials would not require the company to file a 
preliminary proxy statement provided that the company was otherwise 
qualified to file directly in definitive form. In this regard, the 
proposed rules make clear that inclusion of a shareholder nominee would 
not be deemed a ``solicitation in opposition.'' Is this appropriate or 
should the inclusion of a nominee instead be viewed as a solicitation 
in opposition that would require a company to file its proxy statement 
in preliminary form? Should we view inclusion of a shareholder nominee 
as a solicitation in opposition for other purposes (e.g., expanded 
disclosure obligations)?
    G.4. Under the proposal, companies would not be able to provide 
shareholders the option of voting for the company's slate of nominees 
as a whole. Should we allow companies to provide

[[Page 29053]]

that option to shareholders? Are any other revisions to the form of 
proxy appropriate? Would a single ballot or ``universal ballot'' that 
includes both company nominees and shareholder nominees be confusing? 
Would a universal ballot result in logistical difficulties? If so, 
please specify.
    G.5. Is it appropriate to require that the company include in its 
proxy statement a supporting statement by the nominating shareholder or 
group? If so, should this requirement be limited to instances where the 
company wishes to make a statement opposing the nominating 
shareholder's nominee or nominees or supporting company nominees? Is it 
appropriate to limit the nominating shareholder's or group's supporting 
statement to 500 words? If not, what limit, if any, is more appropriate 
(e.g., 250, 750, or 1,000 words)? Should the limit be 500 words per 
nominee, or some other number (e.g., 250, 750, or 1,000 words)? Should 
the company's supporting statement be similarly limited? Why or why 
not?
    G.6. Should the rule explicitly state that the nominating 
shareholder's or group's supporting statement may contain statements 
opposing the company's nominees? Would it be appropriate to require a 
company to include a nominating shareholder's or group's statement of 
opposition in its proxy materials?
    G.7. Is the 14-day time period for the company to respond to a 
nominating shareholder's notice or for the nominating shareholder to 
respond to a company's notice of deficiency sufficient? Should the time 
period be longer (e.g., 20 days, 25 days, 30 days) or shorter (e.g., 10 
days, 7 days, 5 days)? Should the rule explicitly set out the effect of 
a company providing the notice late (e.g., the company may not exclude 
the nominee) or of a shareholder responding to this notice late (e.g., 
the nominee may be excluded)?
    G.8. Is the 80-day requirement for submission of the company's 
notice to the Commission sufficient? If not, should the requirement be 
increased (e.g., 90 days, 100 days, 120 days, or more) or decreased 
(e.g., 75 days, 60 days, or less)? Is the proposed provision under 
which the staff could permit the company to make its submission later 
than 80 days before filing its definitive proxy statement where the 
company demonstrates good cause appropriate? If not, why not? Should 
the rule more explicitly discuss the effect of such a late filing?
    G.9. Is the 14-day time period for the nominating shareholder to 
respond to the receipt of a company's notice to the Commission of its 
intent to exclude the nominee sufficient? Should it be longer (e.g., 20 
days, 25 days, 30 days) or shorter (e.g., 10 days, 7 days, 5 days)? 
Should the rule explicitly set out the effect of a shareholder 
responding to the company's notice late (e.g., the nominee may be 
excluded)?
    G.10. Is the requirement that the company notify the nominating 
shareholder or group of whether it will include or exclude the 
nominating shareholder's or group's nominee or nominees no later than 
30 calendar days before the company files its definitive proxy 
statement and form of proxy with the Commission appropriate and 
workable? If not, what should the deadline be (e.g., 40 calendar days 
before filing definitive proxy materials, 35 days before filing 
definitive proxy materials, 25 calendar days before filing definitive 
proxy materials, 20 calendar days before filing definitive proxy 
materials)? Should the rule explicitly set out the effect of a company 
sending this notice late?
    G.11. Would the timing requirements overall allow a company to 
comply with the requirements of e-proxy?
    G.12. Do the proposed timing requirements, in the aggregate, allow 
sufficient time for the informal staff review process? How far in 
advance of filing definitive proxy materials do companies typically 
begin printing those materials? If the proposed timing requirements do 
not allow sufficient time for the informal staff review process, please 
tell us specifically which timing requirements pose a problem and 
suggest a specific alternative time that would be sufficient.
    G.13. What should happen if one of the deadlines specified in the 
proposed process in Rule 14a-11(f) falls on a Saturday, Sunday, or 
federal holiday? Should the deadline be counted from the preceding or 
succeeding federal work day?
    G.14. Should the informal staff review process be the same for 
reporting companies (other than registered investment companies), 
registered investment companies, and business development companies? 
Should there be unique procedures for different types of entities? If 
so, what is unique to a particular type of entity that would require a 
unique process?
    G.15. Should there be a method for a company to obtain follow-up 
information after a nominating shareholder or group submits an initial 
response to the company's notice of determination? If so, should that 
follow-up method have similar time frames as those related to the 
initial request and response? What adjustments to timing might be 
required for the nominating shareholder or group to respond to any such 
follow-up request?
    G.16. The proposed requirement for a legal opinion regarding state 
law is modeled on the requirement in Rule 14a-8. Is such a requirement 
necessary and appropriate in the context of proposed Rule 14a-11? 
Should it be changed in any way (e.g., should it be revised to require 
a legal opinion regarding foreign law for those instances where there 
may be a conflict with a company's country of incorporation where the 
company is organized in a non-U.S. jurisdiction but does not meet the 
definition of foreign private issuer)?
    G.17. What process would be appropriate for addressing disputes 
concerning a company's determination? Is the proposed staff review 
process an appropriate means to address disputes concerning the 
company's determination? If not, by what other means should a company's 
determination be subject to review? Exclusively by the courts? Are 
there other processes we should consider?
    G.18. In the absence of a staff review process, what would be the 
potential litigation cost associated with the resolution of disputes 
concerning company determinations? Would shareholder meetings be 
delayed due to such litigation or threat of litigation?
    G.19. Are there certain types of company determinations that should 
or should not be subject to the staff review process (e.g., whether a 
nominating shareholder or group meets the required ownership 
threshold)? Please provide specific examples in your response.
    G.20. How should we address the situation where a nominating 
shareholder qualifies, provides its notice, and submits all of the 
nominees a company is required to include, then becomes ineligible 
under the rule? Under what circumstances should a second shareholder or 
group be able to nominate directors? If the second nominating 
shareholder or group provided a notice before the first shareholder 
became ineligible? Should it matter whether a company had notified the 
second nominating shareholder or group that it intended to exclude 
their nominee or nominees?
8. Application of the Other Proxy Rules to Solicitations by the 
Nominating Shareholder or Group
    As proposed, Rule 14a-11 would permit shareholders to aggregate 
their securities with other shareholders in order to meet the 
applicable minimum ownership threshold to nominate a director. 
Accordingly, we anticipate that shareholders would, in many instances,

[[Page 29054]]

engage in communications with other shareholders in an effort to form a 
nominating shareholder group that would be deemed solicitations under 
the proxy rules. In 2003 we proposed an exemption from certain of the 
proxy rules to enable shareholders to communicate for the limited 
purpose of forming a nominating shareholder group without filing and 
disseminating a proxy statement. To qualify for the exemption, 
shareholders would have had two options. The communications would 
either have been made to a limited number of shareholders or, in the 
alternative, to an unlimited number of shareholders, provided that the 
communication was limited in content and filed with the Commission. 
Some commenters supported adoption of limited exemptions,\239\ while 
others stated that the exemptions were unnecessary or duplicative of 
existing exemptions from the proxy rules. In particular, commenters 
expressed concerns about the exemption for solicitations not involving 
more than 30 persons in connection with the formation of a nominating 
security holder group.\240\ These commenters believed the 30-person 
exemption might be used for undeclared control purposes and believed 
that there was no reason to replace the 10-person exemption set forth 
in Exchange Act Rule 14a-2(b)(2), which permits limited testing of the 
waters before application of the notice and filing requirements of the 
proxy rules.\241\
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    \239\ See 2003 Summary of Comments; see also comment letters 
from CalPERS; CIR; ICI; and Clauss & Wolf.
    \240\ See 2003 Summary of Comments; see also comment letters 
from ABA; NYC Bar; and Sullivan.
    \241\ Id.
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    After considering further the need for an exemption, and in 
particular the comments received on the 2003 Proposal, we are proposing 
an exemption from the proxy rules for communications made in connection 
with using proposed Rule 14a-11 \242\ that are limited in content and 
filed with the Commission.\243\ We believe this limited exemption will 
facilitate shareholders' use of proposed Rule 14a-11 and remove 
concerns shareholders seeking to use the rule may have regarding 
certain communications with other shareholders regarding their intent 
to submit a nomination pursuant to the rule. The exemption would not 
apply to oral communications because such communications could not 
easily satisfy the filing requirement, which we believe is important in 
determining compliance with the content restriction in the proposed 
exemption. As proposed, Exchange Act Rules 14a-3 to 14a-6 (other than 
paragraphs 14a-6(g) and 14a-6(p)), 14a-8, 14a-10, and 14a-12 to 14a-15 
would not apply to any solicitation by or on behalf of any shareholder 
in connection with the formation of a nominating shareholder group, 
provided that:
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    \242\ The proposed exemption would not apply to solicitations 
made when seeking to have a nominee included in a company's proxy 
materials pursuant to a procedure specified in the company's 
governing documents. In this instance, companies and/or shareholders 
would have determined the parameters of the shareholder's or group's 
access to the company's proxy materials. Given the range of possible 
criteria companies and/or shareholders could establish for 
nominations, we are not proposing to extend the exemption to those 
circumstances. A shareholder would need to determine whether one of 
the existing exemptions applies to their solicitation conducted in 
connection with a nomination made pursuant to a company's governing 
documents. The proposed exemption also would not apply to 
nominations made pursuant to applicable state law provisions, again 
because state law could establish any number of possible criteria 
for nominations.
    \243\ See proposed Rule 14a-2(b)(7)(i).
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     Each written communication includes no more than:
     A statement of the shareholder's intent to form a 
nominating shareholder group in order to nominate a director under the 
proposed rule;
     Identification of, and a brief statement regarding, the 
potential nominee or nominees or, where no nominee or nominees have 
been identified, the characteristics of the nominee or nominees that 
the shareholder intends to nominate, if any;
     The percentage of securities that the shareholder 
beneficially owns or the aggregate percentage owned by any group to 
which the shareholder belongs; and
     The means by which shareholders may contact the soliciting 
party; \244\ and
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    \244\ See id.
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     Any written soliciting material published, sent or given 
to shareholders in accordance with the terms of this provision is filed 
with the Commission by the nominating shareholder, under the company's 
Exchange Act file number (or in the case of a registered investment 
company, under the company's Investment Company Act file number), no 
later than the date the material is first published, sent or given to 
shareholders. The soliciting material would be required to include a 
cover page in the form set forth in Schedule 14A, with the appropriate 
box on the cover page marked.\245\
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    \245\ See proposed Rule 14a-2(b)(7)(ii). We note that written 
communications include electronic communications, such as e-mails 
and Web site postings.
---------------------------------------------------------------------------

    In this regard, we note that shareholders also would have the 
option to structure their solicitations, whether written or oral, to 
comply with an existing exemption from the proxy rules, including the 
exemption for solicitations of no more than 10 shareholders,\246\ and 
the exemption for certain communications that take place in an 
electronic shareholder forum.\247\
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    \246\ Exchange Act Rule 14a-2(b)(2).
    \247\ Exchange Act Rule 14a-2(b)(6).
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    Both the nominating shareholder or group and the company may wish 
to solicit in favor of their nominees for director by various means, 
including orally, by U.S. mail, electronic mail, and Web site postings. 
While the company ultimately would file a proxy statement and therefore 
could rely on the existing proxy rules to solicit outside the proxy 
statement,\248\ shareholders could be limited in their soliciting 
activities under the current proxy rules. Accordingly, we are proposing 
a new exemption to the proxy rules providing that solicitations by or 
on behalf of a nominating shareholder or group in support of a nominee 
included in the company's proxy statement and form of proxy in 
accordance with the proposed rule, would not be subject to Exchange Act 
Rules 14a-3 to 14a-6 (other than paragraphs 14a-6(g) and 14a-6(p)), 
14a-8, 14a-10, and 14a-12 to 14a-15, provided that:
---------------------------------------------------------------------------

    \248\ See Exchange Act Rule 14a-12.
---------------------------------------------------------------------------

     The soliciting party does not, at any time during such 
solicitation, seek directly or indirectly, either on its own or 
another's behalf, the power to act as proxy for a shareholder and does 
not furnish or otherwise request, or act on behalf of a person who 
furnishes or requests, a form of revocation, abstention, consent or 
authorization; \249\
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    \249\ See proposed Rule 14a-2(b)(8)(i).
---------------------------------------------------------------------------

     Each written communication includes:
     The identity of the nominating shareholder or group and a 
description of his or her direct or indirect interests, by security 
holdings or otherwise;
     A prominent legend in clear, plain language advising 
shareholders that a shareholder nominee is or will be included in the 
company's proxy statement and to read the company's proxy statement 
when it becomes available because it includes important information. 
The legend also must explain to shareholders that they can find the 
proxy statement, other soliciting material and any other relevant 
documents, at no charge on the Commission's Web site; and
     Any soliciting material published, sent or given to 
shareholders in accordance with this paragraph must be filed by the 
nominating shareholder or group with the Commission, under the 
company's Exchange Act file number,

[[Page 29055]]

no later than the date the material is first published, sent or given 
to shareholders.\250\ Three copies of the material would at the same 
time be filed with, or mailed for filing to, each national securities 
exchange upon which any class of securities of the company is listed 
and registered. The soliciting material would be required to include a 
cover page in the form set forth in Schedule 14A, with the appropriate 
box on the cover page marked.\251\
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    \250\ For a registered investment company, the filing would be 
made under the subject company's Investment Company Act file number.
    \251\ See proposed Rule 14a-2(b)(8)(iii).
---------------------------------------------------------------------------

Request for Comment
    H.1. Should the Commission provide a new exemption for soliciting 
activities undertaken by shareholders seeking to form a nominating 
shareholder group pursuant to Rule 14a-11? If so, is the proposed 
exemption appropriate? If not, why not? What specific changes to the 
exemption would be appropriate? Should the rule require that a 
shareholder meet any of the requirements of Rule 14a-11 to rely on the 
exemption (e.g., have held the securities they seek to aggregate for 
the required holding period)? Is it appropriate to require filing with 
the Commission on the date of first use, as proposed?
    H.2. Should the Commission expand the proposed exemption for 
soliciting activities undertaken by shareholders seeking to form a 
nominating shareholder group pursuant to Rule 14a-11 to apply also to 
oral communications? If so, what amendments to the proposed exemption 
would be necessary?
    H.3. What requirements should apply to soliciting activities 
conducted by a nominating shareholder or group? In particular, what 
filing requirements and specific parameters should apply to any such 
solicitations? For example, we have proposed a limited content 
exemption for certain solicitations by shareholders seeking to form a 
nominating shareholder group. Is this content-based limitation 
appropriate? Should shareholders, for example, also be permitted to 
explain their reasons for forming a nominating shareholder group? 
Should shareholders be permitted to identify any potential nominee, as 
proposed, and why that person was chosen? If not, what, if any, 
limitations would be more appropriate? For example, should an exemption 
for certain solicitations by shareholders seeking to form a nominating 
shareholder group be limited to no more than a specified number of 
shareholders, but not limited in content (e.g., fewer than 10 
shareholders, 10 shareholders, 20 shareholders, 30 shareholders, 40 
shareholders, more than 40 shareholders)?
    H.4. Should communications made to form a group be permitted to 
identify a possible or proposed nominee or nominees, as proposed?
    H.5. Is the requirement that the nominating shareholder or group 
provide a description of his or her direct or indirect interests, by 
security holdings or otherwise, sufficiently clear? Do we need to 
provide additional guidance as to what interests would be required to 
be disclosed?
    H.6. Should all written soliciting materials be filed with the 
Commission on the date of first use? If not, how much later should they 
be filed (e.g., two business days after first use; four business days 
after first use, some other date)? Should the materials be filed before 
the date of first use?
    H.7. Should we provide a similar exemption for soliciting 
activities undertaken by shareholders seeking to form a nominating 
shareholder group other than in connection with Rule 14a-11 (e.g., in 
connection with a nomination under applicable state law provisions or a 
company's governing documents)?
    H.8. Should solicitations by or on behalf of a nominating 
shareholder or group in support of a nominee included in the company's 
proxy statement and form of proxy pursuant to Rule 14a-11 be exempt? 
Why or why not?
    H.9. Should the exemption be conditioned on the soliciting 
materials including a legend about the shareholder's nominee being 
included in company proxy materials and a statement about where 
shareholders can find the proxy statement, soliciting material, and 
other relevant documents, as proposed? Should any other conditions be 
included in the exemption?
    H.10. Should a nominating shareholder or group be required to file 
any soliciting material published, sent or given to shareholders in 
accordance with the exemption no later than the date the material is 
first published, sent or given to shareholders, as proposed?
    H.11. Should solicitations by the nominating shareholder or group 
be limited or prohibited? If so, why?
    H.12. Should we provide a similar exemption for soliciting 
activities undertaken by a nominating shareholder or group in support 
of their nominee or nominees, where those nominees are included in a 
company's proxy materials pursuant to applicable state law provisions 
or a company's governing documents?

C. Amendments to Exchange Act Rule 14a-8(i)(8)

1. Background
    Currently, Rule 14a-8(i)(8) allows a company to exclude from its 
proxy statement a shareholder proposal that relates to a nomination or 
an election for membership on the company's board of directors or a 
procedure for such nomination or election. As noted, the Commission 
amended this provision in 2007 to expressly permit the exclusion of a 
proposal that would result in an immediate election contest or would 
set up a process for shareholders to conduct an election contest in the 
future by requiring the company to include shareholders' director 
nominees in the company's proxy materials for subsequent meetings. The 
Commission adopted this proposal in December 2007 to provide certainty 
to companies and shareholders in light of the AFSCME decision.\252\ In 
the adopting release, the Commission noted the many disclosures that 
are required for election contests that would not have been provided 
for in Rule 14a-8.\253\ In this regard, several Commission rules, 
including Exchange Act Rule 14a-12, regulate contested proxy 
solicitations to assure that investors receive disclosure to enable 
them to make informed voting decisions in elections. The requirements 
to provide these disclosures to shareholders from whom proxy authority 
is sought are grounded in Rule 14a-3, which requires that any party 
conducting a proxy solicitation file with the Commission, and furnish 
to each person solicited, a proxy statement containing the information 
in Schedule 14A. Items 4(b) and 5(b) of Schedule 14A require numerous 
specified disclosures if the solicitation is subject to Rule 14a-12(c), 
and Item 7 of Schedule 14A also requires important specified 
disclosures for any director nominee. Finally, all of these disclosures 
are covered by the prohibition on the making of a solicitation 
containing false or misleading statements or omissions that is found in 
Rule 14a-9.
---------------------------------------------------------------------------

    \252\ See Election of Directors Adopting Release. See also 
footnotes 88 and 89, above.
    \253\ See Election of Directors Adopting Release.
---------------------------------------------------------------------------

    The Commission's action in 2007 provided certainty to shareholders 
and companies regarding the application of Rule 14a-8(i)(8) in the wake 
of the AFSCME decision that had caused confusion about what disclosure 
and liability rules might apply to any resulting election contest. As 
noted in

[[Page 29056]]

Section II., at that time, the Commission did not take any action with 
respect to the alternative proposal published in 2007.\254\ Since that 
time, we have continued to consider whether the proxy process can be 
improved and we have concluded that the proxy rules, including Rule 
14a-8(i)(8), can be amended to further facilitate shareholders' rights 
to nominate directors and promote fair corporate suffrage, while still 
providing appropriate disclosure and liability protections.
---------------------------------------------------------------------------

    \254\ Under the alternative proposal, Rule 14a-8(i)(8) would 
have been amended with certain conditions to permit a qualifying 
shareholder who makes full disclosure in connection with a bylaw 
proposal relating to director nominations procedures to have that 
proposal included in a company's proxy materials.
---------------------------------------------------------------------------

2. Proposed Amendment to Rule 14a-8(i)(8)
    We are proposing an amendment to Rule 14a-8(i)(8), the election 
exclusion, to enable shareholders, under certain circumstances, to 
require companies to include in company proxy materials proposals that 
would amend, or that request an amendment to, a company's governing 
documents regarding nomination procedures or disclosures related to 
shareholder nominations, provided the proposal does not conflict with 
proposed Rule 14a-11.\255\ The proposal would have to meet the 
procedural requirements of Rule 14a-8 and not be subject to one of the 
substantive exclusions other than the election exclusion (e.g., the 
proposal could be excluded if the shareholder proponent did not meet 
the ownership threshold under Rule 14a-8).\256\
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    \255\ A proposal would continue to be subject to exclusion under 
Rule 14a-8(i)(2) if its implementation would cause the company to 
violate any state, federal, or foreign law to which it is subject, 
or under Rule 14a-8(i)(3), if the proposal or supporting statement 
was contrary to any of the Commission's proxy rules. As proposed to 
be amended, Rule 14a-8(i)(8) would allow shareholders to propose 
additional means, other than Rule 14a-11, for disclosure of 
shareholder nominees in company proxy materials. Therefore, a 
shareholder proposal that seeks to provide an additional means for 
including shareholder nominees in the company's proxy materials 
pursuant to the company's governing documents would not be deemed to 
conflict with Rule 14a-11 simply because it would establish 
different eligibility thresholds or require more extensive 
disclosures about a nominee or nominating shareholder than would be 
required under Rule 14a-11. A shareholder proposal would conflict 
with Rule 14a-11, however, to the extent that the proposal would 
purport to prevent a shareholder or shareholder group that met the 
requirements of proposed Rule 14a-11 from having their nominee for 
director included in the company's proxy materials. A shareholder 
proposal would also be subject to exclusion under Rule 14a-8(i)(2) 
or Rule 14a-8(i)(3) to the extent that it would affirmatively excuse 
nominating shareholders or their nominees from compliance with the 
liability provisions of Rule 14a-9(c) or the proposed Rule 14a-19 
disclosure requirements applicable to shareholder nominations 
submitted pursuant to an applicable state law provision or a 
company's governing documents.
    \256\ Currently, Rule 14a-8 requires that a shareholder 
proponent have continuously held at least $2,000 in market value, or 
1%, of the company's securities entitled to be voted on the proposal 
at the meeting for a period of one year prior to submitting the 
proposal. See Rule 14a-8(b). These requirements would remain the 
same. The proposal may be subject to exclusion if the procedural 
requirements of the rule are not met or it falls within one of the 
other substantive bases for exclusion included in Rule 14a-8.
---------------------------------------------------------------------------

    As proposed, except as provided below in the codification of staff 
positions, revised Rule 14a-8(i)(8) would not restrict the types of 
amendments that a shareholder could propose to a company's governing 
documents to address the company's provisions regarding nomination 
procedures or disclosures related to shareholder nominations, although 
any such proposals that conflict with proposed Rule 14a-11 or state law 
could be excluded.\257\ We recognize that the proposed amendments to 
Rule 14a-8(i)(8) could result in shareholders proposing amendments that 
would establish procedures for nominating directors and disclosures 
related to such nominations that require a different ownership 
threshold, holding period, or other qualifications or representations 
than those proposed in Rule 14a-11. The amendments proposed by 
shareholders through Rule 14a-8 would be permitted unless they would 
conflict with Rule 14a-11 (i.e., proposals that would preclude 
nominations by shareholders who would qualify under proposed Rule 14a-
11 to have their nominee for director included in the company's proxy 
materials) or applicable state law. We considered whether this would 
create confusion or lack of certainty for companies and their 
shareholders, but believe that this possibility is outweighed by the 
importance of facilitating shareholders' ability to exercise their 
rights to determine their own additional shareholder nomination proxy 
disclosure and related procedures.
---------------------------------------------------------------------------

    \257\ In this regard, the proposed revision to Rule 14a-8(i)(8) 
would not make a distinction between binding and non-binding 
proposals.
---------------------------------------------------------------------------

3. Disclosure Requirements
    We are not proposing any new disclosure requirements for a 
shareholder that submits a proposal that would amend, or that requests 
an amendment to, a company's governing documents to address the 
company's nomination procedures or procedures for inclusion of 
shareholder nominees in company proxy materials or disclosures related 
to those shareholder provisions.\258\ New disclosures would not be 
required from a shareholder simply submitting such a proposal to amend, 
or requesting an amendment to, a company's governing documents because 
the Commission believes that a shareholder may simply want to amend the 
company's procedures for nominating directors, but may not intend to 
nominate any particular individual.\259\
---------------------------------------------------------------------------

    \258\ Shareholders submitting a proposal to amend a company's 
governing documents to address nomination procedures for inclusion 
of shareholder nominees in company proxy materials or disclosures 
related those shareholder nomination provisions would be subject to 
the rule's current requirements. See footnote 256, above.
    \259\ This approach is different from the disclosure 
requirements the Commission proposed in the Shareholder Proposals 
Release in 2007; however, it is consistent with the overall 
requirements relating to the submission of shareholder proposals--
generally, shareholder proponents are not required to provide any 
type of disclosure along with their proposal.
---------------------------------------------------------------------------

    As noted, the proposed amendments to Rule 14a-8(i)(8) could result 
in shareholders proposing amendments that would establish procedures 
for nominating directors and disclosures related to such nominations 
that require a different ownership threshold, holding period, or other 
qualifications or representations than those proposed in Rule 14a-11. 
In addition, a state could set forth in its corporate code \260\ or a 
company may choose to amend its governing documents, to provide for 
nomination or disclosure rights in addition to those provided pursuant 
to Rule 14a-11 (e.g., a company could choose to provide a right for 
shareholders to have their nominees disclosed in the company's proxy 
materials regardless of ownership--in that instance, the company's 
provision would apply for certain shareholders who would not otherwise 
have their nominees included in the company's proxy materials pursuant 
to Rule 14a-11). Accordingly, we are proposing amendments to our proxy 
rules to address the disclosure requirements when a nomination is made 
pursuant to such a provision.\261\ We believe the proposed additional 
disclosure requirements are necessary to provide shareholders with full 
and fair disclosure of information that is material when a choice among 
directors to be elected is presented.
---------------------------------------------------------------------------

    \260\ See discussion of North Dakota Publicly Traded 
Corporations Act, N.D. Cent. Code Sec.  10-35 et al., in footnote 
70, above.
    \261\ See proposed Rule 14a-19.
---------------------------------------------------------------------------

    Proposed Rule 14a-19 would apply to a shareholder nomination for 
director for inclusion in the company's proxy materials made pursuant 
to procedures

[[Page 29057]]

established pursuant to state law or by a company's governing 
documents. The proposed rule would require a nominating shareholder or 
group to include in its shareholder notice on Schedule 14N (which also 
would be filed with the Commission on the date provided to the company) 
disclosures about the nominating shareholder or group and their nominee 
that are similar to what would be required in an election contest.\262\
---------------------------------------------------------------------------

    \262\ See proposed Rule 14a-19.
---------------------------------------------------------------------------

    Specifically, the shareholder notice on Schedule 14N would be 
required to include:
     A statement from the nominee that the nominee consents to 
be named in the company's proxy statement and to serve on the board if 
elected, for inclusion in the company's proxy statement; \263\
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    \263\ See proposed Rule 14a-19(a).
---------------------------------------------------------------------------

     Disclosure about the nominee complying with the 
requirements of Item 4(b), Item 5(b), and Items 7(a), (b) and (c) and, 
for investment companies, Item 22(b) of Exchange Act Schedule 14A, for 
inclusion in the company's proxy statement; \264\
---------------------------------------------------------------------------

    \264\ See proposed Rule 14a-19(b). This information would 
identify the nominee, describe certain legal proceedings, if any, 
related to the nominee, and describe certain of the nominee's 
transactions and relationships with the company. See Items 7(a), 
(b), and (c) of Schedule 14A. This information also would include 
biographical information and information concerning interests of the 
nominee. See Item 5(b) of Schedule 14A. With respect to a nominee 
for director of an investment company, the disclosure would include 
certain basic information about the nominee and any arrangement or 
understanding between the nominee and any other person pursuant to 
which he was selected as a nominee; information about the positions, 
interests, and transactions and relationships of the nominee and his 
immediate family members with the company and persons related to the 
company; information about the amount of equity securities of funds 
in a fund complex owned by the nominee; and information describing 
certain legal proceedings related to the nominee, including legal 
proceedings in which the nominee is a party adverse to, or has a 
material interest adverse to, the company or any of its affiliated 
persons. See paragraph (b) of Item 22 of Schedule 14A.
---------------------------------------------------------------------------

     Disclosure about the nominating shareholder or members of 
a nominating shareholder group consistent with the disclosure currently 
required pursuant to Item 4(b) and Item 5(b) of Schedule 14A; \265\
---------------------------------------------------------------------------

    \265\ See proposed Rule 14a-19(c).
---------------------------------------------------------------------------

     Disclosure about whether the nominating shareholder or 
member of a nominating shareholder group has been involved in any legal 
proceeding during the past five years, as specified in Item 401(f) of 
Regulation S-K. Disclosure pursuant to this section need not be 
provided if provided in response to Items 4(b) and 5(b) of Schedule 
14A; \266\
---------------------------------------------------------------------------

    \266\ See proposed Rule 14a-19(d).
---------------------------------------------------------------------------

     The following disclosure regarding the nature and extent 
of the relationships between the nominating shareholder or group and 
nominee and the company or any affiliate of the company:
     Any material direct or indirect interest in any contract 
or agreement between the nominating shareholder or group or the nominee 
and the company or any affiliate of the company (including any 
employment agreement, collective bargaining agreement, or consulting 
agreement);
     Any material pending or threatened litigation in which the 
nominating shareholder or group or nominee is a party or a material 
participant, and that involves the company, any of its officers or 
directors, or any affiliate of the company; and
     Any other material relationship between the nominating 
shareholder or group or the nominee and the company or any affiliate of 
the company not otherwise disclosed; \267\ and
---------------------------------------------------------------------------

    \267\ See proposed Rule 14a-19(e).
---------------------------------------------------------------------------

     Disclosure of any Web site address on which the nominating 
shareholder or group may publish soliciting materials.\268\

    \268\ See proposed Rule 14a-19(f).

These disclosures would then be included in the company's proxy 
materials pursuant to proposed new Item 7(f) of Schedule 14A. Proposed 
Item 22(b)(19) of Schedule 14A would require investment companies to 
include in their proxy materials disclosures from the nominating 
shareholder or shareholder group with regard to the nominee and 
nominating shareholder or shareholder group that are similar to those 
required for reporting companies (other than registered investment 
companies).
    In addition, the nominating shareholder or group would be required 
to identify the shareholder or group making the nomination and the 
amount of their ownership in the company on Schedule 14N. The filing 
would be required to include, among other disclosures:
     The name and address of the nominating shareholder or each 
member of the nominating shareholder group; and
     Information regarding the aggregate number and percentage 
of the securities entitled to be voted, including the amount 
beneficially owned and the number of shares over which the nominating 
shareholder or each member of the nominating shareholder group has or 
shares voting or disposition power.

We believe that these disclosures would assist shareholders in making 
an informed voting decision with regard to any nominee or nominees put 
forth by the nominating shareholder or group, in that the disclosures 
would enable shareholders to gauge the nominating shareholder's or 
group's interest in the company. Depending on the requirements of the 
state law provisions or the company's governing documents, these 
disclosures also may be important to the company in determining whether 
the nominating shareholder or group meets any ownership threshold, 
where applicable. The nominating shareholder or group would be liable 
for any false or misleading statements in these disclosures pursuant to 
proposed new paragraph (c) of Rule 14a-9.\269\
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    \269\ See proposed Rule 14a-9(c).
---------------------------------------------------------------------------

    The disclosure requirements we are proposing differ from the 
approach proposed in the alternative proposal in 2007.\270\ In that 
release, the Commission proposed requiring significant new disclosures 
from shareholder proponents of bylaw proposals to be made on Schedule 
13G. Commenters expressed concern that the proposed disclosure 
requirements were too onerous and should not be required to submit a 
shareholder proposal.\271\ Upon further consideration, we believe that 
it is appropriate to allow the submission of proposals to amend, or 
that request an amendment to, a company's governing documents to 
address the company's nomination procedures or disclosures related to 
shareholder nominations without requiring extensive disclosure 
regarding the shareholder proponent. As noted above, we acknowledge 
that some shareholders may simply desire to amend or establish the 
company's procedure for nominating directors, but may not contemplate 
nominating any particular

[[Page 29058]]

individual. In addition, we do not require additional disclosure from 
proponents of other types of shareholder proposals submitted under Rule 
14a-8. We are soliciting comment, however, on whether additional 
disclosure from a shareholder submitting a bylaw proposal would be 
appropriate.
---------------------------------------------------------------------------

    \270\ See Shareholder Proposals Proposing Release.
    \271\ See, e.g., comment letters from American Federation of 
Labor and Congress of Industrial Organizations (August 2, 2007) 
(``AFL-CIO 2007''); Amalgamated Bank LongView Funds (October 2, 
2007); Australian Council of Super-Investors (October 2, 2007); 
Robert Balopole, CFA, President, Balopole Investment Management 
Corp.; CalPERS 2007; California State Teachers' Retirement System 
(November 16, 2007) (``CalSTERS 2007''); Council of Institutional 
Investors (September 18, 2007) (``CII''); Public Employees' 
Retirement Association of Colorado (October 1, 2007) (``CO 
Retirement''); McRitchie 2007; F&C Management Limited (October 1, 
2007); State Board of Administration of Florida (October 3, 2007); 
ICGN Shareholder Rights Committee (October 2, 2007); State 
Universities Retirement System of Illinois (October 1, 2007); 
Investment Management Association (October 2, 2007); KLD Research & 
Analytics, Inc. (October 2, 2007); Brett McDonnell (September 27, 
2007); Treasurer, State of North Carolina (October 2, 2007); Ohio 
Public Employees Retirement System (October 2, 2007); SEIU; 
International Brotherhood of Teamsters (August 30, 2007); UK Local 
Authority Pension Fund Forum (October 2, 2007); and United Church 
Foundation (September 27, 2007).
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4. Codification of Prior Staff Interpretations
    Although we are proposing to amend Rule 14a-8(i)(8), we continue to 
believe that under certain circumstances companies should have the 
right to exclude proposals related to particular elections and 
nominations for director from company proxy materials where those 
proposals could result in an election contest between company and 
shareholder nominees without the important protections provided by the 
disclosure and liability provisions otherwise provided for in the proxy 
rules. Rule 14a-8(i)(8) should not, however, be read so broadly such 
that the provision could be used to permit the exclusion of proposals 
regarding the qualifications of directors, shareholder voting 
procedures, board nomination procedures and other election matters of 
importance to shareholders that would not directly result in an 
election contest between management and shareholder nominees, and that 
do not present significant conflicts with the Commission's other proxy 
rules. Therefore, we propose to amend Rule 14a-8(i)(8) to codify 
certain prior staff interpretations with respect to the type of 
proposals that would continue to be excludable.\272\
---------------------------------------------------------------------------

    \272\ In limited circumstances, the staff may permit proponents 
to make minor revisions to a proposal to cure a deficiency under 
Rule 14a-8. Under existing staff interpretations, the staff may 
permit revisions to proposals that would disqualify board nominees 
from standing for election at the upcoming meeting or that would 
remove a director from office before his or her term expires. In 
contrast, where the proposal or supporting statement questions the 
competence or business judgment of one or more directors that will 
stand for reelection at the upcoming meeting, the staff will 
generally not permit the proponent to revise the proposal to cure 
such a deficiency. The proposed codification of existing staff 
interpretations under Rule 14a-8(i)(8) is not intended to alter the 
staff's historical approach (see Staff Legal Bulletin No. 14 (July 
13, 2001)) to permitting revisions to cure deficiencies under Rule 
14a-8(i)(8).
---------------------------------------------------------------------------

    A company would be permitted to exclude a proposal under Rule 14a-
8(i)(8) if it:
     Would disqualify a nominee who is standing for election; 
\273\
---------------------------------------------------------------------------

    \273\ See, e.g., Dollar Tree Stores, Inc. (March 7, 2008) and 
Waddell and Reed Financial, Inc. (February 23, 2001).
---------------------------------------------------------------------------

     Would remove a director from office before his or her term 
expired; \274\
---------------------------------------------------------------------------

    \274\ See, e.g., TVI Corporation (April 2, 2008) and First 
Energy Corp. (March 17, 2003).
---------------------------------------------------------------------------

     Questions the competence, business judgment, or character 
of one or more nominees or directors; \275\
---------------------------------------------------------------------------

    \275\ See, e.g., Exxon Mobil Corporation (March 20, 2002) and 
AT&T Corp. (February 12, 2001).
---------------------------------------------------------------------------

     Nominates a specific individual for election to the board 
of directors,\276\ other than pursuant to Rule 14a-11, an applicable 
state law provision, or a company's governing documents; or
---------------------------------------------------------------------------

    \276\ See, e.g., N-Viro International Corporation (March 8, 
2007) and Dow Jones & Company, Inc. (January 31, 1996).
---------------------------------------------------------------------------

     Otherwise could affect the outcome of the upcoming 
election of directors.

With regard to the language ``otherwise could affect the outcome of the 
upcoming election of directors,'' we are seeking to address the fact 
that the proposed new language of the exclusion specifically addresses 
the particular types of proposals that we have traditionally seen in 
this area and that we believe are clearly excludable under the policy 
underlying the rule. With the broader proposed language, we are seeking 
to address new proposals that may be developed over time that are 
comparable to the four specified categories and would undermine the 
purpose of the exclusion. This broader language is generally consistent 
with the language of the other bases for exclusion in Rule 14a-8.\277\
---------------------------------------------------------------------------

    \277\ See, e.g., Rule 14a-8(i)(7) addressing proposals that 
``deal[] with a matter relating to the company's ordinary business 
operations,'' and Rule 14a-8(i)(10) addressing proposals that have 
been ``substantially implemented'' already by the company.
---------------------------------------------------------------------------

Request for Comment
    I.1. Should the Commission amend Rule 14a-8(i)(8), as proposed, to 
allow proposals that would amend, or that request an amendment to, a 
company's governing documents regarding nomination procedures or 
disclosures related to shareholder nominations, provided the proposal 
does not conflict with proposed Rule 14a-11? Should the rule instead 
require such proposals to be included only in particular circumstances? 
For example, should inclusion of such proposals be required only when a 
company already has a provision in place regarding the inclusion of 
shareholder director nominees, or disclosure about those nominees, in 
company proxy materials?
    I.2. Should the Commission amend Rule 14a-8(i)(8) to allow 
proposals that would amend, or that request an amendment to, a 
company's governing documents to provide for or prohibit inclusion of 
shareholder nominees for director in company proxy materials? Should 
such an amendment operate separately from proposed Rule 14a-11? Should 
such an amendment be adopted regardless of whether proposed Rule 14a-11 
is adopted? If so, under what circumstances should such proposals be 
permitted? For example, should shareholder proposals be included where 
they propose or request amendments to provisions in the company's 
governing documents to address the inclusion of shareholder nominees 
for director in the company's proxy materials so long as such 
amendments are not prohibited under state law? Should such proposals 
instead be included only if the law of the company's state of 
incorporation explicitly authorizes a company to have a provision in 
its governing documents that permits the inclusion of shareholder 
nominees in the company's proxy materials? Should such proposals 
instead be limited under Rule 14a-8 to instances when a company already 
has a provision in its governing documents that addresses the inclusion 
of shareholder nominees in the company's proxy materials?
    I.3. Should companies be required to include non-binding proposals 
regarding procedures to include shareholder nominees for director in 
company proxy materials, as proposed? Should the requirements instead 
be limited to binding proposals?
    I.4. Should proposed Rule 14a-8(i)(8) operate independently, even 
if proposed Rule 14a-11 were not adopted or not in effect? Why or why 
not? Are there changes or additions to Rule 14a-8(i)(8) as proposed 
that can or should be made so that it would be better suited or able to 
operate independently? Please give specific recommendations.
    I.5. Is it sufficiently clear that shareholders would have the 
ability under proposed Rule 14a-8(i)(8) to propose nomination 
procedures that are different from proposed Rule 14a-11 provided that 
such procedures would serve as additional methods of accessing the 
proxy and would not preclude a shareholder or group or shareholders who 
satisfied the Rule 14a-11 requirements from using the Rule 14a-11 
method? If not, what clarification should be made?
    I.6. As proposed, a shareholder proposal under Rule 14a-8(i)(8) 
would supplement proposed Rule 14a-11, not replace it. Should 
shareholders instead be permitted under Rule 14a-8(i)(8) to propose 
governing document amendments that would conflict with proposed Rule 
14a-11? Please explain how and why. Are there different

[[Page 29059]]

limitations on such proposals that we should consider? If so, what are 
they?
    I.7. What would be the costs to companies if Rule 14a-8(i)(8) were 
amended as proposed?
    I.8. Rule 14a-8 currently requires that a shareholder proponent 
have held continuously at least $2,000 in market value or 1% of the 
company's securities entitled to be voted on the proposal at the 
meeting for at least one year as of the date of submission of the 
proposal. Are these thresholds appropriate? Should the minimum 
ownership threshold be higher than $2,000 in market value of the 
company's securities entitled to be voted on the proposal? Should the 
minimum ownership threshold be periodically adjusted for inflation? 
Should these eligibility determinations be made on the date of 
submission of the proposal, as proposed? If not, what date should be 
used?
    I.9. Are there alternative thresholds that would be more 
appropriate for purposes of submitting a proposal under Rule 14a-
8(i)(8) (e.g., 1%, 2%, 3%, 4%, or 5% of the company's securities)? If 
so, please explain.
    I.10. We are not proposing any requirements to disclose information 
about a shareholder proponent who submits a proposal that seeks to 
establish a procedure for nominating one or more directors. Should the 
rule require disclosure about a shareholder proponent who submits a 
proposal that relates to procedures for nominating directors but does 
not nominate a director? If so, what disclosures would be appropriate? 
The disclosures required in a contested election? Disclosure about the 
proponent's motives and interactions with the company leading up to the 
proposal? With respect to requiring disclosure from shareholder 
proponents, should our rules make a distinction between a proposal 
relating to a procedure for nominating directors and other proposals on 
other unrelated subjects?
    I.11. Should disclosure consistent with that required in an 
election contest as defined in Rule 14a-12 be required for shareholder 
nominations pursuant to applicable state law provisions or a company's 
governing documents, as proposed? Why or why not? What additional 
disclosures should be required, if any? Which of the proposed 
disclosure requirements, if any, should be deleted or revised?
    I.12. As proposed, the disclosures required for a nomination 
pursuant to an applicable state law provision or a company's governing 
documents do not include all of the disclosures that would be required 
for a Rule 14a-11 nomination. Would any of the additional disclosures 
required under Rule 14a-11 be appropriate with regard to a nomination 
under an applicable state law provision or a company's governing 
documents? If so, which ones in particular? Should a nominating 
shareholder or group submitting a nomination pursuant to an applicable 
state law provision or a company's governing documents be required to 
provide a statement regarding the nominating shareholder's or group's 
intent to continue to hold the securities through the date of the 
meeting? Should the rules require a statement regarding the nominating 
shareholder's or group's intent with respect to continued ownership of 
the shares after the election?
    I.13. Should Rule 14a-8(i)(8) be amended to codify the prior staff 
interpretations of the election exclusion, as proposed? Why or why not? 
Does the proposed new language best describe the category of proposals 
that companies should be permitted to exclude? Are there other examples 
or categories or proposals that should be included in the revised rule 
(that do not restrict the ability of shareholders to propose nomination 
procedures)?
    I.14. Is the proposed new language of Rule 14a-8(i)(8) sufficiently 
clear? In particular, would the proposed language ``or otherwise could 
affect the outcome of the upcoming election of directors,'' achieve its 
goal? Would there be unintended consequences of revising the language 
as proposed?

D. Other Rule Changes

1. Beneficial Ownership Reporting Requirements
    The proposed rules would enable shareholders to engage in limited 
solicitations to form nominating shareholder groups and engage in 
solicitations in support of their nominees without disseminating a 
proxy statement. Although the minimum amount of securities a 
shareholder or group of shareholders must beneficially hold to be 
eligible to submit a nomination pursuant to proposed Rule 14a-11 is 1% 
for large accelerated filers, 3% for accelerated filers, and 5% for 
non-accelerated filers, the Commission anticipates that some 
shareholders or groups of shareholders may beneficially own in the 
aggregate more than 5% of the company's securities that are eligible to 
vote for the election of directors. Therefore, nominating shareholders 
will need to consider whether they have formed a group under Exchange 
Act Section 13(d)(3) and Rule 13d-5(b)(1) that is required to file 
beneficial ownership reports.\278\ Any person who is directly or 
indirectly the beneficial owner of more than 5% of a class of equity 
securities registered under Exchange Act Section 12 must report that 
ownership by filing an Exchange Act Schedule 13D with the 
Commission.\279\ There are exceptions to this requirement, however, 
that permit such a person to report that ownership on Schedule 13G 
rather than Schedule 13D.\280\ One exception permits filings on 
Schedule 13G for a specified list of qualified institutional investors 
who have acquired the securities in the ordinary course of their 
business and with neither the purpose nor the effect of changing or 
influencing control of the company. A second exception applies to 
persons who are not specified in the first exception. These beneficial 
owners of more than 5% of a subject class of securities may file on 
Schedule 13G if they acquired the securities with neither the purpose 
nor the effect of changing or influencing control of the company and 
they are not directly or indirectly the beneficial owner of 20% or more 
of the subject class of securities.
---------------------------------------------------------------------------

    \278\ Nominating shareholders that have formed a group under 
Exchange Act Section 13(d)(3) and Rule 13d-5(b) would need to 
reassess whether group status and the obligation of the group to 
file beneficial ownership reports continue after the election of 
directors.
    \279\ See Exchange Act Rule 13d-1.
    \280\ See, e.g., Exchange Act Rules 13d-1(b) and 13d-1(c).
---------------------------------------------------------------------------

    Central to Schedule 13G eligibility is that the shareholder be a 
passive investor that has acquired the securities without the purpose, 
or the effect, of changing or influencing control of the company. In 
addition, shareholders who are filing as qualified institutional 
investors must have acquired the securities in the ordinary course of 
their business. We believe that the formation of a shareholder group 
solely for the purpose of nominating one or more directors pursuant to 
proposed Rule 14a-11, the nomination of one or more directors pursuant 
to proposed Rule 14a-11, soliciting activities in connection with such 
a nomination (including soliciting in opposition to a company's 
nominees), or the election of such a nominee as a director under 
proposed Rule 14a-11, should not result in a nominating shareholder or 
nominating shareholder group losing its eligibility to file on Schedule 
13G. In such circumstances, a nominating shareholder or nominating 
shareholder group could report on Schedule 13G, rather than Schedule 
13D. Accordingly, we are proposing to revise the requirement that the 
first and second

[[Page 29060]]

categories of persons who may report their ownership on Schedule 13G 
have acquired the securities without the purpose or effect of changing 
or influencing control of the registrant to provide an exception for 
activities solely in connection with a nomination under Rule 14a-
11.\281\ Any activity other than those provided for under Rule 14a-11 
would make these instructions inapplicable. These rule changes would 
not apply to nominating shareholders or groups that submit a nomination 
pursuant to an applicable state law provision or a company's governing 
documents because in those instances the applicable provisions may not 
limit the number of board seats for which a shareholder or group could 
nominate candidates or include a requirement that the nominating 
shareholder or group lack intent to change the control of the issuer or 
to gain more than a limited number of seats on the board (as is the 
case under proposed Rule 14a-11). Accordingly, we do not believe it 
would be appropriate to make any determination as to whether a 
nominating shareholder or group under an applicable state law provision 
or a company's governing documents would be eligible to file on 
Schedule 13G.
---------------------------------------------------------------------------

    \281\ This exception would only be available for purposes of the 
nomination. After the election of directors, a nominating 
shareholder or group would need to reassess its eligibility to 
continue to report on Schedule 13G as a passive or qualified 
institutional investor. For example, if a nominating shareholder is 
the nominee, and is successful in being elected to the board of a 
company, the shareholder would most likely be ineligible to continue 
filing on Schedule 13G because of its ability as a director to 
directly or indirectly influence the management and policies of the 
company.
---------------------------------------------------------------------------

Request for Comment
    J.1. The proposal would provide that a shareholder or shareholder 
group \282\ would not, solely by virtue of nominating one or more 
directors under proposed Rule 14a-11, soliciting on behalf of that 
nominee or nominees, or having that nominee or nominees elected, lose 
their eligibility to file as a passive or qualified institutional 
investor. This provision would then permit those shareholders or groups 
to report their ownership on Schedule 13G, rather than Schedule 13D. Is 
this approach appropriate? Should other conditions be required to be 
satisfied? If so, what other conditions? For example, should a 
nominating shareholder or group cease to qualify as a passive or 
qualified institutional investor where the nominee is the nominating 
shareholder or a member of the group, a member of the immediate family 
of the nominating shareholder or any member of the group, an employee 
of the nominating shareholder or any member of the group, or is in any 
way controlled by the nominating shareholder or any member of the 
group?
---------------------------------------------------------------------------

    \282\ A group may file on Schedule 13G so long as each member 
qualifies to do so individually.
---------------------------------------------------------------------------

    J.2. Should nominating shareholders or groups be required to comply 
with the additional Schedule 13D filing and disclosure requirements 
under the Exchange Act beneficial ownership reporting standards?
    J.3. Should we provide a similar provision for nominating 
shareholders or groups submitting a nomination pursuant to an 
applicable state law provision or a company's governing documents? Why 
or why not?
2. Exchange Act Section 16
    Exchange Act Section 16 \283\ applies to every person who is the 
beneficial owner of more than 10% of any class of equity security 
registered under Exchange Act Section 12 (``10% owners''), and each 
officer and director (collectively with 10% owners, ``insiders'') of 
the issuer of such security. Generally:
---------------------------------------------------------------------------

    \283\ 15 U.S.C. 78p.
---------------------------------------------------------------------------

     Section 16(a) requires an insider to file an initial 
report with the Commission disclosing his or her beneficial ownership 
of all equity securities of the issuer upon becoming an insider. To 
keep this information current, Section 16(a) also requires insiders to 
report changes in such holdings, in most cases within two business days 
following the transaction.\284\
---------------------------------------------------------------------------

    \284\ Exchange Act Section 16(a) [15 U.S.C. 78p(a)].
---------------------------------------------------------------------------

     Section 16(b) provides the issuer (or shareholders suing 
on behalf of the issuer) a private right of action to recover from an 
insider any profit realized by the insider from any purchase and sale 
(or sale and purchase) of any equity security of the issuer within any 
period of less than six months.\285\
---------------------------------------------------------------------------

    \285\ Exchange Act Section 16(b) [15 U.S.C. 78p(b)].
---------------------------------------------------------------------------

     Section 16(c) makes it unlawful for an insider to sell any 
equity security of the issuer if the insider: (1) Does not own the 
security sold; or (2) owns the security, but does not deliver it 
against the sale within specified time periods.\286\
---------------------------------------------------------------------------

    \286\ Exchange Act Section 16(c) [15 U.S.C. 78p(c)].
---------------------------------------------------------------------------

    In 2003 the Commission proposed that a group formed solely for the 
purpose of nominating a director pursuant to proposed Rule 14a-11, 
soliciting in connection with the election of that nominee, or having 
that nominee elected as a director should not be viewed as being 
aggregated together for purposes of the 10% ownership determination 
under Section 16.\287\ We are not proposing such an exclusion today and 
instead believe it would be appropriate to apply the existing analysis 
of whether a group has formed \288\ and whether Section 16 
applies.\289\ In this regard, because the ownership thresholds for 
proposed Rule 14a-11 are significantly lower than 10%, and are 
generally lower than what was proposed in 2003, we do not believe that 
the lack of an exclusion would have a deterrent effect on the formation 
of groups, and therefore an exclusion may be unnecessary under the 
current proposal. Rather, a group formed for the purpose of nominating 
a director pursuant to proposed Rule 14a-11, soliciting in connection 
with the election of that nominee, or having that nominee elected as a 
director, would be analyzed the same way as any other group for 
purposes of determining whether group members are 10% owners subject to 
Section 16.
---------------------------------------------------------------------------

    \287\ Commenters on the 2003 Proposal generally supported the 
proposed exception. See 2003 Summary of Comments; see also comment 
letters from CalPERS, CIR; ICI; NYC Bar; and NYS Bar.
    \288\ See Exchange Act Rule 13d-5(b) [17 CFR 240.13d-5(b)].
    \289\ See Exchange Act Rule 16a-1(a)(1) [17 CFR 240.16a-
1(a)(1)].
---------------------------------------------------------------------------

    Some shareholders, particularly institutions and other entities, 
may be concerned that successful use of proposed Rule 14a-11 to include 
a director nominee in company proxy materials may result in the 
nominating person also being deemed a director under the 
``deputization'' theory developed by courts in Section 16(b) short-
swing profit recovery cases.\290\ Under this theory it is possible for 
a person to be deemed a director subject to Section 16, even though the 
issuer has not formally elected or otherwise named that person a 
director. We have not proposed standards for establishing the 
independence of the nominee from the nominating shareholder, or members 
of the nominating shareholder group.
---------------------------------------------------------------------------

    \290\ See Feder v. Martin Marietta, 406 F.2d 260 (2d Cir.), 
cert. denied, 396 U.S. 1036 (1970); Blau v. Lehman, 368 U.S. 403 
(1962); and Rattner v. Lehman, 193 F.2d 564 (2d Cir. 1952). The 
judicial decisions in which this theory was applied do not establish 
precise standards for determining when ``deputization'' may exist. 
However, the express purpose of Section 16(b) is to prevent the 
unfair use of information by insiders through their relationships to 
the issuer. Accordingly, one factor that courts may consider in 
determining if Section 16(b) liability applies is whether, by virtue 
of the ``deputization'' relationship, the ``deputizing'' entity's 
transactions in issuer securities may benefit from the deputized 
director's access to inside information.

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[[Page 29061]]

Request for Comment
    K.1. Would it be a disincentive to using proposed Rule 14a-11 if 
shareholders forming a group to nominate a director could become 
subject to Section 16 once the group's ownership exceeds 10% of the 
company's equity securities? Why or why not?
    K.2. Are there any specific reasons why shareholders forming a 
group solely to nominate a director pursuant to proposed Rule 14a-11 
should not be subject to Section 16 once the group's ownership exceeds 
10% of the company's equity securities? If so, should the Commission 
adopt an exclusion from Section 16? Why, or why not?
    K.3. If we should amend Rule 16a-1(a)(1), the rule that defines who 
is a 10% owner for Exchange Act Section 16 purposes, to exclude a Rule 
14a-11 nominating shareholder group from the definition, how should 
such an exclusion be structured? For example, these groups could remain 
subject to the general condition of the rule that they not have the 
purpose or effect of changing or influencing control of the issuer, but 
a note to Rule 16a-1(a)(1) could provide an exception for members of 
nominating shareholder groups formed solely for the purpose of using 
proposed Rule 14a-11.\291\ Should these conditions or other conditions 
apply?
---------------------------------------------------------------------------

    \291\ Rule 16a-1(a)(1) also contains a general condition that 
the securities be held for the benefit of third parties or in 
customer or fiduciary accounts in the ordinary course of business, 
but this condition would not be applicable to nominating shareholder 
groups under the exclusion contemplated by this comment request.
---------------------------------------------------------------------------

    K.4. Should the Commission consider providing an exclusion to the 
existing Rule 13d-5 definition of ``group'' that applies to both the 
Section 13(d) beneficial ownership reporting requirements and the 
Section 16 reporting requirements?
    K.5. If the Commission adopts any such exclusion, should it be 
based on additional or different conditions? For example, should the 
Commission provide an exclusion from the definition of ``group'' in 
Rule 13d-5(b) for shareholders that agree to act together solely for 
the purpose of holding their securities in accordance with proposed 
Rule 14a-11(b)(2)?
    K.6. Are there reasons that members of nominating shareholder 
groups formed under proposed Rule 14a-11 should be treated differently 
than shareholder groups permitted to form and formed to nominate 
directors under an applicable state law provision, or under provisions 
in a company's governing documents? If so, why? What distinctions ought 
to be drawn between groups formed under proposed Rule 14a-11 and an 
applicable state law provision or a company's governing documents in 
terms of Rule 13d-5(b) and Rule 16a-1(a)(1)?
    K.7. Should there be a prohibition on any affiliation between 
nominees and nominating shareholders or groups? If so, what limitations 
would be appropriate? Would any such prohibitions or limitations make 
it less likely that in Section 16(b) cases courts would find nominating 
shareholders to be ``deputized'' directors in circumstances where 
liability should not apply? Would the lack of any such prohibitions or 
limitations increase the likelihood that courts would find nominating 
shareholders to be ``deputized'' directors?

E. Application of the Liability Provisions in the Federal Securities 
Laws to Statements Made by a Nominating Shareholder or Nominating 
Shareholder Group

    It is our intent that a nominating shareholder or group relying on 
Rule 14a-11, an applicable state law provision, or a company's 
governing documents to include a nominee in company proxy materials be 
liable for any materially false or misleading statements in information 
provided by the nominating shareholder or group to the company (in its 
shareholder notice on Schedule 14N) that is then included in the 
company's proxy materials. To this end we have amended Rule 14a-9 to 
add a new paragraph (c), to specifically address these situations. 
Proposed new paragraph (c) states that ``no nominee, nominating 
shareholder or nominating shareholder group, or any member thereof, 
shall cause to be included in a registrant's proxy materials, either 
pursuant to the federal proxy rules, an applicable state law provision, 
or a registrant's governing documents as they relate to including 
shareholder nominees for director in registrant proxy materials, any 
statement which, at the time and in the light of the circumstances 
under which it is made, is false or misleading with respect to any 
material fact, or which omits to state any material fact necessary in 
order to make the statements therein not false or misleading or 
necessary to correct any statement in any earlier communication with 
respect to the solicitation of a proxy for the same meeting or subject 
matter which has become false or misleading.''
    In addition, proposed new Rule 14a-11(e) contains express language 
providing that the company would not be responsible for information 
that is provided by the nominating shareholder or group under Rule 14a-
11 and then repeated by the company in its proxy statement, except 
where the company knows or has reason to know that the information is 
false or misleading. A similar provision is included in proposed Rule 
14a-19 with regard to information that is provided by the nominating 
shareholder or group in connection with a nomination made pursuant to 
an applicable state law provision or the company's governing 
documents.\292\
---------------------------------------------------------------------------

    \292\ See Note to proposed Rule 14a-19.
---------------------------------------------------------------------------

    Also, as proposed, any information that is provided to the company 
in the notice from the nominating shareholder or group under Rule 14a-
11 (and, as required, filed with the Commission by the nominating 
shareholder or group) and then included in the company's proxy 
materials would not be incorporated by reference into any filing under 
the Securities Act, the Exchange Act, or the Investment Company Act 
unless the company determines to incorporate that information by 
reference specifically into that filing.\293\ A similar provision would 
apply to information that is provided by the nominating shareholder or 
group in connection with a nomination made pursuant to an applicable 
state law provision or the company's governing documents.\294\
---------------------------------------------------------------------------

    \293\ See the Instruction to proposed Item 7(e) of Schedule 14A; 
Instruction to proposed Item 22(b)(18) of Schedule 14A.
    \294\ See the Instruction to proposed Item 7(f) of Schedule 14A; 
Instruction to proposed Item 22(b)(19) of Schedule 14A.
---------------------------------------------------------------------------

    To the extent the company does incorporate that information by 
reference or otherwise adopt the information as its own, however, we 
would consider the company's disclosure of that information as the 
company's own statement for purposes of the antifraud and civil 
liability provisions of the Securities Act, the Exchange Act, or the 
Investment Company Act, as applicable.
Request for Comment
    L.1. Is an amendment to Rule 14a-9 the appropriate means to assign 
liability for materially false or misleading information provided by 
the nominating shareholder or group to the company that is included in 
the company's proxy materials? If not, what would be a more appropriate 
means? Should we characterize the disclosure provided to the company by 
the nominating shareholder or group and included in the company's proxy 
materials as soliciting material of the nominating

[[Page 29062]]

shareholder or group, as we proposed in 2003? Why or why not? Is it 
appropriate for proposed Rule 14a-9(c) to apply to nominations made 
pursuant to Rule 14a-11, an applicable state law provision, and a 
company's governing documents?
    L.2. Does the language of proposed new paragraph (c) of Rule 14a-9 
make clear that the nominating shareholder or group would be liable for 
any information included in its Schedule 14N or notice to the company 
that is included in the company's proxy materials? If not, what 
specific changes should be made to the proposed rule text?
    L.3. Does the proposal make clear the company's responsibilities 
when it includes such information in its proxy materials? Should the 
proposal include language otherwise addressing a company's 
responsibility for repeating statements that it knows or has reason to 
know are not accurate? Are there situations where a company should be 
responsible for repeating statements of the nominating shareholder or 
group? Should the proposal treat disclosure provided in connection with 
a nomination pursuant to Rule 14a-11, an applicable state law 
provision, or a company's governing documents differently?
    L.4. Should information provided by nominating shareholders or 
groups be deemed incorporated by reference into Securities Act, 
Exchange Act, or Investment Company Act filings? Why or why not?
    L.5. Should information, if incorporated by reference into 
Securities Act or Exchange Act filings, still be treated as the 
responsibility of the nominee rather than the company? As proposed, are 
we creating a disincentive to incorporation by reference?

F. General Request for Comment

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

IV. Paperwork Reduction Act

A. Background

    The proposed amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 
1995.\295\ We are submitting the proposal to the Office of Management 
and Budget for review in accordance with the PRA.\296\ The titles for 
the collections of information are:
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    \295\ 44 U.S.C. 3501 et seq.
    \296\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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    (1) ``Form ID'' (OMB Control No. 3235-0328);
    (2) ``Proxy Statements--Regulation 14A (Commission Rules 14a-1 
through 14a-19 and Schedule 14A)'' (OMB Control No. 3235-0059);
    (3) ``Information Statements--Regulation 14C (Commission Rules 14c-
1 through 14c-7 and Schedule 14C)'' \297\ (OMB Control No. 3235-0057);
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    \297\ Exchange Act Schedule 14C requires disclosure of some 
items of Exchange Act Schedule 14A. Therefore, while we are not 
proposing to amend the text of Schedule 14C, the proposed amendments 
to Schedule 14A also must be reflected in the PRA burdens for 
Schedule 14C.
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    (4) ``Schedule 14N'';
    (5) ``Securities Ownership--Regulation 13D and 13G (Commission 
Rules 13d-1 through 13d-7 and Schedules 13D and 13G)'' (OMB Control No. 
3235-0145);
    (6) ``Form 8-K'' (OMB Control No. 3235-0060); and
    (7) ``Rule 20a-1 under the Investment Company Act of 1940, 
Solicitations of Proxies, Consents, and Authorizations'' (OMB Control 
No. 3235-0158).
    These regulations, rules and forms were adopted pursuant to the 
Exchange Act and the Investment Company Act and set forth the 
disclosure requirements for securities ownership reports filed by 
investors, proxy and information statements,\298\ and current reports 
filed by companies to ensure that investors are informed and can make 
informed voting or investing decisions. The hours and costs associated 
with preparing, filing, and sending these schedules and forms 
constitute reporting and cost burdens imposed by each collection of 
information. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.
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    \298\ The proxy rules apply only to domestic companies with 
securities registered under Section 12 of the Exchange Act and to 
investment companies registered under the Investment Company Act. 
The number of annual reports by reporting companies may differ from 
the number of proxy and information statements filed with the 
Commission in any given year. This is because some companies are 
subject to reporting requirements by virtue of Section 15(d) of the 
Exchange Act, and therefore are not covered by the proxy rules. 
Also, some companies are subject to the proxy rules only because 
they have a class of debt registered under Section 12. These 
companies generally are not required to hold annual meetings for the 
election of directors. In addition, companies that are not listed on 
a national securities exchange may not hold annual meetings and 
therefore would not be required to file a proxy or information 
statement.
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B. Summary of Proposed Amendments

    The Commission's proposals would provide shareholders with two ways 
to more fully exercise their rights to nominate directors. First, we 
are proposing a new rule--Rule 14a-11--that would, under certain 
circumstances, require companies to include in their proxy materials 
shareholder nominees for director submitted by long-term shareholders 
or groups of shareholders with significant holdings. Under the rule, a 
company would not be required to include a shareholder nominee or 
nominees for director in the company proxy materials where the 
nominating shareholder or group is seeking to change the control of the 
issuer or to obtain more than a limited number of seats on the board. 
Proposed Rule 14a-11 would not apply where state law or a company's 
governing documents prohibit shareholders from nominating directors.
    For purposes of the PRA, we estimate the total annual incremental 
paperwork burden resulting from proposed Rule 14a-11 and the related 
rule changes for reporting companies (other than registered investment 
companies), and registered investment companies to be approximately 
17,149 hours of internal company or shareholder time and a cost of 
approximately $2,796,320 for the services of outside 
professionals.\299\ For purposes of the PRA, we estimate the total 
annual incremental paperwork burden to nominating shareholders and 
groups from proposed Schedule 14N to be approximately 28,565 hours of 
shareholder personnel time, and $3,808,600 for services of outside 
professionals. As discussed further, below, these total costs include 
all additional disclosure burdens associated with the proposed rules 
including burdens related to the notice and disclosure requirements.
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    \299\ For convenience, the estimated PRA hour burdens have been 
rounded to the nearest whole number. We estimate an hourly cost of 
$400 per hour for the service of outside professionals based on our 
consultations with several registrants and law firms and other 
persons who regularly assist registrants in preparing and filing 
proxy statements and related disclosures with the Commission.
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    Second, under the proposed amendment to Rule 14a-8(i)(8), the 
``election exclusion,'' a company would

[[Page 29063]]

not be permitted to exclude a shareholder proposal that would amend, or 
that requests an amendment to, a company's governing documents 
regarding nomination procedures or disclosures related to shareholder 
nominations, provided the proposal does not conflict with proposed Rule 
14a-11.
    For purposes of the PRA, we estimate the total annual incremental 
paperwork burden resulting from the proposed amendment to Rule 14a-
8(i)(8) and the related rule changes for reporting companies (other 
than registered investment companies), registered investment companies, 
and shareholders to be approximately 7,692 hours of internal company or 
shareholder time and a cost of approximately $1,025,500 for the 
services of outside professionals.
    In connection with proposed Rule 14a-11 and the proposed amendment 
to Rule 14a-8(i)(8), we also are proposing new rules that would require 
a notice to be filed with the Commission on proposed new Schedule 14N, 
and provided to the company, when a shareholder seeks to submit a 
nomination to a company pursuant to Rule 14a-11 or pursuant to an 
applicable state law provision or the company's governing documents. 
The Schedule 14N would include disclosure similar to the disclosure 
currently required in a proxy contest. The nominating shareholder or 
group would provide the disclosure specified in Rule 14a-18 or Rule 
14a-19, as applicable, in the Schedule 14N. The company would be 
required to include the disclosure provided by the nominating 
shareholder in its proxy materials.
    We also are proposing a new exemption from the proxy rules for 
communications by nominating shareholders or groups that are soliciting 
in favor of a shareholder nominee for director included pursuant to 
Rule 14a-11. This exemption would require inclusion in the written 
soliciting materials of a legend advising shareholders to look at the 
company's proxy statement when it becomes available and advising 
shareholders how to find the company's proxy statement. The burden 
hours resulting from the proposed exemption are included in the above 
totals related to proposed Rule 14a-11.
    Compliance with the proposed disclosure requirements would be 
mandatory. There would be no mandatory retention period for the 
information disclosed, and responses to the disclosure requirements 
would not be kept confidential.

C. Paperwork Reduction Act Burden Estimates

    The proposed amendments would, if adopted, require additional 
disclosure on Schedules 14A and 14C and new Schedule 14N, as well as 
Form 8-K. Schedule 14A prescribes the information that a company and/or 
a soliciting shareholder must include in its proxy statement to provide 
shareholders with material information relating to voting decisions. 
Schedule 14C prescribes the information that a company that is 
registered under Exchange Act Section 12 must include in its 
information statement in advance of a shareholders' meeting when it is 
not soliciting proxies from its shareholders, including when it takes 
corporate action by written authorization or consent of shareholders. 
When filed in connection with Rule 14a-11, Schedule 14N would require 
disclosure about the amount and percentage of securities entitled to be 
voted on the election of directors by the nominating shareholder or 
group, the length of ownership of such securities, and the nominating 
shareholder's or group's intent to continue to hold the securities 
through the date of the meeting. Schedule 14N would also require a 
certification that the nominating shareholder or group is not seeking 
to change the control of the company or to gain more than a limited 
number of seats on the board, as well as disclosure similar to the 
disclosure currently required for a contested election and certain 
representations required for use of Rule 14a-11, including that the 
nominee meets the generally applicable objective criteria for 
``independence'' in any applicable national securities exchange or 
national securities association rules. When filed in connection with a 
nomination pursuant to an applicable state law provision or the 
company's governing documents, the Schedule 14N would include similar 
but more limited disclosures and representations. Exchange Act Rule 
14a-8 requires the company to include a shareholder proposal in its 
Schedule 14A or 14C unless the shareholder has not complied with the 
procedural requirements in Rule 14a-8 or the proposal falls within one 
of the 13 substantive bases for exclusion in Rule 14a-8. Investment 
Company Act Rule 20a-1 requires registered investment companies to 
comply with Exchange Act Regulation 14A or 14C, as applicable.\300\
---------------------------------------------------------------------------

    \300\ 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.
---------------------------------------------------------------------------

1. Proposed Rule 14a-11
    Proposed Rule 14a-11 would require any subject company to include 
disclosure about a nominating shareholder's or group's nominee or 
nominees for election as director in the company's proxy materials when 
the conditions of the rule are met. The proposed rule would apply 
unless state law or a company's governing documents prohibit 
shareholders from nominating a candidate or candidates for election as 
director. A nominating shareholder or group would be required to file 
proposed Schedule 14N to disclose information about the nominating 
shareholder or group and the nominee or nominees, and the company would 
be required to include certain information regarding the nominating 
shareholder or group and nominee or nominees in the company's proxy 
statement unless the company determines that it is not required to 
include the nominee or nominees in its proxy materials.\301\ Nominating 
shareholders also would be afforded the opportunity to include in the 
company's proxy statement a statement of support for its nominee or 
nominees of a length not to exceed 500 words. The nominee or nominees 
also would be included on the company's form of proxy in accordance 
with Exchange Act Rule 14a-4.
---------------------------------------------------------------------------

    \301\ The burdens associated with Schedule 14N and the 
disclosure requirements of Rule 14a-18 and Rule 14a-19 are discussed 
in Section IV.C.3. below.
---------------------------------------------------------------------------

    Under the proposed rule, shareholders or groups beneficially owning 
at least 1%, 3%, or 5% of a company's securities entitled to be voted 
on the election of directors, for large accelerated, accelerated, and 
non-accelerated filers, respectively, would be eligible to submit a 
nominee for election as director to be included in the company's proxy 
materials subject to certain limitations on the overall number of 
shareholder nominees for director.
    We estimate that 4,163 reporting companies (other than registered 
investment companies) are likely to have at least one shareholder that 
could meet the above thresholds.\302\ For

[[Page 29064]]

purposes of this analysis, we estimate that 5% of companies with 
shareholders eligible to submit nominees pursuant to Rule 14a-11 will 
receive nominees from shareholders for inclusion in their proxy 
materials, which would result in 208 companies with shareholders 
meeting the applicable eligibility threshold receiving nominees 
annually.\303\ We further estimate that 61 registered investment 
companies will receive nominees from shareholders pursuant to Rule 14a-
11 annually.\304\ For purposes of the PRA, we estimate that the 
incremental disclosure burden will be 95 hours per nominee for each 
reporting company (other than registered investment companies) and 
registered investment company to comply with the requirements of Rule 
14a-11 and Items 7(e) and (f) and 22(b)(18) and (19) of Schedule 
14A.\305\ As discussed, we estimate for PRA purposes that each company 
that receives nominees pursuant to Rule 14a-11 will receive two 
nominees from shareholders or groups. Thus, for reporting companies 
(other than registered investment companies) we estimate 13,015 total 
company burden hours which corresponds to 9,761 hours of company time, 
and a cost of approximately $1,301,500 for the services of outside 
professionals. In the case of registered investment companies, we 
estimate the total annual incremental paperwork burden to prepare the 
disclosure that would be required under this portion of the proposed 
rules to be approximately 3,805 burden hours, which corresponds to 
2,854 hours of company time and a cost of approximately $380,500 for 
the services of outside professionals. In each case, this estimate 
includes:
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    \302\ We estimate that 1,385 large accelerated filers have at 
least one shareholder that meets the 1% threshold; 1,584 accelerated 
filers have at least one shareholder meeting the 3% threshold; and 
1,194 non-accelerated filers have at least one shareholder meeting 
the 5% threshold. See Section II.B.3., above.
    Shareholders would be permitted to aggregate holdings for 
purposes of meeting the eligibility thresholds in Rule 14a-11 and 
therefore the Commission anticipates that some groups of 
shareholders may beneficially own in the aggregate more than 5% of 
the company's securities that are eligible to vote for the election 
of directors. In these circumstances, nominating shareholders will 
need to consider whether they have formed a group under Exchange Act 
Section 13(d)(3) and Rule 13d-5(b)(1) that is required to file 
beneficial ownership reports. To the extent nominating shareholder 
groups exceed the 5% threshold and file a Schedule 13G this would 
result in an increased number of Schedule 13G filings. We estimate 
that 25% of the nominees will be from shareholders who individually 
meet the eligibility thresholds (52), and 75% will be from 
shareholder groups (156). Were each of these groups to exceed 5%, we 
estimate that an additional 156 Schedule 13G filings will be made 
annually as a result of the proposed rule. The total burden 
associated with this increase in the number of filings is 1935 
burden hours (156 additional Schedule 13Gs x 12.4 hours/schedule). 
This burden corresponds to 484 hours of shareholder time (156 
additional Schedule 13Gs x 12.4 hours/Schedule x .25) and $580,320 
for services of outside professionals (156 additional Schedule 13Gs 
x 12.4 hours/Schedule x .75 x $400).
    \303\ In this regard, we note that in 2008 there were at least 
32 contested elections. See RiskMetrics Group, 2008 Postseason 
Report Summary, Weathering the Storm: Investors Respond to the 
Global Credit Crisis, October 2008. In addition, approximately 118 
Rule 14a-8 shareholder proposals related to board issues were 
submitted to shareholders for a vote in the 2008-2009 proxy season. 
See RiskMetrics 2009 Proxy Season Scorecard, May 15, 2009. We 
believe these two numbers, or 150 shareholders in total, provide 
some indication of the number of shareholders that may be interested 
in using Rule 14a-11. Based upon this information, we believe it is 
reasonable to use 208 (based on 5% of the companies that have at 
least one shareholder that meets the ownership threshold) as the 
estimate for the number of companies that may receive nominees.
    \304\ We estimate that approximately 1,225 registered investment 
companies will hold a shareholder meeting in a given year, based on 
the number of responses to Rule 20a-1, and that 5% of such companies 
will receive nominees from shareholders for inclusion in their proxy 
materials. We believe that using the 5% estimate for registered 
investment companies is reasonable because we estimate that 
shareholders of registered closed-end and open-end investment 
companies will on balance submit nominees at the same rate as other 
companies.
    \305\ The actual burden hours will depend on the number of 
shareholder nominees submitted to a company for inclusion in its 
proxy materials. For purposes of the PRA, in the case of reporting 
companies (other than registered investment companies) we assume 
each shareholder or group would submit two nominees. As discussed in 
footnote 183 above, the median board size based on a 2007 sample of 
public companies was nine. Approximately 60% of the boards sampled 
had between nine and 19 directors. In the case of registered 
investment companies, we estimate that the median board size is 
eight. See Investment Company Institute and Independent Directors 
Council, Overview of Fund Governance Practices 1994-2006, at 6-7 
(November 2007), available at:http://www.ici.org/issues/dir/1rpt_07_fund_gov_practices.pdf (noting that the median number of 
independent directors per fund complex in 2006 was six and that 
independent directors held 75% or more of board seats in 88% of fund 
complexes). Thus, although some shareholders or groups could 
nominate fewer than two nominees and others would be permitted to 
nominate more than two nominees, depending on the size of the board, 
we assume for purposes of the PRA that each shareholder or group 
would submit two nominees.
---------------------------------------------------------------------------

     If the company determines that it will include a 
shareholder nominee, the company's preparation of a written notice to 
the nominating shareholder or group (five burden hours per notice);
     The company's inclusion in its proxy statement and form of 
proxy of the name of, and other related disclosures concerning, a 
person or persons nominated by a shareholder or shareholder group (five 
burden hours per nominee); \306\
---------------------------------------------------------------------------

    \306\ The requirement is in proposed amended Rule 14a-4.
---------------------------------------------------------------------------

     The company's preparation of its own statement regarding 
the shareholder nominee or nominees (20 burden hours per nominee); and
     If a company determines that it may exclude a shareholder 
nominee submitted pursuant to the proposed rule, the company's 
preparation of a written notice to the nominating shareholder or group 
followed by written notice of the basis for its determination to 
exclude the nominee to the Commission staff (65 burden hours per 
notice).
    For purposes of this analysis, we assume that approximately 187 (or 
90% of) reporting companies (other than registered investment 
companies) and 55 (or 90% of) registered investment companies that have 
a shareholder or group and receives a shareholder nominee for director 
would be required to include the nominee in its proxy materials. In the 
other 10% of cases we assume that the company would be able to exclude 
the shareholder nominee (after providing notice of its reasons to the 
Commission). If a company determines to include a shareholder nominee, 
it must provide written notice to the nominating shareholder or group. 
We estimate the burden associated with preparing this notice to be five 
hours. For reporting companies (other than registered investment 
companies), this would result in 935 aggregate burden hours (187 
companies x 5 hours/company), which corresponds to 701 burden hours of 
company time (187 companies x 5 hours/company x .75) and $93,500 in 
services of outside professionals (187 companies x 5 hours/company x 
.25 x $400). For registered investment companies, this would result in 
275 aggregate burden hours (55 companies x 5 hours/company), which 
corresponds to 206 burden hours of company time (55 companies x 5 
hours/company x .75), and $27,500 for services of outside professionals 
(55 companies x 5 hours/company x .25 x $400).
    We estimate the annual disclosure burden for companies to include 
nominees on their form of proxy and proxy materials to be 5 burden 
hours per nominee, for a total of 1,870 aggregate burden hours (187 
responses x 5 hours/response x 2 nominees) for reporting companies 
(other than registered investment companies), and 550 aggregate burden 
hours (55 responses x 5 hours/response x 2 nominees) for registered 
investment companies. For reporting companies (other than registered 
investment companies), this corresponds to 1,403 burden hours of 
company time, and $187,000 for services of outside professionals.\307\ 
For registered investment companies, this corresponds to 413 hours of 
company time, and $55,000 for services of outside professionals.\308\
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    \307\ The calculations for these numbers are: 1,870 burden hours 
x .75 = 1,402 burden hours of company time and 1,870 burden hours x 
.25 x $400 = $187,000 for services of outside professionals.
    \308\ The calculations for these numbers are: 550 burden hours x 
.75 = 413 hours of company time and 550 burden hours x .25 x $400 = 
$55,000 for services of outside professionals.

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[[Page 29065]]

    We estimate that 187 reporting companies (other than registered 
investment companies) and 55 registered investment companies would 
include a statement with regard to the shareholder nominees.\309\ We 
anticipate that the burden to include a statement would include time 
spent to research the nominee's background, preparation of the 
statement, and company time for review of the statement by, among 
others, the nominating committee and legal counsel. We estimate that 
this burden would be approximately 20 hours per nominee. For reporting 
companies (other than registered investment companies), this would 
result in 7,480 aggregate burden hours (187 statements x 20 hours/
statement x 2 nominees). This corresponds to 5,610 hours of company 
time (187 statements x 20 hours/statement x 2 nominees x .75) and 
$748,000 for services of outside professionals (187 statements x 20 
hours/statement x 2 nominees x .25 x $400) for reporting companies 
(other than registered investment companies). For registered investment 
companies, this would result in 2,200 aggregate burden hours (55 
statements x 20 hours/statement x 2 nominees). This corresponds to 
1,650 hours of company time (55 statements x 20 hours/statement x 2 
nominees x .75) and $220,000 for services of outside professionals (55 
statements x 20 hours/statement x 2 nominees x .25 x $400).
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    \309\ We estimate that each company that includes a shareholder 
nominee in its proxy materials would include such a statement.
---------------------------------------------------------------------------

    Further, for purposes of this analysis, we assume that 
approximately 42 (or 20% of) reporting companies (other than registered 
investment companies) and 12 (or 20% of) registered investment 
companies who receive a shareholder nominee for director for inclusion 
in their proxy materials would make a determination that they are not 
required to include a nominee in their proxy materials because the 
nominee is ineligible under proposed Rule 14a-11 and would file a 
notice of intent to exclude that nominee.\310\ We estimate that the 
burden hours associated with preparing and submitting the company's 
notification to the nominating shareholder or group and the Commission 
regarding its intent to exclude a shareholder nominee, and its reasons 
for doing so, would be 65 hours per notification.\311\ In the case of 
reporting companies (other than registered investment companies), we 
estimate that this would result in an aggregate burden of 2,730 (42 
notices x 65 hours/notice), corresponding to 2,048 hours of company 
time (42 notices x 65 hours/notice x .75) and $273,000 for the services 
of outside professionals (42 responses x 65 hours/notice x .25 x $400). 
In the case of registered investment companies, we estimate that this 
would result in 780 aggregate burden hours (12 notices x 65 hours/
notice), which would correspond to 585 hours of company time (12 
notices x 65 hours/notice x .75) and $78,000 for the services of 
outside professionals (12 notices x 65 hours/notice x .25 x $400). 
These burdens would be added to the PRA burdens of Schedules 14A and 
14C or, in the case of registered investment companies, Rule 20a-1.
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    \310\ We assume that 21 of these nominees (or 50% of those 
sought to be excluded by companies) would ultimately be excludable 
under the rule.
    \311\ This estimate is based on data provided by the American 
Society of Corporate Secretaries in its comment letter on the 2003 
Proposal. In its letter, the ASCS provided data from a survey of its 
own, as well as the Business Roundtable's, members indicating that 
the average burden associated with preparing and submitting a no-
action request to the staff in connection with a shareholder 
proposal was approximately 30 hours and associated costs of $13,896. 
Although the letter did not specify as much, assuming these costs 
correspond to legal fees, which we estimate at an hourly cost of 
$400, we estimate that this cost is equivalent to approximately 35 
hours ($13,896/$400). For purposes of the PRA, we assume that 
submitting the notice and reasons for excluding a shareholder 
nominee to the staff will be comparable to preparing a no-action 
request to exclude a proposal under Rule 14a-8. Thus, we estimate 
that the burden to submit the notice and reasons for excluding a 
shareholder nominee would be approximately 65 hours.
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    We also estimate that the annual incremental burden for the 
nominating shareholder's or group's participation in the Rule 14a-11 
exclusion process would average 30 hours per nomination.\312\ For 
nominating shareholders or groups of reporting companies (other than 
registered investment companies), this would result in 1,260 total 
burden hours (42 responses x 30 hours/response). This would correspond 
to 945 hours of shareholder time (42 responses x 30 hours/response x 
.75) and $126,000 for services of outside professionals (42 responses x 
30 hours/response x .25 x $400). For nominating shareholders or groups 
of registered investment companies, this would result in 360 total 
burden hours (12 responses x 30 hours/response). This would correspond 
to 270 hours of shareholder time (12 responses x 30 hours/response x 
.75) and $36,000 for services of outside professionals (12 responses x 
30 hours/response x .25 x $400). This burden would be added to the PRA 
burden of Schedule 14N.
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    \312\ As noted in footnote 311, above, we estimate that the 
average burden to a company associated with preparing and submitting 
a no-action request to the staff is approximately 65 burden hours. 
We believe that the average burden for a shareholder proponent to 
respond to a company's no-action request is likely to be less than a 
company's burden; therefore, we estimate 30 burden hours for a 
nominating shareholder to respond to a company's notice of intent to 
exclude to the Commission.
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    We also are proposing a new exemption from the proxy rules for 
communications by nominating shareholders or groups that are soliciting 
in favor of a shareholder nominee for director. Although nominating 
shareholders or groups would not be required to engage in written 
solicitations, the exemption would require inclusion in any written 
soliciting materials of a legend advising shareholders to look at the 
company's proxy statement when it becomes available and advising 
shareholders how to find the company's proxy statement. For purposes of 
this analysis, we assume that 50% of nominating shareholders or groups 
would solicit in favor of their nominee or nominees outside the 
company's proxy statement. In the case of reporting companies (other 
than registered investment companies), this would result in an 
aggregate burden of 104 hours (104 solicitations x 1 hour/
solicitation), which corresponds to 78 hours of shareholder time (104 
solicitations x 1 hour/solicitation x .75) and $10,400 for services of 
outside professionals (104 solicitations x 1 hour/solicitation x .25 x 
$400). These burden hours would be added to the PRA burden of Schedule 
14A.\313\
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    \313\ In the case of registered investment companies, this would 
result in an aggregate burden of 31 hours (31 solicitations x 1 
hour/solicitation), which corresponds to 23 hours of shareholder 
time (31 solicitations x 1 hour/solicitation x .75) and $3,100 for 
services of outside professionals (31 solicitations x 1 hour/
solicitation x .25 x $400). These burden hours would be added to the 
PRA burden of Rule 20a-1.
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2. Proposed Amendment to Rule 14a-8(i)(8)
    Our proposed amendment to Rule 14a-8(i)(8), the election exclusion, 
would enable shareholders to submit proposals that would amend, or that 
request an amendment to, a company's governing documents regarding 
nomination procedures or disclosures related to shareholder 
nominations, provided the proposal does not conflict with proposed Rule 
14a-11. As proposed, revised Rule 14a-8(i)(8) would not restrict the 
types of amendments that a shareholder could propose to a company's 
governing documents regarding nomination procedures or disclosures 
related to shareholder nominations, although any

[[Page 29066]]

such proposals that conflict with proposed Rule 14a-11 or state law 
could be excluded. The proposal would have to meet the procedural 
requirements of Rule 14a-8 and not be subject to one of the substantive 
exclusions other than the election exclusion (e.g., the proposal could 
be excluded if the shareholder proponent did not meet the ownership 
threshold under Rule 14a-8).
    Historically, shareholders have made relatively few proposals 
relating to shareholder access to company proxy materials. The staff 
received 368 no-action requests from companies seeking to exclude 
shareholder proposals during the 2006-2007 proxy season. Of these 
requests, only three (or approximately one percent) related to 
proposals for bylaw amendments providing for shareholder nominees to 
appear in the company's proxy materials. During the 2007-2008 proxy 
season, the staff received 432 no-action requests to exclude 
shareholder proposals pursuant to Rule 14a-8. Of these no-action 
requests, 6 (or approximately two percent) related to proposals for 
bylaw amendments providing for shareholder nominees to appear in the 
company's proxy materials. Because our proposed amendment to Rule 14a-
8(i)(8) would narrow the scope of the exclusion and prohibit companies 
from excluding certain proposals that are excludable under the current 
Rule 14a-8(i)(8), we anticipate an increase in the number of 
shareholder proposals to amend, or request an amendment to, a company's 
governing documents regarding nomination procedures or disclosures 
related to shareholder nominations.
    While the number of no-action requests the staff has received in 
the past is a useful starting point, other data also is helpful to 
gauge shareholder interest in nominating directors and predict the 
anticipated impact on the number of proposals submitted pursuant to 
Rule 14a-8 to amend, or request an amendment to, a company's governing 
documents regarding nomination procedures or disclosures related to 
shareholder nominations that otherwise would be excludable under 
current Rule 14a-8(i)(8). For example, based on publicly available 
information, from 2001 to 2005, there were an average of 14 contested 
elections per year.\314\ In 2008, it is estimated that there were at 
least 32 contested elections.\315\ We anticipate that as a result of 
the proposed amendment to Rule 14a-8(i)(8), shareholders will submit at 
least as many shareholder proposals to amend a company's governing 
documents to address the company's nomination procedures or disclosures 
related to director nominations as there are contested elections. We 
anticipate that if shareholders are willing to put forth the expense 
and effort to wage a contest to put forth their own nominees in 32 
instances, there will be at least that many proposals submitted to 
companies pursuant to Rule 14a-8 because companies will no longer be 
permitted under the rule to exclude proposals that currently are 
excludable under Rule 14a-8(i)(8). We also anticipate that some 
shareholders that have submitted proposals in the past with regard to 
other board issues will submit proposals to address a company's 
nomination procedures or disclosures related to director nominations. 
According to information from RiskMetrics, approximately 118 Rule 14a-8 
shareholder proposals regarding board issues were or will be submitted 
to shareholders for a vote in the 2008-2009 proxy season.\316\ We 
estimate that approximately half of these shareholders would submit a 
proposal regarding nomination procedures or disclosures, resulting in 
59 proposals.
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    \314\ See Lucian A. Bebchuk, The Myth of the Shareholder 
Franchise, 93 Va. L. Rev. 675 (2007) (``Bebchuk 2007 Article'') 
(citing data from proxy solicitation firm Georgeson Shareholder).
    \315\ See RiskMetrics Group, 2008 Postseason Report Summary, 
Weathering the Storm: Investors Respond to the Global Credit Crisis, 
October 2008.
    \316\ See footnote 303, above.
---------------------------------------------------------------------------

    In the case of reporting companies (other than registered 
investment companies), we anticipate that the amendments to Rule 14a-8 
will result in an increase of 38 proposals annually from 2008, and a 
total of 97 proposals regarding nomination procedures or disclosures 
related to director nominations to companies per year.\317\ We estimate 
the annual incremental burden for the shareholder to prepare the 
proposal to be 10 burden hours per proposal, for a total of 380 burden 
hours (38 proposals x 10 hours/proposal). This would correspond to 285 
hours of shareholder time (38 proposals x 10 hours/proposal x .75) and 
$38,000 for the services of outside professionals (38 proposals x 10 
hours/proposal x .25 x $400).
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    \317\ The increase is calculated by adding the number of proxy 
contests in 2008 (32) plus the number of no-action requests received 
in 2008 regarding proposals seeking to amend a company's bylaws to 
provide for shareholder director nominations (6). We have not 
included the estimated 59 proposals in this increase because we 
believe they will be submitted in lieu of other types of proposals 
(a shareholder is limited to submitting one shareholder proposal to 
each company). We recognize that a company that receives a 
shareholder proposal has no obligation to submit a no-action request 
to the staff under Rule 14a-8 unless it intends to exclude the 
proposal from its proxy materials. Based on historical data, 
companies generally seek no-action relief from the staff on 
approximately 60% of the proposals received. However, we anticipate 
that because the proposals that would be submitted pursuant to 
amended Rule 14a-8 could affect the composition of the company's 
board of directors, nearly all companies receiving such proposals 
would submit a written statement of its reasons for excluding the 
proposal to the staff. Thus, we estimate that 90% of the estimated 
97 companies receiving proposals to amend, or request an amendment 
to, a company's governing documents to address nomination procedures 
or disclosures related to director nominations would submit a 
written statement of its reasons for excluding the proposal to the 
staff.
---------------------------------------------------------------------------

    We estimate that 90% of companies that receive a shareholder 
proposal to amend, or request an amendment to, a company's governing 
documents regarding nomination procedures or disclosures related to 
shareholder nominations will seek to exclude the proposal from their 
proxy materials (so companies would seek to exclude 87 such proposals 
per proxy season). We estimate that the annual incremental burden for 
the company's submission of a notice of its intent to exclude the 
proposal and its reasons for doing so would average 65 hours per 
proposal, for a total of 5,655 burden hours (87 proposals x 65 hours/
proposal) for reporting companies (other than registered investment 
companies). This would correspond to 4,241 hours of company time (87 
proposals x 65 hours/proposal x .75) and $565,500 for the services of 
outside professionals (87 proposals x 65 hours/proposal x .25 x $400).
    We also estimate that the annual incremental burden for the 
proponent's participation in the Rule 14a-8 no-action process would 
average 30 hours per proposal, for a total of 2,610 burden hours (87 
proposals x 30 hours/proposal).\318\ This would correspond to 1,958 
hours of shareholder time (87 proposals x 30 hours/proposal x .75) and 
$261,000 for services of outside professionals (87 proposals x 30 
hours/proposal x .25 x $400). These burdens would be added to the PRA 
burden of Schedules 14A and 14C.
---------------------------------------------------------------------------

    \318\ As noted above, in footnote 311, we estimate that the 
average burden to a company associated with preparing and submitting 
a no-action request to the staff was approximately 65 burden hours. 
We believe that the average burden for a shareholder proponent to 
respond to a company's no-action request is likely to be less than a 
company's burden; therefore, we estimate 30 burden hours for a 
shareholder proponent to respond to a company's notice of intent to 
exclude to the Commission. In this regard, we also estimate that the 
average burden for a shareholder proponent to submit a shareholder 
proposal would be 10 hours.
---------------------------------------------------------------------------

    In the case of registered investment companies, we anticipate that 
the amendments to Rule 14a-8 will result in an increase of 9 proposals 
annually, and a total of 18 proposals regarding

[[Page 29067]]

nomination procedures or disclosures related to director nominations to 
companies per year.\319\ We estimate the annual incremental burden for 
the shareholder proponent to prepare the proposal to be 10 hours per 
proposal, for a total of 90 burden hours (9 proposals x 10 hours/
proposal). This would correspond to 68 hours of shareholder time (9 
proposals x 10 hours/proposal x .75) and $9,000 for the services of 
outside professionals (9 proposals x 10 hours/proposal x .25 x $400).
---------------------------------------------------------------------------

    \319\ The increase is calculated by adding the average number of 
registered investment company proxy contests in calendar years 2006, 
2007, and 2008 (8) plus the average number of no-action letters 
issued by the staff regarding proposals seeking to amend a 
registered investment company's bylaws to provide for shareholder 
director nominations received in calendar years 2006, 2007, and 2008 
rounded to the nearest whole number greater than zero (1). In 
addition, we estimate that investment companies currently receive as 
many proposals regarding nomination procedures or disclosures as 
there are contested elections and no-action letters issued by the 
staff, resulting in a total of 18 proposals regarding nomination 
procedures or disclosures related to director nominations to 
companies per year.
---------------------------------------------------------------------------

    Similar to reporting companies other than investment companies, we 
assume that 90% of registered investment companies that receive a 
shareholder proposal to amend, or request an amendment to, the 
company's governing documents regarding nomination procedures or 
disclosures related to shareholder nominations will seek to exclude the 
proposal from their proxy materials (so registered investment companies 
would seek to exclude 16 such proposals per proxy season). Also similar 
to reporting companies other than investment companies, we assume that 
the annual incremental burden for the company's submission of a notice 
of its intent to exclude the proposal and its reasons for doing so 
would average 65 hours per proposal, for a total of 1,040 burden hours 
for registered investment companies (16 proposals x 65 hours/proposal). 
This would correspond to 780 hours of company time (16 proposals x 65 
hours/proposal x .75) and $104,000 for the services of outside 
professionals (16 proposals x 65 hours/proposal x .25 x $400). We also 
estimate that the annual incremental burden for the proponent's 
participation in the Rule 14a-8 no-action process would average 30 
hours per proposal, for a total of 480 burden hours (16 proposals x 30 
hours/proposal). This would correspond to 360 hours of shareholder time 
(16 proposals x 30 hours/proposal x .75) and $48,000 for the services 
of outside professionals (16 proposals x 30 hours/proposal x .25 x 
$400). These burdens would be added to the PRA burden of Rule 20a-1.
3. Proposed Schedule 14N and Proposed Exchange Act Rules 14a-18 and 
14a-19
    Proposed Rule 14n-1 would establish a new filing requirement for 
the nominating shareholder or group, under which the nominating 
shareholder or group would be required to file notice of its intent to 
include a shareholder nominee or nominees for director pursuant to 
proposed Rule 14a-11, applicable state law provisions, or a company's 
governing documents, as well as disclosure about the nominating 
shareholder or group and nominee or nominees on proposed new Schedule 
14N. New Schedule 14N was modeled after Schedule 13G, but with more 
extensive disclosure requirements than Schedule 13G. The Schedule 14N 
would require, among other items, disclosure about the amount and 
percentage of securities owned by the nominating shareholder or group, 
the length of ownership of such securities, and the nominating 
shareholder's or group's intent to continue to hold the securities 
through the date of the meeting.
    In addition, the Schedule 14N would include disclosure required 
pursuant to proposed Rule 14a-18 or Rule 14a-19, as applicable. 
Proposed Rule 14a-18 would prescribe the disclosure required to be 
included in the nominating shareholder's notice to the company, on 
Schedule 14N, of its intent to require that the company include that 
shareholder's nominee in the company's proxy materials pursuant to 
proposed Rule 14a-11. Proposed Rule 14a-19 would prescribe the 
disclosure required to be included in the nominating shareholder's 
notice to the company, on Schedule 14N, of its intent to require the 
company to include a nominee pursuant to applicable state law 
provisions or a company's governing documents. With regard to the 
latter, we are seeking to assure that nominating shareholders or groups 
who submit a shareholder nomination for inclusion in company proxy 
materials pursuant to applicable state law provisions or the company's 
governing documents also provide disclosure similar to the disclosure 
required in a contested election to give shareholders the information 
needed to make an informed voting decision.
    Both rules would require disclosures regarding the nature and 
extent of the relationships between the nominating shareholder and 
nominee and the company or any affiliate of the company. Pursuant to 
proposed Items 7(e)-(f) of Schedule 14A or, in the case of a registered 
investment company, Items 22(b)(18)-(19) of Schedule 14A, the company 
would be required to include the information set forth in Schedule 14N 
in its proxy materials. A nominating shareholder filing a Schedule 14N 
to provide disclosure required by proposed Rule 14a-19 when submitting 
a nominee for inclusion in company proxy materials pursuant to 
applicable state law provisions or the company's governing documents 
would not be required to provide the representations required for 
nominating shareholders using proposed Rule 14a-11.
    We estimate that compliance with the proposed Schedule 14N 
requirements would result in a burden greater than Schedule 13G \320\ 
but less than a Schedule 14A.\321\ Therefore, we estimate that 
compliance with proposed Schedule 14N will result in 47 hours per 
response for nominees submitted pursuant to Rule 14a-11.\322\ We also 
note that the burden associated with filing a Schedule 14N in 
connection with a nomination made pursuant to an applicable state law 
provision or the company's governing documents may be slightly less 
than a nomination made pursuant to Rule 14a-11 because certain 
disclosures, representations and certifications would not be required 
(including disclosure about intent to continue to own the company's 
securities, the representations that would be required to rely on Rule 
14a-11, a supporting statement from the nominating shareholder or 
group, and the certification concerning lack of intent to change 
control or to gain more than a limited number of seats on the board 
that would be required for a nomination pursuant to Rule 14a-11). 
Therefore, we estimate that compliance with proposed Schedule 14N when 
a shareholder or group submits a nominee or nominees to a company 
pursuant to an applicable state law provision or the company's 
governing documents will result in 40 hours per response.
---------------------------------------------------------------------------

    \320\ We currently estimate the burden per response for 
preparing a Schedule 13G filing to be 12.4 hours.
    \321\ We currently estimate the burden per response for 
preparing a Schedule 14A filing to be 101.50 hours and a Schedule 
14C to be 102.62 hours.
    \322\ We estimate that the burden of preparing the information 
in Schedule 14N for a nominating shareholder or group would be \1/3\ 
of the disclosures typically required by a Schedule 14A filing, 
which would result in approximately 34 burden hours. For purposes of 
this analysis, we estimate that the 34 burden hours will be added to 
the 12.4 hours associated with filing a Schedule 13G, resulting in a 
total of approximately 47 burden hours. We estimate that 75% of the 
burden of preparation of Schedule 14N will be borne internally by 
the nominating shareholder or group, and that 25% will be carried by 
outside professionals. We believe the nominating shareholder or 
group would work with their nominee to prepare the disclosure and 
then have it reviewed by outside professionals.

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[[Page 29068]]

    For purposes of the PRA, we estimate the total annual incremental 
paperwork burden for nominating shareholders or groups to prepare the 
disclosure that would be required under this portion of the proposed 
rules to be approximately 28,565 hours of shareholder time, and 
$3,808,600 for the services of outside professionals.\323\ This 
estimate includes the nominating shareholder's or group's preparation 
and filing of the notice and required disclosure and, as applicable, 
representations and certifications on Schedule 14N.
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    \323\ This figure represents the aggregate burden hours 
attributed to proposed Schedule 14N and is the sum of the burden 
associated with Schedules 14N submitted pursuant to Rule 14a-11, 
applicable state law provisions, and a company's governing 
documents.
---------------------------------------------------------------------------

    We do not expect that every shareholder that meets the eligibility 
threshold to submit a nominee for inclusion in a company's proxy 
materials pursuant to proposed Rule 14a-11, an applicable state law 
provision, or a company's governing documents will do so. As discussed 
above, we estimate that 208 reporting companies (other than registered 
investment companies) and 61 registered investment companies will 
receive notices of intent to submit nominees pursuant to proposed Rule 
14a-11. We anticipate that some companies will receive nominees from 
more than one shareholder or group, though, as discussed above, for 
purposes of PRA estimates, we assume each company with an eligible 
shareholder would receive two nominees from only one shareholder or 
group.
    We estimate that compliance with the requirements of Schedule 14N 
submitted pursuant to Rule 14a-11 will require 19,552 burden hours (208 
notices x 47 hours/notice x 2 nominees/shareholder) in aggregate each 
year for nominating shareholders or groups of reporting companies 
(other than registered investment companies), which corresponds to 
14,664 hours of shareholder time (208 notices x 47 hours/notice x 2 
nominees/shareholder x .75) and costs of $1,955,200 (208 notices x 47 
hours/notice x 2 nominees/shareholder .25 x $400) for the services of 
outside professionals. In the case of registered investment companies, 
we estimate that a nominating shareholder's or group's compliance with 
the requirements of Schedule 14N will require 5,734 burden hours (61 
responses x 47 hours/response x 2 nominees) in aggregate each year, 
which corresponds to 4,301 hours of shareholder time (61 responses x 47 
hours/response x 2 nominees x .75) and costs of $573,400 for the 
services of outside professionals (61 responses x 47 hours/response x 2 
nominees x .25 x $400). Therefore, we estimate a total of 25,286 burden 
hours for all reporting companies, including investment companies, 
broken down into 18,965 hours of shareholder time and $2,528,600 for 
services of outside professionals.
    We assume that all nominating shareholders or groups will prepare a 
statement of support for the nominee or nominees, and we estimate the 
disclosure burden for the nominating shareholder or group to prepare a 
statement of support for its nominee or nominees to be approximately 10 
burden hours per nominee. This results in an aggregate burden of 4,160 
(208 statements x 10 hours/statement x 2 nominees/shareholder), which 
corresponds to 3,120 hours of shareholder time (208 statements x 10 
hours/statement x 2 nominees/shareholder x .75) and $416,000 for 
services of outside professionals (208 statements x 10 hours/statement 
x 2 nominees/shareholder x .25 x $400) for shareholders of reporting 
companies (other than registered investment companies). For registered 
investment companies, this would result in an aggregate burden of 1,220 
(61 statements x 10 hours/statement x 2 nominees/shareholder), which 
corresponds to 915 hours of shareholder time (61 statements x 10 hours/
statement x 2 nominees/shareholder x .75) and $122,000 for services of 
outside professionals (61 statements x 10 hours/statement x 2 nominees/
shareholder x .25 x $400). Therefore, we estimate a total of 5,380 
burden hours for all reporting companies, including investment 
companies, broken down into 4,035 hours of shareholder time and 
$538,000 for services of outside professionals.
    When a nominating shareholder or group submits a nominee or 
nominees to a company pursuant to an applicable state law provision or 
the company's governing documents, the nominating shareholder or group 
will be required to file a Schedule 14N to provide disclosure about the 
nominating shareholder or group and the nominee or nominees as provided 
in proposed Rule 14a-19. As discussed, a company will be required to 
include certain disclosures about the nominating shareholder or group 
and the nominee or nominees in its proxy statement. As noted above, we 
estimate that the burden associated with filing a Schedule 14N in 
connection with a nomination made pursuant to an applicable state law 
provision or a company's governing documents is 40 hours. We also 
estimate that approximately 49 nominating shareholders or groups of 
reporting companies (other than registered investment companies) would 
submit a nomination pursuant to an applicable state law provision or a 
company's governing documents.\324\ Thus, we estimate compliance with 
the requirements of Schedule 14N for nominating shareholders or groups 
submitting nominations pursuant to an applicable state law provision or 
the company's governing documents would result in 3,920 aggregate 
burden hours (49 notices x 40 hours/notice x 2 nominees/shareholder) 
each year for nominating shareholders or groups of reporting companies 
(other than registered investment companies), broken down into 2,940 
hours of shareholder time (49 notices x 40 hours/notice x 2 nominees/
shareholder x .75) and costs of $392,000 for the services of outside 
professionals (49 notices x 40 hours/notice x 2 nominees/shareholder x 
.25 x $400). In the case of registered investment companies, we 
estimate that approximately 9 nominating shareholders or groups would 
submit a nomination pursuant to an applicable state law provision or a 
company's governing documents.\325\ We estimate that a nominating 
shareholder's or group's compliance with the requirements of Schedule 
14N would result in 720 aggregate burden hours (9 notices x 40 hours/
notice x 2 nominees/shareholder) each year, which corresponds to 540 
hours of shareholder time (9 notices x 40 hours/notice x 2 nominees/
shareholder x .75) and costs of $72,000 for the services of outside 
professionals (9 notices x 40 hours/notice x 2 nominees/shareholder x 
.25 x $400). Therefore, we estimate that the total burden hours would 
be 4,640 for all reporting companies, including investment companies, 
broken down into 3,480 hours of shareholder time

[[Page 29069]]

and $464,000 for services of outside professionals.
---------------------------------------------------------------------------

    \324\ In this regard, we estimated that approximately 97 
shareholder proponents would submit proposals regarding nomination 
procedures or disclosures related to shareholder nominations. For 
purposes of this analysis, we assume that approximately half (49) of 
those shareholders would be eligible to submit a nomination pursuant 
to applicable state law provisions or a company's governing 
documents.
    \325\ In this regard, we estimated that approximately 18 
shareholder proponents would submit proposals to registered 
investment companies regarding nomination procedures or disclosures 
related to shareholder nominations. We estimate that approximately 
half (9) of those shareholders would be eligible to submit a 
nomination pursuant to applicable state law provisions or a 
company's governing documents.
---------------------------------------------------------------------------

    We assume that all nominating shareholders or groups that submit a 
nominee or nominees pursuant to an applicable state law provision or a 
company's governing documents would prepare a statement of support for 
the nominee or nominees,\326\ and we estimate the disclosure burden for 
the nominating shareholder or group to prepare a statement of support 
for its nominee or nominees to be approximately 10 burden hours per 
nominee. This results in an aggregate burden of 980 hours (49 
statements x 10 hours/statement x 2 nominees/shareholder) for 
shareholders of reporting companies (other than registered investment 
companies), which corresponds to 735 hours of shareholder time (49 
statements x 10 hours/statement x 2 nominees/shareholder x .75) and 
$98,000 for services of outside professionals (49 statements x 10 
hours/statement x 2 nominees/shareholder x .25 x $400). For registered 
investment companies, this results in an aggregate burden of 180 hours 
(9 statements x 10 hours/statement x 2 nominees/shareholder), which 
would correspond to 135 hours of shareholder time (9 statements x 10 
hours/statement x 2 nominees/shareholder x .75) and $18,000 for 
services of outside professionals (9 statements x 10 hours/statement x 
2 nominees/shareholder x .25 x $400). This results in a total of 1,160 
burden hours, broken down into 870 hours of shareholder time and 
$116,000 for the services of outside professionals.
---------------------------------------------------------------------------

    \326\ We are assuming for PRA purposes that any applicable state 
law provision or company's governing documents would allow for 
inclusion of such a statement by the nominating shareholder or 
group.
---------------------------------------------------------------------------

4. Proposed Amendments to Exchange Act Form 8-K
    Under proposed Rule 14a-11, a nominating shareholder or group would 
have to provide a notice to the company, on Schedule 14N, of its intent 
to require that the company include the nominating shareholder's or 
group's nominee in the company's proxy materials by the date specified 
by the company's advance notice provision or, where no such provision 
is in place, no later than 120 calendar days before the date that the 
company mailed its proxy materials for the prior year's annual 
meeting.\327\ If the company did not hold an annual meeting during the 
prior year, or if the date of the meeting has changed more than 30 days 
from the prior year, then the nominating shareholder or group would be 
required to provide notice a reasonable time before the company mails 
its proxy materials, as specified by the company in a Form 8-K filed 
pursuant to proposed Item 5.07. We also are proposing to require a 
registered investment company that is a series company to file a Form 
8-K disclosing the company's net assets as of June 30 of the calendar 
year immediately preceding the calendar year of the meeting and the 
total number of the company's shares that are entitled to vote for the 
election of directors at the annual meeting of shareholders (or, in 
lieu of such an annual meeting, a special meeting of shareholders) as 
of the end of the most recent calendar quarter.
---------------------------------------------------------------------------

    \327\ The proposed amendment to Rule 14a-8(i)(8) is not expected 
to impact Form 8-K, so the burden estimates solely reflect the 
burden changes resulting from proposed Rule 14a-11.
---------------------------------------------------------------------------

    For purposes of the PRA, we estimate that approximately 4% of 
reporting companies (other than registered investment companies) would 
be required to file an Exchange Act Form 8-K because the company did 
not hold an annual meeting during the prior year, or the date of the 
meeting has changed by more than 30 days from the prior year.\328\ 
Based on our estimate that there are approximately 11,000 reporting 
companies (other than registered investment companies), this 
corresponds to 440 companies that would be required to file a Form 8-K. 
In accordance with our current estimate of the burden of preparing a 
Form 8-K, we estimate 5 burden hours to prepare, review and file the 
Form 8-K, for a total burden of 2,200 hours (440 filings x 5 hours/
filing). This total burden corresponds to 1,650 hours of company time 
(440 filings x 5 hours/filing x .75) and $220,000 for services of 
outside professionals (440 filings x 5 hours/filing x .25 x $400).
---------------------------------------------------------------------------

    \328\ Based on information obtained in 2003 from the Investor 
Responsibility Research Center, 3.7% of companies (other than 
registered investment companies) filed Form 8-Ks because they did 
not hold an annual meeting during the prior year or the date of the 
meeting has changed by more than 30 days from the prior year. See 
also footnote 195 in the 2003 Proposal.
---------------------------------------------------------------------------

    In the case of registered investment companies, we estimate that, 
similar to reporting companies other than registered investment 
companies, 4% of registered closed-end management investment companies 
subject to Rule 14a-11 that are traded on an exchange would be required 
to file an Exchange Act Form 8-K because the company did not hold an 
annual meeting during the prior year or the date of the meeting has 
changed by more than 30 days from the prior year.\329\ We estimate that 
approximately 650 of the 1,225 registered investment companies 
responding to Investment Company Act Rule 20a-1 are closed-end funds 
that are traded on an exchange, resulting in 26 closed-end funds that 
would be required to file Form 8-K for these purposes (650 registered 
closed-end management investment companies x .04).\330\ However, we 
estimate that few, if any, registered open-end management investment 
companies regularly hold annual meetings. Therefore, we estimate that 
575 registered investment companies are not closed-end investment 
companies and would be required to file Form 8-K. This results in a 
total of 601 registered investment companies required to file Form 8-K 
(26 closed-end management investment companies + 575 other registered 
investment companies) and 3,005 burden hours (601 filings x 5 hours/
filing). This total burden corresponds to 2,254 hours of company time 
(601 filings x 5 hours/filing x .75) and $300,500 for services of 
outside professionals (601 filings x 5 hours/filing x .25 x $400).\331\ 
Adding the totals for reporting companies (other than registered 
investment companies) and registered investment companies results in a 
total burden of 5,205, which corresponds to 3,904 hours of company time 
and $520,500 for services of outside professionals. This includes the 
requirement for a registered investment company that is a series 
company to file a Form 8-K disclosing the company's net assets as of 
June 30 of the calendar year immediately preceding the calendar year of 
the meeting and the total number of the company's shares that are 
entitled to vote for the election of directors at the annual meeting of 
shareholders (or, in lieu of such an annual meeting, a special meeting 
of

[[Page 29070]]

shareholders) as of the end of the most recent calendar quarter.
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    \329\ We believe that the percentage for registered closed-end 
investment companies would be similar to other reporting companies 
because such investment companies are traded on an exchange and are 
required to hold annual meetings of shareholders.
    \330\ We estimate that 1,225 registered investment companies 
hold annual meetings each year based on the number of responses to 
Rule 20a-1. Based on data provided by Lipper, the Commission 
estimates that approximately 650 registered closed-end management 
investment companies are traded on an exchange.
    \331\ Consistent with the current estimates for Form 8-K, we 
estimate that 75% of the burden of preparation of Form 8-K is 
carried by the company and that 25% of the burden of preparation of 
Form 8-K is carried by outside professionals at an average cost of 
$400 per hour. The burden includes disclosure of the date by which a 
nominating shareholder or group must submit the notice required by 
proposed Rule 14a-11(c) as well as disclosure of net assets, 
outstanding shares, and voting.
---------------------------------------------------------------------------

5. Form ID Filings \332\
---------------------------------------------------------------------------

    \332\ The proposed amendment to Rule 14a-8(i)(8) is not expected 
to affect Form ID filings, so the burden estimates solely reflect 
the burden changes resulting from proposed Rule 14a-11.
---------------------------------------------------------------------------

    Under proposed Rule 14a-11(c), a shareholder who submits a nominee 
or nominees for inclusion in the company's proxy statement must provide 
notice on Schedule 14N to the company of its intent to require that the 
company include the nominee or nominees in the company's proxy 
materials and file the Schedule 14N with the Commission. We anticipate 
that some shareholders that submit a nominee or nominees for inclusion 
in a company's proxy materials will not previously have filed an 
electronic submission with the Commission and will file a Form ID. Form 
ID is the application form for access codes to permit filing on EDGAR. 
The proposed rules are not changing the form itself, but we anticipate 
that the number of Form ID filings may increase due to shareholders 
filing Schedule 14N when submitting a nominee or nominees to a company 
for inclusion in its proxy materials pursuant to proposed Rule 14a-11. 
We estimate that 90% of the shareholders who submit a nominee or 
nominees for inclusion in the company's proxy materials will not have 
filed previously an electronic submission with the Commission and would 
be required to file a Form ID.\333\ As noted above, we estimate that 
approximately 208 reporting companies (other than registered investment 
companies) and 61 registered investment companies will receive 
shareholder nominations submitted pursuant to proposed Rule 14a-11. 
This corresponds to 242 additional Form ID filings. In addition, as 
noted above, we estimate that approximately 49 reporting companies 
(other than registered investment companies) and 9 registered 
investment companies will receive shareholder nominations submitted 
pursuant to an applicable state law provision or a company's governing 
documents. This corresponds to an additional 52 Form ID filings. As a 
result, the additional annual burden would be 44 hours (294 filings x 
.15 hours/filing).\334\ For purposes of the PRA, we estimate that the 
additional burden cost resulting from the proposed amendments will be 
zero because we estimate that 100 percent of the burden will be borne 
internally by the nominating shareholder.
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    \333\ We estimate that 326 nominating shareholders or groups 
will submit nominations pursuant to Rule 14a-11, applicable state 
law provisions or a company's governing documents. As noted earlier, 
approximately 32 proxy contests were conducted in 2008. Of the 326 
nominating shareholders or groups, we believe that 32 will have 
obtained EDGAR filer codes previously; therefore we estimate 
approximately 294 will need to file a Form ID. This results in an 
estimate of 90%.
    \334\ We currently estimate the burden associated with Form ID 
is 0.15 hours per response.
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D. Revisions to PRA Reporting and Cost Burden Estimates

    Table 1 below illustrates the incremental annual compliance burden 
of the collection of information in hours and in cost for proxy and 
information statements and current reports under the Exchange Act. The 
burden was calculated by multiplying the estimated number of responses 
by the estimated average number of hours each entity spends completing 
the form. We estimate that 75% of the burden of preparation of the 
proxy and information statement and current reports is carried by the 
company internally, while 25% of the burden of preparation is carried 
by outside professionals at an average cost of $400 per hour. We 
estimate that 75 percent of the burden of preparation of Schedule 14N 
and Schedule 14A (with regard to the legend required for additional 
soliciting materials) will be carried by the nominating shareholder or 
group internally and that 25 percent of the burden of preparation will 
be carried by outside professionals retained by the nominating 
shareholder or group. We estimate that 25 percent of the burden of 
preparation of Schedule 13G (for nominating shareholder groups that 
exceed 5%) will be carried by the nominating shareholder or group 
internally and that 75 percent of the burden of preparation will be 
carried by outside professionals retained by the nominating shareholder 
or group. The portion of the burden carried by outside professionals is 
reflected as a cost, while the portion of the burden carried internally 
by the company and the nominating shareholder or group is reflected in 
hours.

                                               Table 1--Calculation of Incremental PRA Burden Estimates *
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Current      Proposed                               Proposed
                                                  annual       annual      Current    Increase in     burden       Current     Increase in    Proposed
                                                responses    responses      burden       burden       hours     professional  professional  professional
                                                   (A)          (B)       hours (C)    hours (D)     (E)=C+D      costs (F)     costs (G)     costs =F+G
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sch 14A......................................        7,300        7,300      555,683       14,692      570,375   $63,709,987    $1,958,760   $65,668,747
Sch 14C......................................          680          680       52,337        1,632       53,969     5,951,639       217,640     6,169,279
Sch 14N......................................            0          269            0       28,565       28,565             0     3,808,600     3,808,600
Form 8-K.....................................      108,424      109,465      406,590        3,904      410,494    54,212,000       520,500    54,732,500
Form ID......................................       65,700       65,994        9,855           44        9,899             0             0             0
Sch 13G......................................       12,500       12,546       25,577          484       26,061    42,694,200       580,320    43,274,520
Rule 20a-1...................................        1,225        1,225      130,095        4,085      134,180    18,375,000       544,600    18,919,600
    Total....................................  ...........  ...........  ...........       53,406  ...........  ............     7,630,420  ............
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The incremental burden estimate for Rule 20a-1 includes the disclosure that would be required on Schedule 14A and 14C, discussed above, with respect
  to funds.

E. Solicitation of Comment

    We request comment on the accuracy of our estimates. Pursuant to 44 
U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) Evaluate 
whether the proposed collection of information is necessary for the 
proper performance of the functions of the agency, including whether 
the information will have practical utility; (ii) evaluate the accuracy 
of the Commission's estimate of burden of the proposed collection of 
information; (iii) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(iv) evaluate whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.

[[Page 29071]]

    We request comment and supporting empirical data for purposes of 
the PRA on:
     How likely it would be for shareholders or groups to be 
able to meet the requirements under proposed Rule 14a-11;
     In how many instances qualifying shareholders or groups 
would use Rule 14a-11 to include disclosure concerning a nominee or 
nominees in a company's proxy materials;
     How many nominees qualifying shareholders or group might 
offer; and
     Whether there would be an increase in the number of 
shareholder proposals submitted pursuant to Rule 14a-8 that companies 
receive as a result of the proposed amendments.
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct the comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should send a copy to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090, 
with reference to File No. S7-10-09. Requests for materials submitted 
to OMB by the Commission with regard to these collections of 
information should be in writing, refer to File No. S7-10-09, and be 
submitted to the Securities and Exchange Commission, Office of Investor 
Education and Advocacy, 100 F Street, NE., Washington, DC 20549-0213. 
OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days of publication.

V. Cost-Benefit Analysis

A. Background

    The Commission is proposing new rules that would, under certain 
circumstances, require companies to include in their proxy materials 
shareholder nominees for election as director, as well as other 
disclosure regarding those nominees and the nominating shareholder or 
group. In addition, the new rules would require companies to include in 
their proxy statements, under certain circumstances, shareholder 
proposals that would amend, or that request an amendment to, a 
company's governing documents regarding nomination procedures, or 
disclosures related to shareholder nominations, provided the proposal 
does not conflict with proposed Rule 14a-11. The proposed rules are 
intended to remove certain impediments that the federal proxy process 
currently impose on shareholders' ability to exercise their state law 
right to nominate directors, and thereby reduce the costs to 
shareholders of exercising their rights. Below, we describe the 
additional disclosures shareholders would receive if the proposed rules 
are adopted and the direct and indirect economic effects of such new 
disclosures. Our discussion of the economic effects takes into account 
the incentives and actions of parties who would be able under the 
rulemaking to affect its scope and influence. These parties include 
shareholders, the board, and state legislatures.
    Proposed Rule 14a-11 would require companies, where applicable, to 
include disclosures of shareholder nominations for director and 
disclosure about the nominating shareholder or group and the nominee or 
nominees in company proxy materials if, among other things, the 
nominating shareholder or group meets the requisite ownership threshold 
and has held the shares for at least one year prior to the date the 
shareholder provides notice on Schedule 14N of its intent to require 
the company to include a nominee or nominees in the company's proxy 
materials pursuant to Rule 14a-11. The nominating shareholder or group 
also would be required to represent that he or she intends to hold the 
shares through the date of the meeting. A nominating shareholder that 
includes a nominee or nominees in a company's proxy materials pursuant 
to Rule 14a-11 would be required to provide to the company, in its 
notice on Schedule 14N, disclosure similar to the disclosure required 
in a proxy contest.\335\ Pursuant to proposed Item 7(e) of Schedule 14A 
(and, in the case of registered investment companies and business 
development companies, proposed Item 22(b)(18) of Schedule 14A), the 
company would be required to include the information in its proxy 
materials, where applicable. In addition, the proposed rules would 
enable shareholders to engage in limited solicitations to form 
nominating shareholder groups and engage in solicitations in support of 
their nominee or nominees without disseminating a proxy statement.\336\
---------------------------------------------------------------------------

    \335\ See proposed Rule 14a-18.
    \336\ See proposed Rule 14a-2(b)(7)-(8).
---------------------------------------------------------------------------

    The Commission also is proposing an amendment to Rule 14a-8 to 
narrow the exclusion in paragraph (i)(8), which addresses director 
elections. Under the proposed amendment, the company would not be 
permitted to rely on Rule 14a-8(i)(8) to omit from its proxy statement 
a shareholder proposal that would amend, or that requests an amendment 
to, a company's governing documents regarding nomination procedures, or 
disclosures related to shareholder nominations, although any such 
proposals that conflict with proposed Rule 14a-11 or state law could 
still be excluded from the company's proxy materials. The current 
procedural requirements for submitting a proposal pursuant to Rule 14a-
8 would remain the same.
    No additional disclosures would be required from any shareholder 
that submits such a proposal; however, a nominating shareholder that 
includes a nominee or nominees in a company's proxy materials pursuant 
to an applicable state law provision or the company's governing 
documents would be required to provide to the company, in its notice on 
Schedule 14N, disclosure similar to the disclosure required in a proxy 
contest.\337\ Pursuant to proposed Item 7(f) of Schedule 14A (and, in 
the case of registered investment companies and business development 
companies, proposed Item 22(b)(19) of Schedule 14A), the company would 
be required to include the information in its proxy materials. We 
believe this information will provide shareholders with information 
that is useful to an informed voting decision.
---------------------------------------------------------------------------

    \337\ See proposed Rule 14a-19 and Rule 14n-1.
---------------------------------------------------------------------------

    The direct effect of proposed Rule 14a-11 and the related 
disclosure requirements would be to reduce shareholders' cost of 
nominating directors, which can otherwise be prohibitive since, to be 
successful, shareholders generally must conduct their own proxy 
contest. The amendments would do so without eliminating the traditional 
method of conducting a proxy contest. Therefore, were these amendments 
to become effective, the first-order economic effect would be that 
shareholders seeking to nominate directors may choose to move away from 
soliciting their own proxies for their nominees and instead require the 
company to include their nominee or nominees in the company proxy 
materials. The second-order economic effect would be that, due to the 
lowered

[[Page 29072]]

cost of effectively nominating directors, where applicable, there may 
be an increase in shareholder nominees for director.
    The amendment to Rule 14a-8(i)(8) would narrow the exclusion and no 
longer permit a company to exclude shareholder proposals that would 
amend, or request an amendment to, a company's governing documents 
regarding nomination procedures, or disclosures related to shareholder 
nominations could result in additional shareholders being able to 
submit nominees for inclusion in a company's proxy materials, if 
approved by shareholders. Using Rule 14a-8 in this way could result in 
a two-year process to gain access to a company's proxy materials. The 
two-year process could result in different economic effects to those 
discussed above for proposed Rule 14a-11, depending on the proponent's 
success (e.g., the inclusion of the proposal in the company's proxy 
materials and adoption of a binding bylaw proposal by appropriate 
shareholder vote), and the likelihood that the proponent would initiate 
the two-year process. The likelihood that the proponent would initiate 
the two-year process could be limited by the costs of the procedure 
arising from the additional time (including opportunity costs of 
holding securities where the shareholder may consider the company's 
board composition to be sub-optimal) and the risk of failure.\338\
---------------------------------------------------------------------------

    \338\ In this regard, we note that we are proposing new rules 
that would require a shareholder submitting a nominee or nominees 
pursuant to an applicable state law provision or a company's 
governing documents to provide disclosure similar to what is 
required currently in a proxy contest.
---------------------------------------------------------------------------

    The extent of the economic effect of proposed Rule 14a-11 and the 
related disclosure requirements may be affected by several factors. 
These factors include future possible actions by boards and states. 
They also include limits on the number of shareholder director nominees 
that must be disclosed in the company's proxy materials. Another 
relevant factor is how the requirement that a shareholder that intends 
to rely on proposed Rule 14a-11 may not be holding the securities it 
owns in the company ``for the purpose of or with the effect of changing 
control'' of the company would be applied in practice.
    In the case of the proposed amendments to Rule 14a-8, future 
actions of boards may affect applicability of the rule. If Rule 14a-
8(i)(8) is amended as proposed, a company would not be permitted to 
exclude a shareholder proposal that would amend, or that requests an 
amendment to, a company's governing documents to address shareholder 
nomination procedures or disclosures related to shareholder director 
nominations. It is reasonable to expect that at least some shareholders 
will submit this type of proposal--shareholder groups may be most 
likely to attempt to take this action when they perceive that the board 
does not currently represent their interests. Even if these proposals 
are no longer excludable pursuant to Rule 14a-8(i)(8), companies may 
submit a no-action request to exclude these shareholder proposals from 
the proxy statement pursuant to other procedural or substantive bases 
for exclusion. In contrast, we believe that applicability of proposed 
Rule 14a-11 is not likely to be affected by future actions of 
companies, because it is our understanding that under existing state 
laws companies generally may not prohibit shareholders from nominating 
directors.\339\
---------------------------------------------------------------------------

    \339\ We are not aware of any state laws that do so, but we seek 
comments on whether states currently have any prohibitions on 
shareholders' right to nominate directors, and whether, to the 
extent such a right is not explicitly allowed, shareholders are 
presumed to have nomination rights.
---------------------------------------------------------------------------

    Future actions of the states also could affect the applicability of 
the proposed amendments. Proposed Rule 14a-11, for instance, would not 
apply to companies incorporated in states that prohibit nominations of 
directors by shareholders or permit companies to prohibit such 
nominations and where the company's governing documents do so. 
Additionally, the proposed rule requires that the nominee's board 
candidacy and membership be consistent with state law. Under Rule 14a-
8, shareholder proposals must be proper subjects for action by 
shareholders under state law. States may have incentives to affect the 
director nomination process, and these incentives may lead them to 
consider changes that could affect the availability of proposed Rule 
14a-11 or Rule 14a-8. To the extent that states change their laws, for 
example, to prohibit the nomination of directors by shareholders, 
proposed Rule 14a-11 and Rule 14a-8 would apply less broadly.
    The application of the term ``changing control'' affects the 
shareholders that may rely on the proposed amendments to require 
disclosure of their board nominees. The certification by the nominating 
shareholder or group on Schedule 14N that it does not hold the 
securities it owns in the company with the purpose or effect of 
changing control of the company will limit the shareholders that can 
use the procedure in proposed Rule 14a-11. Whether this requirement 
applies to a nominating shareholder or group will depend, however, on 
the facts and circumstances of each nominating shareholder or group. It 
is certainly not the Commission's intent that this requirement would 
restrict shareholders from using the new rule merely because it is 
nominating directors pursuant to the new rule. Nevertheless, other 
factors in addition to the nomination may support a finding of control.
    The economic effects of the proposed rulemaking also are affected 
by the requirement that shareholders cannot nominate more than a 
maximum of one director or 25% of the existing board. In addition to 
this direct requirement, the cap on shareholder nominees may have 
additional, indirect implications for the economic effects of proposed 
Rule 14a-11. First, the number of shareholder nominees that can be 
included in the company's proxy materials overall is limited. If one 
shareholder or group nominates the maximum allowable number of 
candidates, any other shareholder's or group's nominees are not 
required to be disclosed in the same proxy statement. Second, if the 
maximum allowable number of existing shareholder nominees is currently 
in place on the board, additional shareholder nominees are not required 
to be disclosed in the proxy statement. Third, boards seeking to limit 
the effect of shareholder nominated directors under the proposed rule 
may, in some instances, choose to expand the board size to dilute, to 
an extent, those directors.\340\
---------------------------------------------------------------------------

    \340\ As an example, a board of eight with two new shareholder-
nominated directors, may expand to up to 11, diluting the influence 
of the shareholder-nominated directors without expanding the number 
of director slots for which they must place shareholder-nominated 
directors in the proxy statement because the proposed 25% limits in 
proposed Rule 14a-11 would include a provision allowing companies to 
round down the number of directors.
---------------------------------------------------------------------------

    Below we consider the benefits and costs of these economic effects 
of the proposed amendments.

B. Benefits

    We anticipate that the proposals, where applicable, would result in 
(1) a reduction in the cost to shareholders of soliciting votes in 
support of a nominated candidate for election to the board of 
directors; (2) improved disclosure of shareholder nominated director 
candidates; (3) potential improved board performance; and (4) enhanced 
ability for shareholders and companies to adopt their preferred 
shareholder nomination procedures.

[[Page 29073]]

1. Reduction in Costs Related to Shareholder Nominations
    Generally, a shareholder who attempts to nominate directors must 
conduct a proxy contest in which the shareholder is responsible for 
collecting information, preparing proxy materials with required 
disclosures concerning the director nomination, and mailing the proxy 
materials to each shareholder solicited. A shareholder conducting a 
proxy contest incurs large costs involved with preparing a proxy 
statement and soliciting on behalf of his or her nominee.\341\ The 
costs can make it prohibitively expensive for shareholders to exercise 
their state law rights to nominate and elect directors. In addition, 
collective action concerns may discourage any one shareholder or group 
from assuming such costs for the benefit of other shareholders.\342\
---------------------------------------------------------------------------

    \341\ As noted in footnote 303, above, in 2008 there were at 
least 32 contested elections.
    \342\ See, e.g., Lynn A. Stout, The Mythical Benefit of 
Shareholder Control, 93 Va. L. Rev. 789, 789 (2007) (``In a public 
company with widely dispersed share ownership, it is difficult and 
expensive for shareholders to overcome obstacles to collective 
action and wage a proxy battle to oust an incumbent board.''), 
available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=978775.
---------------------------------------------------------------------------

    Proposed new Rule 14a-11 would reduce both the direct and indirect 
costs of the proxy solicitation process. In particular, proposed new 
Rule 14a-11 would allow shareholders to avoid the direct costs of 
conducting a proxy contest and would mitigate collective action and 
free rider concerns that otherwise may deter many shareholders from 
engaging in a traditional proxy contest. In regard to the latter, the 
proposed rule changes would likely ameliorate the need for collective 
action among shareholders, because qualifying shareholders will have 
direct access to a company's proxy materials to more effectively 
nominate directors. To the extent that shareholders substitute use of 
Rule 14a-11 for engaging in traditional election contests, the proposal 
could also help companies avoid potential disruptions and the diversion 
of resources resulting from traditional proxy contests that might take 
place in the absence of the proposed amendments. Because the level of 
this benefit is affected by the extent to which shareholders make such 
substitutions, it is also checked by the extent that use of proposed 
Rule 14a-11 is not a perfect substitute for traditional election 
contests. For example, the proposed rule restricts the number of 
shareholder director nominees that a company would be required to 
include in its proxy materials and the proposed rule would be available 
only to shareholders that do not hold the securities in the company 
with the purpose of, or with the effect of, changing control of the 
company. These elements of the proposed rule impose restrictions that 
are not present in a traditional proxy contest. Proxy contests also 
would still be available where shareholders have a control intent.
    According to a study of proxy contests conducted during 2003, 2004, 
and 2005, the average cost to a soliciting shareholder of a proxy 
contest is $368,000.\343\ The costs included those associated with 
proxy advisors and solicitors, processing fees, legal fees, public 
relations, advertising, and printing and mailing.\344\ Approximately 
95% of the cost was unrelated to printing and postage.\345\ The cost of 
printing and postage averaged approximately $18,000.\346\ Based on this 
information, we estimate that a shareholder using proposed Rule 14a-11 
to submit a nominee or nominees for director to be included in a 
company's proxy statement will save at least $18,000 on average and may 
save more as a result of being able to use the company's proxy 
materials to solicit other shareholders. The nominating shareholder or 
group may or may not engage in public relations and advertising, or 
engage proxy solicitors, therefore, the extent of any cost savings may 
be greater.
---------------------------------------------------------------------------

    \343\ See comment letter from Automatic Data Processing, Inc. 
(April 20, 2006) on File No. S7-10-05.
    \344\ See id.
    \345\ See id.
    \346\ See id.
---------------------------------------------------------------------------

    The benefits of this reduction in costs also may be enhanced to the 
extent that companies' governing documents are modified to allow 
inclusion of additional shareholder nominees for director in company 
proxy materials. The instances of such changes in provisions in 
governing documents may increase as a result of the proposed amendment 
to Rule 14a-8(i)(8) to preclude companies from excluding proposals that 
would amend, or that request an amendment to, a company's governing 
documents regarding nomination procedures or disclosures related to 
shareholder nominations, provided the proposal does not conflict with 
proposed Rule 14a-11.
2. Improved Disclosure of Shareholder Nominated Director Candidates
    The proposed new disclosure requirements in Rules 14a-11, 14a-18, 
and 14n-1 would require additional information to be provided on 
Schedule 14N, including certifications by shareholders who submit a 
nominee under proposed Rule 14a-11 about the nominee's independence, 
and disclosure of the information similar to that currently required in 
a proxy contest regarding the nominating shareholder and nominee. 
Proposed Rules 14a-19 and 14n-1 would require similar disclosures when 
a shareholder uses an applicable state law provision or company's 
governing documents to include shareholder nominees for director in the 
company's proxy materials. The information provided by such 
certifications and disclosures would help provide transparency to 
shareholders in voting on shareholder nominees for director and 
therefore may lead to better informed voting decisions. The information 
also will provide consistent and comparable information about 
shareholder nominated candidates across companies. With respect to Rule 
14a-8(i)(8), companies have been permitted to exclude proposals to 
establish procedures to include shareholder nominees in company proxy 
materials. The Commission was concerned that allowing such proposals 
would result in contested elections without the disclosure that 
otherwise would be required in a traditional proxy contest.\347\ The 
proposed disclosure requirements are designed to address that concern.
---------------------------------------------------------------------------

    \347\ See Shareholder Proposal Proposing Release (proposing 
amendments to Rule 14a-8 to ``make clear that director nominations 
made pursuant to [bylaw amendments concerning shareholder 
nominations of directors] would be subject to the disclosure 
requirements currently applicable to proxy contests'' and noting 
that such disclosure is of ``great importance'' to an informed 
voting decision by shareholders).
---------------------------------------------------------------------------

3. Potential Improved Board Performance and Company Performance
    Both proposed Rule 14a-11 and the amendments to Rule 14a-8(i)(8) 
may result in improved company performance, arising from improvements 
in board performance. First, both proposals, by increasing the chances 
of a shareholder-nominated director to be elected to the board, may 
increase the potential for incumbent directors to face closer scrutiny 
from outsiders. Faced with this new prospect, incumbent directors may 
work more diligently to signal their value to the company through 
efforts to improve the performance of the board and, relatedly, the 
company. \348\ Company performance

[[Page 29074]]

may improve to the extent some directors are replaced by other 
directors whose actions are better aligned with the interests of 
shareholders.\349\ Even where incumbents are not replaced, the 
requirements of the rule can lead to greater accountability on the part 
of incumbent directors. The level of board accountability will depend 
on the extent to which directors see a close link between their 
performance and the prospect of removal.\350\
---------------------------------------------------------------------------

    \348\ The academic literature indicates the benefit to 
shareholders of having an independent, active and committed board of 
directors. See, e.g., Fitch Ratings, ``Evaluating Corporate 
Governance'' (December 12, 2007), available at: http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=363502. Moreover, empirical evidence has indicated that the 
ability of significant shareholders to hold corporate managers 
accountable for activity that does not benefit investors may reduce 
agency costs and increase shareholder value. See, e.g., Brad M. 
Barber, ``Monitoring the Monitor: Evaluating CalPERS' Activism'' 
(November 2006), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=890321. See also Deutsche Bank, Global 
Equity Research, ``Beyond the Numbers: Corporate Governance in 
Europe,'' (March 5, 2005).
    \349\ See, e.g., Chris Cernich, et al., ``Effectiveness of 
Hybrid Boards,'' IRRC Institute for Corporate Responsibility (May 
2009) available at: http://www.irrcinstitute.org/pdf/IRRC_05_09_EffectiveHybridBoards.pdf (finding that in a study of 120 ``hybrid'' 
boards--boards formed when activist shareholders, through actual or 
threatened proxy contests, were able to elect dissident directors 
but not gain control of the entire board--such boards increased 
shareholder value at ongoing companies by 19.1% (16.6 percentage 
points more than peers) from the contest period through the board's 
one-year anniversary).
    \350\ The current proposal, by facilitating a reduction in the 
cost of nominating ``outside'' directors, would create a new threat 
of removal to incumbent directors, which can bring about increased 
accountability that would benefit investors. Economists have put 
forth theory and evidence on the link between incentives that are 
associated with accountability and performance. See, e.g., Benjamin 
E. Hermalin and Michael S. Weisbach, ``Endogenously Chosen Board of 
Directors and Their Monitoring of the Board'' 88 American Economic 
Review 96 (1998), available at: http://129.3.20.41/eps/mic/papers/9602/9602001.ps.gz. Milton Harris and Artur Raviv ``Control of 
Corporate Decisions: Shareholders vs. Management'' (May 29, 1998), 
available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=965559.
---------------------------------------------------------------------------

    Similarly, the inclusion in company proxy materials of shareholder 
nominees for director under proposed Rule 14a-11, or the possibility of 
shareholder nominees being included in company proxy materials pursuant 
to shareholder-initiated amendments to a company's governing documents 
permitted by the proposed amendments to Rule 14a-8, may enhance the 
quality of the shareholders' voice and result in a board whose 
interests are better aligned with shareholders' interests.\351\
---------------------------------------------------------------------------

    \351\ Published research has reported that when chief executive 
officers are more involved in the nomination of independent 
directors, stock price reactions to independent director 
appointments are significantly lower, and companies appoint fewer 
independent directors. See Anil Shivdasani & David Yermack, ``CEO 
Involvement in the Selection of New Board Members: An Empirical 
Analysis,'' 54 J. Finance 1829 (1999). This evidence is consistent 
with the idea that limiting total management control of the 
nomination process improves accountability.
---------------------------------------------------------------------------

    Second, the possibility of shareholder nominated candidates being 
submitted for inclusion in a company's proxy materials, as well as the 
possibility of the shareholder nominee's election, may lead to enhanced 
board performance. If the proposed rules are adopted, the 
responsiveness of boards may increase in an effort to alleviate 
concerns expressed by shareholders on certain matters and thereby avoid 
shareholders submitting nominees pursuant to the new rules. The board 
may feel a need to be more attentive to the company's operations as a 
result of this enhanced accountability to shareholders. In addition, 
having a shareholder-nominated director elected to and serving on the 
board may increase the transparency in boards' decision-making process, 
which would make it easier for shareholders to monitor the board. This 
increased monitoring could enhance board performance and ultimately 
lead to improved corporate performance.\352\
---------------------------------------------------------------------------

    \352\ One benefit of corporate transparency is that it reduces 
information differences between the entities (e.g., the board of 
directors and the shareholders), and hence lowers the cost of 
trading the firm's securities and the firm's cost of capital. See, 
e.g., Diamond, Douglas W. and Robert E. Verrecchia, ``Disclosure, 
Liquidity, and the Cost of Capital,'' Journal of Finance, September 
1991, 46 (4), 1325-1359. For empirical evidence, see, e.g., 
Christian Leuz and Robert E. Verrecchia, ``The Economic Consequences 
of Increased Disclosure,'' Journal of Accounting Research, 2000, 38 
(supplement), 91-124.
---------------------------------------------------------------------------

    Third, increasing shareholders' access to company proxy materials 
for the inclusion of shareholder nominees for director may result in a 
larger pool of qualified director nominees to choose from. To the 
extent that a company does not include shareholder nominees for 
director in its proxy materials, thereby reducing the pool of qualified 
nominees, an opportunity cost may be incurred by the company and thus 
the shareholders. Therefore, proposed Rule 14a-11 may reduce the 
opportunity costs to companies and shareholders.
4. Enhanced Ability for Shareholders and Companies To Adopt Procedures
    The proposed amendment to Rule 14a-8(i)(8) also may facilitate 
shareholders and companies working together to tailor companies' 
governing documents to suit the specific interests of the company and 
its shareholders. The proposed amendment would allow shareholders to 
use Rule 14a-8 to submit proposals that would amend, or that request an 
amendment to, a company's governing documents regarding nomination 
procedures or disclosures related to shareholder nominations, as long 
as the proposal does not conflict with Rule 14a-11. This may provide 
shareholders a more effective voice than simply being able to recommend 
candidates to the nominating committee or being able to nominate 
candidates in person at a shareholder meeting.
    The overall benefit of allowing shareholders to include director 
nominees in a company's proxy materials may depend on the extent to 
which shareholders choose to exercise their rights and on shareholders' 
perception of the merits of the nominees that are advanced by 
nominating shareholders.

C. Costs

    We anticipate that the amendments, where applicable, may result in 
costs related to (1) potential adverse effects on company and board 
performance; (2) potential complexity of the proxy process; and (3) 
preparing the required disclosures, printing and mailing, and costs of 
additional solicitations.
1. Costs Related to Potential Adverse Effects on Company and Board 
Performance
    The proposals would impose some direct costs on the companies that 
would be subject to the new rules. These costs would arise from 
potential changes to corporate behavior and potential lower board 
quality.
    Most, if not all, companies have director nomination procedures. 
The proposed changes may lead some companies to incur costs associated 
with re-examining those procedures, especially if the company is 
subject to, or thinks it likely will be subject to, shareholder 
nominated director candidates. Companies accustomed to uncontested 
director elections may incur costs of adjusting their practices.\353\ 
Further, the possibility of contested director elections may adversely 
influence corporate behavior. To the extent that incumbent board 
members may feel a greater need to respond to shareholders' various 
concerns, the board may incur costs in attempting to institute policies 
and procedures they believe will address shareholder concerns. It is 
possible that the time a board spends on shareholder relations could 
reduce the time that it would otherwise spend on strategic and long-
term thinking and overseeing management, which may negatively

[[Page 29075]]

affect shareholder value.\354\ These costs are limited by the extent to 
which the additional communication results in better decision-making by 
the board, as well as shareholders' understanding that the board's time 
and other resources are in scarce supply and take these considerations 
into account in deciding to nominate directors.
---------------------------------------------------------------------------

    \353\ See, e.g., comment letter on the 2007 Proposals (SEC File 
Nos. S7-16-07 and S7-17-07) from the U.S. Chamber of Commerce 
(October 2, 2007) (``Chamber 2007'').
    \354\ See, e.g., Stout, footnote 342, above, at 792 (``Perhaps 
the most obvious [economic function of board governance] is 
promoting more efficient and informed business decisionmaking. It is 
difficult and expensive to arrange for thousands of dispersed 
shareholders to express their often-differing views on the best way 
to run the firm.''); see generally Stephen M. Bainbridge, Director 
Primacy and Shareholder Disempowerment, 199 Harv. L. Rev. 1, 25-27 
(2006) (discussing how concern for accountability may undermine 
decision making discretion and authority). But see Lucian Arye 
Bebchuk, The Case for Increasing Shareholder Power, 118 Harv. L. 
Rev. 833, 883 (2005) (``[M]ere recognition that back-seat driving 
might sometimes be counter-productive is hardly sufficient to 
mandate general deference to management. Such mandated deference 
would follow only if one assumes that shareholders are so irrational 
or undisciplined that they cannot be trusted to decide for 
themselves whether deference would best serve their interests.''). 
See also, comment letter on the 2007 Proposals (SEC File Nos. S7-16-
07 and S7-17-07) from ABA 2007.
---------------------------------------------------------------------------

    In addition, the rule proposals could, in some cases, result in 
lower quality boards.\355\ If a shareholder nominee is elected and 
disruptions or polarization in boardroom dynamics occur as a result, 
the disruptions may delay or impair the board's decision-making 
process.\356\ In companies in which boards are already well-
functioning, dissent can be counterproductive and could delay the 
board's decision-making process. Such a delay or impairment in the 
decision-making process could constitute an indirect economic cost to 
shareholder value.
---------------------------------------------------------------------------

    \355\ See, e.g., comment letter on the 2007 Proposals (SEC File 
Nos. S7-16-07 and S7-17-07) from Chamber 2007; Stephen M. 
Bainbridge, ``A Comment on the SEC Shareholder Access Proposal'' 
(November 14, 2003) at 17, available at: http://ssrn.com/abstract=470121 (``The likely effects of electing a shareholder 
representative therefore will not be better governance. It will be 
an increase in affectional conflict. * * * It will be a reduction in 
the trust-based relationships that causes horizontal monitoring 
within the board to provide effective constraints on agency 
costs.'').
    \356\ See, e.g., comment letter on the 2007 Proposals (SEC File 
Nos. S7-16-07 and S7-17-07) from the Society of Corporate 
Secretaries & Governance Professionals (October 5, 2007).
---------------------------------------------------------------------------

    Companies may expend more resources on efforts to defeat the 
election of shareholder nominees for director. Commenters have drawn 
attention to the potential to turn every director election into an 
election contest.\357\ This may be the case, for instance, if company 
directors determine to spend company resources to defeat shareholder 
nominees they believe are not in the best interests of the company (or 
for other reasons).\358\ Such a reaction could discourage qualified 
board members from running. This potential would be limited by 
shareholders' understanding that board dynamics can be important, and 
that changing them may not always be beneficial. It also would be 
limited to the extent that company directors do not seek to substitute 
their judgment for the judgment of the shareholders when the question 
is who should comprise the board of directors.\359\ We also have 
assumed that boards generally would be cautious in expending resources 
to defeat shareholder nominees insofar as incumbent board members 
generally are interested in the outcome of elections and in the 
corporation's policy in connection with opposing shareholder nominees. 
Nevertheless, to the extent that company directors make large 
expenditures to defeat shareholder nominees, those expenditures would 
represent a cost to shareholders. An additional cost could arise from 
the potential placement of directors who have insufficient experience 
or capabilities to serve effectively, as some commenters have 
suggested.\360\ But to the extent that shareholders understand that 
experience and competence are important director qualifications, any 
associated costs may be limited.
---------------------------------------------------------------------------

    \357\ See 2003 Summary of Comments and comment letters from ASCS 
and McKinnell, BRT.
    \358\ See 2003 Summary of Comments; see also comment letters 
from ABA; Charlotte M. Bahin, ACB; The Allstate Corporation 
(December 23, 2003) (``Allstate''); Ashland; Richard H. Ayers 
(November 18, 2003) (``Ayers''); Callaway Golf Company (December 22, 
2003) (``Callaway''); Caterpillar, Inc. (December 17, 2003) 
(``Caterpillar''); Cigna Corporation (January 2, 2004) (``Cigna''); 
ConocoPhillips (October 3, 2003) (``ConocoPhillips''); Cummins, Inc. 
(November 23, 2003) (``Cummins''); Debevoise & Plimpton (December 
17, 2003); Exelon Corporation (December 22, 2003) (``Exelon''); 
FirstEnergy Corp. (December 10, 2003) (``FirstEnergy''); Ganske, 
Kelley & Profusek; General Mills (December 19, 2003); Roger L. Howe 
(November 26, 2003); Reed Hundt (December 16, 2003); International 
Paper (December 22, 2003); Letter Type D (representing 8 individuals 
or entities); Letter Type H (representing 7 individuals or 
entities); Letter Type N (representing 38 individuals or entities); 
Letter Type Q (representing 4 individuals or entities); McDATA 
Corporation (December 22, 2003) (``McDATA''); Pfizer, Inc. (December 
11, 2003) (``Pfizer''); MDU Resources (December 22, 2003) (``MDU''); 
Malcolm S. Morris (November 6, 2003); National Association of 
Corporate Directors (March 26, 2004) (``NACD''); Office Depot, Inc. 
(December 22, 2003); Kerr-McGee Corporation (December 22, 2003); 
Progress Energy (December 22, 2003); Tribune Company (December 18, 
2003); and Wachtell.
    \359\ Cf. Blasius Indus. v. Atlas Corp., 564 A.2d 651, 663 (Del. 
Ch. 1988) (stating that ``[although the] premise [that the board 
knows better than do the shareholders what is in the corporation's 
best interest] is no doubt true for any number of matters, it is 
irrelevant (except insofar as the shareholders wish to be guided by 
the board's recommendation) when the question is who should comprise 
the board of directors.'').
    \360\ See, e.g., comment letter from Exelon Corporation 
(December 22, 2003) on the 2003 Proposal.
---------------------------------------------------------------------------

    Finally, the proposals could introduce a cost to shareholders to 
the extent that the nomination procedure is used by shareholders to 
promote an agenda that conflicts with other shareholders' interests. 
For example, it would be possible for an investor to try to maximize 
his private gains through board decisions at the expense of other 
shareholders.\361\ This cost, however, is limited to the extent these 
nominees would be required to make certain disclosures designed to 
elicit their interests and relationships, and must ultimately be 
elected by the shareholders.\362\
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    \361\ See, e.g, Stout, footnote 342 above, at 794 (``[B]y making 
it easier for large shareholders in public firms to threaten 
directors, a more effective shareholder franchise might increase the 
risk of intershareholder ``rent-seeking'' in public companies.'').
    \362\ See, e.g., Bebchuk, note 354 above, at 883 (arguing that 
proposals by special interest shareholders are generally unlikely to 
be adopted by the majority).
---------------------------------------------------------------------------

2. Costs Related to Potential Complexity of Proxy Process
    Under the proposed amendments, the process of determining which 
shareholder director nominee will be on the form of proxy and the 
limitations on the number of shareholder-nominated directors to appear 
in the company's proxy materials and eventually serve on the board may 
create a degree of complexity. If several shareholders or groups desire 
(and qualify) to nominate the maximum number of directors they are 
allowed to place in the company's proxy materials, only the first 
shareholder or group to submit a Schedule 14N will succeed. 
Additionally, under proposed Rule 14a-11, if the maximum allowable 
number of shareholder nominees is currently serving on the board, a 
company would not be required to include additional shareholder 
nominees in the company's proxy materials.
    Under the proposed amendments to Rule 14a-8, shareholders would 
need to wait for two proxy seasons to utilize the particular procedures 
and disclosures adopted through a shareholder proposal under Rule 14a-
8--the first season to establish a shareholder director nomination 
procedure and the second season to nominate and elect directors.
    These sources of complexity and any uncertainty that may arise in 
implementing the proposed amendments could result in costs to 
companies, to shareholders seeking to nominate directors, and to 
shareholder director nominees. For example, both

[[Page 29076]]

companies and shareholders could incur costs to seek legal advice in 
connection with shareholder nominations submitted pursuant to Rule 14a-
11, the inclusion of shareholder nominees in company proxy materials, 
and the process for submission of a notice of intent to exclude a 
nominee or nominees included in the rule.\363\ A company that receives 
a shareholder nomination for director has no obligation to make a 
submission under Rule 14a-11 unless it intends to exclude the nominee 
from its proxy materials. Companies and shareholders also could incur 
costs to seek legal advice in connection with shareholder proposals 
submitted pursuant to Rule 14a-8 and the notice of intent to exclude 
process related to it. A company that receives a shareholder proposal 
has no obligation to make a submission under Rule 14a-8 unless it 
intends to exclude the proposal from its proxy materials. To the extent 
disputes on whether to include particular nominees or proposals are not 
resolved internally, companies and/or shareholders might seek recourse 
in courts, which would increase costs.
---------------------------------------------------------------------------

    \363\ For example, the comment letter from ASCS on the 2003 
Proposal estimated based on survey results that the cost of outside 
counsel in connection with opposing a shareholder nominee and 
supporting the company's nominees for directors would be 59.4 hours 
and $44,460.
---------------------------------------------------------------------------

    The proposed amendments to Rule 14a-8 would no longer permit 
companies to exclude from their proxy materials proposals that would 
amend, or that request an amendment to, a company's governing documents 
regarding nomination procedures or disclosures related to shareholder 
nominations, provided the proposal does not conflict with proposed Rule 
14a-11. Expanding the types of proposals permitted under Rule 14a-8 may 
increase the number of shareholder proposals submitted to companies. 
This would likely result in increased costs to the company related to 
reviewing and processing such proposals to determine matters such as 
shareholder eligibility, and whether there is a basis for excluding the 
proposal under Rule 14a-8. In this regard, in a comment letter 
submitted in connection with the 2003 Proposal, a commenter submitted 
information from a survey conducted about the costs associated with 
including a shareholder proposal in the company's proxy materials, 
estimating that preparation and submission of a notice of intent to 
exclude the proposal to the SEC regarding a shareholder proposal would 
average 65 hours per proposal.\364\ For purposes of PRA, we estimate 
that shareholders will submit approximately 97 proposals regarding 
nomination procedures or disclosures related to director nominations to 
companies per year. Assuming that 90% of companies prepare and submit a 
notice of intent to exclude these proposals, the resulting costs to 
companies would result in approximately 4,241 hours and $565,500 for 
the services of outside professionals. Alternatively, such costs could 
decrease to the extent that proposed Rule 14a-8 provides a clearer 
indication of which proposals are excludable.
---------------------------------------------------------------------------

    \364\ See 2003 Summary of Comments; see also letter from 
McKinnell, BRT (providing information from surveys conducted of BRT 
and ASCS members). See also footnote 311, above.
---------------------------------------------------------------------------

3. Costs Related to Preparing Disclosure, Printing and Mailing and 
Costs of Additional Solicitations
    The proposals may impose additional direct costs on companies and 
shareholders subject to the new rules, related to the preparation of 
required disclosure, printing and mailing costs and costs of additional 
solicitations that may be undertaken as a result of including one or 
more shareholder nominees for director in the company proxy materials.
    For purposes of the PRA analysis, we estimate that the disclosure 
burden of the proposed amendments to reporting companies (other than 
registered investment companies) is 15,652 hours of personnel time and 
$2,087,000 for services of outside professionals. We also estimate for 
purposes of the PRA analysis that the disclosure burden to shareholders 
of the proposed amendments will be 31,865 hours of shareholder time and 
$4,758,420 for services of outside professionals. For registered 
investment companies, we estimate for purposes of the PRA analysis that 
the burden of the proposed amendments will be 5,888 hours of company 
time and $785,000 for the services of outside professionals.
    Companies would incur additional printing and mailing costs to 
include shareholder nominees in the company's proxy materials pursuant 
to Rule 14a-11, an applicable state law provision, or a company's 
governing documents as a result of the proposed amendment to Rule 14a-
8(i)(8).\365\ These incremental printing and mailing costs could 
include the expense of adding the name and background information of 
shareholder nominees for director in their proxy materials as well as 
the increased weight of a company's proxy materials. The printing and 
mailing costs would increase as the number of shareholder nominees to 
be included in the company proxy materials increases. As noted above, 
this may result in a decrease in costs to shareholders that would have 
to conduct proxy contests in the absence of proposed Rule 14a-11, but 
may increase the costs for companies. The increased costs for companies 
may not be as much as would otherwise result if that shareholder 
engaged in a proxy contest.\366\
---------------------------------------------------------------------------

    \365\ We note that these increased costs may be less for 
companies using notice and access. See Internet Availability of 
Proxy Materials, Release No. 34-55146 (January 22, 2007) (``Internet 
Proxy Availability Release'').
    \366\ One commenter on the 2003 Proposal estimated that a Rule 
14a-11 contest would cost a company approximately one-third what a 
full proxy contest costs. See comment letter from Bainbridge. Based 
on this assumption, this commenter estimated, relying on data from a 
late 1980s survey, that the costs of such a contest to a public 
company would be $500,000. This commenter also cited data estimating 
companies' annual expenditures on Rule 14a-8 shareholder proposals 
to be $90 million. While this commenter noted that it is unlikely 
that there will be as many Rule 14a-11 election contests as Rule 
14a-8 shareholder proposals, the commenter asserted that incumbent 
boards are likely to spend considerably more on opposing each Rule 
14a-11 contest than on opposing a Rule 14a-8 shareholder proposal. 
This commenter estimated that $100 million may be an appropriate 
estimate for the lower boundary of the range within which Rule 14a-
11's direct costs will fall. By contrast, another commenter 
estimated that under current rules the total cost of proxy contests 
for companies would exceed $15 million. See comment letter from 
McKinnell, BRT in connection with the 2003 Proposal (estimate was 
based on data provided in response to a 2003 survey of members of 
the Business Roundtable and the American Society of Corporate 
Secretaries).
---------------------------------------------------------------------------

    Companies also would incur printing and mailing costs with respect 
to the inclusion of a shareholder proposal related to changes to the 
company's governing documents regarding inclusion of shareholder 
nominees in company proxy materials. We have two sources of information 
estimating such costs. According to the information provided by one 
commenter, the average cost to a company to print and mail one 
shareholder proposal in its proxy materials is $15,324 and 34 
hours.\367\ The responses to a questionnaire that the Commission made 
available in 1997 relating to 1998 amendments to Rule 14a-8, however, 
suggest such costs to the companies responding averaged $50,000.\368\ 
As noted above, we believe

[[Page 29077]]

that the proposed amendment to Rule 14a-8(i)(8) could result in an 
additional 38 shareholder proposals submitted annually.\369\ Based on 
this information, for purposes of our analysis, we assume printing and 
mailing costs of one shareholder proposal in a company's proxy 
materials could be in the range of approximately $15,000 to $50,000. 
Assuming each of these proposals were included in company proxy 
materials, it could result in a total cost of approximately $570,000 to 
$1,900,000 for the affected companies.
---------------------------------------------------------------------------

    \367\ See ASCS letter. We also note that these increased costs 
may be less for companies using notice and access. See Internet 
Proxy Availability Release.
    \368\ In the adopting release for the amendments to Rule 14a-8 
in 1998, we noted that responses to a questionnaire we made 
available in February 1997 suggested the average cost spent on 
printing costs (plus any directly related costs, such as additional 
postage and tabulation expenses) to include shareholder proposals in 
company proxy materials was approximately $50,000. The responses 
received may have accounted for the printing of more than one 
proposal.
    \369\ We estimated that approximately 97 proposals would be 
submitted regarding nomination procedures or disclosures related to 
nomination procedures, however, our estimate assumed that 59 
proposals that otherwise would have been submitted on other 
governance topics would instead relate to nomination procedures or 
disclosures related to nomination procedures. Assuming the 59 
proposals would already be accounted for in companies' costs, we 
estimate that 38 additional proposals would be submitted to 
companies annually.
---------------------------------------------------------------------------

    The proposed rules also would present direct costs due to 
disclosure requirements. For example, companies that determine that 
they may exclude a shareholder nominee are required to provide a notice 
to the nominating shareholder or group regarding any eligibility or 
procedural deficiencies in the nomination and provide to the Commission 
notice of the basis for its determination.\370\ Nominating shareholders 
or groups and the nominees also would be required to disclose 
information about themselves, which may be costly.\371\ Most of this 
disclosure will be provided by the nominating shareholder or group in 
the notice to the company, which would be filed on new Schedule 14N. 
The Schedule 14N also would include information regarding the length of 
ownership, certifications, and other information.
---------------------------------------------------------------------------

    \370\ For purposes of the PRA analysis, we estimate these 
disclosure requirements would result in 2,633 burden hours of 
company time, and $351,000 for services of outside professionals.
    \371\ For purposes of the PRA analysis, we estimate the Schedule 
14N disclosure requirements for shareholders submitting nominees 
pursuant to Rule 14a-11 or a company's governing documents would 
result in a total of 28,565 hours of shareholder time and $3,808,600 
for services of outside professionals.
---------------------------------------------------------------------------

    We also anticipate the possibility of increased direct costs 
associated with additional solicitations by both companies and 
shareholders. Companies may increase solicitations to vote against 
shareholder proposals or to vote for their slate of directors. 
Shareholders may increase solicitations to vote for shareholder 
proposals, to withhold votes for a company's nominees for director, or 
to vote for the shareholder nominee or nominees. In addition, companies 
may face additional costs for solicitations if shareholders or groups 
submit nominees for inclusion in company proxy materials pursuant to 
Rule 14a-11, an applicable state law, or a company's governing 
documents.

D. Small Business Issuers

    Based on our staff's review of Rule 14a-8 shareholder proposals, it 
seems that smaller companies tend to receive relatively fewer 
shareholder proposals. Therefore, we assume that the proposed amendment 
to the rule would not substantially increase the number of shareholder 
proposals to smaller companies and likely would have little impact on 
small entities. With respect to proposed Rule 14a-11, there is some 
indication that proxy contests may occur disproportionately at smaller 
companies.\372\ Accordingly, we assume that proposed Rule 14a-11 is 
likely to have a greater effect than the proposed amendments to Rule 
14a-8 on smaller companies.\373\
---------------------------------------------------------------------------

    \372\ See, e.g., Bebchuk 2007 Article.
    \373\ For further discussion on the impact of the proposed 
amendments on smaller reporting companies, see discussion of Initial 
Regulatory Flexibility Act below.
---------------------------------------------------------------------------

E. Request for Comment

    We have identified certain costs and benefits imposed by these 
proposals. In addition to the requests for comment throughout the 
release on the potential impact of the proposed rules, we specifically 
request comment on all aspects of this cost-benefit analysis, including 
identification of any additional costs and benefits. We encourage 
commenters to identify and supply relevant data concerning the costs 
and benefits of the proposed amendments. We also solicit comment on how 
the use of electronic proxy materials \374\ may reduce the costs for 
companies that would be required to include shareholder nominees or 
shareholder proposals, as well as for shareholders that otherwise would 
be required to conduct a proxy contest.
---------------------------------------------------------------------------

    \374\ See Internet Proxy Availability Release.
---------------------------------------------------------------------------

    We also request comment on the following specific concerns:
     We solicit quantitative data to assist our assessment of 
the benefits and costs of enhanced shareholder access to company proxy 
materials. Will proposed Exchange Act Rule 14a-11 reduce shareholders' 
cost of nominating directors?
     We solicit quantitative data on how often shareholders 
meeting the proposed Rule 14a-11 thresholds would invoke the rule to 
propose nominees.
     We solicit quantitative data on the potential increases, 
if any, of shareholder proposals under Exchange Act Rule 14a-8(i)(8) as 
a result of these proposed rules.
     We solicit quantitative data on the incremental cost of 
mailing and printing company proxies that may be longer due to the 
inclusion of shareholder nominees. How does this compare with the cost 
of a stand-alone printing of the additional material, such as would be 
borne by a shareholder engaged in a proxy contest under the current 
rules?
     We solicit quantitative data on the time and cost spent by 
shareholders nominating directors through a proxy contest under the 
current rules.

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

    Section 23(a)(2) of the Exchange Act \375\ 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. Section 3(f) of the Exchange Act \376\ and Section 
2(c) of the Investment Company Act \377\ 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.
---------------------------------------------------------------------------

    \375\ 15 U.S.C. 78w(a)(2).
    \376\ 15 U.S.C. 78c(f).
    \377\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    The proposed rules are intended to remove impediments to the 
exercise of shareholders' rights to nominate and elect directors and 
provide shareholders with information about nominating shareholders and 
their nominees for director. The proposed rules, if adopted, would 
establish a process for inclusion of shareholder nominees for director 
in company proxy materials pursuant to Rule 14a-11 and disclosure 
regarding the nominating shareholder and nominees submitted pursuant to 
Rule 14a-11. The proposed rules also would provide an avenue for 
shareholders to submit proposals that would amend, or that request an 
amendment to, a company's governing documents regarding nomination 
procedures or disclosures related to shareholder

[[Page 29078]]

nominations. In addition, the proposed rules would require disclosure 
of information regarding nominating shareholders or groups and any 
nominees submitted pursuant to an applicable state law provision or a 
company's governing documents, which would provide shareholders a 
better informed basis for deciding how to vote for nominees for 
election to the board of directors. Enabling shareholders to submit 
shareholder proposals that would amend, or that request an amendment 
to, a company's governing documents regarding nomination procedures or 
disclosures related to shareholder nominations should better reflect 
shareholders' preferences regarding shareholder director nomination 
procedures and disclosure. We expect the proposed rules to promote the 
efficiency of the exercise of shareholders' rights to nominate and 
elect directors.
    We expect proposed Rule 14a-11 would increase efficiency because a 
shareholder will not have to engage in a formal proxy contest if the 
shareholder only wants to nominate a small number of directors and is 
not seeking control of a company's board. We also note that the 
proposal would increase efficiency because all or most nominees will be 
included on one proxy card with clear disclosure for shareholders to 
evaluate when deciding whether and how to grant authority to vote their 
shares by proxy, rather than having to evaluate more than one set of 
proxy materials sent by a company and an insurgent shareholder.
    If a company is required to include shareholder nominees in its 
proxy materials, competition for board seats could increase, which 
might encourage or discourage qualified candidates from running. To the 
extent that this would discourage less-qualified candidates from 
running, or alternatively, would increase the quality of board members 
due to increased competition, investors may be more or less willing to 
invest in companies that receive shareholder nominees pursuant to the 
proposed rules. The proposed rules should improve and streamline 
information flow between investors and with the company, which we 
believe would give more direct effect to shareholder preferences 
regarding shareholder nominations for director.
    Shareholders and the company's relationship with shareholders may 
benefit from the board devoting additional time to considering 
shareholder concerns; however, one possible adverse impact on 
efficiency, competition, and capital formation is that boards may 
devote less time to fulfilling their other responsibilities as a 
result. However, we believe that investors may be able to evaluate a 
company's board of directors more effectively and make more informed 
investment decisions as a result of the proposed rules. We also believe 
that these developments may have some positive impact on the efficiency 
of markets and capital formation because it may help to increase 
investor confidence during this time of uncertainty in our markets.
    We request comment on whether the proposals, if adopted, would 
promote efficiency, competition and capital formation or have an impact 
or burden on competition. Commenters are requested to provide empirical 
data and other factual support for their view, if possible.

VII. Initial Regulatory Flexibility Act Analysis

    This Initial Regulatory Flexibility Act Analysis has been prepared 
in accordance with 5 U.S.C. 603. It relates to proposed revisions to 
the rules and forms under the Exchange Act and the Investment Company 
Act that would, under certain limited circumstances, require companies 
to include in their proxy materials shareholder nominees for election 
as director. It also relates to the proposed revisions to the rules and 
forms that would prohibit companies from excluding shareholder 
proposals that would amend, or that request an amendment to, a 
company's governing documents regarding nomination procedures or 
disclosures related to shareholder nominations. The proposals are 
intended to improve the ability of shareholders to receive consistent 
and comparable disclosure regarding, and participate meaningfully in, 
the nomination and election of directors.

A. Reasons for, and Objectives of, the Proposed Action

    Today's proposals include features from the proposals on this topic 
in 2003 and 2007, and reflect much of what we learned through the 
public comment that the Commission has received concerning this topic 
over the past six years. The proposals are intended to remove 
impediments to shareholders' ability to participate meaningfully in the 
nomination and election of directors, to promote the exercise of 
shareholders' rights to nominate and elect directors, to open up 
communication between a company and its shareholders, and to provide 
shareholders with better information to make an informed voting 
decision by requiring disclosure about a nominating shareholder or 
group, as well as nominees for director submitted by a nominating 
shareholder or group. In particular, the proposed rules would create a 
process for long-term shareholders, or groups of long-term 
shareholders, with significant holdings to have their nominees for 
director included in company proxy materials. In addition, the proposed 
amendment to Rule 14a-8(i)(8) would narrow the exclusion and would not 
permit companies to exclude shareholder proposals that would amend, or 
that request an amendment to, a company's governing documents regarding 
nomination procedures or disclosures related to shareholder 
nominations, provided the proposal does not conflict with proposed Rule 
14a-11, when certain conditions are met.
    The rule proposals are intended to achieve the stated objectives 
without unduly burdening companies. We seek to limit the cost and 
burden on companies by limiting proposed Rule 14a-11 to nominations by 
shareholders who have maintained a significant continuous beneficial 
ownership in the company for at least one year at the time the notice 
of nomination is submitted. These limitations would lower the cost to 
companies while still improving disclosure in the company's proxy 
materials and thereby improve shareholders' ability to participate 
meaningfully in the nomination and election of directors. This 
increased participation may improve corporate governance by increasing 
director accountability and responsiveness and aligning the interests 
of the board and shareholders, thereby giving investors greater 
confidence that the board is serving the interests of shareholders. 
This may, in turn, enhance the value of shareholders' investments.

B. Legal Basis

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

C. Small Entities Subject to the Proposed Rules

    The Regulatory Flexibility Act defines ``small entity'' to mean 
``small business,'' ``small organization,'' or ``small governmental 
jurisdiction.'' \378\ The Commission's rules define ``small business'' 
and ``small organization'' for purposes of the Regulatory Flexibility 
Act for each of the types of entities regulated by the Commission.\379\ 
A

[[Page 29079]]

``small business'' and ``small organization,'' when used with reference 
to an issuer other than an investment company, generally means an 
issuer with total assets of $5 million as a company with total assets 
of $5 million or less on the last day of its most recent fiscal year. 
We estimate that there are approximately 1,229 issuers that may be 
considered small entities.\380\
---------------------------------------------------------------------------

    \378\ 5 U.S.C. 601(6).
    \379\ Exchange Act Rule 0-10 [17 CFR 240.0-10].
    \380\ The estimated number of reporting small entities is based 
on 2008 data, including the Commission's EDGAR database and Thomson 
Financial's Worldscope database.
---------------------------------------------------------------------------

    For purposes of the Regulatory Flexibility Act, an investment 
company is a small entity if it, together with other investment 
companies in the same group of related investment companies, has net 
assets of $50 million or less as of the end of its most recent fiscal 
year.\381\ We estimate that approximately 178 registered investment 
companies and 34 business development companies meet this definition. 
The proposed rules may affect each of the approximately 212 issuers 
that may be considered small entities, to the extent companies and 
shareholders take advantage of the proposed rules.
---------------------------------------------------------------------------

    \381\ Rule 0-10 under the Investment Company Act [17 CFR 270.0-
10] contains the applicable definition.
---------------------------------------------------------------------------

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

D. Reporting, Recordkeeping and Other Compliance Requirements

    The proposals would, under certain circumstances, require all 
companies subject to the federal proxy rules, including small entities, 
to permit certain shareholders to submit nominees for inclusion in the 
company's proxy materials. A company would be required to include 
shareholder nominees for director in its proxy materials unless state 
law or a company's governing documents prohibits shareholders from 
nominating directors. Nominating shareholders, including nominating 
shareholders that are small entities, would be required to provide 
disclosure in proposed Schedule 14N about the nominating shareholders 
and the nominee, and companies would be required to include the 
disclosure provided by the nominating shareholder or group in the 
company's proxy materials.
    The proposals also would permit shareholders to submit proposals 
that would amend, or that request an amendment to, a company's 
governing documents regarding nomination procedures or disclosures 
related to shareholder nominations, provided the proposal does not 
conflict with proposed Rule 14a-11. A nominating shareholder or group, 
including a nominating shareholder or group that is a small entity, 
using an applicable state law provision or a provision in the company's 
governing documents to submit a nomination for director would be 
required to provide disclosure in proposed Schedule 14N about the 
nominating shareholder or group and the nominee. Companies also would 
be required to include disclosure about the nominating shareholder or 
group and the nominee in the company's proxy materials when a 
shareholder submits a nomination for director pursuant to an applicable 
state law provision or a company's governing documents.
    Based on our staff's review of Rule 14a-8 shareholder proposals, it 
seems that smaller companies tend to receive relatively fewer 
shareholder proposals. Therefore, we assume that the proposed amendment 
to the rule would not substantially increase the number of shareholder 
proposals to smaller companies and likely would have little impact on 
small entities. With respect to proposed Rule 14a-11, there is some 
indication that proxy contests may occur disproportionately at smaller 
companies.\382\ Accordingly, we assume that proposed Rule 14a-11 is 
likely to have a greater effect than the proposed amendments to Rule 
14a-8 on smaller companies.
---------------------------------------------------------------------------

    \382\ See, e.g., Bebchuk 2007 Article.
---------------------------------------------------------------------------

E. Duplicative, Overlapping or Conflicting Federal Rules

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

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish the stated objective, while 
minimizing any significant adverse impact on small entities. In 
connection with the proposed amendments, we considered the following 
alternatives:
     the establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
     the clarification, consolidation or simplification of the 
rule's compliance and reporting requirements for small entities;
     the use of performance rather than design standards; and
     an exemption for small entities from coverage under the 
proposals.
    The Commission has considered a variety of reforms to achieve its 
regulatory objectives while minimizing the impact on small entities. As 
one possible approach, we considered requiring companies to include 
shareholder nominees for director in a company's proxy materials upon 
the occurrence of certain events so that the rule would apply only in 
situations where there was a demonstrated failure in the proxy process 
related to director nominations and elections in 2003. We have not 
taken this approach in the current proposal because we believe that it 
is important to remove impediments to shareholders' exercise of their 
right to nominate directors at all companies subject to the proxy rules 
rather than only at those companies where specified events have 
occurred. Alternatively, we considered changes to Rule 14a-8(i)(8) that 
would enable shareholders to have their proposals for bylaw amendments 
regarding the procedures for nominating directors included in the 
company's proxy materials provided the shareholder submitting the 
proposal made certain disclosures and beneficially owned more than 5% 
of the company's shares in 2007. We did not take this approach because 
we seek to provide shareholders with a more immediate and direct means 
of effecting change in the boards of directors of the companies in 
which they invest. For these reasons, as well as the reasons discussed 
throughout the release, we believe that today's proposals may better 
achieve the Commission's objectives.
    We have sought comment on whether the proposed tiered approach--
under which shareholders or shareholder groups at larger companies 
would have to satisfy a lower ownership threshold than shareholders or 
shareholder groups at smaller companies in order to rely on Rule 14a-
11--is appropriate and workable. The effect of the tiered approach may 
make it less likely that shareholders at smaller companies will 
nominate directors under Rule 14a-11. We are not proposing different 
disclosure standards based on the size of the issuer. We believe the 
proposed uniform disclosure will be helpful to voting decisions on 
shareholder nominated directors at issuers of all sizes. However, we 
seek comment on whether the disclosure can be tiered based on the size 
of the company and still provide useful information to shareholders. We 
also have included requests for comment regarding the appropriate 
ownership threshold for non-accelerated filers. As noted, based on our 
staff's review of Rule 14a-8 shareholder proposals, it seems that 
smaller companies tend to receive

[[Page 29080]]

relatively fewer shareholder proposals. Therefore, we assume that the 
proposed rule would not substantially increase the number of 
shareholder proposals to smaller companies and likely would have little 
impact on small entities. With respect to proposed Rule 14a-11, there 
is some indication that proxy contests may occur disproportionately at 
smaller companies.\383\ Accordingly, we assume that proposed Rule 14a-
11 is likely to have a greater effect than the proposed amendments to 
Rule 14a-8 on smaller companies.
---------------------------------------------------------------------------

    \383\ See id.
---------------------------------------------------------------------------

    We considered the use of performance standards rather than design 
standards in the proposed rules. The proposal contains both performance 
standards and design standards. We are proposing design standards to 
the extent that we believe compliance with particular requirements are 
necessary. However, to the extent possible, we are proposing rules that 
impose performance standards. For example, under Rule 14a-11, 
shareholder nominees can provide a 500 word statement of support 
concerning their nominee or nominees for director, but we do not 
specify the content. Similarly, shareholders can propose any nomination 
procedures or disclosures related to shareholder nominations under the 
proposed amendment to Rule 14a-8(i)(8), provided they do not conflict 
with Rule 14a-11. By allowing shareholders to submit proposals that 
would amend, or that request an amendment to, a company's governing 
documents regarding nomination procedures or disclosures related to 
shareholder nominations, we seek to provide shareholders and companies 
with a measure of flexibility to tailor the means through which they 
can comply with the standards.
    We request comment on whether separate requirements for small 
entities would be appropriate. The purpose of the proposed rules is to 
remove impediments to the exercise of shareholders' rights to nominate 
and elect directors to company boards of directors and thereby enable 
shareholders to participate meaningfully in the nomination and election 
of directors at the companies in which they invest. Exempting small 
entities would not appear to be consistent with these goals. An 
exemption or separate requirements for small entities may not address 
the impediments to the exercise of shareholders' rights to nominate and 
elect directors to company boards of directors that may affect small 
entities as much as they would affect large companies. The 
establishment of any differing compliance or reporting requirements or 
timetables or any exemptions for smaller reporting companies may not be 
in keeping with the objective of the proposed rules.

G. Solicitation of Comment

    We encourage comments with respect to any aspect of this Initial 
Regulatory Flexibility Analysis. In particular, we request comments 
regarding:
     How our rules could achieve their objective while lowering 
any burden on smaller entities;
     The number of small entities that may be affected by the 
proposals;
     The existence or nature of the potential impact of the 
proposals on small entities discussed in the analysis; and
     How to quantify the impact of the proposed rules.
    We solicit comments as to whether the proposed changes could have 
an effect that we have not considered. Commenters are asked to describe 
the nature of any impact and provide empirical data supporting the 
extent of the impact. Such comments will be considered in the 
preparation of the Final Regulatory Flexibility Analysis, if the 
proposals are adopted, and will be placed in the same public file as 
comments on the proposed amendments themselves.

VIII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\384\ a rule is ``major'' if it has resulted, or is likely 
to result in:
---------------------------------------------------------------------------

    \384\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

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

IX. Statutory Basis and Text of Proposed Amendments

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

List of Subjects

17 CFR Part 200

    Freedom of information, Reporting and recordkeeping requirements, 
Securities.

17 CFR Parts 232, 240, and 249

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 274

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

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart D--Information and Requests

    1. The authority citation for part 200, subpart D, continues to 
read, in part, as follows:

    Authority:  5 U.S.C. 552, as amended, 15 U.S.C. 77f(d), 77s, 
77ggg(a), 77sss, 78m(F)(3), 78w, 80a-37, 80a-44(a), 80a-44(b), 80b-
10(a), and 80b-11.
* * * * *
    2. Add Sec.  200.82a to read as follows:


Sec.  200.82a  Public availability of materials filed pursuant to Sec.  
240.14a-11(f) and related materials.

    Materials filed with the Commission pursuant to Rule 14a-11(f) 
under the Securities Exchange Act of 1934 (17 CFR 240.14a-11(f)), 
written communications related thereto received from any person, and 
each related no-action letter or other written communication issued by 
the staff of the Commission, shall be made available to any person upon 
request for inspection or copying.

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

    3. The authority citation for part 232 continues to read, in part, 
as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, and 7201 et seq.; and 18 U.S.C. 1350.
* * * * *
    4. Amend Sec.  232.13 by revising paragraph (a)(4) introductory 
text (the note remains unchanged) to read as follows:

[[Page 29081]]

Sec.  232.13  Date of filing; adjustment of filing date.

    (a) * * *
    (4) Notwithstanding paragraph (a)(2) of this section, a Form 3, 4 
or 5 (Sec. Sec.  249.103, 249.104, and 249.105 of this chapter) or a 
Schedule 14N (Sec.  240.14n-101 of this chapter) submitted by direct 
transmission on or before 10 p.m. Eastern Standard Time or Eastern 
Daylight Saving Time, whichever is currently in effect, shall be deemed 
filed on the same business day.
* * * * *

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

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

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 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.
* * * * *
    6. Amend Sec.  240.13a-11 by revising paragraph (b) to read as 
follows:


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

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


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

* * * * *
    (b)(1) * * *
    (i) Such person has acquired such securities in the ordinary course 
of his business and not with the purpose nor with the effect of 
changing or influencing the control of the issuer, nor in connection 
with or as a participant in any transaction having such purpose or 
effect, including any transaction subject to Sec.  240.13d-3(b), other 
than activities solely in connection with a nomination under Sec.  
240.14a-11; and
* * * * *
    Instruction 1 to paragraph (b)(1). For purposes of paragraph 
(b)(1)(i) of this section, the exception for activities solely in 
connection with a nomination under Sec.  240.14a-11 will not be 
available after the election of a director nominated pursuant to Sec.  
240.14a-11.
* * * * *
    (c) * * *
    (1) Has not acquired the securities with any purpose, or with the 
effect, of changing or influencing the control of the issuer, or in 
connection with or as a participant in any transaction having that 
purpose or effect, including any transaction subject to Sec.  240.13d-
3(b), other than activities solely in connection with a nomination 
under Sec.  240.14a-11;
* * * * *
    Instruction 1 to paragraph (c)(1). For purposes of paragraph (c)(1) 
of this section, the exception for activities solely in connection with 
a nomination under Sec.  240.14a-11 will not be available after the 
election of a director nominated pursuant to Sec.  240.14a-11.
* * * * *
    8. Amend Sec.  240.14a-2 by:
    a. Revising paragraph (b) introductory text; and
    b. Adding paragraphs (b)(7) and (b)(8).
    The revision and additions read as follows:


Sec.  240.14a-2  Solicitations to which Sec.  240.14a-3 to Sec.  
240.14a-15 apply.

* * * * *
    (b) Sections 240.14a-3 to 240.14a-6 (other than paragraphs 14a-6(g) 
and 14a-6(p)), Sec.  240.14a-8, Sec.  240.14a-10, and Sec. Sec.  
240.14a-12 to 240.14a-15 do not apply to the following:
* * * * *
    (7) Any solicitation by or on behalf of any shareholder in 
connection with the formation of a nominating shareholder group 
pursuant to Sec.  240.14a-11, provided that:
    (i) Each written communication includes no more than:
    (A) A statement of each soliciting shareholder's intent to form a 
nominating shareholder group in order to nominate a director under 
Sec.  240.14a-11;
    (B) Identification of, and a brief statement regarding, the 
potential nominee or nominees or, where no nominee or nominees have 
been identified, the characteristics of the nominee or nominees that 
the shareholder intends to nominate, if any;
    (C) The percentage of securities that each soliciting shareholder 
beneficially owns or the aggregate percentage owned by any group to 
which the shareholder belongs; and
    (D) The means by which shareholders may contact the soliciting 
party.
    (ii) Any soliciting material published, sent or given to 
shareholders in accordance with this paragraph must be filed by the 
shareholder with the Commission, under the registrant's Exchange Act 
file number, or, in the case of a registrant that is an investment 
company registered under the Investment Company Act of 1940, under the 
registrant's Investment Company Act file number, no later than the date 
the material is first published, sent or given to shareholders. Three 
copies of the material must at the same time be filed with, or mailed 
for filing to, each national securities exchange upon which any class 
of securities of the registrant is listed and registered. The 
soliciting material must include a cover page in the form set forth in 
Schedule 14A (Sec.  240.14a-101) and the appropriate box on the cover 
page must be marked.
    (8) Any written solicitation by or on behalf of a nominating 
shareholder or nominating shareholder group in support of a nominee 
placed on the registrant's form of proxy in accordance with Sec.  
240.14a-11 or against the registrant's nominee or nominees, provided 
that:
    (i) The soliciting party does not, at any time during such 
solicitation, seek directly or indirectly, either on its own or 
another's behalf, the power to act as proxy for a shareholder and does 
not furnish or otherwise request, or act on behalf of a person who 
furnishes or requests, a form of revocation, abstention, consent or 
authorization;
    (ii) Each written communication includes:
    (A) The identity of each nominating shareholder and a description 
of his or her direct or indirect interests, by security holdings or 
otherwise;
    (B) A prominent legend in clear, plain language advising 
shareholders that a shareholder nominee is or may be included in the 
registrant's proxy statement and to read the registrant's proxy 
statement when it becomes available because it includes important 
information (or, if the registrant's proxy statement is publicly 
available, advising shareholders of that fact and

[[Page 29082]]

encouraging shareholders to read the registrant's proxy statement 
because it includes important information). The legend also must 
explain to shareholders that they can find the registrant's proxy 
statement, and any other relevant documents, at no charge on the 
Commission's Web site; and
    (iii) Any soliciting material published, sent or given to 
shareholders in accordance with this paragraph must be filed by the 
nominating shareholder with the Commission, under the registrant's 
Exchange Act file number, or, in the case of a registrant that is an 
investment company registered under the Investment Company Act of 1940, 
under the registrant's Investment Company Act file number, no later 
than the date the material is first published, sent or given to 
shareholders. Three copies of the material must at the same time be 
filed with, or mailed for filing to, each national securities exchange 
upon which any class of securities of the registrant is listed and 
registered. The soliciting material must include a cover page in the 
form set forth in Schedule 14A (Sec.  240.14a-101) and the appropriate 
box on the cover page must be marked.
    9. Amend Sec.  240.14a-4 by:
    a. Revising the first sentence of paragraph (b)(2) introductory 
text; and
    b. Adding a sentence to the end of the undesignated paragraph 
following paragraph (b)(2)(iv).
    The revision and addition read as follows:


Sec.  240.14a-4  Requirements as to proxy.

* * * * *
    (b) * * *
    (2) A form of proxy that provides for the election of directors 
shall set forth the names of persons nominated for election as 
directors, including any person whose nomination by a shareholder or 
shareholder group satisfies the requirements of Sec.  240.14a-11, an 
applicable state law provision, or a registrant's governing documents 
as they relate to the inclusion of shareholder director nominees in the 
registrant's proxy materials. * * *
* * * * *
    (iv) * * *
    * * * Means to grant authority to vote for any nominees as a group 
or to withhold authority for any nominees as a group may not be 
provided if the form of proxy includes one or more shareholder nominees 
in accordance with Sec.  240.14a-11, an applicable state law provision, 
or a registrant's governing documents as they relate to the inclusion 
of shareholder director nominees in the registrant's proxy materials.
* * * * *
    10. Amend Sec.  240.14a-6 by:
    a. Redesignating paragraphs (a)(4), (a)(5) and (a)(6) as paragraphs 
(a)(5), (a)(6) and (a)(7) respectively;
    b. Adding new paragraph (a)(4);
    c. Adding a sentence at the end of Note 3; and
    d. Adding paragraph (p).
    The revisions and additions read as follows:


Sec.  240.14a-6  Filing requirements.

    (a) * * *
    (4) A shareholder nominee for director included pursuant to Sec.  
240.14a-11, an applicable state law provision, or a registrant's 
governing documents as they relate to the inclusion of shareholder 
director nominees in the registrant's proxy materials.
* * * * *

    Note 3.  * * * The inclusion of a shareholder nominee in the 
registrant's proxy materials pursuant to Sec.  240.14a-11, an 
applicable state law provision, or a registrant's governing 
documents as they relate to the inclusion of shareholder director 
nominees in the registrant's proxy materials does not constitute a 
``solicitation in opposition,'' even if the registrant opposes the 
shareholder nominee and solicits against the shareholder nominee and 
in favor of a registrant nominee.

* * * * *
    (p) Solicitations subject to Sec.  240.14a-11. Any soliciting 
material that is published, sent or given to shareholders in connection 
with Sec.  240.14a-2(b)(7) or (b)(8) must be filed with the Commission 
as specified in that section.
    11. Amend Sec.  240.14a-8 by revising paragraph (i)(8) as follows:


Sec.  240.14a-8  Shareholder proposals.

* * * * *
    (i) * * *
    (8) Director elections: If the proposal:
    (i) Would disqualify a nominee who is standing for election;
    (ii) Would remove a director from office before his or her term 
expired;
    (iii) Questions the competence, business judgment, or character of 
one or more nominees or directors;
    (iv) Nominates a specific individual for election to the board of 
directors, other than pursuant to Sec.  240.14a-11, an applicable state 
law provision, or the company's governing documents; or
    (v) Otherwise could affect the outcome of the upcoming election of 
directors.
* * * * *
    12. Amend Sec.  240.14a-9 by adding a paragraph (c) and removing 
the authority citation following the section to read as follows:


Sec.  240.14a-9  False or misleading statements.

* * * * *
    (c) No nominee, nominating shareholder or nominating shareholder 
group, or any member thereof, shall cause to be included in a 
registrant's proxy materials, either pursuant to the federal proxy 
rules, an applicable state law provision, or a registrant's governing 
documents as they relate to including shareholder nominees for director 
in registrant proxy materials, any statement which, at the time and in 
the light of the circumstances under which it is made, is false or 
misleading with respect to any material fact, or which omits to state 
any material fact necessary in order to make the statements therein not 
false or misleading or necessary to correct any statement in any 
earlier communication with respect to the solicitation of a proxy for 
the same meeting or subject matter which has become false or 
misleading.
* * * * *
    13. Add Sec.  240.14a-11 to read as follows:


Sec.  240.14a-11  Shareholder nominations.

    (a) Applicability. In connection with an annual meeting of 
shareholders (or a special meeting in lieu of the annual meeting) at 
which directors are elected, a registrant (other than a registrant 
subject to the proxy rules solely because it has a class of debt 
registered under Exchange Act Sec.  12) will be required to include in 
its proxy statement and form of proxy the name of a person or persons 
nominated by a shareholder or group of shareholders for election to the 
board of directors and include in its proxy statement the disclosure 
about such nominee or nominees and the nominating shareholder or 
members of a nominating shareholder group that is specified in Sec.  
240.14a-18(e)-(l), provided that:
    (1) Applicable state law or the registrant's governing documents do 
not prohibit the registrant's shareholders from nominating a candidate 
or candidates for election as a director;
    (2) The nominee's candidacy or, if elected, board membership would 
not violate controlling state law, the registrant's governing 
documents, federal law, or rules of a national securities exchange or 
national securities association applicable to the registrant (other 
than rules of a national securities exchange or national securities 
association regarding director independence);
    (3) The nominating shareholder or members of the nominating 
shareholder group have satisfied the eligibility

[[Page 29083]]

requirements in paragraph (b) of this section;
    (4) All information required to be included in the notice to the 
registrant required pursuant to paragraph (c) of this section is so 
included;
    (5) No representation or certification required to be included in 
the notice to the registrant required pursuant to paragraph (c) of this 
section is false or misleading in any material respect; and
    (6) The provisions of paragraph (d) of this section limiting the 
number of nominees required to be included would not necessitate 
exclusion of the nominee.
    Instruction 1 to paragraph (a). A nominating shareholder will not 
be deemed an ``affiliate'' of the registrant under the Securities Act 
of 1933 (15 U.S.C. 77a et seq.) or the Securities Exchange Act of 1934 
(15 U.S.C. 78a et seq.) solely as a result of nominating a candidate 
for director or soliciting for the election of such a director nominee 
or against a registrant's nominee pursuant to this section. Where a 
shareholder nominee is elected, and the nominating shareholder or 
nominating shareholder group does not have an agreement or relationship 
with that director, otherwise than relating to the director's 
nomination pursuant to Sec.  240.14a-11, solicitation for the election 
of the shareholder director nominee or against a registrant's nominee, 
or the election of the shareholder director nominee, the nominating 
shareholder or nominating shareholder group will not be deemed an 
affiliate solely by virtue of having nominated that director.
    Instruction 2 to paragraph (a). If the registrant did not hold an 
annual meeting the previous year, or if the date of the current year's 
annual meeting has been changed by more than 30 calendar days from the 
date of the previous year's annual meeting, the registrant must 
disclose pursuant to Item 5.07 of Form 8-K (Sec.  249.308 of this 
chapter) the date by which a shareholder or shareholder group must 
submit the notice required pursuant to paragraph (c) of this section, 
which date shall be a reasonable time prior to the date the registrant 
mails its proxy materials for the meeting.
    (b) Nominating shareholder eligibility. A shareholder or group of 
shareholders nominating a person or persons must satisfy the following 
requirements:
    (1) The shareholder individually, or the shareholder group in the 
aggregate, must beneficially own, as of the date the shareholder or 
group of shareholders provides notice to the registrant on Schedule 14N 
of their intent to include a nominee or nominees in the registrant's 
proxy materials pursuant to Sec.  240.14a-11:
    (i) For large accelerated filers as defined in Sec.  240.12b-2, and 
investment companies registered under the Investment Company Act of 
1940 (15 U.S.C. 80a-1 et seq.) with net assets of $700 million or more, 
at least 1% of the registrant's securities that are entitled to be 
voted on the election of directors at the annual meeting of 
shareholders (or a special meeting in lieu of the annual meeting);
    (ii) For accelerated filers as defined in Sec.  240.12b-2, and 
investment companies registered under the Investment Company Act of 
1940 with net assets of $75 million or more but less than $700 million, 
at least 3% of the registrant's securities that are entitled to be 
voted on the election of directors at the annual meeting of 
shareholders (or a special meeting in lieu of the annual meeting); and
    (iii) For non-accelerated filers as defined in Sec.  240.12b-2, and 
investment companies registered under the Investment Company Act of 
1940 with net assets of less than $75 million, at least 5% of the 
registrant's securities that are entitled to be voted on the election 
of directors at the annual meeting of shareholders (or a special 
meeting in lieu of the annual meeting); and
    (2) The shareholder or each member of the shareholder group must 
have held the securities that are used for purposes of determining the 
applicable ownership threshold required by paragraph (b)(1) of this 
section continuously for at least one year as of the date it provides 
notice to the registrant on Schedule 14N and intend to continue to hold 
those securities through the date of the subject election of directors.
    Instruction 1 to paragraph (b). In the case of a registrant other 
than an investment company registered under the Investment Company Act 
of 1940, for purposes of (b)(1) of this section, in determining the 
securities that are entitled to be voted on the election of directors, 
the nominating shareholder or nominating shareholder group may rely on 
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, unless the nominating shareholder 
or nominating shareholder group knows or has reason to know that the 
information contained therein is inaccurate. In the case of a 
registrant that is an investment company registered under the 
Investment Company Act of 1940, for purposes of paragraph (b)(1) of 
this section, in determining the securities that are entitled to be 
voted on the election of directors, the nominating shareholder or 
nominating shareholder group may rely on information set forth in the 
following documents, unless the nominating shareholder or nominating 
shareholder group knows or has reason to know that the information 
contained therein is inaccurate:
    a. In the case of a registrant that is a series company as defined 
in Rule 18f-2(a) under the Investment Company Act of 1940 (Sec.  
270.18f-2(a) of this chapter), the Form 8-K described in Instruction 3 
to paragraph (b); or
    b. In the case of other investment companies, the registrant's most 
recent annual or semi-annual report filed with the Commission on Form 
N-CSR (17 CFR 249.331; 17 CFR 274.128).
    Instruction 2 to paragraph (b). For purposes of paragraph (b)(1) of 
this section, the amount of net assets of an investment company 
registered under the Investment Company Act of 1940 shall be the amount 
of net assets of the company as of the end of the company's second 
fiscal quarter in the fiscal year immediately preceding the fiscal year 
of the meeting, as disclosed in the registrant's Form N-CSR filed with 
the Commission, except that, for a series company (as defined in Sec.  
270.18f-2(a) of this chapter), the amount of net assets shall be the 
amount disclosed in the Form 8-K described in Instruction 3 to 
paragraph (b).
    Instruction 3 to paragraph (b). If the registrant is an investment 
company that is a series company (as defined in Sec.  270.18f-2(a) of 
this chapter), the registrant must disclose pursuant to Item 5.07 of 
Form 8-K (Sec.  249.308 of this chapter):
    a. The registrant's net assets as of June 30 of the calendar year 
immediately preceding the calendar year of the meeting; and
    b. The total number of shares of the registrant outstanding and 
entitled to be voted (or if the votes are to be cast on a basis other 
than one vote per share, then the total number of votes entitled to be 
voted and the basis for allocating such votes) at an annual meeting of 
shareholders (or, in lieu of such an annual meeting, a special meeting 
of shareholders) as of the end of the most recent calendar quarter.
    (c) Shareholder notice. To have a nominee included in the 
registrant's proxy statement and form of proxy, the nominating 
shareholder must provide notice to the registrant on Schedule 14N as 
specified by Sec.  240.14n-1 of its intent to require that the 
registrant include that shareholder's nominee on the registrant's form 
of proxy and include

[[Page 29084]]

the disclosures required pursuant to Sec.  240.14a-18. This notice must 
be filed with the Commission on the date provided to the registrant.
    (d) Number of shareholder nominees. (1) The registrant will not be 
required to include in its proxy statement and form of proxy more than 
one shareholder nominee or the number of nominees that represents 25 
percent of the registrant's board of directors, whichever is greater;
    (2) Where the registrant has one or more directors currently 
serving on its board of directors who were elected as a shareholder 
nominee pursuant to this section, and the term of that director or 
directors extends past the date of the meeting of shareholders for 
which it is soliciting proxies, the registrant will not be required to 
include in the proxy statement or form of proxy more shareholder 
nominees than could result in the total number of directors who were 
elected as shareholder nominees pursuant to Sec.  240.14a-11 and 
serving on the board being more than one shareholder nominee or 25 
percent of the registrant's board of directors, whichever is greater; 
and
    (3) In the event that more than one shareholder or group of 
shareholders is otherwise permitted to nominate a person or persons to 
a registrant's board of directors pursuant to Sec.  240.14a-11, the 
registrant shall include in the proxy statement and form of proxy the 
nominee or nominees of the first nominating shareholder or nominating 
shareholder group from which the registrant receives timely notice as 
specified in paragraph (c) of this section, up to and including the 
total number required to be included by the registrant pursuant to this 
paragraph. Where the first nominating shareholder or nominating 
shareholder group to deliver timely notice as specified in paragraph 
(c) of this section does not nominate the maximum number of directors 
required to be included by the registrant, the nominee or nominees of 
the next nominating shareholder or nominating shareholder group from 
which the registrant receives timely notice as specified in paragraph 
(c) of this section would be included in the registrant's proxy 
materials, up to and including the total number required to be included 
by the registrant.
    Instruction 1 to paragraph (d). Depending on board size, 25% of the 
board may not result in a whole number. In those instances, the maximum 
number of shareholder nominees for director that a registrant will be 
required to include in its proxy materials will be the closest whole 
number below 25%.
    Instruction 2 to paragraph (d). If a nominee, a nominating 
shareholder, or any member of a nominating shareholder group has any 
agreement with the registrant or any affiliate of the registrant 
regarding the nomination of a candidate for election as a member of the 
registrant's board of directors, any such nominee or any nominee of 
such nominating shareholder or nominating shareholder group shall not 
be included in calculating the number of nominees required under this 
section.
    (e) False or misleading statements. The registrant is not 
responsible for any information in the notice from the nominating 
shareholder or nominating shareholder group submitted as required by 
paragraph (c) of this section or otherwise provided by the nominating 
shareholder or nominating shareholder group, except where the 
registrant knows or has reason to know that the information is false or 
misleading.
    (f) Determinations regarding eligibility. (1) Upon the registrant's 
receipt of a notice described in paragraph (c) of this section, the 
registrant shall determine whether any of the events permitting 
exclusion of a shareholder nominee has occurred;
    (2) If the registrant determines that it will include a shareholder 
nominee, it must notify in writing the nominating shareholder or 
nominating shareholder group no later than 30 calendar days before it 
files its definitive proxy statement and form of proxy with the 
Commission. The registrant is responsible for providing this notice in 
a manner that evidences its timely receipt by the nominating 
shareholder or each member of the nominating shareholder group;
    (3) If the registrant determines that it may exclude a shareholder 
nominee, the registrant must notify in writing the nominating 
shareholder or nominating shareholder group of this determination. This 
notice must be postmarked or transmitted electronically no later than 
14 calendar days after the registrant receives the notice required by 
paragraph (c) of this section. The registrant is responsible for 
providing this notice in a manner that evidences its timely receipt by 
the nominating shareholder or each member of the nominating shareholder 
group;
    (4) The registrant's notice to the nominating shareholder or 
nominating shareholder group under paragraph (f)(3) of this section 
that it has determined that it may exclude a shareholder nominee must 
include an explanation of the registrant's basis for determining that 
it may exclude the nominee;
    (5) The nominating shareholder or nominating shareholder group 
shall have 14 calendar days after receipt of the registrant's notice 
under paragraph (f)(3) of this section to respond to the registrant's 
notice and correct any eligibility or procedural deficiencies 
identified in that notice, as required by paragraph (f)(4) of this 
section. The nominating shareholder's or nominating shareholder group's 
response must be postmarked, or transmitted electronically, within the 
timeframe identified in the preceding sentence. The nominating 
shareholder or nominating shareholder group is responsible for 
providing the response in a manner that evidences its timely receipt;
    (6) Neither the composition of the nominating shareholder group nor 
the shareholder nominee may be changed as a means to correct a 
deficiency identified in the registrant's notice to the nominating 
shareholder or nominating shareholder group under paragraph (f)(3) of 
this section--those matters must remain as they were described in the 
notice to the registrant submitted pursuant to paragraph (c) of this 
section; however, where a nominating shareholder or nominating 
shareholder group inadvertently submits a number of nominees that 
exceeds the maximum number required to be included by the registrant, 
the nominating shareholder or nominating shareholder group may specify 
which nominee or nominees are not to be included in the registrant's 
proxy materials;
    (7) If the registrant determines that it may exclude a shareholder 
nominee, after providing the requisite notice of and time for the 
nominating shareholder or nominating shareholder group to remedy any 
eligibility or procedural deficiencies in the nomination, the 
registrant must provide notice of the basis for its determination to 
the Commission no later than 80 calendar days before it files its 
definitive proxy statement and form of proxy with the Commission. The 
Commission may permit the registrant to make its submission later than 
80 days before the registrant files its definitive proxy statement and 
form of proxy if the registrant demonstrates good cause for missing the 
deadline;
    (8) The registrant's notice to the Commission shall include:
    (i) Identification of the nominating shareholder or each member of 
the nominating shareholder group, as applicable;
    (ii) The name of the nominee;

[[Page 29085]]

    (iii) An explanation of the registrant's basis for determining that 
the registrant may exclude the nominee; and
    (iv) A supporting opinion of counsel when the registrant's basis 
for excluding a nominee relies on a matter of state law;
    (9) Unless otherwise indicated in this section, the burden is on 
the registrant to demonstrate that it may exclude a nominee;
    (10) The registrant must file its notice with the Commission and 
simultaneously provide a copy to the nominating shareholder or each 
member of the nominating shareholder group;
    (11) The nominating shareholder or nominating shareholder group may 
submit a response to the registrant's notice to the Commission. This 
response must be postmarked or transmitted electronically to the 
Commission no later than 14 calendar days after the nominating 
shareholder's or nominating shareholder group's receipt of the 
registrant's notice to the Commission. The nominating shareholder or 
nominating shareholder group must provide a copy of its response to the 
Commission simultaneously to the registrant;
    (12) The Commission staff may provide an informal statement of its 
views to the registrant and the nominating shareholder or nominating 
shareholder group;
    (13) The registrant shall provide the nominating shareholder or 
nominating shareholder group with notice, no later than 30 calendar 
days before it files its definitive proxy statement and form of proxy 
with the Commission, of whether it will include or exclude the 
shareholder nominee; and
    (14) The exclusion of a shareholder nominee by a registrant where 
that exclusion is not permissible under Sec.  240.14a-11(a) shall be a 
violation of this section.
    14. Amend Sec.  240.14a-12 by removing the heading ``Instructions 
to Sec.  240.14a-12''; by removing the numbers 1. and 2. of 
instructions 1 and 2 to Sec.  240.14a-12 and adding in their places the 
phrases ``Instruction 1. to Sec.  240.14a-12.'' and ``Instruction 2. to 
Sec.  240.14a-12.'', respectively; and adding Instruction 3 to read as 
follows:


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

* * * * *
    Instruction 3. to Sec.  240.14a-12. Solicitations by a nominating 
shareholder or nominating shareholder group that are made in connection 
with a Sec.  240.14a-11 nomination will not be deemed a solicitation in 
opposition subject to Sec.  240.14a-12(c).
    15. Add Sec.  240.14a-18 to read as follows:


Sec.  240.14a-18  Disclosure regarding nominating shareholders and 
nominees submitted for inclusion in a registrant's proxy materials 
pursuant to Sec.  240.14a-11.

    To have a nominee included in a registrant's proxy materials 
pursuant to Sec.  240.14a-11, the nominating shareholder or nominating 
shareholder group must provide notice to the registrant of its intent 
to do so on a Schedule 14N and file that notice with the Commission on 
the date first sent to the registrant. This notice on Schedule 14N 
shall be sent to the registrant by the date specified by the 
registrant's advance notice bylaw provision or, where no such provision 
is in place, no later than 120 calendar days before the date that the 
registrant mailed its proxy materials for the prior year's annual 
meeting, except that, if the registrant did not hold an annual meeting 
during the prior year, or if the date of the meeting has changed by 
more than 30 calendar days from the prior year, then the nominating 
shareholder or nominating shareholder group must provide and file its 
notice a reasonable time before the registrant mails its proxy 
materials, as specified by the registrant in a Form 8-K (Sec.  249.308 
of this chapter) filed pursuant to Item 5.07 of Form 8-K. This notice 
must include:
    (a) A representation that, to the knowledge of the nominating 
shareholder or nominating shareholder group, the nominee's candidacy 
or, if elected, board membership would not violate controlling state 
law, Federal law or rules of a national securities exchange or national 
securities association applicable to the registrant (other than rules 
of a national securities exchange or national securities association 
regarding director independence);
    (b) A representation that the nominating shareholder or nominating 
shareholder group satisfies the conditions in Sec.  240.14a-11(b);
    (c) In the case of a registrant other than an investment company, a 
representation that the nominee meets the objective criteria for 
``independence'' of the national securities exchange or national 
securities association rules applicable to the registrant, if any, or, 
in the case of a registrant that is an investment company, a 
representation that the nominee is not an ``interested person'' of the 
registrant as defined in section 2(a)(19) of the Investment Company Act 
of 1940 (15 U.S.C. 80a-2(a)(19));
    Instruction to paragraph (c). For this purpose, the nominee would 
be required to meet the definition of ``independence'' that generally 
is applicable to directors of the registrant and not any particular 
definition of independence applicable to members of the audit committee 
of the registrant's board of directors. To the extent a national 
securities exchange or national securities association rule imposes a 
standard regarding independence that requires a subjective 
determination by the board or a group or committee of the board (for 
example, requiring that the board of directors or any group or 
committee of the board of directors make a determination regarding the 
existence of factors material to a determination of a nominee's 
independence), the nominee would not be required to represent that the 
nominee meets the subjective determination of independence as part of 
the shareholder nomination process.
    (d) A representation that neither the nominee nor the nominating 
shareholder nor, where there is a nominating shareholder group, any 
member of the nominating shareholder group, has an agreement with the 
registrant regarding the nomination of the nominee;
    Instruction to paragraph (d). For purposes of paragraph (d), 
negotiations between the nominee, the nominating shareholder or 
nominating shareholder group and the nominating committee or board of 
the registrant to have the nominee included on the registrant's proxy 
card as a management nominee, where those negotiations are 
unsuccessful, or negotiations that are limited to whether the 
registrant is required to include the shareholder nominee on the 
registrant's proxy card in accordance with Sec.  240.14a-11, will not 
represent a direct or indirect agreement with the registrant.
    (e) A statement from the nominee that the nominee consents to be 
named in the registrant's proxy statement and form of proxy and, if 
elected, to serve on the registrant's board of directors;
    (f) A statement that the nominating shareholder or nominating 
shareholder group intends to continue to own the requisite shares 
through the date of the meeting of shareholders. Additionally, the 
nominating shareholder or nominating shareholder group must provide a 
statement regarding the nominating shareholder's or nominating 
shareholder group's intent with respect to continued ownership after 
the election.
    (g) Disclosure about the nominee as would be provided in response 
to the disclosure requirements of Items 4(b), 5(b), 7(a), (b) and (c) 
and, for investment

[[Page 29086]]

companies, Item 22(b) of Schedule 14A (Sec.  240.14a-101), as 
applicable;
    (h) Disclosure about the nominating shareholder or each member of a 
nominating shareholder group as would be required in response to the 
disclosure requirements of Items 4(b) and 5(b) of Schedule 14A, as 
applicable;
    (i) Disclosure about whether the nominating shareholder or each 
member of a nominating shareholder group has been involved in any legal 
proceeding during the past five years, as specified in Item 401(f) of 
Regulation S-K (Sec.  229.10 of this chapter). Disclosure pursuant to 
this section need not be provided if provided in response to Items 4(b) 
and 5(b) of Schedule 14A;
    Instruction 1 to paragraphs (h) and (i). Where the nominating 
shareholder is a general or limited partnership, syndicate or other 
group, the information called for in paragraphs (h) and (i) of this 
section must be given with respect to:
    a. Each partner of the general partnership;
    b. Each partner who is, or functions as, a general partner of the 
limited partnership;
    c. Each member of the syndicate or group; and
    d. Each person controlling the partner or member.
    Instruction 2 to paragraphs (h) and (i). If the nominating 
shareholder is a corporation or if a person referred to in a., b., c. 
or d. of Instruction 1 to paragraphs (h) and (i) is a corporation, the 
information called for in paragraphs (h) and (i) of this section must 
be given with respect to:
    a. Each executive officer and director of the corporation;
    b. Each person controlling the corporation; and
    c. Each executive officer and director of any corporation or other 
person ultimately in control of the corporation.
    (j) The following information regarding the nature and extent of 
the relationships between the nominating shareholder or nominating 
shareholder group and nominee and the registrant or any affiliate of 
the registrant:
    (1) Any direct or indirect material interest in any contract or 
agreement between the nominating shareholder or nominating shareholder 
group or the nominee and the registrant or any affiliate of the 
registrant (including any employment agreement, collective bargaining 
agreement, or consulting agreement);
    (2) Any material pending or threatened litigation in which the 
nominating shareholder or nominating shareholder group or nominee is a 
party or a material participant, involving the registrant, any of its 
officers or directors, or any affiliate of the registrant; and
    (3) Any other material relationship between the nominating 
shareholder or nominating shareholder group or the nominee and the 
registrant or any affiliate of the registrant not otherwise disclosed;
    Note to paragraph (j)(3). Any other material relationship of the 
nominating shareholder or nominating shareholder group with the 
registrant or any affiliate of the registrant may include, but is not 
limited to, whether the nominating shareholder or nominating 
shareholder group currently has, or has had in the past, an employment 
relationship with the registrant or any affiliate of the registrant 
(including consulting arrangements).
    (k) The Web site address on which the nominating shareholder or 
nominating shareholder group may publish soliciting materials, if any; 
and
    (l) Any statement in support of the shareholder nominee or 
nominees, which may not exceed 500 words, if the nominating shareholder 
or nominating shareholder group elects to have such statement included 
in the registrant's proxy materials.
    16. Add Sec.  240.14a-19 to read as follows:


Sec.  240.14a-19  Disclosure regarding nominating shareholders and 
nominees submitted for inclusion in a registrant's proxy materials 
pursuant to applicable state law or a registrant's governing documents.

    To have a nominee included in a registrant's proxy materials 
pursuant to a procedure set forth under applicable state law or the 
registrant's governing documents addressing the inclusion of 
shareholder director nominees in the registrant's proxy materials, the 
nominating shareholder or nominating shareholder group must provide 
notice to the registrant of its intent to do so on a Schedule 14N and 
file that notice with the Commission on the date first sent to the 
registrant. This notice shall be sent to the registrant by the date 
specified by the registrant's advance notice provision or, where no 
such provision is in place, no later than 120 calendar days before the 
date that the registrant mailed its proxy materials for the prior 
year's annual meeting, except that, if the registrant did not hold an 
annual meeting during the prior year, or if the date of the meeting has 
changed by more than 30 calendar days from the prior year, then the 
nominating shareholder or nominating shareholder group must provide 
notice a reasonable time before the registrant mails its proxy 
materials, as specified by the registrant in a Form 8-K (Sec.  249.308 
of this chapter) filed pursuant to Item 5.07 of Form 8-K. This notice 
must include:
    (a) A statement from the nominee that the nominee consents to be 
named in the registrant's proxy statement and form of proxy and, if 
elected, to serve on the registrant's board of directors;
    (b) Disclosure about the nominee as would be provided in response 
to the disclosure requirements of Items 4(b), 5(b), 7(a), (b) and (c) 
and, for investment companies, Item 22(b) of Schedule 14A (Sec.  
240.14a-101), as applicable;
    (c) Disclosure about the nominating shareholder or each member of a 
nominating shareholder group as would be required in response to the 
disclosure requirements of Items 4(b) and 5(b) of Schedule 14A (Sec.  
240.14a-101), as applicable;
    (d) Disclosure about whether the nominating shareholder or member 
of a nominating shareholder group has been involved in any legal 
proceeding during the past five years, as specified in Item 401(f) of 
Regulation S-K (Sec.  229.10 of this chapter). Disclosure pursuant to 
this section need not be provided if provided in response to Items 4(b) 
and 5(b) of Schedule 14A (Sec.  240.14a-101);
    Instruction 1 to paragraphs (c) and (d). Where the nominating 
shareholder is a general or limited partnership, syndicate or other 
group, the information called for in paragraphs (c) and (d) of this 
section must be given with respect to:
    a. Each partner of the general partnership;
    b. Each partner who is, or functions as, a general partner of the 
limited partnership;
    c. Each member of the syndicate or group; and
    d. Each person controlling the partner or member.
    Instruction 2 to paragraphs (c) and (d). If the nominating 
shareholder is a corporation or if a person referred to in a., b., c. 
or d. of Instruction 1 to paragraphs (c) and (d) is a corporation, the 
information called for in paragraphs (c) and (d) of this section must 
be given with respect to:
    a. Each executive officer and director of the corporation;
    b. Each person controlling the corporation; and
    c. Each executive officer and director of any corporation or other 
person ultimately in control of the corporation.
    (e) The following information regarding the nature and extent of 
the relationships between the nominating shareholder or nominating 
shareholder group and nominee and the registrant or any affiliate of 
the registrant:
    (1) Any direct or indirect material interest in any contract or 
agreement

[[Page 29087]]

between the nominating shareholder or nominating shareholder group or 
the nominee and the registrant or any affiliate of the registrant 
(including any employment agreement, collective bargaining agreement, 
or consulting agreement);
    (2) Any material pending or threatened litigation in which the 
nominating shareholder or nominating shareholder group or nominee is a 
party or a material participant, involving the registrant, any of its 
officers or directors, or any affiliate of the registrant; and
    (3) Any other material relationship between the nominating 
shareholder or nominating shareholder group or the nominee and the 
registrant or any affiliate of the registrant not otherwise disclosed; 
and
    Instruction to paragraph (e)(3). Any other material relationship of 
the nominating shareholder or nominating shareholder group with the 
registrant or any affiliate of the registrant may include, but is not 
limited to, whether the nominating shareholder or nominating 
shareholder group currently has, or has had in the past, an employment 
relationship with the registrant or any affiliate of the registrant 
(including consulting arrangements).
    (f) The Web site address on which the nominating shareholder or 
nominating shareholder group may publish soliciting materials, if any.
    Note to Sec.  240.14a-19. The registrant is not responsible for any 
information in the notice from the nominating shareholder or nominating 
shareholder group or otherwise provided by the nominating shareholder 
or nominating shareholder group, except where the registrant knows or 
has reason to know that the information is false or misleading.
    17. Amend Sec.  240.14a-101 by:
    a. Adding on the cover page one box before the box ``Soliciting 
Material under Sec.  240.14a-12'';
    b. Revising Item 7 as follows:
    i. Redesignating paragraph (e) as paragraph (g); and
    ii. Adding new paragraph (e) and paragraph (f); and
    c. Adding paragraphs (18) and (19) to Item 22(b).
    The additions and revisions read as follows:


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

SCHEDULE 14A INFORMATION
* * * * *

[ ] Soliciting Material under Sec.  240.14a-11
* * * * *
    Item 7. * * *
* * * * *
    (e) If a shareholder nominee or nominees are submitted to the 
registrant and the registrant is not permitted to exclude the nominee 
or nominees pursuant to the provisions of Sec.  240.14a-11, the 
registrant must include the disclosure required from the nominating 
shareholder or nominating shareholder group under Sec.  240.14a-18(e)-
(l) with regard to the nominee or nominees and the nominating 
shareholder or nominating shareholder group.
    Instruction to Item 7(e). The information disclosed pursuant to 
paragraph (e) of this Item will not be deemed incorporated by reference 
into any filing under the Securities Act of 1933, the Securities 
Exchange Act of 1934, or the Investment Company Act of 1940, except to 
the extent that the registrant specifically incorporates that 
information by reference.
    (f) If a shareholder nominee or nominees are submitted to the 
registrant for inclusion in the registrant's proxy materials pursuant 
to a procedure set forth under applicable state law or the registrant's 
governing documents providing for the inclusion of shareholder director 
nominees in the registrant's proxy materials, the registrant must 
include the disclosure required from the nominating shareholder or 
nominating shareholder group under Sec.  240.14a-19(a) through (f) with 
regard to the nominee or nominees and the nominating shareholder or 
nominating shareholder group.
    Instruction to Item 7(f). The information disclosed pursuant to 
paragraph (f) of this Item will not be deemed incorporated by reference 
into any filing under the Securities Act of 1933, the Securities 
Exchange Act of 1934, or the Investment Company Act of 1940, except to 
the extent that the registrant specifically incorporates that 
information by reference.
* * * * *
    Item 22. Information required in investment company proxy 
statement.
* * * * *
    (b) * * *
    (18) If a shareholder nominee or nominees are submitted to the Fund 
and the Fund is not permitted to exclude the nominee or nominees 
pursuant to the provisions of Sec.  240.14a-11, the Fund must include 
the disclosure required from the nominating shareholder or nominating 
shareholder group under Sec.  240.14a-18(e) through (l) with regard to 
the nominee or nominees and the nominating shareholder or nominating 
shareholder group.
    Instruction to paragraph (b)(18). The information disclosed 
pursuant to paragraph (b)(18) of this Item will not be deemed 
incorporated by reference into any filing under the Securities Act of 
1933, the Securities Exchange Act of 1934, or the Investment Company 
Act of 1940, except to the extent that the Fund specifically 
incorporates that information by reference.
    (19) If a shareholder nominee or nominees are submitted to the Fund 
for inclusion in the Fund's proxy materials pursuant to a procedure set 
forth under applicable state law or the Fund's governing documents 
providing for the inclusion of shareholder director nominees in the 
Fund's proxy materials, the Fund must include the disclosure required 
from the nominating shareholder or nominating shareholder group under 
Sec.  240.14a-19(a) through (f) with regard to the nominee or nominees 
and the nominating shareholder or nominating shareholder group.
    Instruction to paragraph (b)(19). The information disclosed 
pursuant to paragraph (b)(19) of this Item will not be deemed 
incorporated by reference into any filing under the Securities Act of 
1933, the Securities Exchange Act of 1934, or the Investment Company 
Act of 1940, except to the extent that the Fund specifically 
incorporates that information by reference.
* * * * *
    18. Amend Part 240 by adding an undesignated center heading and 
Sec. Sec.  240.14n-1 through 240.14n-3 and Sec.  240.14n-101 to read as 
follows:

Regulation 14N: Filings Required by Certain Nominating Shareholders


Sec.  240.14n-1  Filing of Schedule 14N.

    (a) A shareholder or group of shareholders that submits a nominee 
or nominees in accordance with Sec.  240.14a-11 or a procedure set 
forth under applicable state law or a registrant's governing documents 
providing for the inclusion of shareholder director nominees in the 
registrant's proxy materials shall file with the Commission a statement 
containing the information required by Schedule 14N (Sec.  240.14n-101) 
and simultaneously provide the notice on Schedule 14N to the 
registrant.
    (b)(1) Whenever two or more persons are required to file a 
statement containing the information required by Schedule 14N (Sec.  
240.14n-101), only one statement need be filed. The statement must 
identify all such persons, contain the required information with regard 
to each such person, indicate that the statement is filed on behalf of 
all such persons, and include, as an exhibit,

[[Page 29088]]

their agreement in writing that the statement is filed on behalf of 
each of them. Each person on whose behalf the statement is filed is 
responsible for the timely filing of that statement and any amendments 
thereto, and for the completeness and accuracy of the information 
concerning such person contained therein; such person is not 
responsible for the completeness or accuracy of the information 
concerning the other persons making the filing, unless such person 
knows or has reason to know that the information is inaccurate.
    (2) If the group's members elect to make their own filings, each 
filing should identify all members of the group but the information 
provided concerning the other persons making the filing need only 
reflect information which the filing person knows or has reason to 
know.


Sec.  240.14n-2  Filing of amendments to Schedule 14N.

    (a) If any material change occurs in the facts set forth in the 
Schedule 14N (Sec.  240.14n-101) required by Sec.  240.14n-1(a), the 
person or persons who were required to file the statement shall 
promptly file or cause to be filed with the Commission an amendment 
disclosing that change.
    (b) An amendment shall be filed within 10 calendar days of the 
final results of the election being announced by the registrant stating 
the nominating shareholder's or the nominating shareholder group's 
intention with regard to continued ownership of their shares.


Sec.  240.14n-3  Dissemination.

    One copy of Schedule 14N (Sec.  240.14n-101) filed pursuant to 
Sec. Sec.  240.14n-1 and 240.14n-2 shall be sent to the issuer of the 
security at its principal executive office by registered or certified 
mail. Three copies of the material must at the same time be filed with, 
or mailed for filing to, each national securities exchange upon which 
any class of securities of the registrant is listed and registered.


Sec.  240.14n-101  Schedule 14N--Information to be included in 
statements filed pursuant to Sec.  240.14n-1 and amendments thereto 
filed pursuant to Sec.  240.14n-2.

Securities and Exchange Commission, Washington, DC 20549


Schedule 14N


Under the Securities Exchange Act of 1934


(Amendment No.--)*

-----------------------------------------------------------------------

    (Name of Issuer)
-----------------------------------------------------------------------

    (Title of Class of Securities)

-----------------------------------------------------------------------

    (CUSIP Number)

-----------------------------------------------------------------------

[ ] Notice of Submission of a Nominee or Nominees in Accordance with 
Sec.  240.14a-11
[ ] Notice of Submission of a Nominee or Nominees in Accordance with 
Procedures Set Forth Under Applicable State Law or the Registrant's 
Governing Documents

*The remainder of this cover page shall be filled out for a reporting 
person's initial filing on this form, and for any subsequent amendment 
containing information which would alter the disclosures provided in a 
prior cover page.

The information required in the remainder of this cover page shall not 
be deemed to be ``filed'' for the purpose of Section 18 of the 
Securities Exchange Act of 1934 (``Act'') or otherwise subject to the 
liabilities of that section of the Act but shall be subject to all 
other provisions of the Act.

(1) Names of reporting persons
(2) Amount of securities beneficially owned and entitled to be voted on 
the election of directors held by each reporting person:
(3) Percent of securities entitled to be voted on the election of 
directors represented by amount in Row (2):

    Instructions for Cover Page:
    (1) Names of Reporting Persons--Furnish the full legal name of each 
person for whom the report is filed--i.e., each person required to sign 
the schedule itself--including each member of a group. Do not include 
the name of a person required to be identified in the report but who is 
not a reporting person.
    (2) and (3) Amount Held by Each Reporting Person--Rows (2) and (3) 
are to be completed in accordance with the provisions of Item 3 of 
Schedule 14N. All percentages are to be rounded off to the nearest 
tenth (one place after decimal point).

    Notes: Attach as many copies of the second part of the cover 
page as are needed, one reporting person per page.

    Filing persons may, in order to avoid unnecessary duplication, 
answer items on Schedule 14N by appropriate cross references to an item 
or items on the cover page(s). This approach may only be used where the 
cover page item or items provide all the disclosure required by the 
schedule item. Moreover, such a use of a cover page item will result in 
the item becoming a part of the schedule and accordingly being 
considered as ``filed'' for purposes of section 18 of the Act or 
otherwise subject to the liabilities of that section of the Act.

Special Instructions for Complying With Schedule 14N

    Under Sections 14 and 23 of the Securities Exchange Act of 1934 and 
the rules and regulations thereunder, the Commission is authorized to 
solicit the information required to be supplied by this schedule. The 
information will be used for the primary purpose of determining and 
disclosing the holdings and interests of a nominating shareholder or 
nominating shareholder group. This statement will be made a matter of 
public record. Therefore, any information given will be available for 
inspection by any member of the public.
    Because of the public nature of the information, the Commission can 
use it for a variety of purposes, including referral to other 
governmental authorities or securities self-regulatory organizations 
for investigatory purposes or in connection with litigation involving 
the Federal securities laws or other civil, criminal or regulatory 
statutes or provisions. Failure to disclose the information requested 
by this schedule may result in civil or criminal action against the 
persons involved for violation of the Federal securities laws and rules 
promulgated thereunder.
    Instructions
    The item numbers and captions of the items shall be included but 
the text of the items is to be omitted. The answers to the items shall 
be prepared so as to indicate clearly the coverage of the items without 
referring to the text of the items. Answer every item. If an item is 
inapplicable or the answer is in the negative, so state.
Item 1(a). Name of Registrant
Item 1(b). Address of Registrant's Principal Executive Offices
Item 2(a). Name of Person Filing
Item 2(b). Address or Principal Business Office or, if None, Residence
Item 2(c). Title of Class of Securities
Item 2(d). CUSIP No.
Item 3. Ownership
    Provide the following information regarding the aggregate number 
and percentage of the securities of the registrant identified in Item 
1.
    (a) Amount of securities beneficially owned and entitled to be 
voted on the election of directors at the meeting:.
    (b) Percent of securities entitled to be voted on the election of 
directors at the meeting:----.

[[Page 29089]]

Item 4. Notice of Dissolution of Group
    Notice of dissolution of a nominating shareholder group or the 
termination of a shareholder nomination shall state the date of the 
dissolution or termination.
Item 5. Statement of Ownership From a Nominating Shareholder or Each 
Member of a Nominating Shareholder Group Submitting This Notice 
Pursuant to Sec.  240.14a-11
    (a) If the nominating shareholder, or each member of the nominating 
shareholder group, is the registered holder of the shares, please so 
state. Otherwise, attach to Schedule 14N a written statement from the 
``record'' holder of the nominating shareholder's shares (usually a 
broker or bank) verifying that, at the time of submitting the 
shareholder notice to the registrant on Schedule 14N, the nominating 
shareholder continuously held the securities being used to satisfy the 
applicable ownership threshold for a period of at least one year. In 
the alternative, if the nominating shareholder has filed a Schedule 
13D, Schedule 13G, Form 3, Form 4, and/or Form 5, or amendments to 
those documents, so state and attach a copy or incorporate that filing 
by reference.
    (b) Provide a written statement that the nominating shareholder, or 
each member of the nominating shareholder group, intends to continue to 
own the requisite shares through the date of the meeting of 
shareholders. Additionally, at the time this Schedule is filed, the 
nominating shareholder or each member of the nominating shareholder 
group must provide a written statement regarding the nominating 
shareholder's or nominating shareholder group member's intent with 
respect to continued ownership after the election.
Item 6. Representations and Disclosure Required by Sec.  240.14a-18
    If a nominating shareholder or nominating shareholder group is 
submitting this notice in connection with the inclusion of a 
shareholder nominee or nominees for director in the company's proxy 
materials pursuant to Sec.  2 40.14a-11, provide the information 
required by Sec.  240.14a-18.
Item 7. Disclosure Required by Sec.  240.14a-19
    If a nominating shareholder or nominating shareholder group is 
submitting this notice in connection with the inclusion of a 
shareholder nominee or nominees for director in the company's proxy 
materials pursuant to a procedure set forth under applicable state law 
or the registrant's governing documents, provide the information 
required by Sec.  240.14a-19.
Item 8. Certification for Nominating Shareholder Notices Submitted 
Under Sec.  240.14a-11
    The following certification shall be provided by the filing person, 
or in the case of a group, each filing person whose securities are 
being aggregated for purposes of meeting the ownership threshold set 
out in Sec.  240.14a-11(b):
    By signing below I certify that, to the best of my knowledge and 
belief, the securities referred to above are not held for the purpose 
of or with the effect of changing control of the issuer of the 
securities or to gain more than a limited number of seats on the board.
Signature
    After reasonable inquiry and to the best of my knowledge and 
belief, I certify that the information set forth in this statement is 
true, complete and correct.
Dated:-----------------------------------------------------------------
Signature:-------------------------------------------------------------
Name/Title:------------------------------------------------------------

    The original statement shall be signed by each person on whose 
behalf the statement is filed or his authorized representative. If the 
statement is signed on behalf of a person by his authorized 
representative other than an executive officer or general partner of 
the filing person, evidence of the representative's authority to sign 
on behalf of such person shall be filed with the statement, provided, 
however, that a power of attorney for this purpose which is already on 
file with the Commission may be incorporated by reference. The name and 
any title of each person who signs the statement shall be typed or 
printed beneath his signature.
    Attention: Intentional misstatements or omissions of fact 
constitute Federal criminal violations (see 18 U.S.C. 1001).
    19. Amend Sec.  240.15d-11 by revising paragraph (b) to read as 
follows:


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

* * * * *
    (b) This section shall not apply to foreign governments, foreign 
private issuers required to make reports on Form 6-K (17 CFR 249.306) 
pursuant to Sec.  240.15d-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file reports pursuant to Sec.  270.30b1-1 of this chapter under the 
Investment Company Act of 1940, except where such an investment company 
is required to file:
    (1) Notice of a blackout period pursuant to Sec.  245.104 of this 
chapter;
    (2) Disclosure pursuant to Instruction 2 to Sec.  240.14a-11(a) of 
the date by which a nominating shareholder or nominating shareholder 
group must submit the notice required pursuant to Sec.  240.14a-11(c); 
or
    (3) Disclosure pursuant to Instruction 3 to Sec.  240.14a-11(b) of 
information concerning net assets, outstanding shares, and voting.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

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

    Authority:  15 U.S.C. 78a et seq., 7201 et seq.; and 18 U.S.C. 
1350, unless otherwise noted.
* * * * *
    21. Amend Form 8-K (referenced in Sec.  249.308) by:
    a. Adding a sentence at the end of General Instruction B.1;
    b. Removing the heading ``Section 5.06'' and adding in its place 
``Item 5.06''; and
    c. Adding Item 5.07.
    The additions read as follows:

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

Form 8-K
* * * * *
GENERAL INSTRUCTIONS
* * * * *
B. Events to be Reported and Time for Filing Reports
    1. * * * A report pursuant to Item 5.07 is to be filed within four 
business days after the registrant determines the anticipated meeting 
date.
* * * * *
Item 5.07 Shareholder Nominations Pursuant to Exchange Act Rule 14a-11
    (a) If the registrant did not hold an annual meeting the previous 
year, or if the date of this year's annual meeting has been changed by 
more than 30 calendar days from the date of the previous year's 
meeting, then the registrant is required to disclose the date by which 
a nominating shareholder or nominating shareholder group must submit 
the notice required pursuant to Sec.  240.14a-11(c), which date shall 
be a reasonable time before the registrant mails its proxy materials 
for the meeting.
    (b) If the registrant is a series company as defined in Rule 18f-
2(a) under the Investment Company Act of 1940 (17 CFR 270.18f-2), then 
the

[[Page 29090]]

registrant is required to disclose in connection with the election of 
directors at an annual meeting of shareholders (or, in lieu of such an 
annual meeting, a special meeting of shareholders):
    (1) The registrant's net assets as of June 30 of the calendar year 
immediately preceding the calendar year of the meeting; and
    (2) The total number of shares of the registrant outstanding and 
entitled to be voted (or if the votes are to be cast on a basis other 
than one vote per share, then the total number of votes entitled to be 
voted and the basis for allocating such votes) at such meeting of 
shareholders as of the end of the most recent calendar quarter.
* * * * *

    Dated: June 10, 2009.

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-14090 Filed 6-17-09; 8:45 am]
BILLING CODE 8010-01-P