SEC Adopts Stricter Rules to Improve Disclosure to Investors

At an open meeting last week the Securities and Exchange Commission (SEC) adopted rules that will improve disclosure to investors regarding the nominating committee processes of public companies and the ways by which security holders may communicate with directors at the companies in which they invest.

The disclosure requirements adopted will enhance significantly the transparency of the nominations and communications processes of public companies and are the next step in the implementation of the recommendations in the Staff Report. The Commission has solicited public comment on other rule proposals that would implement recommendations in the Staff Report regarding the inclusion of disclosure of security holder nominees in company proxy materials.

The new disclosure standards require companies to disclose important additional information regarding a company's process of nominating directors, including:

  • whether a company has a separate nominating committee and, if not, the reasons why it does not and who determines nominees for director;

  • whether members of the nominating committee satisfy independence requirements;
  • a company's process for identifying and evaluating candidates to be nominated as directors;
  • whether a company pays any third party a fee to assist in the process or identifying and evaluating candidates;
  • minimum qualifications and standards that a company seeks for director nominees;
  • whether a company considers candidates for director nominees put forward by shareholders and, if so, its process for considering such candidates; and
  • whether a company has rejected candidates put forward by large, long-term security holders or groups of security holders.

The new disclosure standards also require companies to disclose significant, new information regarding shareholder communications with directors, including:

  • whether a company has a process for communications by shareholders to directors and, if not, the reasons why it does not;

  • the procedures for communications by shareholders with directors;
  • whether such communications are screened and, if so, by what process; and
  • the company's policy regarding director attendance at annual meetings and the number of directors that attended the prior year's annual meeting.

Chairman William Donaldson said, "The Commission today continued its efforts to improve the proxy process as it relates to the nomination and election of directors. The disclosure required by these new rules will improve the transparency of the director nomination process and means by which shareholders can work with directors at their companies. This transparency will lead to improved shareholder understanding of these processes."

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