[Federal Register Volume 86, Number 86 (Thursday, May 6, 2021)]
[Proposed Rules]
[Pages 24364-24368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-08301]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-91603; IC-34246; File No. S7-24-16]
RIN 3235-AL84


Reopening of Comment Period for Universal Proxy

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; reopening of comment period.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
reopening the comment period for its proposal to require the use of 
universal proxy cards in all non-exempt solicitations in connection 
with contested elections of directors (``Proposed Rules''). The 
Proposed Rules were set forth in a release published in the Federal 
Register on November 10, 2016 (Release No. 34-79164) (``2016 
Release''), and the related comment period ended on January 9, 2017. 
The reopening of this comment period is intended to allow interested 
persons further opportunity to analyze and comment upon the Proposed 
Rules in light of developments since the publication of the Proposed 
Rules, including developments in corporate governance matters affecting 
funds.

DATES: The comment period for the proposed rule published on November 
10, 2016 (81 FR 79122), is reopened. Comments should be received on or 
before June 7, 2021.

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm).

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-24-16. This file number 
should be included on the subject line if email 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 website (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public

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Reference Room, 100 F Street NE, Washington, DC 20549-1090 on official 
business days between the hours of 10 a.m. and 3 p.m. Due to pandemic 
conditions, however, access to the Commission's public reference room 
is not permitted at this time. All comments received will be posted 
without change. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on our website. To ensure direct electronic 
receipt of such notifications, sign up through the ``Stay Connected'' 
option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: David M. Plattner, Special Counsel, 
Christina Chalk, Senior Special Counsel, or Joshua Shainess, Special 
Counsel, in the Office of Mergers and Acquisitions, at (202) 551-3440, 
or Steven G. Hearne, Senior Special Counsel, in the Office of 
Rulemaking, at (202) 551-3430, Division of Corporation Finance, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549.

SUPPLEMENTARY INFORMATION:

I. Background

    As described more fully in the 2016 Release,\1\ Section 14 of the 
Securities Exchange Act of 1934 \2\ (``Exchange Act'') authorizes the 
Commission to establish rules and regulations governing the 
solicitation of any proxy or consent or authorization with respect to 
any security registered pursuant to the Exchange Act. In regulating the 
proxy process, the Commission has sought to facilitate the exercise of 
voting rights shareholders have under state law.\3\ To allow 
shareholders to exercise fully these rights in contested director 
elections, the Commission proposed to amend the proxy rules to permit 
shareholders to vote by proxy for any combination of candidates for the 
board of directors, as they could if they attended the shareholder 
meeting in person and cast a written ballot.\4\
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    \1\ See Universal Proxy, Release No. 34-79164 (Oct. 26, 2016) 
[81 FR 79122 (Nov. 10, 2016)].
    \2\ 15 U.S.C. 78a et seq.
    \3\ Registrants only reporting pursuant to Exchange Act Section 
15(d) are not subject to the federal proxy rules, while foreign 
private issuers are exempt from the requirements of Section 14(a). 
17 CFR 240.3a12-3(b).
    \4\ As part of this effort, the staff is also considering 
recommending that the Commission propose amendments to the proxy 
rules to facilitate vote confirmations for shareholders and improve 
voting accuracy in the proxy system.
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    The Proposed Rules would establish new procedures for the 
solicitation of proxies, the preparation and use of proxy cards, and 
the dissemination of information about all director nominees in 
contested elections. Among other things, the Proposed Rules would:
     Revise the consent requirement for a bona fide nominee and 
eliminate the ``short slate rule;'' \5\
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    \5\ 17 CFR 240.14a-4(d)(1) and (4).
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     Create new 17 CFR 240.14a-19 (Rule 14a-19) which, if 
adopted, would require the use of universal proxy cards--that is, proxy 
cards that include the names of all duly nominated director candidates 
for whom proxies are solicited--in all non-exempt solicitations for 
contested elections;
     Establish procedural requirements for dissidents and 
registrants to notify each other of their respective director nominees; 
and
     Require dissidents in a contested election subject to Rule 
14a-19 to solicit the holders of shares representing at least a 
majority of the voting power of shares entitled to vote on the election 
of directors.
    The Proposed Rules also include other improvements to the proxy 
voting process, such as mandating that proxy cards include an 
``against'' voting option when permitted under state laws and requiring 
disclosure about the effect of a ``withhold'' vote in an election. 
Finally, in the 2016 Release, the Commission declined to propose 
extending the Proposed Rules to registered investment companies and 
business development companies (``BDCs,'' and together with registered 
investment companies, ``funds,'') at that time. Instead, the Commission 
shared certain observations about the corporate governance of funds and 
requested comment and data on several topics to determine whether to 
extend the proposed universal proxy rules to funds in the future.

II. Reopening of Comment Period

    Since the publication of the Proposed Rules in 2016, there have 
been important developments in proxy contests, corporate governance, 
and shareholder activism. For example, there have been several contests 
in the United States where one or both parties used a universal proxy 
card since the 2016 Release.\6\ During the same time period, there has 
been increased adoption of proxy access bylaws \7\ and use of virtual 
shareholder meetings.\8\ Some registrants have adopted advance notice 
bylaw provisions that require dissident nominees to consent to being 
named in the registrant's proxy statement and on its proxy card.\9\
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    \6\ For example, both the dissident group and the registrant 
used universal proxy cards at EQT Corporation's 2019 Annual Meeting. 
See DEFC14A filed May 20, 2019 by dissidents and DEFC14A filed May 
22, 2019 filed by EQT Corp. The registrant but not the dissident 
group used a universal proxy card at the Sandridge Energy's 2018 
Annual Meeting. See DEFC14A filed May 10, 2018 by Sandridge Energy, 
Inc. and DEFC14A filed May 11, 2018 by dissidents.
    \7\ Holly J. Gregory, Rebecca Grapsas & Claire Holland, Proxy 
Access: A Five-Year Review, Sidley Austin LLP (Feb. 4, 2020), 
https://corpgov.law.harvard.edu/2020/02/04/proxy-access-a-five-year-review/ (noting that proxy access bylaws have been adopted by 76% of 
S&P 500 companies and just over half of the companies in the Russell 
1000).
    \8\ See the following report from Broadridge with statistics on 
the increasing use of virtual shareholders meetings from 2016-2020: 
https://www.broadridge.com/_assets/pdf/vsm-facts-and-figures-2020-brochure-january-2021.pdf.
    \9\ Tiffany Fobes Campion, Christopher R. Drewry and Joshua M. 
Dubofsky, Universal Proxies: What Companies Need to Know, LATHAM & 
WATKINS LLP (Dec. 5, 2018), https://corpgov.law.harvard.edu/2018/12/05/universal-proxies-what-companies-need-to-know/ (stating that more 
than 80 companies have adopted such advance notice bylaw 
provisions).
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    In addition, there have been developments in corporate governance 
matters affecting funds, particularly registered closed-end funds and 
BDCs. In the 2016 Release, the Commission observed that contested 
elections at open-end funds \10\ are rare, because open-end funds 
generally do not hold annual meetings and their shares can be redeemed 
at net asset value (or in the case of ETFs, traded at or near net asset 
value).\11\ The 2016 Release also noted that exchange-listed BDCs and 
registered closed-end funds, unlike most open-end funds, typically do 
hold annual shareholder meetings, and contested elections occur more 
frequently for these funds.\12\ Contested elections of directors for 
registered closed-end funds and BDCs have been more common in recent 
years, as

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compared to the few years preceding the 2016 Release.\13\ Other 
corporate governance developments relating to funds since the 2016 
Release include, for example, an increase in interest by closed-end 
funds in including provisions in their governing documents requiring 
that directors be elected by a majority of all shares outstanding, 
rather than of shares voted, and funds opting into a state's control 
share acquisition statute.\14\
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    \10\ References to open-end funds include both mutual funds and 
exchange-traded funds (``ETFs'').
    \11\ Based on staff review of DEFC14A and DFAN14A filings for 
open-end fund registrants, as was the case in 2016, we are unaware 
of any contested election involving open-end funds since 2000. See 
also 2016 Release at notes 182, 190, and accompanying text.
    \12\ Id. The Commission further explained that its understanding 
at the time was that when dissident shareholders initiated a proxy 
contest for electing directors, such dissidents normally solicited a 
complete slate of nominees for all director positions up for 
election, though the Commission noted some exceptions from that 
general observation.
    \13\ Based on staff review of PREC14A and DEFC14A filings, for 
calendar years 2017 through 2020, we estimate that there have been 
46 contested director elections involving funds, representing over 
two times the rate of such contests per year than that reported in 
the 2016 Release (for 2014 through 2015). We estimate that there 
were a total of 686 registered closed-end funds and 85 BDCs active 
in 2020, based on staff review of filings from July 1, 2019, through 
June 30, 2020. Excluding contests where the same dissident targeted 
additional funds in the same fund complex in the same year, we 
estimate that the rate of contested director elections involving 
funds from 2017 to 2020 was about 25% higher than that reported in 
the 2016 Release. We are aware of three contests involving funds in 
2017 through 2020 in which the dissident sought fewer than the total 
number of seats up for election (overall or for certain shareholders 
voting as a separate class). Approximately 85% of funds involved in 
a contested election had a classified board, based on FactSet 
Corporate Governance data. Accordingly, dissident shareholders often 
presented a full slate of nominees for the director seats up for 
election, which, if elected, would have constituted a minority of 
the board. Along with nominating directors, such dissidents 
sometimes also presented proposals to declassify the board and 
require that all directors be elected annually. As the Commission 
observed in 2016, along with contested director elections, dissident 
shareholders commonly included proposals consistent with reducing 
the discount of the share price to the net asset value, such as 
terminating the advisory contract and commencing a self-tender 
offer.
    \14\ Control share acquisition statutes provide a company with 
the right to prevent or restrict certain changes in corporate 
control by altering or removing voting rights when a person acquires 
control shares. In May 2020, the staff withdrew a prior staff 
position discussing the intersection of control share acquisition 
statutes and Section 18(i) of the Investment Company Act. Division 
of Investment Management Staff Statement, May 27, 2020, avail. at 
https://www.sec.gov/investment/control-share-acquisition-statutes.
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    In light of these developments since the 2016 Release, the 
Commission is reopening the comment period for the Proposed Rules until 
June 7, 2021 to provide the public with an additional opportunity to 
analyze and comment upon the Proposed Rules. Commenters may submit, and 
the Commission will consider, comments on any aspect of the Proposed 
Rules. Comments are particularly helpful to us if accompanied by 
quantified estimates or other detailed analysis and supporting data 
regarding the issues in those comments. Where possible, when providing 
data and information regarding funds, please provide distinct data and 
information for open-end funds, registered closed-end funds, and BDCs. 
In addition to the requests for comment included in the 2016 Release, 
the Commission specifically seeks comments on the following:
    1. The Proposed Rules would require dissidents in a contested 
election subject to proposed Rule 14a-19 to solicit the holders of 
shares representing at least a majority of the voting power of shares 
entitled to vote on the election of directors. Should we instead 
require dissidents to solicit a greater percentage of the voting power? 
For example, should the threshold be 67% or 75% of the voting power, or 
some other percentage? What would be the incremental effects of a 
higher minimum solicitation requirement on the cost of proxy contests?
    2. How should we consider the recent increase in the number of 
companies with dual or multi-class stock structures in determining a 
minimum solicitation requirement?
    3. Would a higher minimum solicitation threshold, such as 67% or 
75%, prevent more nominal contests, in which the dissidents incur 
little more than the basic required costs to pursue a contest, as 
compared to the proposed majority solicitation requirement? Would it be 
more likely to deter other contests than the proposed majority 
solicitation requirement and, if so, what are the costs and benefits of 
that outcome?
    4. Since the 2016 Release, there have been several high-profile 
contested elections at registrants that were significantly larger than 
the typical proxy contest target. To what extent does this development 
affect any of the aspects, including the costs and benefits, of the 
Proposed Rules? Should these contests affect our consideration of the 
appropriate minimum solicitation requirement? If so, how?
    5. We request any estimates or data that would allow us to refine 
our characterization of costs and benefits of nominal contests under 
the current state of the proxy process and how such effects would 
differ under the availability of a universal proxy card. In particular, 
we request specific estimates of the costs that are incurred by 
registrants in such contests, including the costs of disclosure, 
solicitation, and board and management time; and the costs and benefits 
to shareholders.
    6. As discussed above, there have been several contests in the 
United States since the 2016 Release in which one or both parties used 
a universal proxy card. Do the experiences of registrants, 
shareholders, dissidents, and other participants in the proxy process 
in these situations provide any new information about any of the 
aspects, including the costs and benefits, of the Proposed Rules? To 
what extent does the experience with advance notice bylaws that require 
dissident nominees to consent to being included on the registrant's 
proxy card (e.g., as part of the director questionnaire) affect any 
aspects of the Proposed Rules?
    7. The Proposed Rules would require a dissident to provide notice 
to a registrant of its intent to solicit proxies in support of director 
nominees other than the registrant's nominees no later than 60 calendar 
days prior to the anniversary of the previous year's annual meeting 
date. Have there been any developments since the 2016 Release with 
respect to the frequency with which contests are settled or withdrawn 
after the proposed deadline for dissidents to provide notice of their 
intent to solicit proxies for their own nominees? We request specific 
data on the timing and frequency of such actions. Would such 
settlements or withdrawals of proxy contests and the related actions of 
registrants and dissidents be changed by the proposed notice 
requirement and mandatory use of a universal proxy card and, if so, are 
there any modifications we should make to the Proposed Rules in 
response?
    8. In the 2016 Release, the Commission noted that the burden of 
attending a meeting for the purpose of voting a split ticket may be 
lower in the case of a virtual shareholder meeting, but that such 
meetings were relatively rare and that the Commission was unaware of 
any proxy contest that culminated in a virtual meeting. Virtual 
shareholder meetings have increased in frequency since then, 
particularly due to the unique circumstances presented by COVID-19 in 
2020. To what extent should this development affect our assessment of 
the Proposed Rules? Is the increase likely to continue if concerns 
about COVID-19 are reduced or eliminated? Are increased virtual 
meetings likely to affect the cost of split-ticket voting in the 
future, even in the absence of a universal proxy card? Are virtual 
meetings unlikely to be used in the case of a contest? How are virtual 
meetings likely, or not, to affect the nature of proxy contests, such 
as their frequency or targets, in the future?
    9. There have been several changes in the governance, activism, and 
voting landscape in recent years, such as an increase in the adoption 
of proxy access bylaws and other changes discussed above. To what 
extent do any of these developments affect any of the aspects, 
including the costs and benefits, of the Proposed Rules?

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    10. Are there any other developments since the 2016 Release that 
should affect our consideration of adopting a universal proxy card 
requirement? Are there any other developments that affect any of the 
aspects, including the costs and benefits, of the Proposed Rules? Are 
there any changes we should consider in the analytical methodologies 
and estimates presented in the 2016 Release? Are there any other types 
of changes we should consider in light of developments since the 2016 
Release?
    11. Would any presentation and formatting requirements in addition 
or as an alternative to those discussed in the 2016 Release be 
appropriate or helpful for universal proxy cards used in contested 
elections? For example, should we consider requiring a uniform format 
for the voting options listed next to the nominees' names?
    12. Is there a need for the Proposed Rules to facilitate a 
standardized presentation of all nominees on voting instruction forms 
and electronic proxy voting platforms in the context of contested 
elections?
    13. In the 2016 Release, the Commission proposed to exclude all 
funds from the application of the Proposed Rules at that time, 
regardless of whether the fund was structured as a closed-end fund or 
an open-end fund. In light of the differences noted both in the 2016 
Release and by commenters, as well as the fact there have been no 
contests in open-end funds since 2000, but proxy contests for 
registered closed-end funds have increased in recent years relative to 
the years preceding the 2016 Release, we are considering whether we 
should differentiate between open-end funds, registered closed-end 
funds, BDCs, and other registrants. In particular, we are considering 
whether we should apply the proposed universal proxy card requirements 
to registered closed-end funds and BDCs. We request comment on the 
extent to which the similarities or differences among open-end funds, 
registered closed-end funds, and BDCs should result in similar or 
differential application of the universal proxy rules.
    14. In the 2016 Release, the Commission discussed the use of 
cluster and unitary boards by funds and whether dissident board members 
on a board within such a fund complex could reduce the efficiencies of 
such board structures. Commenters on the Proposed Rules also discussed 
these concerns, particularly for open-end funds. How commonly do 
registered closed-end funds and BDCs utilize a unitary structure, where 
a single board oversees every fund in a fund complex? How frequently do 
they use a cluster board structure, where two or more boards each 
oversee a different set of funds in the complex? Do the same concerns 
noted by commenters about a dissident director disrupting this cluster 
board structure in open-end fund complexes apply to these registered 
closed-end funds and BDCs? To the extent a universal proxy card 
requirement would cause disruptions for open-end funds, closed-end 
funds, or BDCs, are the costs of these disruptions justified by the 
benefits to shareholders of the ability to vote by proxy as if they 
were attending the shareholder meeting in person? To what extent would 
disclosure to shareholders in the proxy materials regarding such 
potential losses in efficiency be sufficient to mitigate the risk of 
such disruptive outcomes?
    15. We have observed that a large fraction of the recent contests 
at closed-end funds involve a dissident contesting elections of 
multiple funds in the same fund complex. To what extent is any 
potential disruption to unitary or cluster boards different in 
situations where a dissident is seeking election of directors for 
multiple funds in a complex? How, if at all, should such contests 
affect our consideration of whether to extend the mandatory universal 
proxy card requirement to some or all funds?
    16. In reviewing proxy contests since 2016, we observed that many 
closed-end funds subject to a proxy contest utilized a classified board 
structure, meaning that only a minority of the board was up for 
election each year. Accordingly, even when dissidents ran a full slate 
of directors, such directors, if elected, would still only represent a 
minority of the board. How common is a classified board structure for 
registered closed-end funds and BDCs? How, if at all, does such a 
structure affect contested elections, or our assessment of whether the 
Proposed Rules should apply to registered closed-end funds or BDCs? In 
particular, does a classified board structure itself increase the 
chance of dissident directors disrupting unitary and cluster boards, 
regardless of whether funds with classified boards are subject to the 
Proposed Rules?
    17. We request any data or examples that would help us to better 
ascertain the degree of interest by shareholders in funds in splitting 
their votes in contested elections.
    18. In the 2016 Release, the Commission noted that the types of 
changes pursued by dissidents at registered closed-end funds and BDCs, 
such as converting a closed-end fund to an open-end fund, have tended 
to be binary in nature. Are there other types of goals or compromise 
approaches that dissidents have pursued at such registrants in more 
recent years? To what extent are mixed board outcomes, where some but 
not all of a dissident's nominees are elected, an effective means of 
achieving dissident goals in contests at registered closed-end funds 
and BDCs?
    19. If we extended the Proposed Rules to some or all funds, would a 
different minimum solicitation requirement be appropriate for these 
registrants than for others? If so, what threshold would be 
appropriate, and why? How, if at all, would the appropriate threshold 
differ across open-end funds, registered closed-end funds and BDCs? How 
does the concentration of ownership and types of holders of open-end 
funds, registered closed-end funds and BDCs differ from other 
registrants that may be the subject of proxy contests? Does the 
solicitation process differ for contests at open-end funds, registered 
closed-end funds or BDCs as compared to other registrants? How would 
the costs and other effects of the minimum solicitation requirement 
differ when applied to contests at these registrants as opposed to 
other registrants?
    20. As discussed above, we have observed recent developments in the 
area of corporate governance affecting funds, particularly registered 
closed-end funds and BDCs. How, if at all, are such developments, or 
other developments, relevant to our assessment of whether the Proposed 
Rules should apply to registered closed-end funds and BDCs? Would a 
universal proxy card facilitate shareholder voting in registered 
closed-end fund and BDC elections?
    21. What would be the costs and benefits and other economic effects 
of applying the Proposed Rules to registered closed-end funds and BDCs, 
or more broadly to other kinds of funds? To what extent do any 
developments since the 2016 Release affect the anticipated costs and 
benefits? How, if at all, have any such developments changed the 
differences in the likely economic effects of applying the Proposed 
Rules to some or all funds as compared to operating companies?
    22. As noted above, we have not observed any proxy contests in 
open-end funds since 2000. Would there be benefits to applying the 
Proposed Rules to all funds, including open-end funds, to the extent 
open-end funds do face proxy contests? What would be the costs of 
applying the Proposed Rules to open-end funds in the absence of 
contests?
    23. The Commission noted in the 2016 Release that in the absence of 
the proposed universal proxy card requirement applying to funds, the 
current rules would continue to apply,

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including the short slate and bona fide nominee rules. Do commenters 
believe that these rules are necessary or appropriate for any fund not 
required to use a universal proxy card? Or does the lack of proxy 
contests in open-end funds indicate that it would be appropriate to 
rescind these rules even if we do not extend the application of the 
Proposed Rules to open-end funds?
    24. There are registered closed-end funds and BDCs that, like open-
end funds, do not hold annual meetings to elect directors because of 
their state of incorporation or type of corporate entity, or because 
they are not listed on an exchange. If we were to exclude open-end 
funds from the Proposed Rules because of the lack of annual meetings, 
should the exclusion apply to registered closed-end funds and BDCs that 
do not hold annual meetings? Should such funds continue to be subject 
to the short slate and bona fide nominee rules?
    25. Are there any other developments since 2016 we should consider 
in our assessment of whether the Proposed Rules should apply to open-
end funds, closed-end funds or BDCs? What are the economic effects of 
any such developments?
    We request and encourage any interested person to submit comments 
regarding the Proposed Rules, specific issues discussed in this release 
or the 2016 Release, and other matters that may have an effect on the 
Proposed Rules. We request comment from the point of view of 
registrants, shareholders, directors, and other market participants. We 
note that comments are of particular assistance to us if accompanied by 
supporting data and analysis of the issues addressed in those comments, 
particularly quantitative information as to the costs and benefits. If 
alternatives to the Proposed Rules are suggested, supporting data and 
analysis and quantitative information as to the costs and benefits of 
those alternatives are of particular assistance. Commenters are urged 
to be as specific as possible. All comments received to date on the 
Proposed Rules will be considered and need not be resubmitted. If any 
commenters who have already submitted a letter wish to provide 
supplemental or updated comments, we encourage them to do so.

    By the Commission.

    Dated: April 16, 2021.
J. Lynn Taylor,
Assistant Secretary.

[FR Doc. 2021-08301 Filed 5-5-21; 8:45 am]
BILLING CODE 8011-01-P