408 - Securities 201 for In-House Counsel: Special Disclosure Topics

ACC’s 2010 Annual Meeting Be the Solution.

Monday, October 25 4:30pm-6:00pm

408 - Securities 201 for In-house Counsel: Special Disclosure Topics

LaFleur Browne AVP & Corporate Secretary The Williams Cos.

Mark Harrington General Counsel and Corporate Secretary Guidance Software, Inc.

Michael W. McCurdy EVP,General Counsel Danvers Bancorp, Inc.

Bart Wu Attorney

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Session 408 Faculty Biographies

LaFleur Browne

La Fleur C. Browne joined The Williams Companies as the assistant general counsel and corporate secretary. In that capacity, Ms. Browne has full responsibility for the day-today management of the corporate secretary department. Ms. Browne practices in the areas of securities regulation, corporate governance, underwritten public offerings (debt and equity), finance transactions, benefits, executive compensation and general corporate transactions. Ms. Browne also provides support to the Board and various Committees of the Board for four public companies listed on the NYSE and NASDAQ.

Prior to joining The Williams Companies, Inc., Ms. Browne was an assistant general counsel at West Pharmaceutical Services, Inc.; an assistant corporate secretary at Corning Incorporated; and an associate attorney with Dorsey & Whitney, LLP. Ms. Browne's practice at those companies and at the firm was in the areas of securities regulation, corporate governance-domestic and international, underwritten public offerings (debt and equity), mergers and acquisitions, finance transactions, aircraft transactions, executive compensation, international transactions, commercial transactions and general corporate transactions.

Ms. Browne received her JD and BBA from Howard University.

Mark Harrington

Mark E. Harrington is the general counsel and corporate secretary at Guidance Software Inc., a publicly traded company that is a leading provider of software and services for digital investigations and electronic discovery. His responsibilities include managing the worldwide legal affairs of the company, including operational, compliance, corporate, regulatory, and risk management.

Prior to joining Guidance, Mr. Harrington was a divisional general counsel and senior attorney with the Intel Corporation where he focused on technology, business, and mergers and acquisition transactions.

Mr. Harrington previously served two terms on the executive board of ACCA Southern California and is a current member of the ACC Docket Editorial Advisory Board and programs chair of ACC's national Corporate and Securities Law Committee.

He received his JD from Southwestern Law School and his BA from U.C.L.A.

Michael W. McCurdy

Michael W. McCurdy currently serves as executive vice president, general counsel and corporate secretary of Danvers Bancorp Inc., the publicly traded holding company for

Session 408

Danversbank. Danversbank is a regional community bank located in the Boston area. Mr. McCurdy oversees the company's legal affairs, including the management of corporate governance and executive compensation issues, SEC filings, stockholder relations, and mergers and acquisitions.

Mr. McCurdy was the resident and CEO of BankMalden and joined Danvers Bancorp Inc. when the merger of Danversbank and BankMalden occurred. Prior to his tenure at BankMalden, Mr. McCurdy worked as an associate with a Boston law firm.

Mr. McCurdy has served as a panelist on the topics of executive compensation, governance, and other banking related matters at American Bankers Association and Massachusetts Bankers Association programs.

Mr. McCurdy earned his BA from the University of California at Santa Barbara and his JD from Suffolk Law School.

Bart Wu

Bart Wu is an attorney whose years of experience involve advising, and providing financing to, small and large companies, and municipal entities throughout the country. Most recently, Mr. Wu was involved in the development of a business venture to explore the collection and utilization of the almost 400 million waste tires located throughout the United States.

Previously, he was chief counsel of the NYS Conservation Fund Advisory Board, a state oversight board within the NYS Department of Environmental Conservation. Before that he was a corporate banker with The Sanwa Bank, Limited. Prior to Sanwa, he was an associate general counsel of the predecessor of JPMorgan Chase, and before that he was an attorney with two New York law firms.

In addition to his membership with ACC, Mr. Wu is a member of the ABA and the NYC Bar Association. He has also served on the boards of various not-for-profit organizations, and has been the chair of their respective law committees. He currently is the vice-chair of ACC's Corporate and Securities Law Committee, has participated on the team appearing annually on behalf of the committee before the SEC's Division of Corporate Finance, and has helped guide its advocacy efforts. Mr. Wu also is the vice-chair-privacy of ACC's IT, Privacy and eCommerce Committee, leading the team that developed the privacy policies and user agreements for the ACC.

Mr. Wu received his BA and MA from the University of Pennsylvania, and his JD from the Fordham Law School.

Securities 201: Special Disclosure Topics

Speakers: LaFleur Browne Mark E. Harrington Michael W. McCurdy Bart Wu

Outline of Presentation

General Disclosure Issues – Subjective Company Concerns – Objective Requirements Evolving Disclosure Issues and Trends Practice Focus: SEC Comment Letters Practice Focus: Shareholder Proposals, and Proxy Access

General Disclosure Issues

Mark E. Harrington, Esq., General Counsel and Corporate Secretary Guidance Software, Inc.

Effective Disclosure Process – Company Subjective Determinations “sit down with C-levels and Board and get clarity on how key SEC terms are defined for your company” – Objective/SEC/Regulatory Requirements “after defining key SEC terms for your company, apply the rules in a consistent manner to comply with SEC and exchange rules”

Balancing of Interests

1) Shareholder right to information vs. 2) Company concerns about materiality, competitive harm, timing 3) Confidential Treatment requests to the SEC can be made but are not always timely or easy to get

Subjective Concerns: Define 1) Named Executive Officers 2) Section 16 Officers (sidebar: “Designated Insiders”) 3) “Materiality” for your Company 4) What is “Ordinary Course”

Methods of Disclosure Form 8K Forms 3, 4, 5 Form 10Q, 10K Form 144 Proxy Statement

Form 8K Filings

Triggering Events and Considerations Timing Considerations -most must be filed 4 days after occurrence

Form 8K Reportable Events 28 Reportable Events (summary) --Entry, Termination Amendment of a Material Definitive Agreement not made in the ordinary course --Major Financial Events (Bankruptcy, M&A, Debt/Credit Arrangements, restructurings) --Notice of Delisting or Failure to meet an exchange requirement (e.g. independence of Board) --Governance Changes (Board, Key Officers, Compensation Arrangements) --Financial Disclosures and Restatements; resignation of Auditor --Corporate: changes to Bylaws, Code of Ethics, Fiscal Year --Regulation FD

Materiality The 8-K Rules do not provide a definition of what is “material” or provide any guidance, but definitions developed by courts and the SEC do have some numerical thresholds: – Court Definitions -- Tests have been developed by courts to identify what constitutes material information. The United States Supreme Court has held that information is material only if “there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.” This standard has also been applied by the Second Circuit finding that a fact is material if it is “reasonably certain to have a substantial effect on the market price of a security” or “if there is substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares.”

Agreement Not in Ordinary Course --Typically, sales transactions related to a company’s core business are generally considered ordinary course --Those not ordinary course generally include: --agreements with directors, officers or shareholders --agreements that are foundational to the company being able to conduct business --purchase/sale of property, plant or equipment whereby the purchase or sale price exceeds 15% of a company’s fixed assets on a consolidated basis. --agreements impacting assets reported in 10K or 10Qs

Timing and Extent of Disclosure

--Four Business Days after signed agreement even if certain contingencies still exist --Disclose the “How and Why” agreement is material; parties to it; terms that are material --A copy of the actual agreement is not required to be filed as an attachment but must be filed with your next Form 10-Q/K covering the reporting period --If Event occurs within four business days of a 10Q/K filing (i.e. officer departure), company may decide to include disclosure in those filings rather than in a separate 8K.

Forms 3, 4 and 5 What: Disclosure of “Beneficial Ownership” changes for Section 16 “officers” Who: 10% owners; directors, “officers” (sidebar: president, financial officer, controller, policy making VPs) When: 2nd business day after trade (Form 4s) Practice Tips: Get Board to review/approve who these people are and re-assess periodically; watch for “Trust” ownership issues; be aware of donations, share forfeitures due to tax withholdings

Regulation FD Item 7.01 designed to protect against selective disclosure of non-public material information to some investors and not others Note on Safe Harbor protection of conference calls Practice Tip: Good command over what the company has publicly said; good communication with CEO, CFO and investor relations; clearly designate company spokespersons; legal approve all investor presentations

Form 144 Disclosures Designation can run to status of shares to be traded or to the status of the party seeking to trade (Affiliate) -- “restricted stock” not registered with an exchange (see S-8 process) is not readily transferable or saleable by a shareholder unless the resale qualifies as exempt from the registration requirements of Federal and State securities laws. (founder shares, private placements) -- “control stock” are those shares owned by a director or large shareholder in a position of directing management or policies of company Process of selling such shares involves rendering an opinion that an exemption is met (i.e. time securities held, manner and volumes of sales are below thresholds) AND making a 144 filing to disclose anticipated sales within the next 90 days. Practice Tip: watch out for other restrictions as well (short-swing sales, internal trading blackouts, certificate legends, Section 16)

10Q, 10K and Proxy Quarterly and annual disclosure of financial performance; disclosure of risk factors shareholders should consider Proxy discloses shareholder “ballot” information relevant to election of directors, officers, shareholder proposals (exec compensation, beneficial ownership, say on pay). Disclosures have expanded in recent years (see Dodd Frank for the latest evolving issues).

Current Issues in Executive Compensation And Corporate Governance

Michael W. McCurdy, Esq. Executive Vice President General Counsel Danvers Bancorp, Inc.

SEC Disclosure Rules for 2010 Proxy Season

• Enhanced Compensation Disclosure • Director and Officer Stock Option Awards • Director and Nominee Disclosures • Board Leadership Structure • Use of Compensation Consultants • Statement on Diversity

Enhanced Compensation Disclosures

• Use clear and concise language rather than complex charts. • Discuss potential material adverse effects of compensation on the company. • “Reasonably Likely” standard as used for MD&A. • No general or “boilerplate” language to describe compensation decisions.

Director and Officer Stock Grants

• Reporting probable value of stock grants in summary compensation table. • Potential maximum payout shall be included in a footnote. • Revise 2007/2008 grant disclosure, if necessary. • Disclosure of considerations for performance based awards.

Director and Nominee Disclosures

• Disclosure of director/nominee experience, skills and attributes: why is the director/nominee qualified? • Again, no boilerplate language. Ex. Mr. Smith brings many years of business, management, and customer based experience, along with a knowledge of crisis and risk management to the Board. • Disclosure of all public company boards. • Provide information on all legal proceedings from prior 10 year period.

Board Leadership Structure/Risk Oversight

• State whether the company combines the Chairman/ CEO roles and, if so, explain why. • Is there a Lead Director and, if so, what is his/her role? • What is the board’s role in providing risk oversight, especially as it relates to risks that are applicable to the company?

Use of Compensation Consultants

• Focus on avoiding potential conflicts of interest. • Additional services provided by compensation consultant, or his/her company must be disclosed. • Must provide basis for the decision to retain the consultant. • Issues regarding conflict/risk management as it relates to incentive compensation plans.

Statement on Diversity

• Does the company have a plan regarding the diversity of its directorship? • Diversity can be defined by race, gender, national origin, or something more broad as defined by the company. • A more broad definition might include: different viewpoints, professional experiences, education, skill or other qualities.

Dodd-Frank Wall Street Reform and Consumer Protection Act • Has an impact on nearly every public company. • Establishes new disclosure requirements regarding executive compensation and corporate governance matters. • Timeline for complete implementation remains unclear. • SEC will create rules and guidance for Executive Compensation and Corporation Governance matters.

Executive Compensation

• Role and Independence of Compensation Committee • Clawback Requirements • Pay v. Performance • Equal Pay Disclosures • Incentive Based Compensation Plans

Role and Independence of the Compensation Committee

• Independence of the Committee Members – Essentially codifies existing practices of the securities exchanges regarding the independence of the committee members, with a few limited exceptions. – Failure to comply results in prohibition from listing on all major exchanges. • Use of Consultants – Compensation Committee must use a number of different factors in evaluating its use of an outside consultant. – Must disclose consultant fees in the proxy statement in certain situations.

Clawback

• Repayment of Executive Incentive Compensation – Issuers must institute a policy that requires the repayment of excess executive compensation when financials are restated due to a “material misrepresentation”. – No need to show any executive negligence or misconduct. – Clawback provision applies to former and current executive officers. – Covers a three year period prior to the restatement of financials. – Includes any stock option grants.

Pay v. Performance and Equal Pay Disclosures

• Pay v. Performance – Codifies existing requirement of clear and concise disclosure of compensation subject to disclosure under Item 402. – Also establishes requirement that an issuer establish and disclose the connection between executive pay and the financial performance of the issuer. • Equal Pay Disclosures – Required disclosure of the difference between the pay of the CEO and the median employee annual compensation levels. – Must also provide a ratio of the CEO pay to the median employee pay.

Corporate Governance

• Non-Binding Shareholder Votes • Elimination of Broker Discretionary Voting • Proxy Access • Disclosure of Compensation Votes • Role of Chairman, CEO and Lead Director

Non-Binding Shareholder Votes

• Say on Pay – Non-binding shareholder vote on executive compensation to occur at least every three years. – Compensation Committee can disregard shareholder vote but must state basis for the decision to disregard. – This requirement will likely begin with the 2011 Proxy season. • Frequency of Say on Pay – A separate vote to determine how often a Say on Pay resolution will be put to shareholders. • Say on Golden Parachutes – A separate vote on existing golden parachute agreements during the shareholder meeting to approve activity that would trigger the payment.

Corporate Governance

• Elimination of Broker Discretionary Voting – Authorizes SEC to prohibit brokers from using their own discretion to vote on the election of directors, executive compensation matters and other “significant matters” as determined by the SEC. – Result is an increase in shareholder proposals to declassify boards. • Proxy Access – SEC is authorized to require issuers to provide shareholders with access to issuer proxy materials for the purpose of nominating directors. – Could alter the way companies accept shareholder nominations.

Corporate Governance

• Disclosure of Institutional Voting – 13(f) institutional investment management holders are required to disclose to beneficiaries on an annual basis how they voted on Say on Pay and Say on Golden Parachutes resolutions. • Role of the Chairman, CEO and Lead Director – Instructs the SEC to adopt guidelines regarding an issuer’s disclosure of the roles of the Chairman, CEO and Lead Director, including a discussion on why the roles are combined or separate – Similar to the proxy disclosure rules adopted by the SEC in 2009 that were used during the 2010 proxy season.

Overview of the SEC Comment Letter Process

LaFleur Browne, Esq. Assistant Vice President The Williams Companies

The Review Process

• The Division of Corporation Finance is responsible for the review of filings of public companies under the Securities Act of 1933 and the Securities Exchange Act of 1934.

• There are generally four individuals involved: • a legal examiner • an accounting examiner • a legal reviewer (typically a branch chief or special counsel) • an accounting reviewer (typically the accounting branch chief or senior assistant chief accountant) These individuals will be identified at the bottom of the comment letter.

With the adoption of Sarbanes-Oxley, the SEC is required to review each issuer’s 34 Act report once every three years. Sarbanes Oxley sets forth certain screening criteria: • large cap companies • issuers that have issued material restatements of their financial results • issuers that experience significant volatility in stock price

• emerging companies with disparities in price to earnings ratios • issuers whose operations significantly affect any material sector of the economy • any other factor that the SEC deems relevant The criteria that receives the most attention is “large cap companies,” which generally includes up to Fortune 1000 companies.

Size is not the only deciding factor, the SEC also focuses on specific disclosure issues, which are stated in the latter part of this presentation. In addition, if your company or industry is receiving a fair amount of attention from the press, you are more likely to be reviewed by the SEC.

With respect to the 33 Act, there are generally three types of reviews: a full review; monitor; and, no review: • Generally all Initial Public Offerings get a full review. • With respect to “monitors” this means that the SEC looks at specific issues such as whether the right form was used and whether a “plan of distribution” was unique. • The “no review” is self explanatory.

The SEC also screens preliminary proxies and non-S-4 merger proxies. The process used is slightly different. In those instances the SEC will review the relevant filings and will call you to inform you of their decision to review or not to review. Generally, if you have not heard from the SEC within 10 calendar days from the date of filing, you should feel free to mail or print at that time.

If you submit responses to your comment letter and you are not successful in persuading the reviewer of your position, there is an appeal process. For a thorough review of the SEC review process please go to the SEC’s website at http://www.sec.gov/divisions/corpfin/cffilingreview.htm.

What do you do when you receive a comment letter? • Distribute to all relevant personnel – generally, the General Counsel, the Controller or Chief Financial Officer and your external auditors. • Review the letter to determine issues in the comment letter and note the date the response is required.

• Organize your team. Your team should include individuals who can be responsive to the questions asked, and generally would include an in-house attorney, the controller, outside auditor, individuals from specific areas where questions are focused, and outside counsel. You should select a leader for the project.

• Set up initial meeting to review the questions and determine whether you can respond to the SEC within the timeframe provided in the comment letter. If it is determined that a response cannot be provided in that timeframe, call the staff and request an extension. Be prepared to have a reason for the extension.

• Check the precedent on comments you receive through the SEC’s website at http://www.sec.gov/answers/edgarletters.htm. Remember that your company and your facts may be different from the companies whose comment letters you reviewed, so do not let the responses shown be the driver.

• Determine what your strategy will be with respect to your comment letter response. Your best strategy is to have a complete discussion on the issue without volunteering unnecessary information which can raise extraneous issues. Do not assume that the examiner understands any portion of the questions asked. Remember if you do not understand a question call your examiner and ask what the comment is driving at.

• In preparing your response – think ahead. It is important to analyze why a question is being asked and what additional questions may be asked relating to that topic in the future.

• Be consistent in your response. Your responses should be in line with your other public disclosures, such as information in your press releases; information provided at analyst conferences and interviews.

• Have a meeting with the members of the team to review responses prior to filing with the SEC. Remember that your responses will be available to the public, so keep that in mind.

• Once you are satisfied with your responses, you are ready to file with the SEC via Edgar. You should also consider faxing the response to the SEC examiner.

Note that the SEC comment letters may ask for different responses. Some may require amendments, some may require supplemental responses, and some may require disclosure in future filings. Note that future disclosure requires that the information be included in the next periodic filing.

Comment Letter Trends

• Management’s Discussion and Analysis – Impairments – If you have taken an impairment charge you may be asked to provide more detail on estimates used and how the impairment was evaluated.

• Liquidity and Capital Resources – SEC comments have been focused on how the recent financial crisis is impacting a company’s cash availability. Many companies have expanded their risk factors to account for this specific risk. The SEC may review these risk factors against what is stated in the MD&A.

• Pension Accounting – As a result of the falling values of investments, the SEC has questioned the assumptions used in pension accounting. The question asked is generally focused on the relationship between historical returns and expected returns to the extent historical returns are less than expected returns.

• Contingencies – The SEC may ask questions relating to the likelihood of outcome (probable, reasonably possible or remote) and how the company accounted for the contingency as well as critical accounting estimates used.

• Non-GAAP Measures – The SEC reviews earnings releases, website postings, management presentations and other filings for compliance with regulation G. The SEC has focused on consistency in the use of non- GAAP measures in all filings – formal or informal – and has paid attention to financial metrics used in reconciliations.

• Executive Compensation – Performance Targets – If a company has an incentive plan where compensation is based on performance targets, those targets should be disclosed in the proxy statement, unless the company believes that disclosing the targets will cause competitive harm. If specific performance targets are not disclosed, the SEC has asked for justification of what the competitive harm will be. If a company has previously disclosed performance targets, the SEC is less inclined to accept justification for future periods.

– Individual Performance Goals – Where an NEO’s incentive compensation has increased because of individual performance, the SEC has asked for additional disclosure regarding the specific activities that warranted the increase.

• Disclosure Controls and Procedures – The SEC has focused on whether companies include the specific wording requirements in their disclosure of the effectiveness of disclosure controls and procedures.

• Exhibits – The SEC has focused on exhibit filing requirements and specifically the trend by companies to exclude schedules to agreements that are not merger agreements. Note that schedules to merger agreements are excepted by Item 601(b)(2) of Regulation S-K.

• Risk Factors – The SEC may comment on risk factors that they consider generic and request that a company provide more company specific, targeted discussions of the principal risks facing the company.

Summary

• Don’t become pen pals with the Staff. • Supplement written communication with oral communication. • Documentation is critical before receipt of comment letter.

• If you have timing considerations please let the SEC know at the outset. • Remember that the SEC staff are people too – be polite and professional.

Shareholder Proposals Under Rule 14a-8 (17 CFR § 240.14a-8) Process Interpretation Practice

Bart Wu, Esq. Vice-Chair Corporate & Securities Law Committee

SHAREHOLDER PROPOSALS • Process  Highlights (14a-8__) • (a)-(h), (j)-(l) concern procedural matters. ─ 120d before date proxy mat. distrib. (e)(2)  $2,000 mkt. value or 1% of sh. eligible to vote on proposal. (b)(2)  14d for S/H to respond to Co. notice of defect. (f)  1 proposal (c); 500 words max. (d)  80d (j) (but see below)  Attendance in person or by representative. (h)

SHAREHOLDER PROPOSALS

• (i)(1) – (i)(13) concern substantive bases to object to proposal ± stmt in support

– (i)(1) Improper subj. for S/H under state law of organization – (i)(2) Would cause Co. to violate applicable state, fed. or foreign law – (i)(3) Contrary to proxy rules

SHAREHOLDER PROPOSALS

−(i)(4) Re. personal claim or grievance −(i)(5) Re.<5% of assets/gross sales/earnings and unrelated to Co.’s business −(i)(6) Co. lacks power/auth to implement −(i)(7) Re. ordinary bus. operations −(i)(8) Re. election to Board (i.e.,“election exclusion”). »Now severely restricted under the Proxy Access rules discussed below.

SHAREHOLDER PROPOSALS

– (i)(9) Conflicts with Co.’s proposal(s) – (i)(10) Substantially implemented – (i)(11) Substantially duplicative of proposal already included in current proxy material – (i)(12) Subst. same subject as proposal included in last 3 yrs. and rec’d <3,6,10% – (i)(13) Re. specific amts of $ or dividends

SHAREHOLDER PROPOSALS • Interpretation – Corp. Fin. has issued 5 Staff Legal Bulletins (SLB 14-14E): Helpful to work backward from E to 14 – 14E: (i)(7) – 14D: (i)(1,2,6); (b) – 14C: (i)(6,7); (l) – 14B: (i)(3); (f); (j) – 14A: (i)(7) – 14: General Summary; mechanics

SHAREHOLDER PROPOSALS • (i)(7)-Ordinary Business Operations – Very popular basis to object, but not necessarily most successful • Staff position has evolved since SLB14A – Formerly, Staff viewed any proposal requiring Co. to engage in an evaluation of risk as excludable because it dealt with Ordinary Business Operations.

SHAREHOLDER PROPOSALS

– Now, Staff focuses on the subject matter that gives rise to the risk, and will determine if the subject matter is “so significant” and has a “sufficient nexus” to the Co. so that the Board’s management of that risk is a “significant policy matter.” (SLB 14E)

SHAREHOLDER PROPOSALS » For example, » Staff previously viewed CEO succession planning as an Ordinary Business Operation, because it concerned hiring/ promotion/ termination of employees. » Now, Staff views such planning as raising a “significant policy issue” re governance that “transcends the day-today business matter of managing the workforce.” Thus, not excludable.

SHAREHOLDER PROPOSALS » Similarly, Staff for some years has concluded that proposals that concern a Company’s minimizing or eliminating operations that may adversely affect the environment or public health are not excludable. (SLB 14C). » Also, proposals re. human rights, climate change and other environmental, social and governance-related issues.

SHAREHOLDER PROPOSALS • (i)(3)-Contrary To Proxy Rules – Another popular, but slippery basis to object to proposal and to all or portions of the statement of support. • Reasons to object: – Vague and indefinite – Impugns character, integrity, personal reputation or conduct without factual support – Includes opinions given as facts

SHAREHOLDER PROPOSALS

• (i)(6)-Co. lacks power/auth to implement – Frequently cited against proposals for director independence. • Typical objection is that proposal doesn’t provide for cure if loss of independence – Staff may allow if proposal offers any flexibility (e.g., “whenever possible”, or cure period). SLB 14C

SHAREHOLDER PROPOSALS – (i)(6) also cited when proposer “requests”, “recommends” or “requires” Board amend Co. charter. • Typical objection is that Board lacks auth/power to amend charter – Staff may allow proposer to revise to provide that the Board “take the steps necessary” to amend Co. charter. (SLB 14 D)

SHAREHOLDER PROPOSALS – (b)(2) & (f)- Deficiency Notices • Demonstrating eligibility to make proposal. – Introducing Brokers’ Letters » Acceptable proof for past several years since Staff issued N/A letter in Hain Celestial (2008). » But challenged in court earlier this year by Apache Corp. in S.D. Texas.

SHAREHOLDER PROPOSALS » Court held narrowly that Apache could exclude the proposal based on challenged facts re. custodian. » Since Apache decision, Corp. Fin. Staff have continued Hain Celestial practice thus isolating the Texas decision.

SHAREHOLDER PROPOSALS • Practice-2010 – According to RiskMetrics, more no-action requests were filed than in past three years. • 198 - Co. had some basis to exclude • 70 - Staff did not concur • 34 - Proposal and No-action request were withdrawn • 302 - Total number of exclusion requests.

SHAREHOLDER PROPOSALS – Excluding withdrawn requests, Staff concurred with the Co. 66% of the time. – Importance of timing • >98% Co. success if proposer fails: – To submit proposal within 120d – To respond to deficiency notice within 14d. – To limit proposal & statement to 500 words

SHAREHOLDER PROPOSALS • Requests made <80d of releasing proxy materials is ordinarily not a bar. (SLB 14B) – In almost all cases in 2010, Staff evaluated the merits of a no-action request. About 50% of the time, it also waived the 80d requirement.

SHAREHOLDER PROPOSALS – Big Issues • Compensation issues: – Say on pay – Anti gross-ups – Retention periods after terminated – Independent compensation comm.

SHAREHOLDER PROPOSALS

– Big Issues • Board issues: – Independent Chairman – CEO succession – Majority voting for directors – Written consent

SHAREHOLDER PROPOSALS

– Big Issues • Governance issues: – Right to call special meetings – Ending supermajority voting – Eliminate classified boards

SHAREHOLDER PROPOSALS – Big Issues • Significant Policy issues: – Climate change/greenhouse emissions/environmental impact – Humane treatment/Human rights – Political advocacy reports/spending

Facilitating Shareholder Director Nominations (“Proxy Access”)

PROXY ACCESS Adopted on August 25th – Effective date: November 15, 2010 – Applies to mailings: March 15, 2011 • Smaller Reporting Cos. (gen. with public float of <$75 MM): November 15, 2013 – Requires: S/H or Group have 3% voting sh. for 3 yrs. • Can’t use borrowed sh. or shorted sh. 3 yrs. required through date file Sch. 14N.

PROXY ACCESS – Access: S/H can nominate up to 25% of Bd. (rounded down), and solicit proxies through Co.’s proxy statement • If multiple classes can elect, Co. must include the number of director seats class can elect or 25% of entire Bd., whichever is less. • If Bd. has 3 or fewer directors, Shareholder can nominate 1 director.

PROXY ACCESS

• If Shareholders nominate >25% of the Board, the Shareholder or S/H group with the largest % of voting securities has priority. • If Co. nominates candidate previously nominated by Shareholders at prior annual meeting, Co.’s nominee doesn’t count toward Shareholders’ 25% cap.

PROXY ACCESS • Process – Must (1) disclose information on Sch 14N regarding Shareholder/Group’s relationship with nominee or with Co., holdings, and nominee’s qualifications, (2) provide written statement from record holder (or bank or brokers) verifying required ownership within 7 days of filing Sch. 14N, and (3) certify: • Sh. not acquired “with the purpose, or with the effect, of changing control”

PROXY ACCESS

• Nominee qualifies objectively as independent director • There are no agreements with the Co. concerning the nominee, and • Nominee’s candidacy does not violate law or applicable stock exchange rules.

PROXY ACCESS Process – Notify Co. ≤150d to ≥120d window prior to anniversary of mailing prior year’s proxy materials, and deliver copy of new Schedule. 14N as filed with the SEC. – If Co. will include nominee(s), it must notify Shareholder/Group no later than 30d prior to distributing proxy materials.

PROXY ACCESS – If Co. challenges nominee, it must notify Shareholder/Group within 14d of deadline for submitting nominations. Shareholder/ Group has 14d to cure deficiency. If not cured, Co. may exclude, but must notify SEC of that action no later than 80d prior to distributing proxy materials.

PROXY ACCESS

– Co. may, “if desired” still file a no-action request to exclude. • Shareholder/Group has 14d from receipt of submission to respond to Co.’s no-action request to SEC.

PROXY ACCESS

– Bases for exclusion: • Rule 14a-11 doesn’t apply to Co. • Shareholder/Group did not satisfy eligibility requirements • Co. received more nominees than it is required to include – May not assert certifications or disclosure is false or misleading to exclude, or make assertion as reasoning for no-action request.

PROXY ACCESS – Cannot exclude Shareholder proposals under Rule 14a-8(i)(8) if it: • Would disqualify nominee standing for election; • Would remove director from office before term expired; • Questions competence, business judgment or character of a nominee; • Seeks to include specific individual in Co.’s proxy materials for election to the Board; • Otherwise could affect outcome of upcoming election.

PROXY ACCESS

– (i)(8) cannot be used to exclude a proposal that seeks to restrict access under 14a-11, such as imposing a higher threshold or longer waiting period, but can be used to provide additional means for a Shareholder to nominate directors.

PROXY ACCESS

– Company is not responsible for information or disclosures contained in Shareholder/Group statement of support for nominee(s) nor for information it must lift from Sch. 14N for inclusion in proxy materials.

PROXY ACCESS

– Co. must use a “universal proxy” in which all nominees are listed. – Co. can indicate whether Board recommends a vote “for” the nominee, it cannot otherwise discriminate nor provide blank check box to vote entire Co. slate.

PROXY ACCESS • Going Forward – The Corp. & Securities Law Committee is likely to continue to monitor developments, address governance issues and provide updates about Shareholder Proposals under Rule 14a-8 and Proxy Access under Rule 14a-11 during its monthly conference calls throughout the upcoming year. STAY TUNED

SECURITIES 201 FOR IN-HOUSE COUNSEL: SPECIAL DISCLOSURE TOPICS SUPPLEMENTAL MATERIALS

General Disclosure Issues and Current Issues in Executive Compensation and Corporate Governance

1. Sample periodic email message to “designated insiders” regarding blackouts for trading in company securities (.doc)

2. Company Disclosures To The Public Sample Regulation FD (“Fair Disclosure”) Policy (.doc) 3. Corporate Executive Board Compensation Clawback Policies, dated October 7, 2007. (.pdf)

Overview of the SEC Comment Letter Process

1. Response to SEC Comment Letter regarding 10K filed February 26, 2010 and proxy statement filed April 8, 2010

2. Response to SEC Comment Letter, dated June 18, 2010

Shareholder Proposals and Proxy Access

1. Wu’s 2010 No-Action Analysis (through August 14, 2010) (.xlsx) 2. RULE 14a-8 3. SLB 14E 4. SLB 14D 5. SLB 14C 6. SLB 14B 7. SLB 14A 8. SLB 14 9. Apache Corp. v. Chevedden Decision (.pdf) 10. Facilitating Shareholder Director Nominations (“Proxy Access”) (.pdf)

SAMPLE PERIODIC EMAIL MESSAGE TO “DESIGNATED INSIDERS” REGARDING BLACKOUTS FOR TRADING IN COMPANY SECURITIES

Sent: Monday, June 14, 2010 10:04 AM To: Designated Insiders Subject: [Company] Trading Window CLOSES after market on Wednesday, June 16th

Hello,

If you are receiving this email, you are considered a Designated Insider of the Company. What that means is that by virtue of your position or function within the Company, you may commonly be in possession of material non-public information about the Company. Designated Insiders are generally prohibited from trading in [Company] company securities, starting from the last two weeks of a quarter --- until 48 hours after the earnings for that quarter have been publicly reported. For various reasons, the Company may extend a closed trading window from time to time if it determines that the level of material non-public information currently circulating in the company is at such a level to create risk for the Company or its employees who might otherwise trade in company securities.

Please note that starting after market close on Wednesday, June 16th, the trading window (including to window to set-up or amend any 10b51 Plans) for [Company] securities will CLOSE and remain closed until the window opens again after market on [Date], which is 48 hours after our anticipated Q2 2010 earnings release.

Please remember never to buy or sell company securities if you believe you are in possession of material non-public information about the company. Before engaging in any trading activity related to [Company] securities, you should review the [Company] Insider Trading policy and training materials, located here: http://intranet/policies/default.aspx. As a Designated Insider, you are also required to periodically complete our interactive Insider Trading training module. To access the training module, click here:

[link to interactive Insider Trading module]

Finally, prior to making any trades, please get pre-clearance with [General Counsel or designee], so the Company can determine what if any obligations it may have to disclose such trades to its shareholders.

Regards,

General Counsel

POLICY DEPARTMENT: Legal

COMPANY DISCLOSURES TO THE PUBLIC SAMPLE Regulation FD (“Fair Disclosure”) Policy

POLICY NUMBER: EFFECTIVE DATE:

I. PURPOSE

Our Company is committed to fair disclosure to investors in compliance with all applicable securities laws. This is a highly technical area with important consequences for the Company. If you believe that a disclosure of material nonpublic information about the Company may have occurred, immediately notify our General Counsel.

Here are examples of the areas affected by this policy: • Quarterly earnings releases and related conference calls • Speeches, interviews and conferences • Providing “guidance” as to the Company’s performance or results • Responding to market rumors • Customer Meetings • Contacts with financial analysts covering the Company • Reviewing analyst reports and similar materials • Referring to or distributing analyst reports on the Company • Analyst and investor visits • Postings on our website • Postings on external “blogs” or bulletin boards

General

This policy has been adopted in response to SEC rules concerning the practice known as “selective disclosure” of material nonpublic information. All questions about this policy should be directed to a member of the Company’s Disclosure Committee or the General Counsel. The General Counsel and Disclosure Committee are responsible for interpreting this policy and for establishing and implementing procedures to ensure compliance of all communications with applicable securities laws.

II. SCOPE

What kinds of persons and disclosures does this policy cover?

This policy applies to all employees and covers all disclosures to people (other than to our fellow employees) who may be expected to trade in our securities, which includes our stockholders and other security holders, customers, securities brokers and dealers, financial analysts and financial institutions. If you are in doubt as to whether someone is covered by this policy, then either (i) assume that they are or (ii) contact a member of the Disclosure Committee for guidance.

What is material nonpublic information?

“Material” information is information that investors in our securities would consider important. This includes a range of subjects, including our current or expected operating performance, acquisitions and strategic transactions, new products, errors or defects in products, large customer deals, changes in management and potentially a host of other things. Because this is an area that requires specialized judgment, you should contact a member of the Disclosure Committee if you have questions.

“Non Public” information is that which we have not previously released it in a way the SEC has agreed is designed to reach the public. In the SEC’s view, for example, a website posting is not adequate distribution to the public, although a press release clearly would be.

III. POLICY

How does the Company make public disclosure of material information?

In keeping with the requirement of Regulation FD of the Securities and Exchange Commission (SEC), all queries from news reporters, financial analysts and research firms must be funneled through the Vice President of Investor and Public Relations, who will ensure that no selective disclosure of information occurs. The Company is committed to disclosing information about itself fully and promptly, and constantly seeks to improve its financial communication program. Our corporate policy, reflecting current legal requirements, is that our employees and board members will not make any disclosure of material nonpublic information about the Company to anyone outside the Company (other than to persons who first expressly agree in writing to maintain confidentiality), unless we disclose it to the public at the same time.

IV. PROCEDURES

Following are the standards by which the Company will disclose information about itself:

1. Earnings Guidance: We will make every attempt possible to provide quarterly and yearly earnings forecast, and related issues and drivers, in the earnings release outlook section. We will not comment one way or the other on individual earnings estimates or street consensus, including First Call or any other service. 2. Analysts’ Models: We will not review analysts’ financial models and research reports. We will assist with historical data and previously disclosed public information. 3. Updates: We will not give running updates during the quarter on current business performance, including orders, sales (revenues), earnings, or any material P&L and balance sheet information. 4. One-on-One Meetings: These meetings will be limited to previously released financial information and historical data; information regarding markets, products, processes, etc., will be discussed as long as it is not considered to be material information. 5. Analyst and Investor Conferences: We continue to look forward to participating in and presenting at these meetings. We will put the formal presentation on our Web site prior to the meeting. We will encourage the organizer to make webcasting connectivity available for the formal presentation.

6. Earnings Phone Conference: We will issue a press release prior to the phone conference announcing the date and time and that there will be a live webcast. We will continue the practice of opening the phone conference to the news media. 7. Quiet Period: Our quiet period will begin the last two weeks of the quarter up to the earnings release. We will have no one-on-one meetings during this time, and access to senior executives will be restricted.

As a general matter, the Company’s Disclosure Committee has the responsibility to determine the content, form and timing of public disclosure, consistent with our legal responsibilities and with the best interests of the Company. With respect to quarterly earnings: • We will issue a press release through widely circulated news and wire services and file a Form 8-K with the SEC. • We then may conduct a public conference call. If we do, we will provide advance public notice and public access information for each scheduled conference call. Anyone may listen to the call by telephone or webcast. • We may allow a limited group to ask questions on the conference call, as long as all listeners can hear the questions and answers. • We will make an audio recording of the conference call publicly available through our website or an outside service for one week following the call. After this time the call will be taken down so that the information does not become stale.

How do we give “guidance” about our expected future results?

We may determine that it is appropriate to make statements about our expectations for future results. The decision whether or not to do so is the responsibility of the Disclosure Committee. If we provide guidance we generally will do so by press release and Form 8-K. We will not change or confirm this guidance in any material respect except in the same way.

Will we comment on analyst reports?

We will not review or comment upon any financial analyst reports except as approved by the Disclosure Committee. In any event, such review or comment shall be limited to immaterial matters or to confirm factual accuracy consistent with available public information.

How do we pre-clear speeches and other public presentations?

All proposed disclosures of material nonpublic information about the Company, or participation in speeches, interviews or conferences where persons covered by this policy may be in attendance, must be reviewed and approved by the Disclosure Committee. Spokespersons should adhere to the script and not disclose any material nonpublic information about the Company during any “break out” or question-and- answer sessions.

What about visits by analysts or other financial professionals?

Any visits should be pre-cleared with the Disclosure Committee. Any communications during visits will be subject to this policy.

How do we respond to market or media rumors?

Whether or not the rumor has any basis in fact, we normally will respond by saying: “Our policy is no to comment on rumors or speculation.” Like most companies, we follow this approach consistently in order to avoid providing an implied confirmation or denial in other circumstances. Any exceptions to this policy must be approved by the Disclosure Committee.

Who may receive nonpublic material information?

There are certain people who are required by professional responsibility or by contract to keep our information confidential. These include our employees, our attorneys, our accountants, our investment bankers, and people or entities that are subject to nondisclosure agreements with us. If you are in doubt as to whether someone falls within this category, don’t guess: contact the Disclosure Committee for guidance.

What if an unauthorized disclosure of nonpublic material information happens?

If you believe such an unauthorized disclosure may have occurred, immediately contact the General Counsel. Certain inadvertent disclosures or nonpublic material information can be “cured” by appropriate and prompt subsequent disclosure.

V. RESPONSIBILITY

HR and Legal have responsibility for enforcement of this policy.

Who is authorized to disclose material nonpublic information?

Only the following people: • The Chief Executive Officer; • The Chief Financial Officer; • The Vice President of Investor and Public Relations; and • Other people who may be designated in writing as spokespersons for the Company by any two of the above individuals, or by the Disclosure Committee. If you receive a request from someone outside the Company for material nonpublic information – for example, seeking guidance about our quarterly results, or asking for confirmation of a rumor – you should not respond. Instead, ask for the person’s name and number and contact a member of the Disclosure Committee.

Why should these issues concern me?

As an employee, you are expected to comply with all Company policies. Disclosure of material nonpublic information could have significant negative consequences to the Company. As an individual, you are required to comply with all applicable laws. Under SEC rules, as an individual you could be held

liable for substantial penalties if you disclose material nonpublic information in a deliberate or reckless way.

AUDIT COMMITTEE LEADERSHIP FORUM October 2007 www.aclf.executiveboard.com COMPENSATION CLAWBACK POLICIES An overview of the implementations of compensation clawback policies

RESEARCH OVERVIEW At our member’s request, the Forum conducted research regarding companies’ compensation clawback policies. The SEC now lists companies' recoupment policies as an example of an item that generally should be described in the CD&A section in their proxy statement. Indeed, recoupment policies have been expanded to cover situations that result in a restatement of financial results due to a material error1. This paper presents a summary of the Forum’s findings and provides relevant examples of companies’ attempts to recover (or “claw back”) certain forms of compensation

TABLE OF CONTENTS EXECUTIVE SUMMARY

More companies are building in recovery provisions Page 1— Clawback Policy Prevalence into their employment contracts to safeguard against And Trends 2 the scenario of fraud-based compensation. Page 2— Characteristics of Clawback Policies Companies’ clawback policies are explicit and

Page 2-3— Five Key Director publicly disclosed in annual filings. Considerations Clawback policies are becoming broader in scope Page 3-4— Examples Of Company and intent. Clawback Policies

Page 5-6— Companies’ Experience Directors may have a legal obligation to consider Executing Clawback Policies in whether or not to attempt to recoup payments, but do Practice not have an obligation to engage in recovery.

CLAWBACK POLICY PREVALENCE AND TRENDS

Clawback policies are becoming more prevalent, at least amoung large American companies. Almost half (44%) of the Fortune 100 publicly disclosed a compensation clawback policy in 2007.

Fortune 100 Companies Implementing Clawback Policies3 Reflects only 50 of the Fortune 100 that filed prioxies prior to March 25, 2007

Claw back provision implemented in 2006 12% No Claw back provision Claw back provision 56% prior to 2006 32%

N= 50.

EXPANDING BREADTH OF POLICY

“The breadth of clawback policies has increased. More companies are moving beyond policies which only allow for the recovery of bonuses to include provisions allowing companies to take back unvested equity awards and even equity gains.” Alexander Cwirko-Godycki Senior Analyst, Equilar, Inc.

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COMPENSATION CLAWBACK POLICIES PAGE 2 OCTOBER 2007

CHARACTERISTICS OF CLAWBACK POLICIES

A Towers-Perrin analysis of clawback policies (below ) reveals that policies differ in their application, forcing directors to consider what to include and what to omit when implementing a policy.

Selected Characteristics of Clawback Policies4 Percent of Fortune 100, 2007

When to Apply Provision— Most companies (84%) indicate that they would 84% apply the provisions if executive misconduct led to a financial restatement.

How Broadly to Apply Provision— Almost half (49%) of the companies stated that they 49% authorize clawbacks for other conduct (besides financial restatements) that is determined to be detrimental to the company.

Whether or Not to Apply Toward Long-Term Incentives— In nearly all cases (97%), the company stated that the recoupment or clawback provisions would 97% apply to long-term incentive awards.

Whether or Not to Apply Toward Annual Pay and Equity Awards— Most companies (76%) indicated that the provis ions would affect annual incentives. These 76% types of provisions can include the clawb ack of unexercised stock options and gains from previously exercised option awards.

How Explicit Should the Disclosure Be? — For most organizations (73%), the CD&A section of the proxy statement ou tlined a general recoupment policy that 73% did not pertain to any specific program or plan. However, some companies—20 altogether—went further and provided an explicit discussion of the clawback or recoupment policies contained in their long-term incentive plan.

FIVE KEY DIRECTOR CONSIDERATIONS

The Full Board of Directors, or a specially tasked Compensation Committee, is responsible for crafting a clawback policy. Directors must consider 4 key areas when designing a clawback policy5:

Five Key Considerations For Clawback Policies

1. Which events should trigger the restatement clawback? Boards must specifically state which events would lead to a clawback claim in order to minimize future uncertainty.6 Research indicates that recouping past compensation is highly disruptive and difficult to apply due to highly complex compensation contracts and insurance provisions. Boards attempting to recoup funds often spend many years in litigation arguing over contractual nuances and vague definitions of events.7,8

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COMPENSATION CLAWBACK POLICIES PAGE 3 OCTOBER 2007

FIVE KEY DIRECTOR CONSIDERATIONS (CONTINUED)

2. Which employees or executives will be subject to the clawback? Boards should consider differently those who unwittingly benefited from fraud versus, those who might have directly contbuted to the misconduct itself. In addition, Boards should also consider holding those not directly causal, but “who permitted the fraud to happen on their watch.” For example, a CFO who benefited from fraud, even though he/she was not a party to the fraud.9

3. What forms of compensation are vulnerable to being clawed? Generally the most successful clawback provisions in practice, are those specifically based on performance based bonuses. For example, in 1998, former CEO Lawrence Coss returned roughly a third of his $102 million 1996 bonus to Green Tree Financial Corp. This was after a restatement eliminated the $174 million pretax profit Mr. Coss’s bonus was based upon. Dollar General’s former CEO, Cal Turner Jr. also decided to return all of his bonuses totaling $6.8 million.10

4. Should the clawback extend to past awards or be limited to current or future ones? The success rate of companies recouping money paid to executives for certain achieved illegitimately is not great. While clawback suits are increasingly common, it is rare for companies or boards to try to force executives to disgorge past compensation.11

5. Where should the provision manifest itself from a legal perspective? Whether or not there is a contractual provision to recoup bonuses in the employment contract, companies have cause of action under Common Law to recoup funds that were obtained by fraud. However, the Common Law claim is weaker than a Contractual Claim, which is why repayment provisions are beginning to appear more frequently in employment contracts.

EXAMPLES OF COMPANY CLAWBACK POLICIES

The following are examples of publicly disclosed compensation clawback policies.

Sprint Nextel Corporation

In addition to any other remedies available to Sprint Nextel (but subject to applicable law), if the Board or any committee of the Board determines that it is appropriate, Sprint Nextel may recover (in whole or in part) any bonus, incentive payment, commission, equity award or other compensation received by an officer of Sprint Nextel at the level of vice president or above to the extent that such bonus, incentive payment, commission, equity award or other compensation is or was based on any financial results or operating metrics that were impacted by the officer's knowing or intentional fraudulent or illegal conduct.

www.sprint.com/governance/documents/ex ecCompensationClawbackPolicy.html

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COMPENSATION CLAWBACK POLICIES PAGE 4 OCTOBER 2007

EXAMPLES OF COMPANY CLAWBACK POLICIES (CONTINUED)

The Home Depot, Inc.

To the extent permitted by law, if the Board of Directors, or a committee thereof, determines that any bonus, incentive payment, equity award or other compensation has been awarded or received by an executive officer of the Company, as defined by Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended, and that such compensation was based on any financial results or operating metrics that were satisfied as a result of such officer’s knowing or intentional fraudulent or illegal conduct, then the Board or a committee thereof, shall recover from the officer such compensation (in whole or in part) as it deems appropriate under the circumstances. Further, following a restatement of the Company’s financial statements, the Company shall recover any compensation received by the CEO and CFO that is required to be recovered by Section 304 of Sarbanes-Oxley Act of 2002.

In determining whether to recover a payment, the Board shall take into account such considerations as it deems appropriate, including whether the assertion of a claim may violate applicable law or prejudice the interests of the Company in any related proceeding or investigation. The Board shall have sole discretion in determining whether an officer’s conduct has or has not met any particular standard of conduct under law or Company policy.

http://ir.homedepot.com/governance/guidelines.cfm

News Corporation

To the extent permitted by governing law and any employment arrangements entered into before the adoption of this policy, the Company will require reimbursement of a portion of any performance-based bonus granted to any named executive officer after August 7, 2007 where: a) the bonus payment was predicated upon the achievement of certain financial results that were subsequently the subject of a substantial restatement, b) in the Board’s view the officer engaged in fraud or misconduct that caused or partially caused the need for the substantial restatement and c) a lower payment would have been made to the officer based upon the restated financial results. In each such instance, the Company will, to the extent practicable, seek to recover the amount by which the individual officer’s annual bonus for the relevant period exceeded the lower payment that would have been made based on the restated financial results, plus a reasonable rate of interest; provided that the Company will not seek to recover bonuses granted more than three years prior to the date the applicable restatement is disclosed.

For purposes of this policy, the term “named executive officers” has the meaning given that term in Item 402(a)(3) of Regulation S-K under the Securities Exchange Act of 1934, as amended, and the term “bonus” means a payout under the News Corporation 2005 Long-Term Incentive Plan

http://www.newscorp.com/corp_gov/socg.html

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COMPENSATION CLAWBACK POLICIES PAGE 5 OCTOBER 2007

COMPANIES’ EXPERIENCE EXECUTING CLAWBACK POLICIES IN PRACTICE

The following represent examples found in the press of small to mid-cap companies that have pursued and recouped bonuses awarded to executives as the result of fraudulent activities. They are listed by size.

Gemstar Revenues: $0.6 Billion In December 2005, Gemstar’s CEO, Henry Yuen, was accused of overstating its total revenues by at least $248 million to meet ambitious projections for revenue growth from 1999 to 2002 and earned $72 million from bonuses and stock sales.12 In January of this year as a result of arbitration proceedings it was concluded that Mr. Yuen is not entitled to $30 million that Gemstar froze when it fired him in 2003, but he actually owes the company $93.6 million in damages, salary and other costs. The assessment comes atop the $22 million in restitution, penalties and interest that a federal court ordered him to pay last 13 May. Other Gemstar executives were also affected. Former chief financial officer of Gemstar-TV Guide International Inc. has agreed to pay $25,000 to settle civil charges stemming from the company's accounting fraud, according to the Associated Press. The SEC had also charged Gemstar's former co- president, co-chief operating officer, and board member Peter C. Boylan (who also served as co- chairman, chief executive officer, and co-president of Gemstar's wholly owned subsidiary TV Guide Inc.) and Jonathan Orlick, a former general counsel, executive vice president, and board member. Boylan and Orlick previously agreed to pay about $600,000 and $300,000 respectively.”14

Valeant Pharmaceuticals International Revenues: $0.9 Billion Valeant’s former CEO, Milan Panic agreed to pay $20 million to Costa Mesa-based Valeant Pharmaceuticals International to settle charges that he received unwarranted bonuses in 2002 as the company's chairman.15 Last month, Valeant’s former CEO, Milan Panic was also ordered by a Deleware judge to repay the drug maker $4.8 million over a bonus tied to a unit's aborted spinoff.16

Molex Inc. Revenues: $2.8 Billion Last August, fourteen executive officers at Molex Inc., a connector supplier, agreed to repay the company their portion of the $685,000 in total gains they realized as a result of the misdating of stock options found in a recent internal review of the company's stock option granting practices. The company concluded that the dates of option and restricted stock grants to executive officers and other employees in a number of instances differed from the dates grants were approved.17

HealthSouth Revenues: $3.0 Billion

Last November, Richard Scrushy, founder of the HealthSouth Corporation, ousted in 2003 after auditors uncovered a $2.7 billion accounting fraud, agreed to credit $21 million in Scrushy's legal fees against the $52 million he owed for inflated bonuses. Scrushy has agreed to pay the company $31 million as part of a settlement of litigation over his bonuses and legal fees.18

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COMPENSATION CLAWBACK POLICIES PAGE 6 OCTOBER 2007

COMPANIES’ EXPERIENCE EXECUTING CLAWBACK POLICIES IN PRACTICE (CONTINUED)

Computer Associates Revenues: $3.8 Billion In the late 1990s, Computer Associates’ three top executives were handed a joint bonus of $1.024 billion shortly before a profits warning severely dented its stock. An internal investigation revealed in 2004 that in 2000 more than $2 billion of sales were reported earlier than they should have been – about one-third of its total sales recorded that year.19 Former Computer Associates CEO, Sanjay Kumar is responsible for repaying the stockholders as a result of a plea deal on restitution that took place on April 13, 2007 in U.S. District Court in Brooklyn. Stockholders are only expected to get a fraction of the money back. Under the terms of restitution agreement reached with the U.S. Attorney's Office for the Eastern District, Kumar must repay $52 million by December 2008.20

First Data Corp. Revenues: $7.0 Billion Daniel Burnham, a director of First Data Corp. and chairman of its compensation committee, will pay a fine and return part of a six-year-old, $1.75 million cash bonus he received as chairman and CEO of Raytheon Co. First Data announced the fine in a filing with the Securities and Exchange Commission. The SEC has been investigating alleged accounting violations at Raytheon in 2000 and 2001 when Burnham led the company. Burnham neither admitted nor denied the SEC's allegations. The SEC didn't release the amount of the bonus repayment or of the fine.” 21

Royal Group Technologies, Ltd. Revenues: NA Royal Group Technologies dismissed Chairman Vic De Zen in December of 2004, who, at the time owed the company more than $1 million. The debt dates back to July, 2003, when Royal Group changed its compensation policy for senior executives, including Mr. De Zen, who was chairman and co-chief executive officer at the time. Under the policy change, Mr. De Zen was supposed to repay $1.8-million in bonuses he had received in 2002. The repayment was going to be made over several years through a reduction in Mr. De Zen's annual bonus. Mr. De Zen resigned as co-CEO in December, 2003, and the company's Board began negotiating a retirement package with him. At the time of his departure, Mr. De Zen still owed $1.1-million of the 2002 bonus and the company's Board had planned to offset that amount from his retirement package.”22

Dollar General Revenues: ~$8.6 Billion After the restatement, Cal Turner Jr. resigned as chief executive and gave back his bonus of $6.8 million – a figure determined by Dollar General’s board. Turner has declined to talk about what happened at Dollar General, and attempts to reach the other executives in the SEC investigation were unsuccessful.23

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COMPENSATION CLAWBACK POLICIES PAGE 7 OCTOBER 2007

SOURCES

1 “Taking Back What’s Yours: Clawbacks Make a Comeback,” Towers-Perrin Monitor, June 2007. 2 Gregory, Holly, “The 2006 Summit on Exeutive Compensation,” Audit Committee Leadership Forum, 23 January 2007. 3 Morgenson, Gretchen “Making Managers Pay, Literally,” The New York Times, 25 March 2007. 4 “Taking Back What’s Yours: Clawbacks Make a Comeback,” Towers-Perrin Monitor, June 2007. 5 Poerio, Mark and Moran, Crescent, “They Can't Take It With Them,” The National Law Journal, 21March 2007. 6 Gregory, 2007. 7 Dvorak, Phred and Serena Ng, “Check, Please: Reclaiming Pay from Executives is Tough to Do,” The Wall Street Journal Europe, 22 November 2006. 8 Poerio, Mark and Moran, Crescent, “They Can't Take It With Them,” The National Law Journal, 21March 2007. 9 Gregory, 2007. 10 Dvorak, et al. 11 Grant, Elaine Appleton, “Claw-Back Time,” Corporate Counsel, 01 May 2005. 12 Dvorak, et al. 13 Stein, Mark A. “Ouch!”The New York Times, 28 January 2007. 14Taub, Stephen, “Gemstar Ex-CFO Agrees to Settlement,” CFO.com, 14 December 2005. 15 Yi, Daniel, “Ex-Chairman to Repay Valeant $20 Million,” Los Angeles Times, 04 August 2006. 16 “Former Executive Must Repay Valeant,” Los Angeles Times, 03 March 2007. 17 “Molex Execs to Repay Option Gains,” Electronic News, 07 August 2006. 18 “HealthSouth's Scrushy Agrees to Pay Settlement,” Los Angeles Times, 30 November 2006. 19 Waters, Richard, “CA Shareholders Reject Bonus Action,” Financial Times, 26 August 2004. 20 Kessler, Robert E., “CA'S $1B Man,” Newsday, 13 April 2007. 21 “First Data’s Burnham Will Pay For Raytheon Missteps,” Cardline, 31 March 2006. 22 Waldie, Paul and Derek DeCloet, “Royal Group Faces Hurdle Collecting from De Zen; Dismissal Could Impede Bonus Repayment of more than $1-million from Ex-Chairman,” The Globe and Mail, 02 December 2004. 23 Snyder, Naomi, “Former Dollar General Accountant Says He's Sorry,” The Tennessean, 24 April 2005.

Note to Reader

This project was researched and written to address the research interest of a specific company and as a result may not satisfy the information needs of all companies. The Corporate Executive Board encourages readers who have additional questions about this topic to contact the Audit Committee Leadership Forum staff for further discussion. Descriptions or viewpoints contained herein regarding organizations profiled in this report do not necessarily reflect the policies or viewpoints of those organizations.

Confidentiality of Findings

This project has been prepared by the Corporate Executive Board for the exclusive use of its research contacts. It contains valuable proprietary information belonging to the Corporate Executive Board and each company should make it available only to those employees and agents who require such access in order to learn from the material provided herein, and who undertake not to disclose it to third parties. In the event that you are unwilling to assume this confidentiality obligation, please return this document and all copies in your possession promptly to the Corporate Executive Board.

Legal Caveat

The Audit Committee Leadership Forum has worked to ensure the accuracy of the information it provides to its readers. This report relies upon data obtained from many sources, however, and the Audit Committee Leadership Forum cannot guarantee the accuracy of the information or its analysis in all cases. Further, the Audit Committee Leadership Forum is not engaged in rendering legal, accounting, or other professional services. Its reports should not be construed as professional advice on any particular set of facts or circumstances. Readers requiring such services are advised to consult an appropriate professional. Neither the Corporate Executive Board nor its programs is responsible for any claims or losses that may arise from (a) any errors or omissions in their reports, whether caused by the Corporate Executive Board or its sources, or (b) reliance upon any recommendation made by the Audit Committee Leadership Forum.

ACC's 2010 Annual Meeting Be the Solution.

OUT- 80-DAY ISSUER NAME AND DATE 14a-8(x) TIMING ACTION SHAREHOLDER SOUGHT/REASON FOR NO-ACTION/REASON FOR DENIAL APPEAL OUTCOME COME WAIVER The Procter & Gamble Company, August 4, 2010 + i10 SUBSTANTIALLY IMPLEMENTED Hewle Packard Company, July 28, 2010 + 14d News Corporaon, July 27, 2010 - b,f EXEC COMP General Mills, Inc., July 2, 2010 + i7 LIMIT SODIUM FOR FLAVOR Smithfield Foods, Inc., July 1, 2010 - b,f NO REQUEST FOR PROOF OF B/0 Smithfield Foods, Inc., June 24, 2010 - b,f ENVIRONMENTAL (GREENHOUSE EMISSIONS) Great Plains Energy Incorporated, June 17, 2010 + b 14d Del Monte Foods Company, June 3, 2010 + i9 BOD ACTION (CONFLICTS WITH CO. PROPOSAL) Symantec Corporaon, June 3, 2010 + i10 SUBSTANTIALLY IMPLEMENTED Medtronic, Inc., May 17, 2010 W Medtronic, Inc., May 13, 2010 W Merck & Co., Inc., May 4, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS + PetSmart, Inc., April 27, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS + Devon Energy Corporaon, April 20, 2010 - b,f 80d CO. DIDN'T TIMELY OBJECT - SUPERVALU INC., April 20, 2010 + i9 CONFLICTS WITH CO. PROPOSAL CB Richard Ellis Group, Inc., April 15, 2010 + i7 ORD. BUS. OPS (EXT. REPT RE ANNUAL BUDGET) - Chesapeake Energy Corporaon, April 13, 2010 - i3, i7, i10 ENVIRONMENTAL (NOT MATERIALLY FALSE) Abercrombie & Fitch Co., April 12, 2010 - d,i7,i10 SIGNIFICANT POLICY (HUMAN RIGHTS) The Kroger Co., April 12, 2010 - i3,i10 NOT SUBST. IMPLEMENTED ('C DOESN'T COMPARE FAVORABLY) PetSmart, Inc., April 12, 2010 + i3 VAGUE AND INDEFINITE (BAR ANIMAL PURCH FROM VIO OF "THE LAW") BioSpecifics Technologies Corp., April 5, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS + Celgene Corporaon, April 5, 2010 + i10 SUBSTANTIALLY IMPLEMENTED - Mentor Graphics Corporaon, April 5, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS - Altria Group, Inc., April 2, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS (SENT TO EMAIL ADD OF FORMER SEC.) + Altria Group, Inc., April 20, 2010 X - Chesapeake Energy Corporaon, April 2, 2010 - i3,i7 ENVIRONMENTAL (SUSTAINABILITY REPT) Staples, Inc., April 2, 2010 - b,f INTRODUCING BROKER LTR OKAY AS STTMT OF RECORD HOLDER Yahoo! Inc., April 2, 2010 + f 14d Chevron Corporaon, April 1, 2010 W HUMAN RIGHTS Great Plains Energy Incorporated, April 1, 2010 + e2 120 REC'D AFTER DEADLINE FOR PROPOSALS + Caterpillar Inc., March 31, 2010 - b,f CUSTODIAN LTR OKAY AS STTMT OF RECORD HOLDER DaVita Inc., March 31, 2010 - i3 NOT VAGUE OR INDEFINITE (ALLOW SHLDERS TO ACT ON WRITTEN CONSENT) InterDigital, Inc., March 31, 2010 + i10 CONFLICTS WITH CO. PROPOSAL Raytheon Company, March 31, 2010 - i3 NOT VAGUE OR INDEFINITE (ALLOW SHLDERS TO ACT ON WRITTEN CONSENT) Target Corporaon, March 31, 2010 + i7 ORD. BUS OPS. (RE CHARITABLE CONTRIBUTIONS TO SPECIFIC ORGANIZATIONS GEN EXCL.) The Kroger Co., March 31, 2010 + i12ii SIMILAR TO PREVIOUS LOSING PROPOSALS Wal-Mart Stores - i5,i7 SIGNIFICANT POLICY (HUMANE TREATMENT); SIGNIFICANTLY RELATED Caterpillar Inc., March 30, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (CHANGING SUPER MAJORITY REQ'TS) Wal-Mart Stores, Inc., March 30, 2010 + i10 SUBSTANTIALLY IMPLEMENTED Wal-Mart Stores, Inc., March 30, 2010 + i7 ORD. BUS. OPS (SALE OF PARTICULAR PRODUCTS GENERALLY EXCLUDABLE) Omnicom Group Inc., March 29, 2010 - b,f,i2,i3,i6 CHANGING SUPER MAJORITY REQ'TS NOT VIO OF STATE LAW,FAL&MSLD,BEYOND BOD Raytheon Company, March 29, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (SP. MTING CAN BE CALLED BY % OF SHLDERS) Wal-Mart Stores, Inc., March 29, 2010 - i7 NOT MICROMGMT (REPT RE POLITICAL ACTIVITIES) Ultra Petroleum Corp., March 26, 2010 - i7 NOT MICROMGMT (REPT RE ENVIRONMENTAL IMPACTS) Union Pacific Corporaon, March 26, 2010 - b,f 80d CO. DIDN'T TIMELY OBJECT (SIMPLE MAJ. VOTING) - Wal-Mart Stores, Inc., March 26, 2010 + i7 ORD. BUS. OPS (SALE OF PARTICULAR PRODUCTS AND SERVICES GENERALLY EXCLUDABLE) Wal-Mart Stores, Inc., March 26, 2010 + e2 120 REC'D AFTER DEADLINE FOR PROPOSALS Wal-Mart Stores, Inc., March 26, 2010 + e2 120 REC'D AFTER DEADLINE FOR PROPOSALS The Goldman Sachs Group, Inc., March 25, 2010 + i6 BEYOND POWER OF BOD TO IMPLEMENT BASED ON CRITERIA IN PROPOSAL - Omnicom Group Inc., March 25, 2010 - i3 NOT VAGUE OR INDEFINITE (REQ SHLDER OK FOR DEATH BENEFIT POLICY) Omnicom Group Inc., March 24, 2010 + i6 BEYOND POWER OF BOD TO AMEND BLAWS (ONLY SHLDERS CAN) Yahoo! Inc., March 24, 2010 W

R.R. Donnelley & Sons Company, March 23, 2010 + NO ACTION LETTER CANNOT BE RETRIEVED. R.R. Donnelley & Sons Company, April 5, 2010 X - Streamline Health Soluons, Inc., March 23, 2010 + c MORE THAN ONE PROPOSAL (RE #OF DIR., DIR. INDEPENDENCE, VOTING THRESHOLD) Amazon.com, Inc., March 22, 2010 - i3 NOT VAGUE OR INDEFINITE (ALLOW 10% OF SHLDERS TO CALL SPECIAL MTING) Amazon.com, Inc., April 7, 2010 GRANTED RECONSIDERATION 'C VAGUE WHAT "RIGHTS" PROPOSAL SEEKS TO REGULATE X + CoBiz Financial Inc., March 22, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (ADVISORY VOTE ON EXEC COMP) - Connental Airlines, Inc., March 22, 2010 W Lowe's Companies, Inc., March 22, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (SP. MTING CAN BE CALLED BY % OF SHLDERS) NiSource, Inc., March 22, 2010 + i1,i2,i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 3 YRS AFTER TERM) Exxon Mobil Corporaon, March 19, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (MAJ OF SHLDERS TO VOTE BY WRITTEN CONSENT) Exxon Mobil Corporaon, March 19, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PROPOSAL TO BE INCLUDED IN PROXY JPMorgan Chase & Co., March 19, 2010 - i3, i7 NOT VAGUE AND INDEFINITE; SIGNIFICANT POLICY ISSUE (DERIVATIVES & SYSTEMIC RK) Xcel Energy Inc., March 19, 2010 - i3 NOT MATERIALLY FALSE AND MISLEADING (ANNUAL ADVISORY SAY ON PAY)

Comcast Corporaon, March 18, 2010 + i7 ORD. BUS. OPS (ADOPT POLICY TO PROMOTE FREE AND OPEN INTERNET)/NOT SIGNIFICANT SOCIAL POLICY Ensco Internaonal plc, March 18, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (CHG SUPER MAJORITY OF SHLDERS TO VOTE TO SIMPLE MAJORITY) Lowe's Companies, Inc., March 18, 2010 + i7 ORD. BUS. OPS (RE MANNER IN WHICH SELL PARTICULAR PRODUCTS GEN EXCLUDABLE) Northrop Grumman Corporaon, March 18, 2010 + i7 ORD. BUS. OPS (RE PROCEDURES TO TERMINATE EMPLOYEES GEN EXCLUDABLE) Comcast Corporaon, March 17, 2010 + i2, i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 2 YRS AFTER TERM) King Pharmaceucals, Inc., March 17, 2010 + i10 PROPOSAL ALREADY REQ'D UNDER STATE LAW Marrio Internaonal, Inc., March 17, 2010 + i7 ORD. BUS. OPS (USE FLOW CONTROL SHOWERHEADS) --MICROMANAGES Marrio Internaonal, Inc., April 19, 2010 X - Pulte Homes, Inc., March 17, 2010 - i11 NOT SUBSTANTIALLY DUPLICATIVE OF 2ND SHLDER'S PROPOSAL (RETAIN EXEC COMP) Safeway Inc., March 17, 2010 - 8c,i3,i6,i10 ONLY 1 PROPOSAL; NOT VAGUE AND INDEFINITE AND CO. CAN ACT; NOT IMPLEMTED JPMorgan Chase & Co., March 16, 2010 + i7 ORD. BUS. OPS (ADOPT POLICY TO STOP ISSUING REFUND ANTICIPATION LOANS) Sprint Nextel Corporaon, March 16, 2010 + i7 ORD. BUS. OPS (CAN EXCLUDE PROPS RE ADHERENCE TO ETHICS PRACTICES AND CONDUCT COMPLIANCE PROGS. Sprint Nextel Corporaon, April 20, 2010 X - Ford Motor Company, March 12, 2010 - i3 NOT VAGUE AND INDEFINITE (RE NOT TO FUND PROJ SOLELY RE CARBON DIOX REDUCTION) Goldman Sachs Group, Inc., March 12, 2010 + i7 ORD. BUS OPS (RE GENERAL EMPLOYEE COMPENSATION MATTERS GENERALLY EXCLUDABLE) The Home Depot, Inc., March 12, 2010 + i7 ORD. BUS OPS. ( RE SALE OF PARTICULAR PRODUCTS GENERALLY EXCLUDABLE) Intel Corporaon, March 12, 2010 W ORD. BUS OPS. RE ASSESS AND PROHIBIT LOANS FOR MOUNTAIN TOP REMOVAL COAL MINING OF CLIENTS (RE JPMorgan Chase & Co., March 12, 2010 + i7 CUSTOMER RELATIONS/SALE OF PRODS GENERALLY EXCLUDABLE) Marrio Internaonal, Inc., March 12, 2010 + i8 CAN EXCLUDE PROPS RE Q OF BUS JDGMT OF BD MEMBER UP FOR REELECTION Medco Health Soluons, Inc., March 12, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS + Mylan, Inc., March 12, 2010 + i2, i6 2 PROPOSALS:CURABLE DEFECT REQ. MAJ OF EXISTING DIR BE INDEPENDENT; CHAIR BE INDEPENDENT-BEYOND BOD; (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 2 YRS AFTER TERM) LIMITED TO 1 PROPOSAL PER MTING IF CO FILES STTMT OF REASONS TO OMIT SHLDER SUBMITS 2 Noble Romans, Inc., March 12, 2010 + i6, 8c PROPOSAL Sprint Nextel Corporaon, March 12, 2010 + i7 ORD. BUS OPS. (ADOPT POLICY TO PROMOTE OPEN INTERNET-NOT SIGN POLICY ISSUE) Ultra Petroleum Corp., March 12, 2010 W Internaonal Paper Company, March 11, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (10% V. 20% SHLDER VOTE NEC TO CALL SP SHLDER MTING The Goldman Sachs Group, Inc., March 11, 2010 - i3 NOT FALSE OR MISLEADING (REVIEW EXEC COMP POLICIES AND REPORT) InterDigital, Inc., March 11, 2010 W NOT BEYOND BOD TO "INITIATE THE APPROPRIATE PROCESS" TO AMEND CHARTER DOCS TO ALLOW Omnicom Group Inc., March 11, 2010 - 8b,8f,i6 NOMINEES TO BE ELECTED BY MAJ OF VOTES CAST PG&E Corporaon, March 11, 2010 + 8c 2 PROPOSALS (LICENSE RENEWAL DISTINCT FROM PROP TO MITIGATE RISKS & PRODUCTION LEVELS UAL Corporaon, March 11, 2010 + 8f 1yr hold DIDN'T SATISFY THRESHOLD OWNERSHIP REQ'T FOR 1 YR. PG&E Corporaon, March 10, 2010 + i10 SUBSTANTIALLY IMPLEMENTED 'C CO'S GUIDELINES COMPARE FAVORABLY WITH PROP The Western Union Company, March 10, 2010 + 8f 14d The Western Union Company, March 19, 2010 X - Central Federal Corporaon, March 8, 2010 + i7 ORD. BUS OPS. (RE EXPLORE ALTS TO MAX VALUE IN EXTRA ORD AND ORD DEALS GEN EXCL.) Comcast Corporaon, March 9, 2010 W CVS Caremark Corporaon, March 9, 2010 + i2 CONFLICT WITH STATE LAW AND COI (REQUIRE CHMN TO BE INDEPENDENT DIR.) The Goldman Sachs Group, Inc., March 9, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP TO BE INCLUDED Virtual Radiologic Corporaon, March 9, 2010 - 8c NOT SUBMITTED ON BEHALF OF ANOTHER Alaska Air Group, Inc., March 8, 2010 + i7 ORD. BUS OPS. (RE DECISIONS RELATING TO VENDOR RELATIONSHIPS GEN EXCLUDABLE)

Goldman Sachs Group, Inc., March 8, 2010 + i7 ORD. BUS OPS. (RE GENERAL EMPLOYEE COMPENSATION MATTERS GEN. EXCLUDABLE) Intel Corporaon, March 8, 2010 + 8f 500words PERCENT SYMBOL AND DOLLAR SIGN COUNTS AS A SEPARATE WORD. JPMorgan Chase & Co., March 8, 2010 W Comcast Corporaon, March 5, 2010 - i3 NOT VAGUE OR INDEFINITE (AMEND COI TO REQUIRE INDEPEND DIR TO SERVE AS CHMN) JPMorgan Chase & Co., March 5, 2010 + i3 VAGUE AND INDEFINITE (RE CONTRIBUTIONS USED FOR "GRASSROOTS LOBBYING COMMUNICATIONS") JPMorgan Chase & Co., March 26, 2010 X - JPMorgan Chase & Co., March 5, 2010 + i7 ORD BUS OPS. (RE SELECTION & MGMT OF ENGAGEMENT OF INDEP. AUDITORS GEN EXCL.) JPMorgan Chase & Co., March 5, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP TO BE INCLUDED NBT Bancorp Inc., March 5, 2010 + i10 SUBSTANTIALLY DUPLICATIVE OF CO.-SPONSORED AMENDMENT FOR ANNUAL DIR. ELECTION Sempra Energy, March 5, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (CHG SUPER MAJORITY REQTS TO SIMPLE MAJORITY VOTING REQTS) Union Paciﬁc Corporaon, March 5, 2010 + 8f 14d Yum! Brands, Inc., March 5, 2010 + i7 ORD BUS OPS. (RE LEGAL COMPLIANCE PROGRAM-VERIFY SSN/E-VERIFY GENERALLY EXCLUDABLE) Casade Financial Corporaon, March 4, 2010 + i7 CURABLE DEFECT (RE SEVERANCE PYMTS TO ALL OR ONLY SR. EXEC OFFICERS) Casade Financial Corporaon, March 4, 2010 + i3 VAGUE AND INDEFINITE (RE ELIMINATE "NON-ESSENTIAL EXPENDITURES"…) Freeport-McMoRan Copper & Gold Inc., March 4, 2010 W IDACORP Inc., March 4, 2010 + 8f 14d Sprint Nextel Corporaon, March 4, 2010 - i2 NOT VIO. OF STATE LAW (PROP SEEKS ACTION "TO EXTENT PERMITTED BY LAW") Wells Fargo & Company, March 4, 2010 + i7 ORD BUS OPS. (RE GENERAL EMPLOYEE COMP (EVEN IF LTD TO TOP 100) GEN EXCL.) XTO Energy Inc., March 4, 2010 + i1 VIO. OF STATE LAW ('C ADVISORY VOTE RE COMP NOT PROPER AT THE SPECIAL MTING) - Bank of America Corporaon, March 3, 2010 - i2, i3, i6 PROP TO ALLOW 10% OF C/S TO CALL SPECIAL MEETINGS) - The Allstate Corporaon, March 3, 2010 W AT&T Inc., March 2, 2010 - i3 NOT V&INDEF (RE EXCLUDING NON-CASH PENSION CREDITS FROM PERFORM AWARD FORMULA) - Bank of America Corporaon, March 2, 2010 - i10 SUBSTANTIALLY IMPLEMENTED (RE INITIATE PROCESS TO ADOPT AND DISCLOSE SUCCESSION PLANNING POLICY) Verizon Communicaons, Inc., March 2, 2010 + i7 ORD. BUS OPS. (RE POLICY ON NET NEUTRALITY) NOT SIGNIFICANT SOCIAL POLICY Verizon Communicaons Inc., March 12, 2010 X - Allegheny Technologies Incorporated, March 1, 2010 + i6 NOT W/I POWER OF BOD TO ENSURE DIR INDEPENDENCE "AT ALL TIMES" & NO CURE IF VIO) AT&T Inc., March 1, 2010 + i7 ORD. BUS OPS. (RE POLICY ON NET NEUTRALITY) NOT SIGNIFICANT SOCIAL POLICY AT&T Inc., March 12, 2010 X - Bank of America Corporaon, March 1, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS + Ford Motor Company, March 1, 2010 + i7 ORD. BUS OPS. (RE METHOD TO DISTRIBUTE OR PRESENT INFO TO SHLDERS GEN EXCL.) Genzyme Corporaon, March 1, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 40% V. 10% TO CALL SPECIAL MTING) Pinnacle West Capital Corporaon, March 1, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) ORD BUS OPS. (RE COMP TO EES GENERALLY (TOP 100) NOT SR. EXEC O&D ONLY)+ DOES NOT FOCUS ON Bank of America Corporaon, February 26, 2010 + i7 RELATIONSHIP BETWEEN COMP PRACTICES AND EXCESSIVE RISK TAKING. EMC Corporaon, February 26, 2010 + 8f 14d EMC Corporaon, March 10, 2010 X - Exelon Corporaon, February 26, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (RE REPT RE POLITICAL CONTRIBUTIONS) PepsiCo, Inc., February 26, 2010 - i3, i7 NOT F&MLEADING NOR ORD. BUS OPS.( RE REPT RE GENERAL POLITICAL ADVOCACY ACTIVITIES NOT MICROMGING) Cascade Financial Corporaon, February 25, 2010 + i7 ORD. BUS OPS. (PROP RE GENERAL EMPLOYEE COMP (NOT SR. EXEC O&D) GEN EXCL) CVS Caremark Corporaon, February 25, 2010 + i7 ORD. BUS OPS. (PROP RE SALE OF PARTICULAR PRODS GEN EXCLUDABLE) The First Bancorp, Inc., February 25, 2010 + i1 CURABLE DEFECT (RE RECAST AS REQUEST TO BOD INSTEAD OF DEMAND FOR REDUCTION IN # OF PREF. SH) - ORD BUS OPS. (RE COMP TO EES GENERALLY (TOP 100) NOT SR. EXEC O&D ONLY)+ DOES NOT FOCUS ON JPMorgan Chase & Co., February 25, 2010 + i7 RELATIONSHIP BETWEEN COMP PRACTICES AND EXCESSIVE RISK TAKING. Liz Claiborne, Inc., February 25, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 35% V. 10% TO CALL SPECIAL MTING) The Allstate Corporaon, February 24, 2010 - i3 NOT V&INDEF OR FALSE&M/LEADING(RE ALLOW MAJ OR SHLDERS VOTE ON WRITTEN CONSENT) CURABLE DEFECT (RECAST AS REQUEST TO BOD INSTEAD OF DEMAND FOR REPT WHICH IS IMPROPER Bank of America Corporaon, February 24, 2010 + i1 SUBJ FOR SHLDER ACTION UNDER STATE LAW ORD. BUS OPS. RE ASSESS AND PROHIBIT LOANS FOR MOUNTAIN TOP REMOVAL COAL MINING OF CLIENTS (RE Bank of America Corporaon, February 24, 2010 + i7 CUSTOMER RELATIONS/SALE OF PRODS GENERALLY EXCLUDABLE) The McGraw-Hill Companies, Inc., February 24, 2010 - i3, i9 NOT V&INDEF OR FALSE&M/LEADING(RE ALLOW MAJ OR SHLDERS VOTE ON WRITTEN CONSENT) The McGraw-Hill Companies, Inc., March 17, 2010 X - PepsiCo, Inc., February 24, 2010 + i7 ORD. BUS OPS. PROP RE CHARITABLE CONTRIBS DIRECTED TO SPEC ORGANS GEN EXCLUDABLE) Pulte Homes, Inc., February 24, 2010 - i3 NOT V&INDEF (RE AFTER CURRENT EE Ks EXPIRE REQUIRE INDEP DIR. TO SERVE AS CHRMN) NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN Sprint Nextel Corporaon, February 24, 2010 - i3 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. AT&T Inc., February 23, 2010 - i3 NOT V&INDEF (RE ADVISORY VOTE RE OK OF NAMED EXEC OFFICERS COMP) Cigroup Inc., February 23, 2010 - i7 SIGNIFICANT POLICY ISSUE (POLICIES RE COLLATERALIZATION OF DERIVATES & SYS RISK)

PSB Group, Inc., February 23, 2010 + 8c ONE PROPOSAL LIMIT (APPLIES COLLECTIVELY TO EVERYONE WITH AN INTEREST IN SAME STK) Allergan, Inc., February 22, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (CHG SUPER MAJORITY REQTS TO SIMPLE MAJORITY VOTING REQTS) Bank of America Corporaon, February 22, 2010 + i3 VAGUE AND INDEFINITE (RE CREATING COMM ON "US ECONOMIC SECURITY") NOT V&INDEF (PROP RE REDUCING SALARY 25% FOR ANYONE >$150K UNTIL TARP REPAID AND Cascade Financial Corporaon, February 22, 2010 - i3, i9 C/SHLDERS DIVIDENDS RESTORED)-NOT LTD TO SR. EXEC OFFICERS ORD. BUS OPS. (FREEZE SALARIES OF STAFF >$100K UNTIL TARP REPD & DIV. RESTORED)-NOT LTD TO Cascade Financial Corporaon, February 22, 2010 + i7 SR. EXEC OFFICERS NOT V&INDEF, ORD. BUS OPS, ETC. (PROHIBIT BONUSES TO EXEC. OFFICERS UNTIL TARP REPD AND DIV Cascade Financial Corporaon, February 22, 2010 - i3, i7, i10 RESTORED) Cigroup Inc., February 22, 2010 + i3 VAGUE & INDEF (RE CREATE BD COMM ON "US ECONOMIC SECURITY") Comcast Corporaon, February 22, 2010 + i7 ORD. BUS OPS. (ELIM. COMP >$500K FOR ANYONE IN MGMT)-NOT LTD TO SR. EXEC OFFICERS Comcast Corporaon, March 23, 2010 X - Connental Airlines, Inc., February 22, 2010 + 8b, 8f 14d Internaonal Business Machines Corporaon, February 22, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS + Internaonal Business Machines Corporaon, March 24, 2010 X - Johnson & Johnson, February 22, 2010 + i7 ORD. BUS OPS. (RE CK SSN/E-VERIFY) PROP RE LEGAL COMPLIANCE PROG GEN EXCLUDABLE Merck & Co., Inc., February 22, 2010 + 8b, 8f 14d NOT FEASIBLE FOR BD TO ENSURE CONTINUOUS COMLIANCE AND NO CURE MECHANISM (PROHIBIT Time Warner, Inc., February 22, 2010 + i6 CURRENT OR FORMER CEO'S ON COMP COMM.) Verizon Communicaons Inc., February 22, 2010 - i3, i10 NOT V&INDEF, ETC. (RE SAY ON BONUS, AWARDS, DEATH BENEFITS OF SR. EXEC. OFFICERS) American Express Company, February 19, 2010 + i2, i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 2 YRS AFTER TERM) The Charles Schwab Corporaon, February 19, 2010 + i9 CONFLICTS WITH CO. PROP RE EXEC. BONUS PLAN FOR SR. EXEC. OFFICERS Gilead Sciences, Inc., February 19, 2010 - i1,i2, i3,i6 RE REQUEST TO BOD TO TAKE STEPS TO CHG SUPER MAJ. TO SIMPLE MAJ IN CHARTER DOCS. Henry Schein, Inc., February 19, 2010 W CURABLE DEFECT (NOT FEASIBLE FOR BD TO ENSURE CONTINUOUS COMLIANCE AND NO CURE Honeywell Internaonal Inc., February 18, 2010 + i6 MECHANISM (PROHIBIT CURRENT OR FORMER CEO'S ON COMP COMM.) Merck & Co., Inc., February 19, 2010 + 8b, 8f 14d Merck & Co., Inc., March 29, 2010 X - Merck & Co., Inc., February 19, 2010 + 8b, 8f 14d Merck & Co., Inc., March 29, 2010 X - Verizon Communicaons Inc., February 19, 2010 + i2, i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 2 YRS AFTER TERM) Wal-Mart Stores, Inc., February 19, 2010 W Wal-Mart Stores, Inc., February 19, 2010 W Wells Fargo & Company, February 19, 2010 - i7 NOT ORD. BUS OPS. (PROP REQUESTS LIST ON WEBSITE OF CONTRIBUTIONS >$5K) Range Resources Corporaon, February 18, 2010 W NOT FEASIBLE FOR BD TO ENSURE CONTINUOUS COMLIANCE AND NO CURE MECHANISM (PROHIBIT Verizon Communicaons Inc., February 18, 2010 + i6 CURRENT OR FORMER CEO'S ON COMP COMM.) Questar Corporaon, February 17, 2010 W ORD. BUS OPS. (REP'T RE POLICY OPTIONS RE BOTTLED WATER)-CUST RELATIONS & PROD. QUALITY GEN The Coca-Cola Company, February 17, 2010 + i7 EXCLUDABLE The Coca-Cola Company, March 3, 2010 SEC CONSIDERS ISSUES RE BOTTLED WATER ORD BUS, NOT SIGNIFICANT SOCIAL POLICY ISSUE X - AT&T Inc., February 16, 2010 + i3 VAGUE & INDEFINITE (RE REP'T ON CONTRIBUTIONS FOR "GRASSROOTS LOBBYING COMMUNICATIONS" AT&T Inc., March 2, 2010 X - Bank of America Corporaon, February 16, 2010 - i2, i3, i6 NOT V&INDEF, ETC (RE PROP TO ADOPT A CLAWBACK POLICY FROM PRIOR 5 YRS.) E.I. du Pont de Nemours and Company, February 16, 2010 + h3 EXCLUDABLE 'C PROPONENT W/O GD CAUSE FAILED TO APPEAR & PRESENT PROP AT EARLIER AM) NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN E. I. DuPont de Nemours and Company, February 16, 2010 - i3 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. E.I. du Pont de Nemours and Company, March 16, 2010 X - NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN Exxon Mobil Corporaon, February 16, 2010 - i3 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. Exxon Mobil Corporaon, February 16, 2010 + i7 ORD. BUS OPS. (PROP TO LIMIT COMP >$500K TO "MGMT" NOT LTD TO SR. EXEC. OFFICERS) Exxon Mobil Corporaon, March 23, 2010 X - Merck & Co., Inc., February 16, 2010 + 8b, 8f 14d NYSE Euronext, February 16, 2010 W Allegheny Energy, Inc., February 12, 2010 - i3 V&INDEFINITE (PROP RE CHMN BE INDEPENDENT AND NOT HAVE SERVED AS CEO) AMR Corporaon, February 12, 2010 + 8b, 8f 14d FAILED TO RESPOND TO REQUEST TO PROVE 8b OWNERHSIP AMR Corporaon, February 12, 2010 + 8b, 8f 14d

AT&T Inc., February 12, 2010 +/- i2/8c,i3, i10 2 PROP 1-ALLOW SHLDER ACTS ON WRITTEN CONSENT-VIO STATE LAW; 2-10% SHLDERS CAN CALL SPEC. MTING. Exxon Mobil Corporaon, February 12, 2010 W The Goldman Sachs Group, Inc., February 12, 2010 W CO. TO INCLUDE PROPOSAL IN PROXY. The Goldman Sachs Group, Inc., February 12, 2010 W Halliburton Company, February 12, 2010 - i10 NOT SUBSTANTIALLY IMPLEMENTED (PROP TO ALLOW 10% TO CALL SPEC MTING V. 25% REQ'D IN BYLAWS Halliburton Company, March 19, 2010 X - Halliburton Company, February 12, 2010 - e2 PROPONENT ATTEMPTED TIMELY DELIVERY/RESPONSE Halliburton Company, March 19, 2010 X - Pioneer Natural Resources Company, February 12, 2010 + 8b, 8f 14d BANKER CONFIRMATION SUFFICIENT & NOT SUBSTANTIALLY IMPLEMENTED(RE INITIATE PROCESS TO ADOPT Verizon Communicaons Inc., February 12, 2010 - 8b, 8f, i10 AND DISCLOSE SUCCESSION PLANNING POLICY) Xcel Energy Inc., February 12, 2010 W The Boeing Company, February 6, 2010 - 8c 3 PROPOSALS (1-COMPENSATION; 2- SPECIAL MTINGS; 3-INDEP BOD CHRMN) Chevron Corporaon, February 6, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 15% V. 10% TO CALL SPECIAL MTING) Chevron Corporaon, March 1, 2010 X - The Allstate Corporaon, February 5, 2010 - i3, i7 NOT V&INDEF, MICROMANAGING (PROP RE REVIEW & REPT ON EXEC COMP POLICIES) VAGUE & INDEFINITE (CREATE COMM TO REVIEW POLICIES THAT "WILL FOLLOW THE UNIVERSAL The Boeing Company, February 5, 2010 + i3 DECLARATION OF HUMAN RIGHTS" ORD. BUS OPS. (ADOPT POLICY TO DISTRIBUTE RESTTMTS IN SAME MANNER AS ORIGLLY DIST)-PROPOSALS RE Occidental Petroleum Corporaon, February 5, 2010 + i7 METHOD TO DISTRIB FIN OR PRESENT INFO GEN EXCLUDABLE State Bancorp, Inc., February 5, 2010 + 8b, 8f 14d DID NOT RESPOND TO REQUEST Great Plains Energy Incorporated, February 4, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS + JPMorgan Chase & Co., February 4, 2010 W NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN The Boeing Company, February 3, 2010 - i3 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. NOT ORD. BUS OPS. (RE ENVIRONMENTAL IMPACT REPT NOT MICROMGMT)I.E., SUBSTANTIAL POLICY EOG Resources, Inc., February 3, 2010 - i7 ISSUE Goldman Sachs Group, February 3, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) Goldman Sachs Group, Inc., February 22, 2010 X - Intel Corporaon, February 3, 2010 + 8b, 8f 14d Mael, Inc., February 3, 2010 + i10 NOT SUBSTANTIALLY IMPLEMENTED (REQUEST BOD UNDERTAKE STEPS TO ALLOW SHLDERS VOTE ON WRITTEN CONSENT) State Street Corporaon, February 3, 2010 + h3 EXCLUDABLE 'C PROPONENT W/O GD CAUSE FAILED TO APPEAR & PRESENT PROP AT EARLIER AM) American Express Company, February 2, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS + Energen Corporaon, February 2, 2010 W PG&E Corporaon, February 2, 2010 + i10 SUBSTANTIALLY IMPLEMENTED BY STATE LAW (REQUEST BOD UNDERTAKE STEPS TO ALLOW SHLDERS VOTE ON WRITTEN CONSENT) Alpha Natural Resources, Inc., February 1, 2010 W Bank of America Corporaon, February 1, 2010 - i3 NOT V&INDEF (SEEKS ANNUAL REPT OF "NON DEDUCTIBLE" AMTS CO PAYS TO SR. EXEC OFFICERS) The Boeing Company, February 1, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP THAT CO. WILL INCLUDE E.I. du Pont de Nemours and Company, February 1, 2010 + 8b, 8f 14d NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN Bank of America, January 29, 2010 - i3, i6 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. Bank of America Corporaon, March 8, 2010 X - CURABLE DEFECT(REPT ON REVIEW OF CODE OF CONDUCT RE ETHICAL CRITERIA FOR MILITARY The Boeing Company, January 29, 2010 + i1 CONTRACTS)-REVISE AS REQUEST OR RECOMMENDATION TO BOD DOES NOT LACK AUTHORITY TO CHANGE BYLAW (REQUESTS BOD TAKE STEPS TO ELIMINATE CLASSES OF Cleco Corporaon, January 29, 2010 - i6 DIR AND ELECT ANNUALLY) Comcast Corporaon, January 29, 2010 + 8b, 8f 14d DID NOT RESPOND TO REQUEST Merck & Co., Inc., January 29, 2010 + i2 WOULD VIO STATE LAW (PROP TO PERMIT MAJORITY VOTE ON WRITTEN CONSENT) Time Warner Inc., January 29, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 15% V. 10% TO CALL SPECIAL MTING) Union Paciﬁc Corporaon, January 29, 2010 + 8b, 8f 14d Verizon Communicaons Inc., January 28, 2010 - i10 NOT SUBSTANTIALLY IMPLEMENTED (PROP TO ALLOW 10% TO CALL SPEC MTING V. 25% ALREADY REQ'D IN BYLAWS) The Boeing Company, January 27, 2010 - i2, i3, i6 PROP TO ALLOW 10% OF C/S TO CALL SPECIAL MEETINGS) Bristol-Myers Squibb Company, January 28, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) NOT ORD. BUS OPS. (RE ENVIRONMENTAL IMPACT REPT RE FRACTURING NOT MICROMGMT)I.E., Cabot Oil & Gas Corporaon, January 28, 2010 - i7 SUBSTANTIAL POLICY ISSUE Express Scripts Inc., January 28, 2010 + i10 SUBSTANTIALLY IMPLEMENTED(CHG SUPER MAJORITY REQTS TO SIMPLE MAJORITY VOTING REQTS) Internaonal Paper Company, January 28, 2010 + 8b, 8f 14d

Portland General Electric Company, January 28, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Range Resources Corporaon, January 28, 2010 W SUBSTANTIALLY SIMILAR TO PREVIOUS INCLUDED PROPOSALS (ENCOURAGING TRANSPARENCY RE Abbo Laboratories, January 27, 2010 + i12(ii) ANIMAL USED IN RESEARCH AND TESTING) Cigroup Inc., January 27, 2010 + 8b, 8c, 8f 14d BUT DEFICIENCY NOTICE FROM CITI SENT TO WRONG ADDRESS-PROPONENT GIVEN 7D TO CURE The Dow Chemical Company, January 27, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) Exxon Mobil Corporaon, January 27, 2010 + 8b, 8f 14d General Dynamics Corporaon, January 27, 2010 + 8b, 8f 14d CIGNA Corporaon, January 26, 2010 + 8b, 8f 14d Froner Communicaons Corporaon, January 26, 2010 + 8b, 8f 14d INFEASIBLE FOR BOD TO IMPLEMENT (PROP FOR BOD TO AMEND BYLAWS TO REQ CHMN TO BE INDEP.) Time Warner Inc., January 26, 2010 + i6 NO MECHANISM TO CURE Time Warner Inc., March 23, 2010 X - Aetna Inc., January 25, 2010 + 8b, 8f 14d Froner Communicaons Corporaon, January 25, 2010 + 8b, 8f 14d PROP DID NOT RESPOND TO REQUEST General Electric Company, January 23, 2010 + i10 SUBSTANTIALLY IMPLEMENTED(PROP RE BOD EXPLORE WITH CERTAIN EXEC OFFICERS RENUNICATION OF STK OPTION GRANTS) - Ball Corporaon, January 25, 2010 + i2, i6 VIO. OF STATE LAW (RE REORGANIZE BOD INTO ONE CLASS OF DIR TO BE ANNUALLY ELECTED Ball Corporaon, March 12, 2010 X - Internaonal Business Machines Corporaon, January 22, 2010 + 8b, 8f 14d VAGUE & INDEF (RE LIMIT NUMBER OF CONSECUTIVE ELECTIONS TO ELECT A DIR TO THE BOD)-NOT CLEAR A CEO Cigroup Inc., January 21, 2010 + i3 NOT ON THE BOD WOULD BE SUBJECT TO SAME TERM LIMITS. INFEASIBLE FOR BOD TO IMPLEMENT (PROP FOR BOD TO AMEND BYLAWS TO REQ CHMN TO BE INDEP.) Exxon Mobil Corporaon, January 21, 2010 + i6 NO MECHANISM TO CURE Exxon Mobil Corporaon, March 23, 2010 X - NOT EXCLUDABLE 'C DIDN'T SEND DEFICIENCY NOTICE; NOR 'C SUBSTANTIALLY SIMILAR TO PROPOSALS Halliburton Company, January 21, 2010 - 8e, 8f, h3 WHERE REP DID NOT APPEAR AT AM (PROP RE TO A REPT) Textron Inc., January 21, 2010 + i10 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP THAT CO. WILL INCLUDE NOT V&INDEF (PROP. RE ADOPT POLICY TO ALLOW STK OPTIONS OF SR. EXEC. OFFICERS TO VEST IFF Verizon Communicaons Inc., January 21, 2010 - i3, i9 TOTAL SHLDER RETURN >= PERFORMANCE OF PEERS Yum! Brands, Inc., January 21, 2010 W Central Pacific Financial Corp., January 20, 2010 + 8b, 8f 14d CURABLE DEFECT (PROP WOULD CAUSE BREACH OF EXISTING COMP K'S-7D TO REVISE TO APPLY ONLY Occidental Petroleum Corporaon, January 20, 2010 + i2 TO FUTURE COMP K'S) CAN'T EXCLUDE SHLDER 'C DIDN'T ADDRESS CLAIM THAT PROP'S BROKER PROVIDED VERIFICATION OF Pfizer Inc., January 20, 2010 - 8f, 8b 14d ELIGIBILITY Pfizer Inc., February 22, 2010 RECONSIDERATION GRANTED ON PROOF THAT PROP FAILED TO PROVE ELIGIBILITY IN 14D X + The Charles Schwab Corporaon, January 19, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE PAY FOR PERFORMANCE BASED ON PEERS POLICY) Cigroup Inc., January 19, 2010 + i10 SUBSTIALLY IMPLEMENTED (PROP RE BOD TO ADOPT BYLAW TO REQ INDEP LEAD DIR WHENEVER POSS) Danaher Corporaon, January 19, 2010 + 8d, 8f 500words Dominion Resources, Inc., January 19, 2010 + i9 CONFLICTS WITH CO. PROP (RE CHG CHARTER TO ALLOW SIMPLE INSTEAD OF SUPER MAJ VOTING) Dominion Resources, Inc., March 29, 2010 X - Honeywell Internaonal Inc., January 19, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP THAT CO. WILL INCLUDE SUBSTANTIALLY IMPLEMENTED (ALLOWING SHLDERS TO VOTE ON CHG IN CHARTER TO ALLOW SIMPLE MDU Resources Group, Inc., January 16, 2010 + i10 INSTEAD OF SUPER MAJ VOTING) Brocade Communicaons Systems, Inc., January 15, 2010 W Norfolk Southern Corporaon, January 15, 2010 - i7 NOT ORD BUS OPS. OR MICROMANAGING (ADOPT GOALS TO REDUCE GREENHOUSE EMISSIONS) NOT V&INDEF OR ORD. BUS OPS. (REPT HOW RESPONSIBLY DISCLOSES ENVIRON IMPACTS WHERE IT PPG Industries, Inc., January 15, 2010 - i3, i7 OPERATES) Brocade Communicaons Systems, Inc., January 14, 2010 W Coachmen Industries, Inc., January 14, 2010 + i10 SUBSTANTIALLY IMPLEMENTED ('C SUBJ MATTER CONCLUDED PRIOR TO AM) Mael, Inc., January 14, 2010 + i12(iii) SUBST SAME AS 3 PRIOR PROPS(RE REPT ON WORKING CONDITIONS AT CO. FACILITIES AND ITS VENDORS) Wells Fargo & Company, January 14, 2010 + i13 RE SPECIFIC AMTS (RE COMP AND BENEFITS OF TOP 300 OFFICERS NOT TO CHG UNTIL C/S DIV REPAID) Bank of America Corporaon, January 13, 2010 + i2 WOULD VIO STATE LAW (PROP TO PERMIT MAJORITY VOTE ON WRITTEN CONSENT) Bank of America Corporaon, February 11, 2010 X - Internaonal Business Machines Corporaon, January 13, 2010 + i3 VAGUE & INDEFINITE (PROP RE TAKING IMMEDIATE CORRECTIVE ACTION) Johnson & Johnson, January 13, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS

ORD. BUS OPS. (RE LIMITING ENGMNT OF AUDITORS TO 5 YRS)-PROP RE SELECTION & MGMT OF Masco Corporaon, January 13, 2010 + i7 ENGMNT GEN EXCLUDABLE ORD. BUS OPS. (RE "MAKE EVERY EFFORT TO REPAY" TARP DEBT)-PROP RE MGMT OF COS. ASSETS AND Oak Valley Bancorp, January 13, 2010 + i7 OBLIGATIONS GENERALLY EXCLUDABLE NOT V&INDEF, ORD. BUS OPS. (REQT FOR BOD REPT RE ENVIRON & SOCIAL IMPACT OF CO BUS STRATEGIES TO SunTrust Banks, Inc., January 13, 2010 - i3, i7 ADDRESS CLIMATE CHANGE.)-I.E., SIGNIFICANT SOCIAL POLICY ISSUE NOT V&INDEF (PROP FOR BOD TO INITIATE PROCESS TO AMEND CHARTER DOCS TO ALLOW ANNUAL SunTrust Banks, Inc., January 13, 2010 - i3 ELECT OF DIR) Abbo Laboratories, January 12, 2010 W Entergy Corporaon, January 12, 2010 + h3 EXCLUDABLE 'C PROPONENT W/O GD CAUSE FAILED TO APPEAR & PRESENT PROP AT EARLIER AM) Entergy Corporaon, March 16, 2010 X - Pﬁzer, Inc., January 12, 2010 + 8b, 8f 14d EOG Resources, Inc., January 11, 2010 W EQT Corporaon, January 11, 2010 + 8b, 8f 14d Fluor Corporaon, January 11, 2010 + 8b, 8f 14d Pﬁzer Inc., January 11, 2010 + 8b, 8f 14d INFEASIBLE FOR BOD TO IMPLEMENT (PROP FOR BOD TO ADOPT POLICY TO REQ SPLIT BETW CHMN & + First Mariner Bancorp, January 8, 2010 + i6 CEO) Marathon Oil Corporaon, January 8, 2010 - i1, i2 NOT VIO. OF STATE LAW (PROP SEEKS ADVISORY SAY ON PAY VOTE OF COMP REPT & POLICIES) McDermo Internaonal, Inc., January 8, 2010 W Reynolds American Inc., January 8, 2010 + 8b, 8f 14d Bristol-Myers Squibb Company, January 7, 2010 W CO TO PROVIDE PROP IN PROXY MATERIALS Ganne Co., Inc. , January 7, 2010 + 8b, 8f 14d Google, Inc., January 7, 2010 W ORD. BUS OPS. (RE RESTATE & ENFORCE ETHICAL BEHAVIOR)-PROP RE GEN ADHERENCE TO ETHICAL Internaonal Business Machines Corporaon, January 7, 2010 + i7 COMPLIANCE PRACTICES GENERALLY EXCLUDABLE Internaonal Business Machines Corporaon, February 22, 2010 X - ORD. BUS OPS. (PROP RE TERMINATING ACCEPTANCE OF CERTAIN ID CARDS)-PROP RE CUSTOMER Bank Of America Corporaon, January 6, 2010 + i7 RELATIONS OR SALE OF PARTICULAR SERVICES GENERALLY EXCLUDABLE Eastman Chemical Company, January 6, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) VIO. STATE LAW (PROP REQUESTS BOD TO UNDERTAKE TO ALLOW SHLDERS TO VOTE ON WRITTEN Fortune Brands, Inc., January 6, 2010 + i2 CONSENT) Mael, Inc., January 6, 2010 + i12(i) SUBST SAME AS PRIOR INCLUDED PROPOSAL (PROP TO ELIM COMP >$500K) NiSource, Inc., January 6, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) NiSource Inc., February 22, 2010 X - VAGUE & INDEF (RE REQUIRE CHMN TO BE INDEP DIR, BUT REFERS TO ONE SECTION OF B/LAWS AND SunTrust Banks, Inc., January 6, 2010 + i3 QUOTES FROM ANOTHER SECTION OF BYLAWS) SunTrust Banks, Inc., February 12, 2010 X - Verizon Communicaons Inc., January 6, 2010 + 8b, 8f 14d NOT V&INDEF AND ELIGIBILITY DEMONSTRATED (PROP REQUEST EEO POLICY TO PROHIBIT Verizon Communicaons Inc., January 6, 2010 - 8b, 8f, i3 DISCRIMINATION BASED ON SEXUAL ORIENTATION AND GENDER IDENTITY OR EXPRESSION) CSX Corporaon, January 5, 2010 + e2 120d REC'D AFTER DEADLINE FOR PROPOSALS CVS Caremark Corporaon, January 5, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) CVS CaremarkCorporaon, January 26, 2010 X - AT&T Inc., January 4, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Cigroup Inc., January 4, 2010 + 8b, 8f 14d Honeywell Internaonal Inc., January 4, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 20% V. 10% TO CALL SPECIAL MTING) Honeywell Internaonal Inc., January 26, 2010 X - Internaonal Business Machines Corporaon, January 4, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (PROP REQUESTS PERIODIC REPTS ON "SMARTER PLANET" INITIATIVE) Medco Health Soluons, Inc., January 4, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 40% V. 10% TO CALL SPECIAL MTING) Medco Health Soluons, Inc., January 26, 2010 X - Mylan Inc., January 4, 2010 W Safeway Inc., January 4, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) Safeway, Inc., January 26, 2010 X - Apache Corporaon (no response) APACHE CORP. FILED PER 8(j) AND SUED JOHN CHEVEDDEN TO EXCLUDE THE PROPOSAL

Number of N/A Requests withdrawn ("W") = 35 Number of Appeals for Reconsideraon or Requests to Refer to Full Commission ("X") = 38 Number of N/A Requests Granted ("+") = 198 Appeals Granted ("+") = 2 Percentage of N/A Requests Granted = 74% Percentage of Appeals Granted = 5% Number of N/A Requests Denied ("-") = 70 Appeals Denied ("-") = 36 Percentage of N/A Requests Denied = 26% Percentage of Appeals Denied = 95% Number of N/A Requests in which company was denied waiver of 80-day req't ("-") = 12 Number of N/A Requests in which company was granted a waiver of 80-day req't ("+") = 11

OUT- 80-DAY ISSUER NAME AND DATE 14a-8(x) TIMING ACTION SHAREHOLDER SOUGHT/REASON FOR NO-ACTION/REASON FOR DENIAL APPEAL OUTCOME COME WAIVER Cigroup Inc., January 27, 2010 + 8b, 8c, 8f 14d BUT DEFICIENCY NOTICE FROM CITI SENT TO WRONG ADDRESS-PROPONENT GIVEN 7D TO CURE CAN'T EXCLUDE SHLDER 'C DIDN'T ADDRESS CLAIM THAT PROP'S BROKER PROVIDED VERIFICATION OF Pfizer Inc., January 20, 2010 - 8b, 8f 14d ELIGIBILITY Connental Airlines, Inc., February 22, 2010 + 8b, 8f 14d Merck & Co., Inc., February 22, 2010 + 8b, 8f 14d Merck & Co., Inc., February 19, 2010 + 8b, 8f 14d Merck & Co., Inc., February 19, 2010 + 8b, 8f 14d Merck & Co., Inc., February 16, 2010 + 8b, 8f 14d AMR Corporaon, February 12, 2010 + 8b, 8f 14d FAILED TO RESPOND TO REQUEST TO PROVE 8b OWNERHSIP AMR Corporaon, February 12, 2010 + 8b, 8f 14d Pioneer Natural Resources Company, February 12, 2010 + 8b, 8f 14d State Bancorp, Inc., February 5, 2010 + 8b, 8f 14d DID NOT RESPOND TO REQUEST Intel Corporaon, February 3, 2010 + 8b, 8f 14d E.I. du Pont de Nemours and Company, February 1, 2010 + 8b, 8f 14d + Comcast Corporaon, January 29, 2010 + 8b, 8f 14d DID NOT RESPOND TO REQUEST + Union Pacific Corporaon, January 29, 2010 + 8b, 8f 14d - Internaonal Paper Company, January 28, 2010 + 8b, 8f 14d Exxon Mobil Corporaon, January 27, 2010 + 8b, 8f 14d - General Dynamics Corporaon, January 27, 2010 + 8b, 8f 14d CIGNA Corporaon, January 26, 2010 + 8b, 8f 14d Froner Communicaons Corporaon, January 26, 2010 + 8b, 8f 14d Aetna Inc., January 25, 2010 + 8b, 8f 14d Froner Communicaons Corporaon, January 25, 2010 + 8b, 8f 14d PROP DID NOT RESPOND TO REQUEST + Internaonal Business Machines Corporaon, January 22, 2010 + 8b, 8f 14d - Central Pacific Financial Corp., January 20, 2010 + 8b, 8f 14d - Pfizer, Inc., January 12, 2010 + 8b, 8f 14d + EQT Corporaon, January 11, 2010 + 8b, 8f 14d Fluor Corporaon, January 11, 2010 + 8b, 8f 14d Pfizer Inc., January 11, 2010 + 8b, 8f 14d Reynolds American Inc., January 8, 2010 + 8b, 8f 14d Ganne Co., Inc. , January 7, 2010 + 8b, 8f 14d Verizon Communicaons Inc., January 6, 2010 + 8b, 8f 14d + Cigroup Inc., January 4, 2010 + 8b, 8f 14d Union Pacific Corporaon, March 5, 2010 + 8b, 8f 14d - IDACORP Inc., March 4, 2010 + 8b, 8f 14d EMC Corporaon, February 26, 2010 + 8b, 8f 14d Great Plains Energy Incorporated, June 17, 2010 + 8b, 8f 14d - Yahoo! Inc., April 2, 2010 + 8b, 8f 14d The Western Union Company, March 10, 2010 + 8b, 8f 14d Verizon Communicaons Inc., February 12, 2010 - 8b, 8f, i10 SUBST. IMPLEMENTED (RE INITIATE PROCESS TO ADOPT AND DISCLOSE SUCCESSION PLANNING POLICY) NOT V&INDEF AND ELIGIBILITY DEMONSTRATED (PROP REQUEST EEO POLICY TO PROHIBIT Verizon Communicaons Inc., January 6, 2010 - 8b, 8f, i3 DISCRIMINATION BASED ON SEXUAL ORIENTATION AND GENDER IDENTITY OR EXPRESSION) NOT BEYOND BOD TO "INITIATE THE APPROPRIATE PROCESS" TO AMEND CHARTER DOCS TO ALLOW Omnicom Group Inc., March 11, 2010 - 8b,8f,i6 NOMINEES TO BE ELECTED BY MAJ OF VOTES CAST Virtual Radiologic Corporaon, March 9, 2010 - 8c NOT SUBMITTED ON BEHALF OF ANOTHER The Boeing Company, February 6, 2010 - 8c 3 PROPOSALS (1-COMPENSATION; 2- SPECIAL MTINGS; 3-INDEP BOD CHRMN) PG&E Corporaon, March 11, 2010 + 8c 2 PROPOSALS (LICENSE RENEWAL DISTINCT FROM PROP TO MITIGATE RISKS & PRODUCTION LEVELS PSB Group, Inc., February 23, 2010 + 8c ONE PROPOSAL LIMIT (APPLIES COLLECTIVELY TO EVERYONE WITH AN INTEREST IN SAME STK) Safeway Inc., March 17, 2010 - 8c,i3,i6,i10 ONLY 1 PROPOSAL; NOT VAGUE AND INDEFINITE AND CO. CAN ACT; NOT IMPLEMTED Danaher Corporaon, January 19, 2010 + 8d, 8f 500words NOT EXCLUDABLE 'C DIDN'T SEND DEFICIENCY NOTICE; NOR 'C SUBSTANTIALLY SIMILAR TO PROPOSALS Halliburton Company, January 21, 2010 - 8e, 8f, h3 WHERE REP DID NOT APPEAR AT AM (PROP RE TO A REPT) UAL Corporaon, March 11, 2010 + 8f 1yr hold DIDN'T SATISFY THRESHOLD OWNERSHIP REQ'T FOR 1 YR.

Intel Corporaon, March 8, 2010 + 8f 500words PERCENT SYMBOL AND DOLLAR SIGN COUNTS AS A SEPARATE WORD. News Corporaon, July 27, 2010 - b,f EXEC COMP Smithfield Foods, Inc., July 1, 2010 - b,f NO REQUEST FOR PROOF OF B/0 Smithfield Foods, Inc., June 24, 2010 - b,f ENVIRONMENTAL (GREENHOUSE EMISSIONS) Devon Energy Corporaon, April 20, 2010 - b,f 80d CO. DIDN'T TIMELY OBJECT Staples, Inc., April 2, 2010 - b,f INTRODUCING BROKER LTR OKAY AS STTMT OF RECORD HOLDER Caterpillar Inc., March 31, 2010 - b,f CUSTODIAN LTR OKAY AS STTMT OF RECORD HOLDER Union Pacific Corporaon, March 26, 2010 - b,f 80d CO. DIDN'T TIMELY OBJECT (SIMPLE MAJ. VOTING) Omnicom Group Inc., March 29, 2010 - b,f,i2,i3,i6 CHANGING SUPER MAJORITY REQ'TS NOT VIO OF STATE LAW,FAL&MSLD,BEYOND BOD Streamline Health Soluons, Inc., March 23, 2010 + c MORE THAN ONE PROPOSAL (RE #OF DIR., DIR. INDEPENDENCE, VOTING THRESHOLD) - Abercrombie & Fitch Co., April 12, 2010 - d,i7,i10 SIGNIFICANT POLICY (HUMAN RIGHTS) Halliburton Company, February 12, 2010 - e2 PROPONENT ATTEMPTED TIMELY DELIVERY/RESPONSE Merck & Co., Inc., May 4, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS PetSmart, Inc., April 27, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS BioSpecifics Technologies Corp., April 5, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Mentor Graphics Corporaon, April 5, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Altria Group, Inc., April 2, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS (SENT TO EMAIL ADD OF FORMER SEC.) Great Plains Energy Incorporated, April 1, 2010 + e2 120d REC'D AFTER DEADLINE FOR PROPOSALS Wal-Mart Stores, Inc., March 26, 2010 + e2 120d REC'D AFTER DEADLINE FOR PROPOSALS Wal-Mart Stores, Inc., March 26, 2010 + e2 120d REC'D AFTER DEADLINE FOR PROPOSALS Medco Health Soluons, Inc., March 12, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Bank of America Corporaon, March 1, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Internaonal Business Machines Corporaon, February 22, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Great Plains Energy Incorporated, February 4, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS American Express Company, February 2, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Portland General Electric Company, January 28, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS Johnson & Johnson, January 13, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS CSX Corporaon, January 5, 2010 + e2 120d REC'D AFTER DEADLINE FOR PROPOSALS AT&T Inc., January 4, 2010 + e2 REC'D AFTER DEADLINE FOR PROPOSALS E.I. du Pont de Nemours and Company, February 16, 2010 + h3 EXCLUDABLE 'C PROPONENT W/O GD CAUSE FAILED TO APPEAR & PRESENT PROP AT EARLIER AM) State Street Corporaon, February 3, 2010 + h3 EXCLUDABLE 'C PROPONENT W/O GD CAUSE FAILED TO APPEAR & PRESENT PROP AT EARLIER AM) Entergy Corporaon, January 12, 2010 + h3 EXCLUDABLE 'C PROPONENT W/O GD CAUSE FAILED TO APPEAR & PRESENT PROP AT EARLIER AM) XTO Energy Inc., March 4, 2010 + i1 VIO. OF STATE LAW ('C ADVISORY VOTE RE COMP NOT PROPER AT THE SPECIAL MTING) The First Bancorp, Inc., February 25, 2010 + i1 CURABLE DEFECT (RE RECAST AS REQUEST TO BOD INSTEAD OF DEMAND FOR REDUCTION IN # OF PREF. SH) CURABLE DEFECT (RECAST AS REQUEST TO BOD INSTEAD OF DEMAND FOR REPT WHICH IS IMPROPER Bank of America Corporaon, February 24, 2010 + i1 SUBJ FOR SHLDER ACTION UNDER STATE LAW CURABLE DEFECT(REPT ON REVIEW OF CODE OF CONDUCT RE ETHICAL CRITERIA FOR MILITARY + The Boeing Company, January 29, 2010 + i1 CONTRACTS)-REVISE AS REQUEST OR RECOMMENDATION TO BOD Marathon Oil Corporaon, January 8, 2010 - i1, i2 NOT VIO. OF STATE LAW (PROP SEEKS ADVISORY SAY ON PAY VOTE OF COMP REPT & POLICIES) Gilead Sciences, Inc., February 19, 2010 - i1,i2, i3,i6 RE REQUEST TO BOD TO TAKE STEPS TO CHG SUPER MAJ. TO SIMPLE MAJ IN CHARTER DOCS. NiSource, Inc., March 22, 2010 + i1,i2,i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 3 YRS AFTER TERM) Bank of America Corporaon, March 2, 2010 - i10 SUBSTANTIALLY IMPLEMENTED (RE INITIATE PROCESS TO ADOPT AND DISCLOSE SUCCESSION PLANNING POLICY) Halliburton Company, February 12, 2010 - i10 NOT SUBSTANTIALLY IMPLEMENTED (PROP TO ALLOW 10% TO CALL SPEC MTING V. 25% REQ'D IN BYLAWS Verizon Communicaons Inc., January 28, 2010 - i10 NOT SUBSTANTIALLY IMPLEMENTED (PROP TO ALLOW 10% TO CALL SPEC MTING V. 25% ALREADY REQ'D IN BYLAWS) The Procter & Gamble Company, August 4, 2010 + i10 SUBSTANTIALLY IMPLEMENTED Symantec Corporaon, June 3, 2010 + i10 SUBSTANTIALLY IMPLEMENTED Celgene Corporaon, April 5, 2010 + i10 SUBSTANTIALLY IMPLEMENTED InterDigital, Inc., March 31, 2010 + i10 CONFLICTS WITH CO. PROPOSAL Wal-Mart Stores, Inc., March 30, 2010 + i10 SUBSTANTIALLY IMPLEMENTED CoBiz Financial Inc., March 22, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (ADVISORY VOTE ON EXEC COMP) Exxon Mobil Corporaon, March 19, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (MAJ OF SHLDERS TO VOTE BY WRITTEN CONSENT) Ensco Internaonal plc, March 18, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (CHG SUPER MAJORITY OF SHLDERS TO VOTE TO SIMPLE MAJORITY) King Pharmaceucals, Inc., March 17, 2010 + i10 PROPOSAL ALREADY REQ'D UNDER STATE LAW PG&E Corporaon, March 10, 2010 + i10 SUBSTANTIALLY IMPLEMENTED 'C CO'S GUIDELINES COMPARE FAVORABLY WITH PROP NBT Bancorp Inc., March 5, 2010 + i10 SUBSTANTIALLY DUPLICATIVE OF CO.-SPONSORED AMENDMENT FOR ANNUAL DIR. ELECTION Sempra Energy, March 5, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (CHG SUPER MAJORITY REQTS TO SIMPLE MAJORITY VOTING REQTS) Exelon Corporaon, February 26, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (RE REPT RE POLITICAL CONTRIBUTIONS)

Mael, Inc., February 3, 2010 + i10 SUBSTANTIALLY IMPLEMENTED(REQUEST BOD UNDERTAKE STEPS TO ALLOW SHLDERS VOTE ON WRITTEN CONSENT) PG&E Corporaon, February 2, 2010 + i10 SUBSTANTIALLY IMPLEMENTED(REQUEST BOD UNDERTAKE STEPS TO ALLOW SHLDERS VOTE ON WRITTEN CONSENT) Express Scripts Inc., January 28, 2010 + i10 SUBSTANTIALLY IMPLEMENTED(CHG SUPER MAJORITY REQTS TO SIMPLE MAJORITY VOTING REQTS) General Electric Company, January 23, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (PROP RE BOD EXPLORE WITH CERTAIN EXEC OFFICERS RENUNICATION OF STK OPTION GRANTS) Textron Inc., January 21, 2010 + i10 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP THAT CO. WILL INCLUDE Cigroup Inc., January 19, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (PROP RE BOD TO ADOPT B/LAW TO REQ INDEP LEAD DIR WHENEVER POSSIBLE) SUBSTANTIALLY IMPLEMENTED (ALLOWING SHLDERS TO VOTE ON CHG IN CHARTER TO ALLOW SIMPLE MDU Resources Group, Inc., January 16, 2010 + i10 INSTEAD OF SUPER MAJ VOTING) Coachmen Industries, Inc., January 14, 2010 + i10 SUBSTANTIALLY IMPLEMENTED ('C SUBJ MATTER CONCLUDED PRIOR TO AM) Internaonal Business Machines Corporaon, January 4, 2010 + i10 SUBSTANTIALLY IMPLEMENTED (PROP REQUESTS PERIODIC REPTS ON "SMARTER PLANET" INITIATIVE) Pulte Homes, Inc., March 17, 2010 - i11 NOT SUBSTANTIALLY DUPLICATIVE OF 2ND SHLDER'S PROPOSAL (RETAIN EXEC COMP) Exxon Mobil Corporaon, March 19, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PROPOSAL TO BE INCLUDED IN PROXY The Goldman Sachs Group, Inc., March 9, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP TO BE INCLUDED JPMorgan Chase & Co., March 5, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP TO BE INCLUDED The Boeing Company, February 1, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP THAT CO. WILL INCLUDE Honeywell Internaonal Inc., January 19, 2010 + i11 SUBSTANTIALLY DUPLICATIVE OF PREVIOUSLY SUBMITTED PROP THAT CO. WILL INCLUDE Mael, Inc., January 6, 2010 + i12 (i) SUBST SAME AS OTHERS (PROP TO ELIM COMP >$500K) Abbo Laboratories, January 27, 2010 + i12 (ii) SUBST. SAME AS OTHERS(ENCOURAGING TRANSPARENCY RE ANIMAL USED IN RESEARCH AND TESTING) Mael, Inc., January 14, 2010 + i12(iii) SUBST SAME AS OTHERS(RE REPT ON WORKING CONDITIONS AT CO. FACILITIES AND ITS VENDORS) The Kroger Co., March 31, 2010 + i12 (ii) SIMILAR TO PREVIOUS LOSING PROPOSALS - Wells Fargo & Company, January 14, 2010 + i13 ORD BUS OPS (RE COMP AND BENEFITS OF TOP 300 OFFICERS NOT TO CHG UNTIL C/S DIV REPAID) - Sprint Nextel Corporaon, March 4, 2010 - i2 NOT VIO. OF STATE LAW (PROP SEEKS ACTION "TO EXTENT PERMITTED BY LAW") CVS Caremark Corporaon, March 9, 2010 + i2 CONFLICT WITH STATE LAW AND COI (REQUIRE CHMN TO BE INDEPENDENT DIR.) - Merck & Co., Inc., January 29, 2010 + i2 WOULD VIO STATE LAW (PROP TO PERMIT MAJORITY VOTE ON WRITTEN CONSENT) CURABLE DEFECT (PROP WOULD CAUSE BREACH OF EXISTING COMP K'S-7D TO REVISE TO APPLY ONLY Occidental Petroleum Corporaon, January 20, 2010 + i2 TO FUTURE COMP K'S) Bank of America Corporaon, January 13, 2010 + i2 WOULD VIO STATE LAW (PROP TO PERMIT MAJORITY VOTE ON WRITTEN CONSENT) VIO. STATE LAW (PROP REQUESTS BOD TO UNDERTAKE TO ALLOW SHLDERS TO VOTE ON WRITTEN Fortune Brands, Inc., January 6, 2010 + i2 CONSENT) Bank of America Corporaon, March 3, 2010 - i2, i3, i6 PROP TO ALLOW 10% OF C/S TO CALL SPECIAL MEETINGS) Bank of America Corporaon, February 16, 2010 - i2, i3, i6 NOT V&INDEF, ETC (RE PROP TO ADOPT A CLAWBACK POLICY FROM PRIOR 5 YRS.) The Boeing Company, January 27, 2010 - i2, i3, i6 PROP TO ALLOW 10% OF C/S TO CALL SPECIAL MEETINGS) + Comcast Corporaon, March 17, 2010 + i2, i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 2 YRS AFTER TERM) Mylan, Inc., March 12, 2010 + i2, i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 2 YRS AFTER TERM) American Express Company, February 19, 2010 + i2, i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 2 YRS AFTER TERM) Verizon Communicaons Inc., February 19, 2010 + i2, i6 CURABLE DEFECT (ADOPT POLICY REQ EXEC TO RETAIN SH FOR 2 YRS AFTER TERM) Ball Corporaon, January 25, 2010 + i2, i6 VIO. OF STATE LAW (RE REORGANIZE BOD INTO ONE CLASS OF DIR TO BE ANNUALLY ELECTED AT&T Inc., February 12, 2010 +/- i2/8c,i3, i10 2 PROP 1-ALLOW SHLDER ACTS ON WRITTEN CONSENT-VIO STATE LAW; 2-10% SHLDERS CAN CALL SPEC. MTING. DaVita Inc., March 31, 2010 - i3 NOT VAGUE OR INDEFINITE (ALLOW SHLDERS TO ACT ON WRITTEN CONSENT) Raytheon Company, March 31, 2010 - i3 NOT VAGUE OR INDEFINITE (ALLOW SHLDERS TO ACT ON WRITTEN CONSENT) Omnicom Group Inc., March 25, 2010 - i3 NOT VAGUE OR INDEFINITE (REQ SHLDER OK FOR DEATH BENEFIT POLICY) Amazon.com, Inc., March 22, 2010 - i3 NOT VAGUE OR INDEFINITE (ALLOW 10% OF SHLDERS TO CALL SPECIAL MTING) Xcel Energy Inc., March 19, 2010 - i3 NOT MATERIALLY FALSE AND MISLEADING (ANNUAL ADVISORY SAY ON PAY) - Ford Motor Company, March 12, 2010 - i3 NOT VAGUE AND INDEFINITE (RE NOT TO FUND PROJ SOLELY RE CARBON DIOX REDUCTION) The Goldman Sachs Group, Inc., March 11, 2010 - i3 NOT FALSE OR MISLEADING (REVIEW EXEC COMP POLICIES AND REPORT) Comcast Corporaon, March 5, 2010 - i3 NOT VAGUE OR INDEFINITE (AMEND COI TO REQUIRE INDEPEND DIR TO SERVE AS CHMN) AT&T Inc., March 2, 2010 - i3 NOT V&INDEF (RE EXCLUDING NON-CASH PENSION CREDITS FROM PERFORM AWARD FORMULA) The Allstate Corporaon, February 24, 2010 - i3 NOT V&INDEF OR FALSE&M/LEADING(RE ALLOW MAJ OR SHLDERS VOTE ON WRITTEN CONSENT) Pulte Homes, Inc., February 24, 2010 - i3 NOT V&INDEF (RE AFTER CURRENT EE Ks EXPIRE REQUIRE INDEP DIR. TO SERVE AS CHRMN) NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN Sprint Nextel Corporaon, February 24, 2010 - i3 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. AT&T Inc., February 23, 2010 - i3 NOT V&INDEF (RE ADVISORY VOTE RE OK OF NAMED EXEC OFFICERS COMP) NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN E. I. DuPont de Nemours and Company, February 16, 2010 - i3 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN Exxon Mobil Corporaon, February 16, 2010 - i3 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. Allegheny Energy, Inc., February 12, 2010 - i3 V&INDEFINITE (PROP RE CHMN BE INDEPENDENT AND NOT HAVE SERVED AS CEO)

NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN The Boeing Company, February 3, 2010 - i3 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. Bank of America Corporaon, February 1, 2010 - i3 NOT V&INDEF (SEEKS ANNUAL REPT OF "NON DEDUCTIBLE" AMTS CO PAYS TO SR. EXEC OFFICERS) NOT V&INDEF (PROP FOR BOD TO INITIATE PROCESS TO AMEND CHARTER DOCS TO ALLOW ANNUAL SunTrust Banks, Inc., January 13, 2010 - i3 ELECT OF DIR) PetSmart, Inc., April 12, 2010 + i3 VAGUE AND INDEFINITE (BAR ANIMAL PURCH FROM VIO OF "THE LAW") JPMorgan Chase & Co., March 5, 2010 + i3 VAGUE AND INDEFINITE (RE CONTRIBUTIONS USED FOR "GRASSROOTS LOBBYING COMMUNICATIONS") Casade Financial Corporaon, March 4, 2010 + i3 VAGUE AND INDEFINITE (RE ELIMINATE "NON-ESSENTIAL EXPENDITURES"…) Bank of America Corporaon, February 22, 2010 + i3 VAGUE AND INDEFINITE (RE CREATING COMM ON "US ECONOMIC SECURITY") Cigroup Inc., February 22, 2010 + i3 VAGUE & INDEF (RE CREATE BD COMM ON "US ECONOMIC SECURITY") AT&T Inc., February 16, 2010 + i3 VAGUE & INDEFINITE (RE REP'T ON CONTRIBUTIONS FOR "GRASSROOTS LOBBYING COMMUNICATIONS" VAGUE & INDEFINITE (CREATE COMM TO REVIEW POLICIES THAT "WILL FOLLOW THE UNIVERSAL The Boeing Company, February 5, 2010 + i3 DECLARATION OF HUMAN RIGHTS" VAGUE & INDEF (RE LIMIT NUMBER OF CONSECUTIVE ELECTIONS TO ELECT A DIR TO THE BOD)-NOT CLEAR A CEO Cigroup Inc., January 21, 2010 + i3 NOT ON THE BOD WOULD BE SUBJECT TO SAME TERM LIMITS. Internaonal Business Machines Corporaon, January 13, 2010 + i3 VAGUE & INDEFINITE (PROP RE TAKING IMMEDIATE CORRECTIVE ACTION) + VAGUE & INDEF (RE REQUIRE CHMN TO BE INDEP DIR, BUT REFERS TO ONE SECTION OF B/LAWS AND SunTrust Banks, Inc., January 6, 2010 + i3 QUOTES FROM ANOTHER SECTION OF BYLAWS) Verizon Communicaons Inc., February 22, 2010 - i3, i10 NOT V&INDEF, ETC. (RE SAY ON BONUS, AWARDS, DEATH BENEFITS OF SR. EXEC. OFFICERS) NOT V&INDEF OR FALSE&M/LEADING (ADVISORY VOTE TO OK COMP REPT & POLICIES) PROP DID NOT INCLUDE GEN Bank of America, January 29, 2010 - i3, i6 SENTENCE RE ADVISORY VOTE EFFECTIVE WAY FOR HOLDERS TO ADVISE CO. JPMorgan Chase & Co., March 19, 2010 - i3, i7 NOT VAGUE AND INDEFINITE; SIGNIFICANT POLICY ISSUE (DERIVATIVES & SYSTEMIC RK) PepsiCo, Inc., February 26, 2010 - i3, i7 NOT F&MLEADING NOR ORD BUS OPS ( RE REPT RE GENERAL POLITICAL ADVOCACY ACTIVITIES NOT MICROMGING) The Allstate Corporaon, February 5, 2010 - i3, i7 NOT V&INDEF, MICROMANAGING (PROP RE REVIEW & REPT ON EXEC COMP POLICIES) NOT V&INDEF OR ORD. BUS OPS. (REPT HOW RESPONSIBLY DISCLOSES ENVIRON IMPACTS WHERE IT PPG Industries, Inc., January 15, 2010 - i3, i7 OPERATES) NOT V&INDEF, ORD. BUS OPS. (REQT FOR BOD REPT RE ENVIRON & SOCIAL IMPACT OF CO BUS STRATEGIES TO SunTrust Banks, Inc., January 13, 2010 - i3, i7 ADDRESS CLIMATE CHANGE.)-I.E., SIGNIFICANT SOCIAL POLICY ISSUE Chesapeake Energy Corporaon, April 13, 2010 - i3, i7, i10 ENVIRONMENTAL (NOT MATERIALLY FALSE) NOT V&INDEF, ORD. BUS OPS, ETC. (PROHIBIT BONUSES TO EXEC. OFFICERS UNTIL TARP REPD AND DIV Cascade Financial Corporaon, February 22, 2010 - i3, i7, i10 RESTORED) The McGraw-Hill Companies, Inc., February 24, 2010 - i3, i9 NOT V&INDEF OR FALSE&M/LEADING(RE ALLOW MAJ OR SHLDERS VOTE ON WRITTEN CONSENT) NOT V&INDEF (PROP RE REDUCING SALARY 25% FOR ANYONE >$150K UNTIL TARP REPAID AND Cascade Financial Corporaon, February 22, 2010 - i3, i9 C/SHLDERS DIVIDENDS RESTORED)-NOT LTD TO SR. EXEC OFFICERS NOT V&INDEF (PROP. RE ADOPT POLICY TO ALLOW STK OPTIONS OF SR. EXEC. OFFICERS TO VEST IFF Verizon Communicaons Inc., January 21, 2010 - i3, i9 TOTAL SHLDER RETURN >= PERFORMANCE OF PEERS The Kroger Co., April 12, 2010 - i3,i10 NOT SUBST. IMPLEMENTED ('C DOESN'T COMPARE FAVORABLY) Chesapeake Energy Corporaon, April 2, 2010 - i3,i7 ENVIRONMENTAL (SUSTAINABILITY REPT) Wal-Mart Stores - i5,i7 SIGNIFICANT POLICY (HUMANE TREATMENT); SIGNIFICANTLY RELATED Cleco Corporaon, January 29, 2010 - i6 DOES NOT LACK AUTH (REQUESTS BOD TAKE STEPS TO ELIMINATE CLASSES OF DIR AND ELECT ANNUALLY) The Goldman Sachs Group, Inc., March 25, 2010 + i6 BEYOND POWER OF BOD TO IMPLEMENT BASED ON CRITERIA IN PROPOSAL Omnicom Group Inc., March 24, 2010 + i6 BEYOND POWER OF BOD TO AMEND BLAWS (ONLY SHLDERS CAN) Allegheny Technologies Incorporated, March 1, 2010 + i6 NOT W/I POWER OF BOD TO ENSURE DIR INDEPENDENCE "AT ALL TIMES" & NO CURE IF VIO) NOT FEASIBLE FOR BD TO ENSURE CONTINUOUS COMLIANCE AND NO CURE MECHANISM (PROHIBIT Time Warner, Inc., February 22, 2010 + i6 CURRENT OR FORMER CEO'S ON COMP COMM.) CURABLE DEFECT (NOT FEASIBLE FOR BD TO ENSURE CONTINUOUS COMLIANCE AND NO CURE Honeywell Internaonal Inc., February 18, 2010 + i6 MECHANISM (PROHIBIT CURRENT OR FORMER CEO'S ON COMP COMM.) NOT FEASIBLE FOR BD TO ENSURE CONTINUOUS COMLIANCE AND NO CURE MECHANISM (PROHIBIT Verizon Communicaons Inc., February 18, 2010 + i6 CURRENT OR FORMER CEO'S ON COMP COMM.) INFEASIBLE FOR BOD TO IMPLEMENT (PROP FOR BOD TO AMEND BYLAWS TO REQ CHMN TO BE INDEP.) Time Warner Inc., January 26, 2010 + i6 NO MECHANISM TO CURE INFEASIBLE FOR BOD TO IMPLEMENT (PROP FOR BOD TO AMEND BYLAWS TO REQ CHMN TO BE INDEP.) Exxon Mobil Corporaon, January 21, 2010 + i6 NO MECHANISM TO CURE INFEASIBLE FOR BOD TO IMPLEMENT (PROP FOR BOD TO ADOPT POLICY TO REQ SPLIT BETW CHMN & First Mariner Bancorp, January 8, 2010 + i6 CEO)

2 PROPOSALS: REQ. MAJ OF EXISTING DIR BE INDEPENDENT; CHAIR BE INDEPENDENT-BEYOND BOD; LIMITED TO 1 PROPOSAL PER MTING IF CO FILES STTMT OF REASONS TO OMIT SHLDER SUBMITS 2 Noble Romans, Inc., March 12, 2010 + i6, 8c PROPOSAL Wal-Mart Stores, Inc., March 29, 2010 - i7 NOT MICROMGMT (REPT RE POLITICAL ACTIVITIES) Ultra Petroleum Corp., March 26, 2010 - i7 NOT MICROMGMT (REPT RE ENVIRONMENTAL IMPACTS) Cigroup Inc., February 23, 2010 - i7 SIGNIFICANT POLICY ISSUE (POLICIES RE COLLATERALIZATION OF DERIVATES & SYS RISK) Wells Fargo & Company, February 19, 2010 - i7 NOT ORD. BUS OPS. (PROP REQUESTS LIST ON WEBSITE OF CONTRIBUTIONS >$5K) NOT ORD. BUS OPS. (RE ENVIRONMENTAL IMPACT REPT NOT MICROMGMT)I.E., SUBSTANTIAL POLICY EOG Resources, Inc., February 3, 2010 - i7 ISSUE NOT ORD. BUS OPS. (RE ENVIRONMENTAL IMPACT REPT RE FRACTURING NOT MICROMGMT)I.E., Cabot Oil & Gas Corporaon, January 28, 2010 - i7 SUBSTANTIAL POLICY ISSUE Norfolk Southern Corporaon, January 15, 2010 - i7 NOT ORD BUS OPS. OR MICROMANAGING (ADOPT GOALS TO REDUCE GREENHOUSE EMISSIONS) General Mills, Inc., July 2, 2010 + i7 LIMIT SODIUM FOR FLAVOR CB Richard Ellis Group, Inc., April 15, 2010 + i7 ORD. BUS. OPS (EXT. REPT RE ANNUAL BUDGET) Target Corporaon, March 31, 2010 + i7 ORD. BUS OPS. (RE CHARITABLE CONTRIBUTIONS TO SPECIFIC ORGANIZATIONS GEN EXCL.) Wal-Mart Stores, Inc., March 30, 2010 + i7 ORD. BUS. OPS (SALE OF PARTICULAR PRODUCTS GENERALLY EXCLUDABLE) Wal-Mart Stores, Inc., March 26, 2010 + i7 ORD. BUS. OPS (SALE OF PARTICULAR PRODUCTS AND SERVICES GENERALLY EXCLUDABLE) Comcast Corporaon, March 18, 2010 + i7 ORD. BUS. OPS (ADOPT POLICY TO PROMOTE FREE AND OPEN INTERNET)/NOT SIGNIFICANT SOCIAL POLICY Lowe's Companies, Inc., March 18, 2010 + i7 ORD. BUS. OPS (RE MANNER IN WHICH SELL PARTICULAR PRODUCTS GEN EXCLUDABLE) Northrop Grumman Corporaon, March 18, 2010 + i7 ORD. BUS. OPS (RE PROCEDURES TO TERMINATE EMPLOYEES GEN EXCLUDABLE) Marrio Internaonal, Inc., March 17, 2010 + i7 ORD. BUS. OPS (USE FLOW CONTROL SHOWERHEADS) --MICROMANAGES JPMorgan Chase & Co., March 16, 2010 + i7 ORD. BUS. OPS (ADOPT POLICY TO STOP ISSUING REFUND ANTICIPATION LOANS) Sprint Nextel Corporaon, March 16, 2010 + i7 ORD. BUS. OPS (CAN EXCLUDE PROPS RE ADHERENCE TO ETHICS PRACTICES AND CONDUCT COMPLIANCE PROGS. Goldman Sachs Group, Inc., March 12, 2010 + i7 ORD. BUS OPS (RE GENERAL EMPLOYEE COMPENSATION MATTERS GENERALLY EXCLUDABLE) The Home Depot, Inc., March 12, 2010 + i7 ORD. BUS OPS. ( RE SALE OF PARTICULAR PRODUCTS GENERALLY EXCLUDABLE) ORD. BUS OPS. RE ASSESS AND PROHIBIT LOANS FOR MOUNTAIN TOP REMOVAL COAL MINING OF CLIENTS (RE JPMorgan Chase & Co., March 12, 2010 + i7 CUSTOMER RELATIONS/SALE OF PRODS GENERALLY EXCLUDABLE) Sprint Nextel Corporaon, March 12, 2010 + i7 ORD. BUS OPS. (ADOPT POLICY TO PROMOTE OPEN INTERNET-NOT SIGN POLICY ISSUE) Central Federal Corporaon, March 8, 2010 + i7 ORD. BUS OPS. (RE EXPLORE ALTS TO MAX VALUE IN EXTRA ORD AND ORD DEALS GEN EXCL.) Alaska Air Group, Inc., March 8, 2010 + i7 ORD. BUS OPS. (RE DECISIONS RELATING TO VENDOR RELATIONSHIPS GEN EXCLUDABLE) Goldman Sachs Group, Inc., March 8, 2010 + i7 ORD. BUS OPS. (RE GENERAL EMPLOYEE COMPENSATION MATTERS GEN. EXCLUDABLE) JPMorgan Chase & Co., March 5, 2010 + i7 ORD BUS OPS. (RE SELECTION & MGMT OF ENGAGEMENT OF INDEP. AUDITORS GEN EXCL.) Yum! Brands, Inc., March 5, 2010 + i7 ORD BUS OPS. (RE LEGAL COMPLIANCE PROGRAM-VERIFY SSN/E-VERIFY GENERALLY EXCLUDABLE) Casade Financial Corporaon, March 4, 2010 + i7 CURABLE DEFECT (RE SEVERANCE PYMTS TO ALL OR ONLY SR. EXEC OFFICERS) Wells Fargo & Company, March 4, 2010 + i7 ORD BUS OPS. (RE GENERAL EMPLOYEE COMP (EVEN IF LTD TO TOP 100) GEN EXCL.) + Verizon Communicaons, Inc., March 2, 2010 + i7 ORD. BUS OPS. (RE POLICY ON NET NEUTRALITY) NOT SIGNIFICANT SOCIAL POLICY AT&T Inc., March 1, 2010 + i7 ORD. BUS OPS. (RE POLICY ON NET NEUTRALITY) NOT SIGNIFICANT SOCIAL POLICY Ford Motor Company, March 1, 2010 + i7 ORD. BUS OPS. (RE METHOD TO DISTRIBUTE OR PRESENT INFO TO SHLDERS GEN EXCL.) ORD BUS OPS. (RE COMP TO EES GENERALLY (TOP 100) NOT SR. EXEC O&D ONLY)+ DOES NOT FOCUS ON Bank of America Corporaon, February 26, 2010 + i7 RELATIONSHIP BETWEEN COMP PRACTICES AND EXCESSIVE RISK TAKING. Cascade Financial Corporaon, February 25, 2010 + i7 ORD. BUS OPS. (PROP RE GENERAL EMPLOYEE COMP (NOT SR. EXEC O&D) GEN EXCL) CVS Caremark Corporaon, February 25, 2010 + i7 ORD. BUS OPS. (PROP RE SALE OF PARTICULAR PRODS GEN EXCLUDABLE) ORD BUS OPS. (RE COMP TO EES GENERALLY (TOP 100) NOT SR. EXEC O&D ONLY)+ DOES NOT FOCUS ON JPMorgan Chase & Co., February 25, 2010 + i7 RELATIONSHIP BETWEEN COMP PRACTICES AND EXCESSIVE RISK TAKING. ORD. BUS OPS. RE ASSESS AND PROHIBIT LOANS FOR MOUNTAIN TOP REMOVAL COAL MINING OF CLIENTS (RE Bank of America Corporaon, February 24, 2010 + i7 CUSTOMER RELATIONS/SALE OF PRODS GENERALLY EXCLUDABLE) PepsiCo, Inc., February 24, 2010 + i7 ORD. BUS OPS. PROP RE CHARITABLE CONTRIBS DIRECTED TO SPEC ORGANS GEN EXCLUDABLE) + ORD. BUS OPS. (FREEZE SALARIES OF STAFF >$100K UNTIL TARP REPD & DIV. RESTORED)-NOT LTD TO Cascade Financial Corporaon, February 22, 2010 + i7 SR. EXEC OFFICERS Comcast Corporaon, February 22, 2010 + i7 ORD. BUS OPS. (ELIM. COMP >$500K FOR ANYONE IN MGMT)-NOT LTD TO SR. EXEC OFFICERS Johnson & Johnson, February 22, 2010 + i7 ORD. BUS OPS. (RE CK SSN/E-VERIFY) PROP RE LEGAL COMPLIANCE PROG GEN EXCLUDABLE ORD. BUS OPS. (REP'T RE POLICY OPTIONS RE BOTTLED WATER)-CUST RELATIONS & PROD. QUALITY GEN The Coca-Cola Company, February 17, 2010 + i7 EXCLUDABLE Exxon Mobil Corporaon, February 16, 2010 + i7 ORD. BUS OPS. (PROP TO LIMIT COMP >$500K TO "MGMT" NOT LTD TO SR. EXEC. OFFICERS) ORD. BUS OPS. (ADOPT POLICY TO DISTRIBUTE RESTTMTS IN SAME MANNER AS ORIGLLY DIST)-PROPOSALS RE Occidental Petroleum Corporaon, February 5, 2010 + i7 METHOD TO DISTRIB FIN OR PRESENT INFO GEN EXCLUDABLE

ORD. BUS OPS. (RE LIMITING ENGMNT OF AUDITORS TO 5 YRS)-PROP RE SELECTION & MGMT OF Masco Corporaon, January 13, 2010 + i7 ENGMNT GEN EXCLUDABLE ORD. BUS OPS. (RE "MAKE EVERY EFFORT TO REPAY" TARP DEBT)-PROP RE MGMT OF COS. ASSETS AND Oak Valley Bancorp, January 13, 2010 + i7 OBLIGATIONS GENERALLY EXCLUDABLE ORD. BUS OPS. (RE RESTATE & ENFORCE ETHICAL BEHAVIOR)-PROP RE GEN ADHERENCE TO ETHICAL Internaonal Business Machines Corporaon, January 7, 2010 + i7 COMPLIANCE PRACTICES GENERALLY EXCLUDABLE ORD. BUS OPS. (PROP RE TERMINATING ACCEPTANCE OF CERTAIN ID CARDS)-PROP RE CUSTOMER Bank Of America Corporaon, January 6, 2010 + i7 RELATIONS OR SALE OF PARTICULAR SERVICES GENERALLY EXCLUDABLE Marrio Internaonal, Inc., March 12, 2010 + i8 CAN EXCLUDE PROPS RE Q OF BUS JDGMT OF BD MEMBER UP FOR REELECTION Del Monte Foods Company, June 3, 2010 + i9 BOD ACTION (CONFLICTS WITH CO. PROPOSAL) SUPERVALU INC., April 20, 2010 + i9 CONFLICTS WITH CO. PROPOSAL Caterpillar Inc., March 30, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (CHANGING SUPER MAJORITY REQ'TS) Raytheon Company, March 29, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (SP. MTING CAN BE CALLED BY % OF SHLDERS) Lowe's Companies, Inc., March 22, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (SP. MTING CAN BE CALLED BY % OF SHLDERS) Internaonal Paper Company, March 11, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (10% V. 20% SHLDER VOTE NEC TO CALL SP SHLDER MTING Genzyme Corporaon, March 1, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 40% V. 10% TO CALL SPECIAL MTING) Pinnacle West Capital Corporaon, March 1, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) Liz Claiborne, Inc., February 25, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 35% V. 10% TO CALL SPECIAL MTING) Allergan, Inc., February 22, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (CHG SUPER MAJORITY REQTS TO SIMPLE MAJORITY VOTING REQTS) The Charles Schwab Corporaon, February 19, 2010 + i9 CONFLICTS WITH CO. PROP RE EXEC. BONUS PLAN FOR SR. EXEC. OFFICERS Chevron Corporaon, February 6, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 15% V. 10% TO CALL SPECIAL MTING) Goldman Sachs Group, February 3, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) Time Warner Inc., January 29, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 15% V. 10% TO CALL SPECIAL MTING) Bristol-Myers Squibb Company, January 28, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) The Dow Chemical Company, January 27, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) The Charles Schwab Corporaon, January 19, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE PAY FOR PERFORMANCE BASED ON PEERS POLICY) Dominion Resources, Inc., January 19, 2010 + i9 CONFLICTS WITH CO. PROP (RE CHG CHARTER TO ALLOW SIMPLE INSTEAD OF SUPER MAJ VOTING) Eastman Chemical Company, January 6, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) NiSource, Inc., January 6, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) CVS Caremark Corporaon, January 5, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) Honeywell Internaonal Inc., January 4, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 20% V. 10% TO CALL SPECIAL MTING) Medco Health Soluons, Inc., January 4, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 40% V. 10% TO CALL SPECIAL MTING) - Safeway Inc., January 4, 2010 + i9 CONFLICTS WITH CO. PROPOSAL (RE ALLOW 25% V. 10% TO CALL SPECIAL MTING) Hewle Packard Company, July 28, 2010 + 14d R.R. Donnelley & Sons Company, March 23, 2010 + NO ACTION LETTER CANNOT BE RETRIEVED. Medtronic, Inc., May 17, 2010 W Chevron Corporaon, April 1, 2010 W HUMAN RIGHTS Yahoo! Inc., March 24, 2010 W Connental Airlines, Inc., March 22, 2010 W Intel Corporaon, March 12, 2010 W Ultra Petroleum Corp., March 12, 2010 W InterDigital, Inc., March 11, 2010 W Comcast Corporaon, March 9, 2010 W JPMorgan Chase & Co., March 8, 2010 W Freeport-McMoRan Copper & Gold Inc., March 4, 2010 W The Allstate Corporaon, March 3, 2010 W Henry Schein, Inc., February 19, 2010 W Wal-Mart Stores, Inc., February 19, 2010 W Wal-Mart Stores, Inc., February 19, 2010 W Range Resources Corporaon, February 18, 2010 W Questar Corporaon, February 17, 2010 W NYSE Euronext, February 16, 2010 W Exxon Mobil Corporaon, February 12, 2010 W The Goldman Sachs Group, Inc., February 12, 2010 W CO. TO INCLUDE PROPOSAL IN PROXY. The Goldman Sachs Group, Inc., February 12, 2010 W Xcel Energy Inc., February 12, 2010 W JPMorgan Chase & Co., February 4, 2010 W

Energen Corporaon, February 2, 2010 W Alpha Natural Resources, Inc., February 1, 2010 W Range Resources Corporaon, January 28, 2010 W Yum! Brands, Inc., January 21, 2010 W Brocade Communicaons Systems, Inc., January 15, 2010 W Brocade Communicaons Systems, Inc., January 14, 2010 W Abbo Laboratories, January 12, 2010 W EOG Resources, Inc., January 11, 2010 W McDermo Internaonal, Inc., January 8, 2010 W Bristol-Myers Squibb Company, January 7, 2010 W CO TO PROVIDE PROP IN PROXY MATERIALS Google, Inc., January 7, 2010 W Mylan Inc., January 4, 2010 W Medtronic, Inc., May 13, 2010 Altria Group, Inc., April 20, 2010 R.R. Donnelley & Sons Company, April 5, 2010 X - Amazon.com, Inc., April 7, 2010 GRANTED RECONSIDERATION 'C VAGUE WHAT "RIGHTS" PROPOSAL SEEKS TO REGULATE X + Marrio Internaonal, Inc., April 19, 2010 X - Sprint Nextel Corporaon, April 20, 2010 X - The Western Union Company, March 19, 2010 X - JPMorgan Chase & Co., March 26, 2010 X - + Verizon Communicaons Inc., March 12, 2010 X - AT&T Inc., March 12, 2010 X - EMC Corporaon, March 10, 2010 X - The McGraw-Hill Companies, Inc., March 17, 2010 X - Comcast Corporaon, March 23, 2010 X - Internaonal Business Machines Corporaon, March 24, 2010 X - Merck & Co., Inc., March 29, 2010 X - Merck & Co., Inc., March 29, 2010 X - The Coca-Cola Company, March 3, 2010 SEC CONSIDERS ISSUES RE BOTTLED WATER ORD BUS, NOT SIGNIFICANT SOCIAL POLICY ISSUE X - AT&T Inc., March 2, 2010 X - E.I. du Pont de Nemours and Company, March 16, 2010 X - Exxon Mobil Corporaon, March 23, 2010 X - Halliburton Company, March 19, 2010 X - Halliburton Company, March 19, 2010 X - Chevron Corporaon, March 1, 2010 X - Goldman Sachs Group, Inc., February 22, 2010 X - Bank of America Corporaon, March 8, 2010 X - Time Warner Inc., March 23, 2010 X - Ball Corporaon, March 12, 2010 X - Exxon Mobil Corporaon, March 23, 2010 X - Pﬁzer Inc., February 22, 2010 RECONSIDERATION GRANTED ON PROOF THAT PROP FAILED TO PROVE ELIGIBILITY IN 14D X + Dominion Resources, Inc., March 29, 2010 X - Bank of America Corporaon, February 11, 2010 X - Entergy Corporaon, March 16, 2010 X - Internaonal Business Machines Corporaon, February 22, 2010 X - NiSource Inc., February 22, 2010 X - SunTrust Banks, Inc., February 12, 2010 X - CVS CaremarkCorporaon, January 26, 2010 X - Honeywell Internaonal Inc., January 26, 2010 X - Medco Health Soluons, Inc., January 26, 2010 X - Safeway, Inc., January 26, 2010 X - Apache Corporaon (no response) APACHE CORP. SUED JOHN CHEVEDDEN TO EXCLUDE THE PROPOSAL

Number of N/A Requests withdrawn ("W") = 34 Number of Appeals for Reconsideraon or Requests to Refer to Full Commission ("X") = 37 Number of N/A Requests Granted ("+") = 198 Appeals Granted ("+") = 2 Percentage of N/A Requests Granted = 74% Percentage of Appeals Granted = 5%

Number of N/A Requests Denied ("-") = 70 Appeals Denied ("-") = 35 Percentage of N/A Requests Denied = 26% Percentage of Appeals Denied = 95% Number of N/A Requests in which company was denied waiver of 80-day req't ("-") = 12 Number of N/A Requests in which company was granted a waiver of 80-day req't ("+") = 11

Total 8b, 8f arguments = 37 Pct. Granted = Total i3 arguments= 35 Pct. Granted = Total e2 arguments = 18 Pct. Granted = i2 6 Pct. Granted = i7 48 Pct. Granted = i9 24 Pct. Granted = i10 25 Pct. Granted = i11 6 Pct. Granted = i12 1 Pct. Granted =

IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

APACHE CORPORATION, § § Plaintiff, § § VS. § CIVIL ACTION NO. H-10-0076 § JOHN CHEVEDDEN, § § Defendant. §

MEMORANDUM AND ORDER

This court is asked to decide whether the proof of stock ownership that John Chevedden

submitted to Apache Corporation satisfies the requirements of S.E.C. Rule 14a-8(b)(2). This rule

requires a shareholder submitting a proposal for the company to include in its proxy materials to

prove that he is eligible. A company may exclude a shareholder proposal from its proxy materials

if the shareholder fails to present timely and adequate proof of eligibility. Apache seeks a

declaratory judgment that it may exclude a proposal submitted by Chevedden from the proxy

materials it will distribute to shareholders before Apache’s annual shareholder meeting on May 6,

2010. The only issue is whether Chevedden has met the requirements for showing stock ownership

under S.E.C. Rule 14a-8(b)(2), 17 C.F.R. § 240.14a-8(b)(2).

Chevedden is not listed as a shareholder in Apache’s records. Chevedden sent Apache four

letters, three from Ram Trust Services (“RTS”), which Chevedden asserts is his “introducing

broker,” certifying that Chevedden was the beneficial owner of Apache stock, and another from

Northern Trust Company, certifying that it held Apache stock as “master custodian” for RTS.

Northern Trust is a participating member of the Depository Trust Company (“DTC”). In its

“nominee name,” Cede & Co., the DTC is listed as the owner of Apache’s shares in the company’s

records. Apache’s records do not identify the beneficial owners of the shares held in the name of

Cede & Co. Chevedden argues that Rule 14a-8(b)(2) was satisfied by a letter from RTS, his

“introducing broker.” Id. Apache argues that Rule 14a-8(b)(2) required Chevedden to prove his

stock ownership by obtaining a confirming letter from the DTC or by becoming a registered owner

of the shares. Apache has moved for a declaratory judgment that it may exclude Chevedden’s

shareholder proposal from the proxy materials because he failed to do either. (Docket Entry No. 11).

Chevedden has responded and asked for a declaratory judgment that his proposal met the Rule 14a-

8(b)(2) requirements. (Docket Entry No. 17).1 Apache has replied. (Docket Entry No. 18).

Based on the motion, response, and reply; the record; and the applicable law, this court

grants Apache’s motion for declaratory judgment and denies Chevedden’s motion. The ruling is

narrow. This court does not rule on what Chevedden had to submit to comply with Rule 14a-8(b)(2).

The only ruling is that what Chevedden did submit within the deadline set under that rule did not

meet its requirements.

The reasons for this ruling are explained below.

I. Background

A. Proof of Securities Ownership

It has been decades since publicly traded companies printed separate certificates for each

share, sold them separately to the individual investors, kept track of subsequent sales of the shares,

and maintained comprehensive lists identifying the shareholders, the number of the shares they held,

and the duration of their ownership. Nor are securities certificates any longer traded directly by

brokers on exchanges, with the shares recorded in the brokers’ “street name” in a company’s

1At a hearing held on February 11, Chevedden objected to this court exercising personal jurisdiction over him. (Docket Entry No. 10). Apache filed a brief on that issue. (Docket Entry No. 12). In his brief on the merits, however, Chevedden stated that he is no longer challenging personal jurisdiction. (Docket Entry No. 17). 2

records. The volume, speed, and frequency of trading required a different system. In 1975,

Congress, amended the Securities Exchange Act of 1934. The amendments were based on four

explicit findings:

(A) The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.

(B) Inefficient procedures for clearance and settlement impose unnecessary costs on investors and persons facilitating transactions by and acting on behalf of investors.

(C) New data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.

(D) The linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.

15 U.S.C. § 78q-1(a)(1). Congress directed the S.E.C. to create a “national system for prompt and

accurate clearance and settlement in securities.” 15 U.S.C. § 78q-1(a)(2)(A)(i). Clearing agencies

became subject to S.E.C. regulation and uniform procedures. After the amendments were passed,

the two national securities exchanges—the New York Stock Exchange and the American Stock

Exchange—as well as, the National Association of Securities Dealers, which operated the over-the-

counter trading market, merged their subsidiary clearing agencies into one larger entity, called the

National Securities Clearing Corporation (“NSCC”). The S.E.C. permitted the NSCC to register as

a clearing agency, provided that it established links with the regional clearing agencies. The S.E.C.

found that this was “an essential step toward the establishment, at an early date, of a comprehensive

network of linked clearance and settlement systems and branch facilities with the national scope,

efficiencies and safeguards envisioned by Congress in enacting the 1975 Amendments.”2

A parallel development to centralizing clearing operations was the establishment of the

Depository Trust Company (“DTC”) in 1973. The DTC is the nation’s only securities depository.3

A securities depository is “a large institution that holds only the accounts of ‘participant’ brokers

and banks and serves as a clearinghouse for its participants’ securities transactions.” Delaware v.

New York, 507 U.S. 490, 495, 113 S. Ct. 1550 (1993). Although the DTC is also an S.E.C.-

registered clearing corporation, 3 THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION §

14.2[2], at 99 n. 48, its primary purpose is to improve trading efficiency by “immobilizing”

securities, or retaining possession of securities certificates even as they are traded. According to its

website, the DTC holds nearly $34 trillion worth of securities in participants’ accounts. When a

securities transaction occurs, the DTC changes, in its own records, which participant broker or bank

“owns” the securities. The company’s records, however, reflect that these securities are owned in

street name, under the DTC’s “nominee name” of Cede & Company. Delaware, 507 U.S. at 495,

113 S. Ct. 1550; In re Color Tile Inc., 475 F.3d 508, 511 (3d Cir. 2007). Neither the company nor

the DTC records the identity of the beneficial owner of the shares unless that owner is registered as

such.

One result—and major advantage—of this process is “netting.” Participating brokers that

have engaged in multiple transactions in the same securities in a trading day will report only the net

2In the Matter of the Application of the National Securities Clearing Corporation for Registration as a Clearing Agency, Release No. 13163, File No. 6000-15, 1977 WL 173551 (Jan. 13, 1977).

3Marcel Kahan & Edward Rock, The Hanging Chads of Corporate Voting, 92 GEO. L.J. 1227, 1238 n. 50 (2008). 4

change in their ownership to the DTC.4 The DTC and the NSCC are now subsidiaries of the same

holding company, the Depository Trust & Clearing Corporation (“DTCC”). The functions of each

entity are integrated as well. “The changes in beneficial ownership of securities resulting from

transactions that are cleared and settled at NSCC are implemented by book-entry transfers among

brokers’ accounts at DTC.” Whistler Investments, Inc. v. Depository Trust & Clearing Corp., 539

F.3d 1159, 1163 (9th Cir. 2008). Cede & Co. is the shareholder of record for a substantial majority

of the outstanding shares of all publicly traded companies. See In re FleetBoston Financial Corp.

Securities Litigation, 253 F.R.D. 315, 345 n. 32 (D.N.J. 2008) (quotations omitted).

There is at least one intermediary between the DTC and a retail investor such as Chevedden.

A participating broker or bank sells securities to the DTC; a participating broker or bank on the other

side buys from the DTC. A retail investor could be a direct client of the participating broker or

bank, in which case the DTC and the participating broker or bank are the only intermediaries

between the investor and the company. Frequently, however, there is a third financial institution,

an “introducing” broker, which serves as an intermediary between the retail investor and the

participating broker or bank.

One important part of this system is the Non-Objecting Beneficial Shareholders (“NOBO”)

list. When a company’s shares are held in street name, S.E.C. rules require the DTC to provide the

company, upon request, with a list of participants that hold its stock. Once the company has this

DTC participant list, called a “Cede breakdown,” it asks the participating banks and brokers on it

to submit the names of beneficial owners to the company. This second list is the NOBO list. This

is typically done through a centralized intermediary, Broadridge Financial Solutions, Inc., which

4Gene N. Lebrun & Fred H. Miller, The Law of Letters of Credit and Investment Securities Under the UCC–Modernization and Process, 43 S.D. L. REV. 14, 28 (1998). 5

compiles the NOBO list. Beneficial owners may exclude themselves from this list by objecting,

which is why the list includes only “Non-Objecting” shareholders. The NOBO list includes the

name, address, and ownership position of each nonobjecting beneficial owner. The NOBO list is

used to communicated with shareholders, primarily to distribute proxy materials . See 17 C.F.R. §

240.14b-1; Sadler v. NCR Corp., 928 F.2d 48, 50 (2d Cir. 1991).5 Approximately 75% of beneficial

owners object to disclosing their information to the company.6 But while the majority of

institutional shareholders object to the disclosure, according to one report, an estimated 75% of

individual shareholders do not object to inclusion on the list.7 Nonetheless, the company will never

discover the identity of many of its beneficial owners. The company must communicate with those

shareholders through Broadridge and the intermediary financial institutions.

B. Shareholder Proposals

Before a public company holds its annual shareholders’ meeting, it must distribute a proxy

statement to each shareholder. A proxy statement includes information about items or initiatives

on which the shareholders are asked to vote, such as proposed bylaw amendments, compensation

or pension plans, or the issuance of new securities. 2 HAZEN, supra, § 10.2, at 83-90. The proxy

card, on which the shareholder may submit his proxy, and the proxy statement together are the

“proxy materials.” See 17 C.F.R. § 240.14a-8(j).

Within this framework, the rules governing proxy solicitation for director voting are

different than those governing proxy solicitation for voting on other proposals. See 17 C.F.R. §

5See also Alan L. Beller & Janet L. Fisher, The OBO/NOBO Distinction in Beneficial Ownership, Council of Institutional Investors (Feb. 2010), available at http://www.cii.org.

6Kahan & Block, supra note 3, at 75.

7 Katten Munchin Rosenman LLP, Frequently Asked Questions Regarding the SEC’s NOBO-OBO Rules and Companies’ Ability to Communicate with Retail Shareholders, available at http://www.kattenlaw.com. 6

240.14a-8(i)(6). This case involves a proposed shareholder resolution. A shareholder wishing to

submit a proposed shareholder resolution may solicit proxies in two ways. First, he may pay to issue

a separate proxy statement, which must satisfy all the disclosure requirements applicable to

management’s proxy statement. See HAZEN, supra, § 10.2, at 85-89. Second, a shareholder may

force management to include his proposal in management’s proxy statement, along with a statement

supporting the proposal, at the company’s expense. See id. § 10.8[1][A] at 136-37. Regulations

promulgated under the Securities Exchange Act of 1934 apply to this second method. See 17 C.F.R.

§ 240.14a-8 (“This section addresses when a company must include a shareholder’s proposal in its

proxy statement and identify the proposal in its form of proxy when the company holds an annual

or special meeting of shareholders.”).

Rule 14a-8 is written in a question-and-answer format. It informs shareholders that “in order

to have your proposal included on a company’s proxy card, and included along with any supporting

statement in its proxy statement, you must be eligible and follow certain procedures. Under a few

specific circumstances, the company is permitted to exclude your proposal, but only after submitting

its reasons to the [S.E.C.].” Id.

Many of these reasons for exclusion are substantive. Among other reasons, a proposal may

be excluded if it would cause the company to violate the law, if it relates only to a personal

grievance against the company, if it is beyond the company’s authority, or if it relates to the

company’s “ordinary business operations.” 17 C.F.R. § 240.14a-8(i). The company may also

exclude proposals that violate the procedural requirements set out in the S.E.C. rules. These

procedural requirements include a 500-word limit, a filing deadline, and a limit to one proposal per

shareholder per meeting. 17 C.F.R. § 240.14a-8(c)-(e). Finally, the company may exclude a

proposal if the submitter does not satisfy the eligibility requirements. The requirements limit those 7

submitting proposals to holders of “at least $2,000 in market value, or 1%, of the company’s

securities entitled to be voted on the proposal at the meeting.” 17 C.F.R. § 240.14a-8(b)(1). The

shareholder must have owned at least that amount of securities continuously for one year as of the

date he submits the proposal to the company and must continue to do so through the date of the

shareholder meeting. Id.

Rule 14a-8(b)(2) sets out two ways for a shareholder who is not a registered owner to

establish eligibility. Only the first of those ways is relevant here. The rule states:

If you are the registered holder of your securities, which means that your name appears in the company's records as a shareholder, the company can verify your eligibility on its own, although you will still have to provide the company with a written statement that you intend to continue to hold the securities through the date of the meeting of shareholders. However, if like many shareholders you are not a registered holder, the company likely does not know that you are a shareholder, or how many shares you own. In this case, at the time you submit your proposal, you must prove your eligibility to the company in one of two ways [only the first of which is relevant]:

(i) The first way is to submit to the company a written statement from the “record” holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year. You must also include your own written statement that you intend to continue to hold the securities through the date of the meeting of shareholders. . . .

17 C.F.R. § 240.14a-8(b)(2) (emphasis added).8

If a shareholder’s proposal is procedurally deficient or the shareholder has not submitted

proper proof of ownership, the company may exclude it only after giving the shareholder notice and

8The Rule was amended in 1998, to recast it in question-and-answer format. This amendment added the “usually a bank or broker” language. The prior amendment, in 1987, was accompanied by a note stating that a shareholder should submit “ a written statement by a record owner or an independent third party, such as a depository or broker-dealer holding the securities in street name.” S.E.C. Release No. 34-25217, 52 FR 489 48977-01, 1987 WL 153779 (Dec. 29, 1987). The notes to the 1998 amendment did not state that a substantive change to Rule 14a-8(b)(2) was intended. S.E.C. Release No. 34-40018, 63 FR 29106-01, 1998 WL 266441 (May 28, 1998). 8

an opportunity to correct the deficiency. 17 C.F.R. § 240.14a-8(f)(1). The company must notify the

shareholder of the problem in writing within 14 days of receiving the proposal and inform the

shareholder that he has 14 days to respond. Id. If after the response date the company decides to

exclude a proposal, it must notify the S.E.C. of its reasons for doing so no later than 80 days before

the company files its proxy materials with the S.E.C. 17 C.F.R. § 240.14a-8(j). The shareholder is

entitled to file with the S.E.C. his arguments for including the proposal. 17 C.F.R. § 240.14a-8(k).

The burden is on the company to demonstrate to the S.E.C. that the proposal is properly excluded.

17 C.F.R. § 240.14a-8(g).

A company may ask the S.E.C. Department of Corporate Finance staff for a no-action letter

to support the exclusion of a proposal from proxy materials. Although no-action letters are not

required, “virtually all companies that decide to omit a shareholder proposal seek a no-action letter

in support of their decision.”9 The S.E.C. receives hundreds of requests for no-action letters each

year. HAZEN, supra, § 10.8[1][A], at 138. The company submits the proposal and its reasons for

exclusion to the S.E.C. staff, seeking a letter stating that the staff will not recommend enforcement

action to the S.E.C. if the company chooses to exclude the proposal. The shareholder often responds

with his own submission. The staff will issue a brief letter stating either that it will not recommend

enforcement action (“no action”) or that it is “unable to concur” with the company. This advice

comes with a lengthy disclaimer, entitled “Division of Corporate Finance Informal Procedures

Regarding Shareholder Proposals.” (Docket Entry No. 11, Ex. 11). It states:

The Division of Corporation Finance believes that its responsibility with respect to matters arising under Rule 14a-8 [17 CFR 240.14a-8], as with other matters under the proxy rules, is to aid those who must

9 Donna M. Nagy, Judicial Reliance on Regulatory Interpretation in S.E.C. No-Action Letters: Current Problems and a Proposed Framework, 83 CORNELL L. REV. 921, 989 (1998). 9

comply with the rule by offering informal advice and suggestions and to determine, initially, whether or not it may be appropriate in a particular matter to recommend enforcement action to the Commission. In connection with a shareholder proposal under Rule 14a-8, the Division's staff considers the information furnished to it by the Company in support of its intention to exclude the proposals from the Company's proxy materials, as well as any information furnished by the proponent or the proponent's representative.

Although Rule 14a-8(k) does not require any communications from shareholders to the Commission's staff, the staff will always consider information concerning alleged violations of the statutes administered by the Commission, including argument as to whether or not activities proposed to be taken would be violative of the statute or rule involved. The receipt by the staff of such information, however, should not be construed as changing the staff's informal procedures and proxy review into a formal or adversary procedure.

It is important to note that the staff's and Commission's no-action responses to Rule 14a-8(j) submissions reflect only informal views. The determinations reached in these no-action letters do not and cannot adjudicate the merits of a company's position with respect to the proposal. Only a court such as a U.S. District Court can decide whether a company is obligated to include shareholder proposals in its proxy materials. Accordingly a discretionary determination not to recommend or take Commission enforcement action, does not preclude a proponent, or any shareholder of a company, from pursuing any rights he or she may have against the company in court, should the management omit the proposal from the company's proxy material.

(Id.).

C. Chevedden’s Proposal

The events giving rise to this dispute began on November 8, 2009, when Chevedden, a

retired Hughes Aircraft employee living in Redondo, Beach, California, sent an e-mail to Cheri

Peper, the Corporate Secretary of Apache Corporation. (Docket Entry No. 11, Ex. 1). Apache is

an oil and gas company based in Houston and incorporated in Delaware. The November 8 e-mail

attached a “Rule 14a-8 Proposal” and a cover letter. The cover letter was addressed to Raymond

Plank, Apache’s Chairman, and stated:

This Rule 14a-8 proposal is respectfully submitted in support of the long-term performance of our company. This proposal is submitted for the next annual shareholder meeting.10 Rule 14a-8 requirements are intended to be met including the continuous ownership of the required stock value until after the date of the respective shareholder meeting and presentation of the proposal at the annual meeting. This submitted format, with the shareholder-supplied emphasis, is intended to be used for definitive proxy publication.

In the interest of company cost savings and improving the efficiency of the rule 14a-8 process please communicated via email to olmsted7p (at) earthlink.net.

Your consideration and the consideration of the Board of Directors is appreciated in support of the long-term performance of our company. Please acknowledge receipt of this proposal promptly by email to olmsted7p (at) earthlink.net.

(Id. at 2). The proposal was a shareholder resolution that “our board take the steps necessary so that

each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple

majority vote, be changed to a majority of the votes cast for and against the proposal in compliance

with applicable laws.” (Id. at 3). The resolution called for changing the 80% supermajority

requirements for amending particular provisions of the charter and bylaws. (Id.). The record does

not show an Apache response to this e-mail.

Chevedden sent another Apache another e-mail on Friday, November 27, 2009, this time

copying the Office of the Chief Counsel in the S.E.C.’s Division of Corporate Finance. (Id., Ex. 2

at 1). Chevedden wrote: “Please see the attached broker letter. Please advise on Monday whether

there are now any rule 14a-8 open items.” (Id.). The attached broker letter, on the letterhead of Ram

10Apache’s 2010 annual shareholders’ meeting is scheduled for May 6, 2010 in Houston. 11

Trust Services (“RTS”), was dated November 23, 2009 and signed by Meghan M. Page, Assistant

Portfolio Manager. It stated:

To Whom it May Concern,

I am responding to Mr. Chevedden’s requiest to confirm his position in several securities held in his account at Ram Trust Services. Please accept this letter as confirmation that John R. Chevedden has continuously held no less than 50 shares of the following security since November 7, 2008:

• Apache Corp (APA)

(Id. at 2).

On December 3, 2009, Peper sent Chevedden a letter, presumably by fax or e-mail. (Id., Ex.

3). The letter informed Chevedden that Apache had received his November 8 letter and the RTS

letter. The letter stated:

Based on our review of the information provided by you, our records and regulatory materials, we have been unable to conclude that the proposal meets the requirements for inclusion in Apache’s proxy materials, and unless you can demonstrate that you meet the requirements in the proper time frame, we will be entitled to exclude your proposal from the proxy materials for Apache’s 2010 annual meeting. . . .

[W]e have been unable to confirm your current ownership of Apache stock, or the length of time that you have held the shares.

Although you have provided us with a letter from RAM Trust Services, the letter does not identify the record holder of the shares or include the necessary verification. Apache has reviewed the list of record owners of the company’s common stock, and neither you, nor RAM Trust Services are listed as an owner of Apache common stock. Pursuant to the SEC Rule 14a-8(b), since neither you nor RAM Trust Services is a record holder of the shares you beneficially own verifying that you continually have held the required amount of Apache common stock for at least one year as of the date of your submission of the proposal. As required by Rule 14a-8(f), you must provide us with this statement within 14 days of your receipt of this 12

letter. We have attached to this notice of defect a copy of Rule 14a-8 for your convenience.

(Id. at 1-2). It is undisputed that neither Chevedden nor RTS appears on Apache’s list of registered

holders of common stock.

Chevedden responded to the letter by e-mail the same day, again copying the Division of

Corporate Finance. The e-mail cited Rule 14a-8, which Chevedden “believed to state that a

company must notify the proponent of any defect with 14-days of the receipt of a rule 14a-8

proposal – which was already acknowledged by the company to be almost a month ago.” (Id., Ex.

4). Peper responded on December 8, 2009, disagreeing with Chevedden’s characterization of the

14-day rule. Peper referred to the language in Rule 14a-8(b)(2) stating that a shareholder must

establish his eligibility at the time he submits his proposal, meaning that the 14-day period did not

begin until Chevedden completed his submission by sending the November 23 RTS letter on

November 27. Apache’s December 3 response was within 14 days of that date. Peper then

reminded Chevedden that, within 14 days of the December 3 defect letter, he had to submit “a

written statement from the record holder of the shares you beneficially own verifying that you

continually have held the required amount of Apache common stock for at least one year as of the

date of your submission of the proposal.” (Id., Ex. 5).

On December 10, 2009, Chevedden sent Peper another e-mail, without copying the S.E.C.

staff. This e-mail directed Peper to “see the attached broker letter” and to “advise tomorrow whether

there are now any rule 14a-8 open items.” (Id., Ex. 6 at 1). The attached letter was dated December

10 and again signed by Meghan Page of RTS. It stated:

To Whom it May Concern,

As introducing broker for the account of John Chevedden, held with Northern Trust as custodian, Ram Trust Services confirms that John 13

Chevedden has continuously held no less than 50 shares of the following security since November 7, 2008:

• Apache Corp (APA)

(Id. at 2). It is undisputed that Northern Trust is not a registered shareholder listed in Apache’s

records.

On January 8, 2010, Apache sent notice to the S.E.C. staff (and to Chevdedden) that it

intended to exclude Chevedden’s proposal from its proxy materials for the 2010 annual meeting.

Apache informed the staff that “[b]ecause an introducing broker is not a record holder of the shares

of a company, the Company intends to exclude this proposal unless a U.S. District Court rules that

the Company is obligated to include it in its 2010 Proxy Materials.” (Id., Ex. 7). Rather than seek

a no-action letter from the staff, Apache filed this lawsuit the same day. The S.E.C. staff will not

provide no-action letters when litigation is pending.11 (Docket Entry No. 1).

On January 11, Chevedden sent the S.E.C. staff a response to Apache’s letter. He attached

the December 10 RTS letter and stated that it “appears to be consistent with the attached precedent

of [the no-action letter issued in] The Hain Celestial Group, Inc. (October 1, 2008).” (Id., Ex. 8).

As discussed more fully below, in Hain Celestial, the S.E.C. staff stated that “we are now of the

view that a written statement from an introducing broker-dealer constitutes a written statement from

the ‘record’ holder of securities, as that term is used in rule 14a-8(b)(2)(i).” Apache had attached

the December 10 letter as an exhibit to its submission to the S.E.C. staff and, in its submission, had

attempted to distinguish the Hain Celestial no-action letter. (Id., Ex. 7).

11 Securities and Exchange Commission, Division of Corporate Finance Staff Legal Bulletin No. 14 (July 13, 2001), available at http://www.sec.gov/interps/legal/cfslb14.htm. 14

On January 22, 2010, Carolyn Haynes, an RTS Executive Assistant, e-mailed Peper two

letters. The first was from Meghan Page of RTS, addressed to Peper and dated January 22. Page

wrote:

John R. Chevedden owns no fewer than 50 shares of Apache Corporation (APA) and has held them continuously since November 7, 2008.

Mr. Chevedden is a client of Ram Trust Services (“RTS”). RTS acts as his custodian for these shares. Northern Trust Company, a direct participant in the Depository Trust Company, in turn acts as master custodian for RTS. Northern Trust is a member of the Depository Trust Company whose nominee name is Cede & Co.

Mr. Chevedden individually meets the requirements set forth in rule 14a-8(b)(1). To repeat, these shares are held by Northern Trust as master custodian for RTS. All of the shares have been held continuously since at least November 7, 2008, and Mr. Chevedden intends to continue to hold such shares through the date of the Apache Corporation 2010 annual meeting.

I enclose a copy of Northern Trust’s letter dated January 22, 2010 as proof of ownership in our account for the requisite time period. Please accept this telefax copy as the original was sent directly to you from Northern Trust.

(Id., Ex. 9 at 2). The Northern Trust letter, signed by Rhonda Epler-Staggs, was also dated January

22 and addressed to Peper. It stated:

The Northern Trust Company is the custodian for Ram Trust Services. As of November 7, 2009, Ram Trust Services held 183 shares of Apache Corporation CUSIP# 037411105.

The above account has continuously held at least 50 shares of Apache common stock for the period of November 7, 2008 through January 21, 2010.

Northern Trust is a member of the Depository Trust Company whose nominee name is Cede & Co.

(Id. at 3). The parties agree that Apache has not received any letter from the DTC or Cede & Co.,

the registered owner of any Apache stock Chevedden owns. There is nothing in the record to

suggest that Apache attempted to obtain a NOBO list to determine whether Chevedden was

included. Apache has submitted into the record two lists it obtained from the DTC. These are

“Cede breakdowns,” one from March 18, 2009 and the other from March 5, 2010, of DTC

participating brokers or banks that hold Apache stock on behalf of beneficial owners or on behalf

of brokers and their beneficial owners. (Docket Entry No. 18, Exs. 26, 27). Northern Trust appears

on both lists. RTS is not a participant in the DTC and as a result is not included on the list.

Beneficial owners are also not included.

Because of the impending annual meeting, this case has proceeded on an expedited basis.

After filing its complaint on January 8, 2010, Apache filed a motion for a speedy hearing on January

14, informing this court that the proxy materials had to be finalized by March 10, 2010. (Docket

Entry No. 3). At the hearing, this court overruled Chevedden’s objection to the method of service

and set a briefing schedule. (Docket Entry Nos. 10, 14). The parties complied.

Apache filed briefs on February 15, 2010. (Docket Entry Nos. 11, 12). Chevedden

responded on March 4, 2010. (Docket Entry No. 17), stating that he was no longer contesting

personal jurisdiction. In the response, Chevedden did not argue that Apache’s deficiency notice was

untimely. With this court’s permission, the United States Proxy Exchange filed an amicus curiae

brief on March 5, 2010. (Docket Entry No. 19). Apache filed a reply. (Docket Entry No. 20). On

March 10, 2010, Chevedden submitted a brief styled as a “Motion for Summary Judgment” to this

court’s case manager by e-mail, with a copy to Apache. Apache filed a response the same day.

(Docket Entry No. 20). The only issue before this court is whether, under Rule 14a-8, Chevedden

has provided Apache with proper proof of his eligibility to submit proposals. If he has, Apache must

include the proposal in its proxy materials.

II. Analysis

Because most Rule 14a-8 disputes are resolved cooperatively or through the no-action

process, there is little case law. See 2 HAZEN, supra, § 10.8[1][A], at 138. Indeed, the parties have

not identified, and research has not revealed, judicial opinions deciding what proof of stock

ownership is required for eligibility under Rule 14a-8(b)(2). In this case, unlike others, see Apache

Corp. v. New York City Employees Ret. Sys., 621 F. Supp. 2d 444 (S.D. Tex. 2008), the S.E.C. has

not been asked to issue a no-action letter. In presenting their arguments, the parties rely on four

sources of authority: the Rule; S.E.C. staff legal bulletins; S.E.C. staff no-action letters; and the

policy reasons for the Rule.

The text of Rule 14a-8(b)(2), in its question-and-answer format, instructs a shareholder who

is not “the registered holder” that “you must prove your eligibility to the company.” 17 C.F.R.

240.14a-8(b)(2). The parties agree that Chevedden is not the registered holder of his shares. The

rule instructs him to “submit to the company a written statement from the ‘record’ holder of [his]

securities (usually a broker or bank) verifying that” he satisfies the eligibility requirements. Id.

Apache argues that the unambiguous meaning of this language is that shareholders must submit a

letter from the entity actually registered on the company’s books. Under this interpretation,

Chevedden would have to obtain a letter from the DTC or Cede & Co.

Chevedden points to the language explaining that a “record” holder is “usually a broker or

bank.” Neither the DTC nor Cede & Co., which “usually” is the registered owner named on a

company’s shareholder list, is a broker or bank. This suggests that Apache’s reading of the word

“record” is too narrow. The parenthetical statement that the “‘record’ holder” is usually a broker

or bank is inconsistent with reading the rule to require a letter from the DTC or Cede & Co.12 It also

weighs against Apache’s interpretation that the Rule uses the word “registered” to describe

shareholders who do not need take any additional steps to prove eligibility. A “registered” holder’s

“name appears in the company’s records as a shareholder.” 17 C.F.R. § 2 40.14a-8(b)(2). If the

Rule meant that a shareholder needed a letter from the “street name” holder (usually Cede & Co.)

listed in the company records, the Rule would have asked for a letter from the “registered holder,”

not the “‘record’ holder.” The Rule text does not support Apache’s proposed narrow reading.13

The next cited source of authority is guidance issued by the S.E.C. staff. Staff Legal Bulletin

No. 14, issued on July 14, 2001, is set out in a question-and-answer format. Section C.1.c(1) states:

Q: Does a written statement from the shareholder's investment adviser verifying that the shareholder held the securities continuously for at least one year before submitting the proposal demonstrate sufficiently continuous ownership of the securities?

A: The written statement must be from the record holder of the shareholder's securities, which is usually a broker or bank. Therefore, unless the investment adviser is also the record holder, the statement would be insufficient under the rule.

Securities and Exchange Commission, Division of Corporate Finance Staff Legal Bulletin No. 14

(July 13, 2001) (emphasis added), available at http://www.sec.gov/interps/legal/cfslb14.htm. An

12The S.E.C.’s notes to the 1987 Rule amendments provides further support for this conclusion. It stated that, under the prior text of the Rule, proof could be supplied by a “record owner or an independent third party, such as a depository or broker-dealer holding the securities in street name.” S.E.C. Release No. 34-25217, 52 FR 489 48977-01, 1987 WL 153779 (Dec. 29, 1987). There is no evidence that the 1998 amendments were intended to make substantive changes to this interpretation.

13As Apache states in its reply brief, the S.E.C. rules elsewhere provide a definition of “record holder,” but limit the applicability of the definition to Rules 14a-13, 14b-1, and 14b-2. The definition does not apply to Rule 14a-8. 17 C.F.R. § 2 40.14a-1(b)(1).

update, Bulletin No. 14B, issued on September 15, 2004, repeats the Rule language, advising

companies to include the language in their notices of defect. S.E.C., Division of Corporate Finance

Staff Legal Bulletin No. 14B (Sept. 15, 2004), available at

http://www.sec.gov/interps/legal/cfslb14b.htm. These bulletins do not add significant clarity. The

information that an investment adviser’s statement is insufficient unless the adviser is also the record

holder—which, again, is “usually a broker or bank”—does not address who is a “‘record’ holder.”

The next source of cited authority is no-action letters issued by the S.E.C. staff. “[N]o-action

letters are nonbinding, persuasive authority.” Apache, 621 F. Supp. 2d at 449 (noting that the proper

weight to accord no-action letters was an issue of first impression in the Fifth Circuit and adopting

Second Circuit precedent).14 Even if the S.E.C. staff has spoken, “a court must independently

analyze the merits of a dispute.” Apache, 621 F. Supp. 2d at 449 (citing New York City Employees’

Ret. Sys. v. Brunswick Corp., 789 F. Supp. 144, 146 (S.D.N.Y. 1992)). “Because the staff's advice

on contested proposals is informal and nonjudicial in nature, it does not have precedential value with

respect to identical or similar proposals submitted to other issuers in the future.”15 “[R]egulatory

interpretations in no-action letters may nonetheless enlighten a court struggling with ambiguous

provisions in federal securities statutes or S.E.C. rules.” Nagy, supra note 9, at 996. Although this

court is not bound by S.E.C. staff determinations made in no-action letters, the letters are

“persuasive” authority.

14 See also Amalgamated Clothing & Textile Workers Union v. S.E.C., 15 F.3d 254, 257 (2d Cir. 1994); Nagy, supra note 9, at 989 (Because “deference principles assume that the responsible administrative agency has authoritatively interpreted a regulatory provision, . . .neither Chevron nor Seminole Rock mandate judicial deference to regulatory interpretations in staff no-action letters that the Commission has neither reviewed nor affirmed.” (quotations and alterations omitted)).

15 Statement of Informal Procedures for the Rendering of Staff Advice with Respect to Shareholder Proposals, S.E.C. Release No. 34-12599, 1976 WL 160411 (July 7, 1976).

Apache argues that the S.E.C. staff has consistently found that a letter from a broker stating

that an individual or institution owned a certain amount of a specific stock on certain dates is

insufficient to satisfy Rule 14a-8(b)(2). Apache argues that when companies have asserted their

intent to exclude a proposal submitted by a shareholder who has a letter from a broker not listed on

the company’s shareholder list, the S.E.C. staff will recommend no enforcement action. Apache

cites a number of letters that have reached this conclusion. For example, in JP Morgan Chase &

Co, 2008 WL 486532 (Feb. 15, 2008), Chevedden presented a proposal on behalf of Kenneth

Steiner. In response to a deficiency notice based on Rule 14a-8(b), Chevedden submitted a letter

from DJF Discount Brokers stating that it was the “introducing broker for the account of Kenneth

Steiner . . . held with National Financial Servcies Corp. as custodian” and certifying that Steiner met

the ownership requirements. Id. at *3. The S.E.C. staff attorney found this broker letter insufficient

proof of ownership under the Rule. He wrote:

While it appears that the proponent provided some indication that he owned shares, it appears that he has not provided a statement from the record holder evidencing documentary support of continuous beneficial ownership of $2,000, or 1% in market value of voting securities, for at least one year prior to submission of the proposal. We note, however, that JPMorgan Chase failed to inform the proponent of what would constitute appropriate documentation under rule 14a-8(b) in JPMorgan Chase's request for additional information from the proponent. Accordingly, unless the proponent provides JPMorgan Chase with appropriate documentary support of ownership, within seven calendar days after receiving this letter, we will not recommend enforcement action to the Commission if JPMorgan Chase omits the proposal from its proxy materials in reliance on rules 14a-8(b) and 14a-8(f).

Id. at *1. Other no-action letters from 2008 and earlier, many issued in response to requests

involving Chevedden, have also concluded that letters from introducing brokers are insufficient.

See, e.g., Verizon Communications, Inc., 2008 WL 257310 (Jan 25. 2008); MeadWestvaco Corp,

2007 WL 817472 (Mar. 12, 2007); Clear Channel Communications, 2006 WL 401184 (Feb. 9,

2006); AMR Corp., 2004 WL 892255 (Mar. 15, 2004).

According to Apache, the S.E.C. staff’s single deviation from this consistent approach was

what Apache calls the “rogue” no-action letter issued in Hain Celestial Group, 2008 WL 4717434,

(Oct. 1, 2008). In Hain Celestial, Chevedden once again wrote on behalf of Kenneth Steiner, who

submitted a shareholder proposal. The company sent a deficiency notice based on Rule 14a-8(b).

Chevedden then submitted a letter from DJF signed by its president, Mark Filberto. The letter stated

that DJF was the introducing broker for Steiner and that his shares were held by National Financial

Services as custodian. Id. at *5-6. In submitting a no-action request, Hain Celestial made arguments

similar to those advanced here by Apache. Hain Celestial cited the JP Morgan, Verizon, and

MeadWestvaco no-action letters to argue that a letter from DJF as “introducing broker” was

insufficient to satisfy the “record” holder requirement. Id. at *6. The S.E.C. staff attorney issued

an unusually detailed letter. He wrote:

We are unable to concur in your view that The Hain Celestial Group may exclude the proposal under rules 14a-8(b) and 14a-8(f). After further consideration and consultation, we are now of the view that a written statement from an introducing broker-dealer constitutes a written statement from the “record” holder of securities, as that term is used in rule 14a-8(b)(2)(i). For purposes of the preceding sentence, an introducing broker-dealer is a broker-dealer that is not itself a participant of a registered clearing agency but clears its customers' trades through and establishes accounts on behalf of its customers at a broker-dealer that is a participant of a registered clearing agency and that carries such accounts on a fully disclosed basis. Because of its relationship with the clearing and carrying broker-dealer through which it effects transactions and establishes accounts for its customers, the introducing broker-dealer is able to verify its customers' beneficial ownership. Accordingly, we do not believe that The Hain Celestial Group may omit the proposal from its proxy materials in reliance on rules 14a-8(b) and 14a-8(f).

Id.(emphasis added).

Apache argues that this letter is “wrong and should not be followed,” that it conflicts with

the “unambiguous” requirement in Rule 14a-8(b)(2), and that it is “inconsistent with the staff’s long

and otherwise unblemished line of no-action letters,” issued before and after Hain Celestial.

The argument that Rule 14a-8(b)(2) is unambiguous is not persuasive. And a closer

examination of S.E.C. staff letters shows that Hain Celestial was not a “rogue” position. The Hain

Celestial no-action letter was neither the first or last letter in which the S.E.C. staff declined to agree

that a letter from the registered owner was required under Rule 14a-8(b)(2).

In AIG, 2009 WL 772853 (Mar. 13, 2009), for example, the S.E.C. staff wrote that it was

“unable to concur” with AIG’s position that a proposal advanced by Kenneth Steiner, with

Chevedden as his representative, should be excluded under Rule 14a-8(b). Chevedden had

submitted a letter from DJF Discount Brokers stating that it was the “introducing broker” for Steiner,

that Steiner was the beneficial owner of an appropriate amount of AIG stock for an appropriate

length of time, and that National Financial Services Corp. was the “custodian” of Steiner’s

securities. Id. at *4-5. Although the S.E.C. staff did not cite Hain Celestial—the no-action letters

rarely cite precedent—the refusal to issue a no-action letter was consistent with Hain Celestial.

Indeed, the facts were similar.

In another post-Hain Celestial case in which Chevedden represented Kenneth Steiner and

submitted a similar letter from DJF Discount Brokers, the S.E.C. staff also declined to issue a no-

action letter. Schering-Plough Corp., 2009 WL 926913 (Apr. 3, 2009). The S.E.C. staff reached

the same result in two other cases in which Chevedden was a representative of shareholder

proponent William Steiner and had submitted broker letters from DJF Discount Brokers. Schering-

Plough Corp., 2009 WL 975142 (Apr. 3, 2009); Intel Corp., 2009 WL 772872 (Mar. 13, 2009). In

these three cases, the company’s Rule 14a-8(b) objection was that Chevedden, who owned no

shares, was the actual proponent of the shareholder proposal, not Steiner. In concluding that there

was no basis for exclusion under Rule 14a-8(b), the S.E.C. staff presumably would have had to find

that Steiner was the proponent and that the broker letter was sufficient to establish his stock

ownership under Rule 14a-8(b)(2).

In an interesting post-Hain Celestial case not involving Chevedden, Comerica Inc., 2009 WL

800002 (Mar. 9, 2009), the company sought to exclude a shareholder proposal by the Laborers

National Pension Fund because, among other reasons, the Fund had not provided adequate proof of

stock ownership. The Fund provided a letter from U.S. Bank confirming that it held an adequate

amount of Comerica stock on behalf of the Fund as beneficial owner. In a letter to the S.E.C., the

Fund stated:

Comerica argues that U.S. Bank was not the record holder of any Company stock because the securities were held through CEDE & Co. This argument has consistently been rejected by the Staff and should be rejected here. See Equity Office Properties Trust (March 28, 2003); Dillard Dept. Stores, Inc. (March 4, 1999).

Comerica Inc., 2009 WL 800002, at *3 (Mar. 9, 2009). The S.E.C. staff found no basis for

excluding the proposal under Rule 14a-8(b). The Fund’s citations to earlier letters are accurate and

helpful. In Equity Office Properties Trust, 2003 WL 1738866 (Mar. 28, 2003), the S.E.C. staff

found no basis for excluding a shareholder proposal from the Service Employees International

Union, which had submitted a letter from Fidelity Investments confirming that the Union was the

beneficial owner of shares “held of record by Fidelity Investments through its agent National

Financial Services.” Id. at *15. The Union’s letter to the S.E.C. staff observed: “Despite the nearly

universal practice by institutional shareholders of employing an agent such as the Depository Trust

Company (“DTC”) or NFS, the Rule indicates that the record owner from whom a statement must

be obtained is usually a broker or bank. It is unlikely that the Commission was unaware of the

ubiquity of agents when it drafted the Rule.” The company’s letter, which failed to persuade the

S.E.C. staff, argued that the Fidelity letter was insufficient because Fidelity was not the registered

owner and that it was inappropriate to require the company to determine whether National Financial

Services was in fact Fidelity’s agent. Id. at *14.

Several years earlier, in Dillard Department Stores, Inc., 1999 WL 129804 (Mar. 4, 1999),

the S.E.C. staff also stated that it did not believe there was a basis for exclusion under Rule 14a-8(b).

The shareholder proponent in that case, an investment fund, submitted a statement from the

Amalgamated Bank of New York that the fund’s “shares are held of record by the Amalgamated

Bank of New York through its agent, CEDE, Inc.” Id. at *4. Because no letter was submitted from

Cede & Co., Dillard’s argued to the S.E.C. staff that there was insufficient proof of ownership. In

its letter to the S.E.C., the fund argued that it was inconsistent with the text of Rule 14a-8(b)(2) to

require a letter from Cede & Co. The argument was that because the Rule placed the term “record”

in quotations and stated that the “‘record’ holder” would usually be a broker or bank, it would be

anomalous to require a letter from Cede & Co., which is not a bank or broker and is the registered

holder of most securities. “Beneficial owners generally have a relationship with their broker or

bank; requiring investors to obtain a letter from an agent of their broker or bank would needlessly

complicate the process and encourage the sort of petty games-playing in which Dillard’s is engaging

here.” Id. at *3. The S.E.C. staff sided with the fund.

The letters Apache cites to show that the S.EC. staff retreated from its Hain Celestial

position do not provide support for that proposition. See EQT Corp., 2010 WL 147295 (Jan. 11,

2010); Microchip Tech., Inc., 2009 WL 1526972 (May 26, 2009); Schering-Plough Corp.,2009 WL

890012 (Mar. 27, 2009); Omnicom Group, 2009 WL 772864 (Mar. 16, 2009). In these cases, the

shareholder seeking to have a proposal included in the company’s proxy materials received a

deficiency notice but either failed to submit documents intended to prove ownership or failed to do

so within the 14-day period provided by the rules. Other recent S.E.C. letters finding a basis for

exclusion under Rule 14a-8(b)(2) when a broker letter was submitted are consistent in that there

were defects in the broker letter that warranted exclusion. See, e.g., Continental Airlines, Inc., 2010

WL 387513 (Feb. 22, 2010) (shares listed in broker letter amounted to less than $2,000 in value);

Pfizer, Inc., 2010 WL 738739 (Feb. 22, 2010) (broker letter was never received by company and was

dated three days before submission of the proposal, making it incapable of establishing ownership

for a year as of the actual submission date); Intel Corp., 2009 WL 5576306 (Feb. 3, 2010) (broker

letter was dated 18 days after deficiency notice, received by the proponent 26 days late, and received

by the company 31 days late). These no-action letters all involved broker letters that were deficient

for reasons other than the nature of the broker submitting them. These no-action letters do not

provide a basis for believing that the S.E.C. staff’s reading of Rule 14a-8(b)(2) has changed since

Hain Celestial. See Pioneer Natural Resources Co., 2010 WL 128070 (Feb. 12, 2010) (finding no

basis for exclusion when the proponent, a union pension fund, had submitted a broker letter from

AmalgaTrust, which was not a registered shareholder, stating that it served as “corporate co-trustee

and custodian for the [pension fund] and is the record holder for 1,180 shares of [company] common

stock held fore the benefit of the Fund.”).

The S.E.C. staff’s position in Hain Celestial and the similar letters is more consistent with

the text of Rule 14a-8(b)(2) than the position Apache advances, that the Rule requires confirming

letters from the DTC or Cede & Co. Apache argues that the DTC does offer letters certifying a

shareholder’s beneficial stock ownership and attaches examples to its reply brief. But these

examples show that the DTC will only process letter requests forwarded to it by participants, not by

beneficial owners. The record does not show how long it takes shareholders to obtain such letters,

especially when they are not direct clients of a DTC participant. The documents Apache attached

to its reply brief show that the DTC bases its response to such requests on information supplied by

the participant. The responses state that the DTC is a “holder of record” of the company’s common

stock and that the “DTC is informed by its Participant” that a certain amount of shares “credited to

the Participant’s DTC account are beneficially owned by [John Doe], “a customer of Participant.”

(See Docket Entry No. 18, Exs. 21-24). The responses provide no indication that the DTC presents

information about beneficial owners other than what is submitted by the participant for the purpose

of preparing the letter. Nor is there information on how the participant obtains information about

beneficial owners when the participant’s customer is not the beneficial owner but the broker for the

owners. And as a practical matter, because of the “netting” system, in which DTC members report

only the net change in their ownership at the end of the day rather than the details of each transaction

between members, the DTC could not accurately certify that a participating broker—let alone that

broker’s client—had held a sufficient number of shares continuously for a year to comply with the

Rule. If a participating broker sold all its Apache shares one morning, its continuous ownership

would end, but if it bought all the shares back after lunch, the DTC might never know. Finally, as

noted, the text of Rule 14a-8(b)(2), which was amended in 1998 (well after ascendency of the

depository system), shows that the Rule does not envision companies receiving letters from the DTC

(at least not solely from the DTC). It is not a “broker or bank.” Rule 14a-8(b)(2) permits but does

not require Chevedden to obtain a letter from the DTC.

This court need not decide whether the letter from Northern Trust, the DTC participant, in

combination with the letter from RTS, met the Rule’s requirements. The January 22 letters from

RTS and Northern Trust were untimely. Any letters had to be submitted within 14 days of the

December 3, 2009 deficiency notice. The only letters submitted within that period were the

November 23 and December 10, 2009 RTS letters. The first letter stated that Chevedden had held

no less than 50 shares of Apache stock in his account at RTS since November 7, 2008. The second

letter stated that RTS was the “introducing broker for the account of John Chevedden” and that

Northern Trust was the custodian of his Apache stock. (Id., Ex. 6 at 2). The second is the type of

letter the S.E.C. staff found adequate in Hain Celestial.16 The present record does not permit the

same result in this case.

16Apache argues that this case is distinguishable from the facts in Hain Celestial because RTS was not a broker. Apache is correct that RTS does not appear on the SEC’s list of registered broker-dealers, on the FINRA membership list, or on the SIPC membership list. But neither does DJF Discount Brokers, which submitted the broker letter in Hain Celestial. RTS’s website and customer application indicate that an RTS subsidiary, Atlantic Financial Services of Maine, Inc (“AFS”)., acts as the broker for RTS customers’ securities transactions. AFS, which shares an address with RTS, is on the SEC, FINRA, and SIPC membership lists. Similarly, DJF’s website states that it is a division of R&R Planning Group LTD. R&R appears on the SEC, FINRA, and SIPC membership lists.

The Rule requires shareholders to “prove [their] eligibility.”17 The parties agree that all

Chevedden gave Apache as timely, relevant proof of ownership was the December 10 RTS letter.

Apache has described its concerns about the reliability of the statements made in the RTS letter. It

is not Apache’s burden to investigate to confirm the statements or to engage in such steps as

obtaining a NOBO list to provide independent verification of Chevedden’s status as an Apache

shareholder. Because of the limited nature of the NOBO list, Chevedden’s absence from the list

would not have been definitive. And even if Chevedden were on the list and the list indicated that

he owned a sufficient number of shares, that would not have established that he had owned those

shares continuously for a year.

RTS is not a participant in the DTC. It is not registered as a broker with the SEC, or the self-

regulating industry organizations FINRA and SIPC. Apache argues that RTS is not a broker but an

investment adviser, citing its registration as such under Maine law, representations on RAM’s

website, and federal regulations barring an investment adviser from serving as a broker or custodian

except in limited circumstances. (Docket Entry No. 18 at 14-19). Chevedden disputes that RTS has

not provided investment advice and that its “sole function is as a custodian.” (Docket Entry No. 17

at 3). The record suggests that Atlantic Financial Services of Maine, Inc., a subsidiary of RTS that

is also not a DTC participant, may be the relevant broker rather than RTS. Atlantic Financial

17Apache points out that it was not until the January 22 letters that Chevedden gave any indication that his shares were held in Cede & Co.’s name. This argument is disingenuous. Without even looking at the shareholder list, the default assumption for a publicly traded company should be that Cede & Co. holds a beneficial owner’s shares. DTCC publishes a list of DTC member banks and brokers on its website. The list is a seven-page document, with all the members listed in alphabetical order. Once the December 10 letter identified Northern Trust as custodian, it would have been easy for Apache to look at the list and see that Northern Trust was included. See Depository Trust & Clearing Corp., DTC Participant Accounts in Alphabetical Sequence, at 6, available at http://www.dtcc.com/downloads/membership/directories/dtc/alpha.pdf. Apache also had the May 2009 “Cede breakdown” listing the DTC participants that owned Apache shares. This list indicated that Northern Trust has a substantial position in Apache. It also appears from the March 2010 Cede breakdown that Apache had access to the DTC website to obtain less formal versions of the Cede breakdown owning participants owning Apache shares at any time.

Services did not submit a letter confirming Chevedden’s stock ownership. RTS did not even

mention Atlantic Financial Services in any of its letters to Apache. The nature of RTS’s corporate

structure, including whether RTS is or is not an “investment adviser” is not determinative of

eligibility. But the inconsistency between the publicly available information about RTS and the

statement in the letter that RTS is a “broker” underscores the inadequacy of the RTS letter, standing

alone, to show Chevedden’s eligibility under Rule 14a-8(b)(2).

Chevedden’s interpretation of the Rule would require companies to accept any letter

purporting to come from an introducing broker, that names a DTC participating member with a

position in the company, regardless of whether the broker was registered or the letter raised

questions. Chevedden’s interpretation of Rule 14a-8(b)(2) would not require the shareholder to

show anything. It would only require him to obtain a letter from a self-described “introducing

broker,” even if, as here, there are valid reasons to believe the letter is unreliable as evidence of the

shareholder’s eligibility. By contrast, a separate certification from a DTC participant allows a public

company at least to verify that the participant does in fact hold the company’s stock by obtaining

the Cede breakdown from the DTC, as Apache did in May 2009 and March 2010.

Chevedden did, ultimately, submit a letter from the participant, Northern Trust, along with

a letter from RTS. The January 22 Northern Trust letter refers to RTS’s account and RTS’s stock

ownership; the RTS letter submitted that same day linked RTS’s account with Northern Trust to

Chevedden. Because these letters were submitted well after the deadline, this court does not decide

whether they would have been sufficient. The only issue before this court is whether the earlier

letters from RTS – an unregistered entity that is not a DTC participant – were sufficient to prove

eligibility under Rule 14a-8(b)(2), particularly when the company has identified grounds for

believing that the proof of eligibility is unreliable. This court concludes that the December 2009

RTS letters are not sufficient.

Although section 14 of the Securities Exchange Act of 1934 (governing proxies), under

which Rule 14a-8 was promulgated, was intended to “give true vitality to the concept of corporate

democracy,” Medical Comm. for Human Rights v. SEC, 432 F.2d 659, 676 (D.C. Cir. 1970), cert.

granted sub nom SEC v. Medical Comm. for Human Rights, 401 U.S.973, 91 S. Ct. 1191 (1971),

vacated as moot, 404 U.S. 403, 92 S. Ct. 577 (1972), that does not necessitate a complete surrender

of a corporation’s rights during proxy season. Rule 14a-8 requires a shareholder seeking to

participate to register as a shareholder or prove that he owns a sufficient amount of stock for a

sufficient period to be eligible. Although this court concludes that Rule 14a-8(b)(2) is not as

restrictive as Apache contends, on the present record, Chevedden has failed to meet the Rule’s

requirements.

III. Conclusion

Apache’s motion for declaratory judgment is granted and Chevedden’s motion is denied.

Apache may exclude Chevedden’s proposal from its proxy materials.

SIGNED on March 10, 2010, at Houston, Texas.

______Lee H. Rosenthal United States District Judge

Thursday, September 16, 2010

Part II

Securities and Exchange Commission 17 CFR Parts 200, 232, 240 and 249 Facilitating Shareholder Director Nominations; Final Rule

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SECURITIES AND EXCHANGE G. Brown, Division of Investment Register a Class of Securities Under COMMISSION Management, at (202) 551–6784, U.S. Exchange Act Section 12(g) Securities and Exchange Commission, f. Smaller Reporting Companies 17 CFR PARTS 200, 232, 240 and 249 100 F Street, NE., Washington, DC 4. Who Can Use Exchange Act Rule 14a– 11 [Release Nos. 33–9136; 34–62764; IC– 20549. a. General 29384; File No. S7–10–09] SUPPLEMENTARY INFORMATION: We are b. Ownership Threshold i. Percentage of Securities RIN 3235–AK27 adding new Rule 82a of Part 200 Subpart D—Information and Requests,1 ii. Voting Power and new Rules 14a–11,2 and 14a–18,3 iii. Ownership Position Facilitating Shareholder Director iv. Demonstrating Ownership Nominations and new Regulation 14N 4 and Schedule 5 6 c. Holding Period 14N, and amending Rule 13 of d. No Change in Control Intent AGENCY: 7 8 9 Securities and Exchange Regulation S–T, Rules 13a–11, 13d–1, e. Agreements With the Company Commission. 14a–2,10 14a–4,11 14a–5,12 14a–6,13 f. No Requirement To Attend the Annual ACTION: Final rule. 14a–8,14 14a–9,15 14a–12,16 and 15d– or Special Meeting 11,17 Schedule 13G,18 Schedule 14A,19 g. No Limit on Resubmission SUMMARY: We are adopting changes to and Form 8–K,20 under the Securities 5. Nominee Eligibility Under Exchange Act the Federal proxy rules to facilitate the Exchange Act of 1934.21 Although we Rule 14a–11 effective exercise of shareholders’ are not amending Schedule 14C 22 under a. Consistent With Applicable Law and traditional State law rights to nominate the Exchange Act, the amendments will Regulation b. Independence Requirements and Other and elect directors to company boards of affect the disclosure provided in directors. The new rules will require, Director Qualifications Schedule 14C, as Schedule 14C requires c. Agreements With the Company under certain circumstances, a disclosure of some items contained in d. Relationship Between the Nominating company’s proxy materials to provide Schedule 14A. Shareholder or Group and the Nominee shareholders with information about, e. No Limit on Resubmission of and the ability to vote for, a Table of Contents Shareholder Director Nominees shareholder’s, or group of shareholders’, I. Background and Overview of Amendments 6. Maximum Number of Shareholder nominees for director. We believe that A. Background Nominees To Be Included in Company these rules will benefit shareholders by B. Our Role in the Proxy Process Proxy Materials improving corporate suffrage, the C. Summary of the Final Rules a. General disclosure provided in connection with II. Changes to the Proxy Rules b. Different Voting Rights With Regard to A. Introduction Election of Directors corporate proxy solicitations, and B. Exchange Act Rule 14a–11 c. Inclusion of Shareholder Nominees in communication between shareholders 1. Overview Company Proxy Materials as Company in the proxy process. The new rules 2. When Rule 14a–11 Will Apply Nominees apply only where, among other things, a. Interaction With State or Foreign Law 7. Priority of Nominations Received by a relevant state or foreign law does not b. Opt-In Not Required Company prohibit shareholders from nominating c. No Opt-Out a. Priority When Multiple Shareholders directors. The new rules will require d. No Triggering Events Submit Nominees e. Concurrent Proxy Contests b. Priority When a Nominating Shareholder that specified disclosures be made 3. Which Companies Are Subject to Rule concerning nominating shareholders or or Group or a Nominee Withdraws or Is 14a–11 Disqualified groups and their nominees. In addition, a. General 8. Notice on Schedule 14N the new rules provide that companies b. Investment Companies a. Proposed Notice Requirements must include in their proxy materials, c. Controlled Companies b. Comments on the Proposed Notice under certain circumstances, d. ‘‘Debt Only’’ Companies Requirements shareholder proposals that seek to e. Application of Exchange Act Rule 14a– c. Adopted Notice Requirements establish a procedure in the company’s 11 to Companies That Voluntarily i. Disclosure ii. Schedule 14N Filing Requirements governing documents for the inclusion 1 of one or more shareholder director 17 CFR 200.82a. 9. Requirements for a Company That 2 17 CFR 240.14a–11. Receives a Notice From a Nominating nominees in the company’s proxy 3 17 CFR 240.14a–18. Shareholder or Group materials. We also are adopting related 4 17 CFR 240.14n et seq. a. Procedure If Company Plans To Include changes to certain of our other rules and 5 17 CFR 240.14n–101. Rule 14a–11 Nominee regulations, including the existing 6 17 CFR 232.13. b. Procedure If Company Plans To Exclude 7 solicitation exemptions from our proxy 17 CFR 232.10 et seq. Rule 14a–11 Nominee 8 rules and the beneficial ownership 17 CFR 240.13a–11. c. Timing of Process 9 17 CFR 240.13d–1. d. Information Required in Company Proxy reporting requirements. 10 17 CFR 240.14a–2. Materials DATES: Effective Date: November 15, 11 17 CFR 240.14a–4. i. Proxy Statement 2010. 12 17 CFR 240.14a–5. ii. Form of Proxy 13 Compliance Dates: November 15, 17 CFR 240.14a–6. e. No Preliminary Proxy Statement 14 2010, except that companies that qualify 17 CFR 240.14a–8. 10. Application of the Other Proxy Rules 15 as ‘‘smaller reporting companies’’ (as 17 CFR 240.14a–9. to Solicitations by the Nominating 16 defined in 17 CFR 240.12b–2) as of the 17 CFR 240.14a–12. Shareholder or Group 17 17 CFR 240.15d–11. effective date of the rule amendments 18 a. Rule 14a–2(b)(7) 17 CFR 240.13d–102. b. Rule 14a–2(b)(8) will not be subject to Rule 14a–11 until 19 17 CFR 240.14a–101. 11. 2011 Proxy Season Transition Issues three years after the effective date. 20 17 CFR 249.308. C. Exchange Act Rule 14a–8(i)(8) FOR FURTHER INFORMATION CONTACT: 21 15 U.S.C. 78a et seq. (the ‘‘Exchange Act’’). Part 1. Background Lillian Brown, Tamara Brightwell, or 200 Subpart D—Information and Requests and Regulation S–T are also promulgated under the 2. Proposed Amendment Ted Yu, Division of Corporation Securities Act of 1933 [15 U.S.C. 77a et seq.] (the 3. Comments on the Proposal Finance, at (202) 551–3200, or, with ‘‘Securities Act’’). 4. Final Rule Amendment regard to investment companies, Kieran 22 17 CFR 240.14c–101. 5. Disclosure Requirements

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D. Other Rule Changes I. Background and Overview of affected by our proxy regulations 1. Disclosure of Dates and Voting Amendments because, as has long been recognized, a Information federally-regulated corporate proxy A. Background 2. Beneficial Ownership Reporting solicitation is the primary way for Requirements On June 10, 2009, we proposed a public company shareholders to learn 3. Exchange Act Section 16 number of changes to the Federal proxy 4. Nominating Shareholder or Group Status about the matters to be decided by the as Affiliates of the Company rules designed to facilitate shareholders’ shareholders and to make their views E. Application of the Liability Provisions traditional State law rights to nominate known to company management.24 As in the Federal Securities Laws to and elect directors. Our proposals discussed in detail below, in light of Statements Made by a Nominating sought to accomplish this goal in two these concerns, we reviewed our proxy Shareholder or Nominating Shareholder ways: (1) By facilitating the ability of regulations to determine whether they Group shareholders with a significant, long- should be revised to facilitate III. Paperwork Reduction Act term stake in a company to exercise shareholders’ ability to nominate and A. Background their rights to nominate and elect elect directors. We have taken into B. Summary of the Final Rules and directors by establishing a minimum Amendments consideration the comments received on C. Summary of Comment Letters and standard for including disclosure the proposed amendments as well as Revisions to Proposal concerning, and enabling shareholders subsequent congressional action 25 and D. Revisions to PRA Reporting and Cost to vote for, shareholder director are adopting final rules that will, for the Burden Estimates nominees in company proxy materials; first time, require company proxy 1. Rule 14a–11 and (2) by narrowing the scope of the materials, under certain circumstances, 2. Amendment to Rule 14a–8(i)(8) Commission rule that permitted to provide shareholders with 3. Schedule 14N and Exchange Act Rule companies to exclude shareholder information about, and the ability to 14a–18 proposals that sought to establish a vote for a shareholder’s, or group of 4. Amendments to Exchange Act Form 8– procedure for the inclusion of K shareholders’, nominees for director. We 5. Schedule 13G Filings shareholder nominees in company also are amending our proxy rules to 23 6. Form ID Filings proxy materials. We recognized at that provide shareholders the ability to E. Revisions to PRA Reporting and Cost time that the financial crisis that the include in company proxy materials, Burden Estimates nation and markets had experienced under certain circumstances, IV. Cost-Benefit Analysis heightened the serious concerns of shareholder proposals that seek to A. Background many shareholders about the establish a procedure in the company’s B. Summary of Rules accountability and responsiveness of governing documents for the inclusion C. Factors Affecting Scope of the New some companies and boards of directors of one or more shareholder director Rules to shareholder interests, and that these D. Benefits concerns had resulted in a loss of 24 1. Facilitating Shareholders’ Ability To See, e.g., Securit[ies] and Exchange Exercise Their State Law Rights To investor confidence. These concerns Commission Proxy Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House Comm. Nominate and Elect Directors also led to questions about whether boards were exercising appropriate on Interstate and Foreign Commerce, 78th Cong., 2. Minimum Uniform Procedure for 1st Sess., at 17–19 (1943) (Statement of the Inclusion of Shareholder Director oversight of management, whether Honorable Ganson Purcell, Chairman, Securities Nominations and Enhanced Ability for boards were appropriately focused on and Exchange Commission) (explaining the initial Shareholders To Adopt Director shareholder interests, and whether Commission rules requiring the inclusion of Nomination Procedures boards need to be more accountable for shareholder proposals in company proxy materials: ‘‘We give [a stockholder] the right in the rules to put 3. Potential Improved Board Performance their decisions regarding issues such as and Company Performance his proposal before all of his fellow stockholders compensation structures and risk along with all other proposals * * * so that they 4. More Informed Voting Decisions in management. can see then what they are and vote accordingly. Director Elections Due to Improved A principal way that shareholders can * * * The rights that we are endeavoring to assure Disclosure of Shareholder Director to the stockholders are those rights that he has Nominations and Enhanced Shareholder hold boards accountable and influence traditionally had under State law, to appear at the Communications matters of corporate policy is through meeting; to make a proposal; to speak on that E. Costs the nomination and election of proposal at appropriate length; and to have his 1. Costs Related to Potential Adverse directors. The ability of shareholders to proposal voted on. But those rights have been Effects on Company and Board effectively use their power to nominate rendered largely meaningless through the process of dispersion of security ownership through[out] the Performance and elect directors is significantly country. * * * [T]he assurance of these 2. Costs Related to Additional Complexity fundamental rights under State laws which have of Proxy Process 23 See Facilitating Shareholder Director been, as I say, completely ineffective * * * because 3. Costs Related to Preparing Disclosure, Nominations, Release No. 33–9046, 34–60089 (June of the very dispersion of the stockholders’ interests Printing and Mailing and Costs of 10, 2009) [74 FR 29024] (‘‘Proposal’’ or ‘‘Proposing throughout the country[;] whereas formerly * * * Additional Solicitations and Shareholder Release’’). The Proposing Release was published for a stockholder might appear at the meeting and Proposals comment in the Federal Register on June 18, 2009, address his fellow stockholders[, t]oday he can only V. Consideration of Burden on Competition and the initial comment period closed on August address the assembled proxies which are lying at the head of the table. The only opportunity that the and Promotion of Efficiency, 17, 2009. The Commission re-opened the comment period as of December 18, 2009 for thirty days to stockholder has today of expressing his judgment Competition and Capital Formation provide interested persons the opportunity to comes at the time he considers the execution of his VI. Final Regulatory Flexibility Analysis comment on additional data and related analyses proxy form, and we believe * * * that this is the A. Need for the Amendments that were included in the public comment file at or time when he should have the full information B. Significant Issues Raised by Public following the close of the original comment period. before him and ability to take action as he sees fit.’’); Comments In total, the Commission received approximately see also S. Rep. 792, 73d Cong., 2d Sess., 12 (1934) C. Small Entities Subject to the Rules 600 comment letters on the proposal. The public (‘‘[I]t is essential that [the stockholder] be D. Reporting, Recordkeeping and Other comments we received are available on our Web enlightened not only as to the financial condition of the corporation, but also as to the major Compliance Requirements site at http://www.;sec.gov/comments/s7-10-09/ s71009.shtml. Comments also are available for Web questions of policy, which are decided at E. Agency Action To Minimize Effect on site viewing and copying in the Commission’s stockholders’ meetings.’’). Small Entities Public Reference Room, 100 F Street, NE., 25 Dodd-Frank Wall Street Reform and Consumer VII. Statutory Authority and Text of the Washington, DC 20549, on official business days Protection Act, Public Law 111–203, § 971, 124 Stat. Amendments between the hours of 10 a.m. and 3 p.m. 1376 (2010) (‘‘Dodd-Frank Act’’).

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nominees in the company’s proxy meeting at which they may nominate divided on the necessity for, and the materials. directors. Recognizing that this failure workability of, the proposed Regulation of the proxy process was of the proxy process to facilitate amendments. Supporters of the one of the original responsibilities that shareholder nomination rights has a amendments generally believed that, if Congress assigned to the Commission as practical effect on the right to elect adopted, they would facilitate part of its core functions in 1934. The directors, the new rules will enable the shareholders’ ability to exercise their Commission has actively monitored the proxy process to more closely State law right to nominate directors proxy process since receiving this approximate the conditions of the and provide meaningful opportunities authority and has considered changes shareholder meeting. In addition, to effect changes in the composition of when it appeared that the process was because companies will be required to the board.31 These commenters not functioning in a manner that include shareholder-nominated predicted that the amendments would adequately protected the interests of candidates for director in company lead to more accountable, responsive, investors.26 One of the key tenets of the proxy materials, shareholders will and effective boards.32 Many Federal proxy rules on which the receive additional information upon commenters saw a link between the Commission has consistently focused is which to base their voting decisions. recent economic crisis and whether the proxy process functions, as Finally, we believe these changes will shareholders’ inability to have nominees nearly as possible, as a replacement for significantly enhance the confidence of included in a company’s proxy an actual in-person meeting of shareholders who link the recent materials.33 shareholders.27 This is important financial crisis to a lack of Commenters opposed to our Proposal because the proxy process represents responsiveness of some boards to believed that recent corporate shareholders’ principal means of shareholder interests.29 governance developments, including participating effectively at an annual or The Commission has, on a number of increased use of a majority voting special meeting of shareholders.28 In our prior occasions, considered whether its standard for the election of directors Proposal we noted our concern that the proxy rules needed to be amended to and certain State law changes, already Federal proxy rules may not be facilitate shareholders’ ability to provide shareholders with meaningful facilitating the exercise of shareholders’ nominate directors by having their opportunities to participate in director State law rights to nominate and elect nominees included in company proxy elections.34 These commenters viewed directors. Without the ability to materials.30 Most recently, in June 2009, effectively utilize the proxy process, we proposed amendments to the proxy 31 See letters from CII; Colorado Public shareholder nominees do not have a rules that included both a new proxy Employees’ Retirement Association (‘‘COPERA’’); realistic prospect of being elected rule, Exchange Act Rule 14a–11, that CtW Investment Group (‘‘CtW Investment Group’’); L. Dallas; Thomas P. DiNapoli (‘‘T. DiNapoli’’); because most, if not all, shareholders would require a company’s proxy Florida State Board of Administration (‘‘Florida return their proxy cards in advance of materials to provide shareholders with State Board of Administration’’); International the shareholder meeting and thus, in information about, and the ability to Corporate Governance Network (‘‘ICGN’’); Denise L. essence, cast their votes before the vote for, candidates for director Nappier (‘‘D. Nappier’’); Ohio Public Employees Retirement System (‘‘OPERS’’); Pax World; nominated by long-term shareholders or Teamsters. 26 For example, the Commission has considered groups of long-term shareholders with 32 Id. changes to the proxy rules related to the election significant holdings, and amendments 33 See letters from AFL–CIO; CalPERS; California of directors in recent years. See Security Holder State Teachers’ Retirement System (‘‘CalSTRS’’); CII; Director Nominations, Release No. 34–48626 to Rule 14a–8(i)(8) to prohibit exclusion L. Dallas; LACERA; LIUNA; Nathan Cummings (October 14, 2003) [68 FR 60784] (‘‘2003 Proposal’’); of certain shareholder proposals seeking Shareholder Proposals, Release No. 34–56160 (July Foundation; Pax World; Pershing Square; to establish a procedure in the Relational; RiskMetrics; Shareowners.org; Social 27, 2007) [72 FR 43466] (‘‘Shareholder Proposals company’s governing documents for the Proposing Release’’); Shareholder Proposals Investment Forum; SWIB; Teamsters; Trillium; Relating to the Election of Directors, Release No. inclusion of one or more shareholder Universities Superannuation; WSIB. 34–56161 (July 27, 2007) [72 FR 43488] (‘‘Election director nominees in the company’s 34 See letters from Group of 26 Corporate of Directors Proposing Release’’); and Shareholder proxy materials. We received significant Secretaries and Governance Professionals (‘‘26 ’’ ‘‘ ’’ Proposals Relating to the Election of Directors, comment on the proposed amendments. Corporate Secretaries ); 3M Company ( 3M ); Release No. 34–56914 (December 6, 2007) [72 FR Advance Auto Parts, Inc. (‘‘Advance Auto Parts’’); 70450] (‘‘Election of Directors Adopting Release’’). Overall, commenters were sharply The Allstate Corporation (‘‘Allstate’’); Avis Budget When we refer to the ‘‘2007 Proposals’’ and the Group, Inc. (‘‘Avis Budget’’); American Express comments received in 2007, we are referring to the 29 See letters from American Federation of Labor Company (‘‘American Express’’); Anadarko Shareholder Proposals Proposing Release and the and Congress of Industrial Organizations (‘‘AFL– Petroleum Corporation (‘‘Anadarko’’); Association of Election of Directors Proposing Release and the CIO’’); California Public Employees’ Retirement Corporate Counsel (‘‘Association of Corporate comments received on those proposals, unless System (‘‘CalPERS’’); Council of Institutional Counsel’’); AT&T Inc. (‘‘AT&T’’); Lawrence Behr (‘‘L. otherwise specified. Investors (‘‘CII’’); Lynne L. Dallas (‘‘L. Dallas’’); Los Behr’’); Best Buy Co., Inc. (‘‘Best Buy’’); The Boeing 27 Professor Karmel has described the Angeles County Employees Retirement Association Company (‘‘Boeing’’); Business Roundtable (‘‘BRT’’); Commission’s proxy rules as having the purpose ‘‘to (‘‘LACERA’’); Laborers’ International Union of North Robert N. Burt (‘‘R. Burt’’); State Bar of California, make the proxy device the closest practicable America (‘‘LIUNA’’); The Nathan Cummings Corporations Committee of Business Law Section substitute for attendance at the [shareholder] Foundation (‘‘Nathan Cummings Foundation’’); Pax (‘‘California Bar’’); Sean F. Campbell (‘‘S. meeting.’’ Roberta S. Karmel, The New Shareholder World Management Corp. (‘‘Pax World’’); Pershing Campbell’’); Carlson (‘‘Carlson’’); Caterpillar Inc. and Corporate Governance: Voting Power Without Square Capital Management, L.P. (‘‘Pershing (‘‘Caterpillar’’); U.S. Chamber of Commerce Center Responsibility or Risk: How Should Proxy Reform Square’’); Relational Investors, LLC (‘‘Relational’’); for Capital Markets Competitiveness (‘‘Chamber of Address the De-Coupling of Economic and Voting RiskMetrics Group, Inc. (‘‘RiskMetrics’’); Commerce/CMCC’’); Chevron Corporation Rights?, 55 Vill. L. Rev. 93, 104 (2010). Shareowner Education Network and (‘‘Chevron’’); CIGNA Corporation (‘‘CIGNA’’); W. Don 28 Historically, a shareholder’s voting rights Shareowners.org (‘‘Shareowners.org’’); Social Cornwell (‘‘W. Cornwell’’); CSX Corporation generally were exercised at a shareholder meeting. Investment Forum (‘‘Social Investment Forum’’); (‘‘CSX’’); Cummins Inc. (‘‘Cummins’’); Davis Polk & As discussed in the Proposing Release, in passing State of Wisconsin Investment Board (‘‘SWIB’’); Wardwell LLP (‘‘Davis Polk’’); Dewey & LeBoeuf the Exchange Act, Congress understood that the International Brotherhood of Teamsters (‘‘Dewey’’); E.I. du Pont de Nemours and Company securities of many companies were held through (‘‘Teamsters’’); Trillium Asset Management (‘‘DuPont’’); Eaton Corporation (‘‘Eaton’’); Michael dispersed ownership, at least in part facilitated by Corporation (‘‘Trillium’’); Universities Eng (‘‘M. Eng’’); FedEx Corporation (‘‘FedEx’’); FMC stock exchange listing of shares. Although voting Superannuation Scheme—UK (‘‘Universities Corporation (‘‘FMC Corp.’’); FPL Group, Inc. (‘‘FPL rights in public companies technically continued to Superannuation’’); Washington State Investment Group’’); Frontier Communications Corporation be exercised at a meeting, the votes cast at the Board (‘‘WSIB’’). (‘‘Frontier’’); General Electric Company (‘‘GE’’); meeting were by proxy and the voting decision was 30 For a discussion of the Commission’s previous General Mills, Inc. (‘‘General Mills’’); Charles O. made during the proxy solicitation process. This actions in this area, see the Proposing Release and Holliday, Jr. (‘‘C. Holliday’’); Honeywell structure continues to this day. the 2003 Proposal. International Inc. (‘‘Honeywell’’); Constance J.

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the amendments as inappropriately worried about the impact of the After considering the comments and intruding into matters traditionally proposed amendments on small weighing the competing interests of governed by State law or imposing a businesses.36 facilitating shareholders’ ability to ‘‘one size fits all’’ rule for all companies exercise their State law rights to and expressed concerns about ‘‘special Flutterby Kissed Unique Treasures (‘‘Flutterby’’); nominate and elect directors against interest’’ directors, forcing companies to FPL Group; Frontier; GE; Allen C. Goolsby (‘‘A. potential disruption and cost to Goolsby’’); C. Holliday; IBM; Investment Company focus on the short-term rather than the Institute (‘‘ICI’’); Intelect Corporation (‘‘Intelect’’); companies, we are convinced that creation of long-term shareholder value, JPMorgan Chase & Co. (‘‘JPMorgan Chase’’); Jones adopting the proposed amendments to and other perceived negative effects of Day; R. Clark King; Leggett & Platt Incorporated the proxy rules serves our purpose to the amendments, if adopted, on boards (‘‘Leggett’’); Teresa Liddell (‘‘T. Liddell’’); Little regulate the proxy process in the public 35 Diversified Architectural Consulting (‘‘Little’’); and companies. Finally, commenters McDonald’s Corporation (‘‘McDonald’s’’); interest and on behalf of investors. We MeadWestvaco; MedFaxx, Inc. (‘‘MedFaxx’’); are not persuaded by the arguments of Horner (‘‘C. Horner’’); International Business Medical Insurance Services (‘‘Medical Insurance’’); some commenters that the provisions of Machines Corporation (‘‘IBM’’); Jones Day (‘‘Jones MetLife; Mary S. Metz (‘‘M. Metz’’); Microsoft Rule 14a–11 are unnecessary.37 Those Day’’); Keating Muething & Klekamp PLL (‘‘Keating Corporation (‘‘Microsoft’’); John R. Miller (‘‘J. commenters argued that changes in Muething’’); James M. Kilts (‘‘J. Kilts’’); Reatha Clark Miller’’); Marcelo Moretti (‘‘M. Moretti’’); Motorola; King, Ph.D. (‘‘R. Clark King’’); Ned C. Lautenbach National Association of Corporate Directors corporate governance over the past six (‘‘N. Lautenbach’’); MeadWestvaco Corporation (‘‘NACD’’); National Association of Manufacturers years have obviated the need for a (‘‘MeadWestvaco’’); MetLife, Inc. (‘‘MetLife’’); (‘‘NAM’’); National Investor Relations Institute Federal rule to allow shareholders to Motorola, Inc. (‘‘Motorola’’); O’Melveny & Myers (‘‘NIRI’’); O’Melveny & Myers; Office Depot; Omaha place their nominees in company proxy LLP (‘‘O’Melveny & Myers’’); Office Depot, Inc. Door & Window (‘‘Omaha Door’’); The Procter & (‘‘Office Depot’’); Pfizer Inc. (‘‘Pfizer’’); Protective Gamble Company (‘‘P&G’’); PepsiCo, Inc. materials and that shareholders should Life Corporation (‘‘Protective’’); Sullivan & (‘‘PepsiCo’’); Pfizer; Realogy Corporation be left to determine whether, on a Cromwell LLP (‘‘S&C’’); Safeway Inc. (‘‘Safeway’’); (‘‘Realogy’’); Jared Robert (‘‘J. Robert’’); Marissa company-by-company basis, such a rule Sara Lee Corporation (‘‘Sara Lee’’); Shearman & Robert (‘‘M. Robert’’); RPM International Inc. is necessary at any particular company. Sterling LLP (‘‘Shearman & Sterling’’); The Sherwin- (‘‘RPM’’); Ryder System, Inc. (‘‘Ryder’’); Safeway; Williams Company (‘‘Sherwin-Williams’’); Sidley Ralph S. Saul (‘‘R. Saul’’); Shearman & Sterling; While we recognize that some states, 38 Austin LLP (‘‘Sidley Austin’’); Simpson Thacher & Sherwin-Williams; Raymond F. Simoneau (‘‘R. such as Delaware, have amended their Bartlett LLP (‘‘Simpson Thacher’’); Tesoro Simoneau’’); Society of Corporate Secretaries and state corporate law to enable companies Corporation (‘‘Tesoro’’); Textron Inc. (‘‘Textron’’); Governance Professionals, Inc. (‘‘Society of to adopt procedures for the inclusion of Texas Instruments Corporation (‘‘TI’’); Gary L. Corporate Secretaries’’); The Southern Company shareholder director nominees in Tooker (‘‘G. Tooker’’); UnitedHealth Group (‘‘Southern Company’’); Southland Properties, Inc. 39 Incorporated (‘‘UnitedHealth’’); Unitrin, Inc. (‘‘Southland’’); The Steele Group (‘‘Steele Group’’); company proxy materials, as was (‘‘Unitrin’’); U.S. Bancorp (‘‘U.S. Bancorp’’); Style Crest Enterprises, Inc. (‘‘Style Crest’’); Tesoro; Wachtell, Lipton, Rosen & Katz (‘‘Wachtell’’); Wells Textron; Theragenics Corporation (‘‘Theragenics’’); Daycare (‘‘Ms. Dee’’); Gavin Napolitano (‘‘G. Fargo & Company (‘‘Wells Fargo’’); West Chicago TI; Richard Trummel (‘‘R. Trummel’’); Terry Napolitano’’); NK Enterprises (‘‘NK’’); Hugh S. Olson Chamber of Commerce & Industry (‘‘West Chicago Trummel (‘‘T. Trummel’’); Viola Trummel (‘‘V. (‘‘H. Olson’’); Parts and Equipment Supply Co. Chamber’’); Weyerhaeuser Company Trummel’’); tw telecom inc. (‘‘tw telecom’’); Laura (‘‘PESC’’); Pioneer Heating & Air Conditioning (‘‘Weyerhaeuser’’); Xerox Corporation (‘‘Xerox’’); D’Andrea Tyson (‘‘L. Tyson’’); United Brotherhood (‘‘Pioneer Heating & Air Conditioning’’); RC Yahoo! (‘‘Yahoo’’). of Carpenters and Joiners of America (‘‘United Furniture Restoration (‘‘RC’’); RTW Enterprises Inc. 35 See letters from 26 Corporate Secretaries; Brotherhood of Carpenters’’); UnitedHealth; U.S. (‘‘RTW’’); Debbie Sapp (‘‘D. Sapp’’); Southwest American Bar Association (‘‘ABA’’); ACE Limited Bancorp; VCG Holding Corporation (‘‘VCG’’); Business Brokers (‘‘SBB’’); Security Guard IT&T (‘‘ACE’’); Advance Auto Parts; AGL Resources Wachtell; The Way to Wellness (‘‘Wellness’’); Wells Alarms, Inc. (‘‘SGIA’’); Peggy Sicilia (‘‘P. Sicilia’’); (‘‘AGL’’); Aetna Inc. (‘‘Aetna’’); Allstate; Alston & Fargo; Whirlpool Corporation (‘‘Whirlpool’’); Xerox; Slycers Sandwich Shop (‘‘Slycers’’); Southern Bird LLP (‘‘Alston & Bird’’); American Bankers Yahoo; Jeff Young (‘‘J. Young’’). Services (‘‘Southern Services’’); Steele Group; Association (‘‘American Bankers Association’’); The 36 See letters from ABA; American Mailing Sylvron Travels (‘‘Sylvron’’); Theragenics; Erin American Business Conference (‘‘American Service (‘‘American Mailing’’); All Cast, Inc. (‘‘All White Tremaine (‘‘E. Tremaine’’); Wagner Health Business Conference’’); American Electric Power Cast’’); Always N Bloom (‘‘Always N Bloom’’); Center (‘‘Wagner’’); Wagner Industries (‘‘Wagner Company, Inc. (‘‘American Electric Power’’); American Carpets (‘‘American Carpets’’); John Industries’’); Wellness; West End Auto Paint & Body Anadarko; Applied Materials, Inc. (‘‘Applied Arquilla (‘‘J. Arquilla’’); Beth Armburst (‘‘B. (‘‘West End’’); Y.M. Inc. (‘‘Y.M.’’); J. Young. Materials’’); Artistic Land Designs LLC (‘‘Artistic Armburst’’); Artistic Land Designs; Charles Atkins 37 See, e.g., letters from 26 Corporate Secretaries; Land Designs’’); Association of Corporate Counsel; (‘‘C. Atkins’’); Book Celler (‘‘Book Celler’’); Kathleen 3M; Advance Auto Parts; Allstate; Avis Budget; Avis Budget; Atlantic Bingo Supply, Inc. (‘‘Atlantic G. Bostwick (‘‘K. Bostwick’’); Brighter Day Painting American Express; Anadarko; Association of Bingo’’); L. Behr; Best Buy; Biogen Idec Inc. (‘‘Brighter Day Painting’’); Colletti and Associates Corporate Counsel; AT&T; L. Behr; Best Buy; (‘‘Biogen’’); James H. Blanchard (‘‘J. Blanchard’’); (‘‘Colletti’’); Commercial Concepts (‘‘Commercial Boeing; BRT; R. Burt; California Bar; S. Campbell; Boeing; Tammy Bonkowski (‘‘T. Bonkowski’’); Concepts’’); Complete Home Inspection (‘‘Complete Carlson; Caterpillar; Chamber of Commerce/CMCC; BorgWarner Inc. (‘‘BorgWarner’’); Boston Scientific Home Inspection’’); Debbie Courtney (‘‘D. Chevron; CIGNA; W. Cornwell; CSX; Cummins; Corporation (‘‘Boston Scientific’’); The Brink’s Courtney’’); Sue Crawford (‘‘S. Crawford’’); Crespin’s Davis Polk; Dewey; DuPont; Eaton; M. Eng; FedEx; Company (‘‘Brink’s’’); BRT; Burlington Northern Cleaning, Inc. (‘‘Crespin’’); Don’s Tractor Repair FMC Corp.; FPL Group; Frontier; GE; General Mills; Santa Fe Corporation (‘‘Burlington Northern’’); R. (‘‘Don’s’’); Theresa Ebreo (‘‘T. Ebreo’’); M. Eng; Joseph A. Grundfest, Stanford Law School (July 24, Burt; California Bar; Callaway Golf Company eWareness, Inc. (‘‘eWareness’’); Evans Real Estate 2009) (‘‘Grundfest’’); C. Holliday; Honeywell; C. (‘‘Callaway’’); S. Campbell; Carlson; Carolina Mills Investments, LLC (‘‘Evans’’); Fluharty Antiques Horner; IBM; Jones Day; Keating Muething; J. Kilts; (‘‘Carolina Mills’’); Caterpillar; Chamber of (‘‘Fluharty’’); Flutterby; Fortuna Italian Restaurant & R. Clark King; N. Lautenbach; MeadWestvaco; Commerce/CMCC; Chevron; Rebecca Chicko (‘‘R. Pizza (‘‘Fortuna Italian Restaurant’’); Future Form Metlife; Motorola; O’Melveny & Myers; Office Chicko’’); CIGNA; Comcast Corporation (‘‘Comcast’’); Inc. (‘‘Future Form Inc.’’); Glaspell Goals Depot; Pfizer; Protective; S&C; Safeway; Sara Lee; Competitive Enterprise Institute’s Center for (‘‘Glaspell’’); Cheryl Gregory (‘‘C. Gregory’’); Shearman & Sterling; Sherwin-Williams; Sidley Investors and Entrepreneurs (‘‘Competitive Healthcare Practice Management, Inc. (Healthcare Austin; Simpson Thacher; Tesoro; Textron; TI; G. Enterprise Institute’’); W. Cornwell; CSX; Edwin Practice’’); Brian Henderson (‘‘B. Henderson’’); Sheri Tooker; UnitedHealth; Unitrin; U.S. Bancorp; Culwell (‘‘E. Culwell’’); Cummins; Darden Henning (‘‘S. Henning’’); Jaynee Herren (‘‘J. Herren’’); Wachtell; Wells Fargo; West Chicago Chamber; Restaurants, Inc. (‘‘Darden Restaurants’’); Daniels Ami Iriarte (‘‘A. Iriarte’’); Jeremy J. Jones (‘‘J. Jones’’); Weyerhaeuser; Xerox; Yahoo. Manufacturing Corporation (‘‘Daniels Juz Kidz Nursery and Preschool (‘‘Juz Kidz’’); 38 We refer to Delaware law frequently because of Manufacturing’’); Davis Polk; Delaware State Bar Kernan Chiropractic Center (‘‘Kernan’’); LMS Wine the large percentage of public companies Association (‘‘Delaware Bar’’); Tom Dermody (‘‘T. Creators (‘‘LMS Wine’’); Tabitha Luna (‘‘T. Luna’’); incorporated under that law. The Delaware Division Dermody’’); Devon Energy Corporation (‘‘Devon’’); Mansfield Children’s Center, Inc. (‘‘Mansfield of Corporations reports that over 50% of U.S. public DTE Energy Company (‘‘DTE Energy’’); Eaton; The Children’s Center’’); Denise McDonald (‘‘D. companies are incorporated in Delaware. See Edison Electric Institute (‘‘Edison Electric McDonald’’); Meister’s Landscaping (‘‘Meister’’); http://www.corp.delaware.gov. Institute’’); Eli Lilly and Company (‘‘Eli Lilly’’); Merchants Terminal Corporation (‘‘Merchants 39 Del. Code Ann. tit. 8, § 112. In December 2009, Emerson Electric Co. (‘‘Emerson Electric’’); M. Eng; Terminal’’); Middendorf Bros. Auctioneers and Real the Committee on Corporate Laws of the American Erickson Retirement Communities, LLC Estate (‘‘Middendorf’’); Mingo Custom Woods Bar Association Section of Business Law Committee (‘‘Erickson’’); ExxonMobil Corporation (‘‘Mingo’’); Moore Brothers Auto Truck Repair adopted amendments to the Model Act that (‘‘ExxonMobil’’); FedEx; Financial Services (‘‘Moore Brothers’’); Mouton’s Salon (‘‘Mouton’’); explicitly authorize bylaws that prescribe Roundtable (‘‘Financial Services Roundtable’’); Doug Mozack (‘‘D. Mozack’’); Ms. Dee’s Lil Darlins Continued

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highlighted by a number of commenters, voting.41 We agree with commenters 42 14a–11, such as with a lower ownership other states have not.40 These who argued that a majority voting threshold, a shorter holding period, or commenters noted that, as a result, standard in director elections does not to allow for a greater number of companies not incorporated in Delaware address the need for a rule to facilitate nominees if shareholders of a company could frustrate shareholder efforts to the inclusion of shareholder nominees support such standards. establish procedures for shareholders to for director in company proxy materials. We recognize that many commenters place board nominees in the company’s While majority voting impacts advocated that shareholders’ ability to proxy materials by litigating the validity shareholders’ ability to elect candidates include nominees in company proxy materials should be determined of a shareholder proposal establishing put forth by management, it does not exclusively by what individual such procedures, or possibly repealing affect shareholders’ ability to exercise their right to nominate candidates for companies or their shareholders shareholder-adopted bylaws director. affirmatively choose to provide, or that establishing such procedures. In We also do not believe that the recent companies or their shareholders should addition, due to the difficulty that amendments to New York Stock be able to opt out of Rule 14a–11 or shareholders could have in establishing Exchange (NYSE) Rule 452, which otherwise alter its terms for individual such procedures, we believe that it eliminated brokers’ discretionary voting companies (the ‘‘private ordering’’ would be inappropriate to rely solely on authority in director elections, negate arguments).46 After careful an enabling approach to facilitate the need for the rule. Certain consideration of the numerous shareholders’ ability to exercise their commenters specifically noted their comments advocating this State law rights to nominate and elect concurrence with us on this point.43 perspective,47 we believe that the directors. Even if bylaw amendments to The amendments to NYSE Rule 452 arguments in favor of this perspective permit shareholders to include address who exercises the right to vote are flawed for several reasons. nominees in company proxy materials rather than shareholders’ ability to have First, corporate governance is not were permissible in every state, their nominees put forth for a vote. merely a matter of private ordering. shareholder proposals to so amend While these and other changes have Rights, including shareholder rights, are company bylaws could face significant been important events, they bolster artifacts of law, and in the realm of obstacles. shareholders’ ability to elect directors corporate governance some rights who are already on the company’s proxy cannot be bargained away but rather are We also considered whether the move card, not their ability to affect who imposed by statute. There is nothing by many companies away from plurality appears on that card. We therefore are novel about mandated limitations on voting to a general policy of majority convinced that the Federal proxy rules private ordering in corporate voting in uncontested director elections should be amended to better facilitate governance.48 should lead to a conclusion that our the exercise of shareholders’ rights actions are unnecessary or whether we under State law to nominate directors. 46 See letters from 26 Corporate Secretaries; ABA; should premise our actions on the We also considered whether we ACE; Advance Auto Parts; AGL; Aetna; Allstate; should amend Rule 14a–8 to narrow the Alston & Bird; American Bankers Association; failure of a company to adopt majority American Business Conference; American Electric ‘‘election exclusion,’’ without also Power; Anadarko; Applied Materials; Artistic Land shareholder access to company proxy materials or adopting Rule 14a–11. We note that a Designs; Association of Corporate Counsel; Avis reimbursement of proxy solicitation expenses. See significant number of commenters Budget; Atlantic Bingo; L. Behr; Best Buy; Biogen; ABA Press Release, ‘‘Corporate Laws Committee supported the proposed amendments to J. Blanchard; Boeing; T. Bonkowski; BorgWarner; Adopts New Model Business Corporation Act 44 Boston Scientific; Brink’s; BRT; Burlington Rule 14a–8(i)(8). We concluded, Northern; R. Burt; California Bar; Callaway; S. Amendments to Provide For Proxy Access And however, as certain commenters pointed Campbell; Carlson; Carolina Mills; Caterpillar; Expense Reimbursement,’’ December 17, 2009, out, that adopting only the proposed Chamber of Commerce/CMCC; Chevron; R. Chicko; available at http://www.abanet.org/abanet/media/ CIGNA; Comcast; Competitive Enterprise Institute; _ amendments to Rule 14a–8(i)(8), release/news release.cfm?releaseid=848. W. Cornwell; CSX; E. Culwell; Cummins; Darden In addition, in 2007, North Dakota amended its without Rule 14a–11, would not achieve Restaurants; Daniels Manufacturing; Davis Polk; 45 corporate code to permit 5% shareholders to the Commission’s stated objectives. We Delaware Bar; T. Dermody; Devon; DTE Energy; provide a company notice of intent to nominate believe that the amendments to Rule Eaton; Edison Electric Institute; Eli Lilly; Emerson directors and require the company to include each 14a–8(i)(8) will provide shareholders Electric; M. Eng; Erickson; ExxonMobil; FedEx; such shareholder nominee in its proxy statement with an important mechanism for Financial Services Roundtable; Flutterby; FPL and form of proxy. N.D. Cent. Code § 10–35–08 Group; Frontier; GE; A. Goolsby; Grundfest; C. including in company proxy materials Holliday; IBM; ICI; Intelect; JPMorgan Chase; Jones (2009); see North Dakota Publicly Traded proposals that would address the Day; R. Clark King; Leggett; T. Liddell; Little; Corporations Act, N.D. Cent. Code § 10–35 et al. McDonald’s; MeadWestvaco; MedFaxx; Medical (2007). inclusion of shareholder director nominees in the company’s proxy Insurance; Metlife; M. Metz; Microsoft; J. Miller; M. 40 See letters from American Federation of State, Moretti; Motorola; NACD; NAM; NIRI; O’Melveny County and Municipal Employees (‘‘AFSCME’’); materials in ways that supplement Rule & Myers; Office Depot; Omaha Door; P&G; PepsiCo; AllianceBernstein L.P. (‘‘AllianceBernstein’’); Pfizer; Realogy; J. Robert; M. Robert; RPM; Ryder; Amalgamated Bank LongView Funds 41 Despite the rate of adoption of a majority voting Safeway; R. Saul; Shearman & Sterling; Sherwin- (‘‘Amalgamated Bank’’); Association of British standard for director elections by companies in the Williams; R. Simoneau; Society of Corporate Insurers (‘‘British Insurers’’); CalPERS; CII; The S&P 500, only a small minority of firms in the Secretaries; Southern Company; Southland; Steele Corporate Library (‘‘Corporate Library’’); L. Dallas; Russell 3000 index have adopted them. See Group; Style Crest; Tesoro; Textron; Theragenics; Florida State Board of Administration; ICGN; discussion in footnote 69 in the Proposing Release. TI; R. Trummel; T. Trummel; V. Trummel; tw 42 telecom; L. Tyson; United Brotherhood of LIUNA; D. Nappier; Paul M. Neuhauser (‘‘P. See letters from AFSCME; AllianceBernstein; CalPERS; CII; L. Dallas; D. Nappier; P. Neuhauser; Carpenters; UnitedHealth; U.S. Bancorp; VCG; Neuhauser’’); Comment Letter of Nine Securities RiskMetrics; TIAA–CREF. One commenter Wachtell; Wellness; Wells Fargo; Whirlpool; Xerox; and Governance Law Firms (‘‘Nine Law Firms’’); Pax characterized a majority voting standard as a Yahoo; J. Young. World; Pershing Square; theRacetotheBottom.org mechanism for ‘‘registering negative sentiment’’ 47 See id. (‘‘RacetotheBottom’’); RiskMetrics; Schulte Roth & about an incumbent board nominee, not a 48 For example, quite a few aspects of Delaware Zabel LLP (‘‘Schulte Roth & Zabel’’); Sodali mechanism to ensure board accountability. See corporation law are mandatory (i.e., not capable of (‘‘Sodali’’); Teachers Insurance and Annuity letter from AFSCME. modification by agreement or provision in the Association of America and College Retirement 43 See letters from CII; Sodali; USPE. certificate of incorporation or bylaws), including: (i) Equities Fund (‘‘TIAA–CREF’’); United States Proxy 44 For a list of these commenters, see footnotes The requirement to hold an annual election of Exchange (‘‘USPE’’); ValueAct Capital, LLC 677, 678, and 679 below. directors (Del. Code Ann., tit. 8, § 211(b); Jones (‘‘ValueAct Capital’’). 45 See letters from CII; USPE. Apparel Group v. Maxwell Shoe Co., 883 A.2d 837,

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Second, the argument that there is an of the Federal securities laws can be existence of that right in the absence of inconsistency between mandating waived by referendum. A rule that such a statute may be challenged. inclusion of shareholder nominees in would permit some shareholders (even Moreover, we understand that under company proxy materials and our a majority) to restrict the Federal Delaware law, the board of directors is concern for the rights of shareholders securities law rights of other ordinarily free, subject to its fiduciary under the Federal securities laws 49 shareholders would be without duties, to amend or repeal any mistakenly assumes that basic precedent and, we believe, a shareholder-adopted bylaw.51 In protections of, and rights of, particular fundamental misreading of basic addition, not all state statutes confer shareholders provided under the premises of the Federal securities laws. upon shareholders the power to adopt Federal proxy rules should be able to be In addition, allowing some shareholders and amend bylaws, and even where abrogated by ‘‘the shareholders’’ of a to impair the ability of other shareholders have that power it is particular corporation, acting in the shareholders to have their director frequently limited by requirements in aggregate. The rules we adopt today nominees included in company proxy the company’s governing documents provide individual shareholders the materials cannot be reconciled with the that bylaw amendments be approved by ability to have director nominees purpose of the rules we are adopting a supermajority shareholder vote.52 included in the corporate proxy today. In our view, it would be no more After careful consideration of the materials if State law 50 and governing appropriate to subject a Federal proxy options that commenters have corporate documents permit a rule that provides the ability to include suggested, we have determined that the shareholder to nominate directors at the nominees in the company proxy most effective way to facilitate shareholder meeting and the statement to a shareholder vote than it shareholders’ exercise of their requirements of Rule 14a–11 are would be to subject any other aspect of traditional State law rights to nominate satisfied. Those rules similarly facilitate the proxy rules—including the other and elect directors would be through the right of individual shareholders to required disclosures—to abrogation by Rule 14a–11 and the related vote for those nominated, whether by shareholder vote. amendments to the proxy rules that we management or another shareholder, if Third, the net effect of our rules will proposed in June 2009. We have the shareholder has voting rights under be to expand shareholder choice, not concluded that the ability to include State law and the company’s governing limit it. Our rules will result in a greater shareholder nominees in company documents. The rules we adopt today number of nominees appearing on a proxy materials pursuant to Rule 14a– reflect our judgment that the proxy rules proxy card. Shareholders will continue 11 53 must be available to shareholders should better facilitate shareholders’ to have the opportunity to vote solely who are entitled under State law to effective exercise of their traditional for management candidates, but our nominate and elect directors, regardless State law rights to nominate directors rules will also give shareholders the of any provision of State law or a and cast their votes for nominees. When opportunity to vote for director company’s governing documents that the Federal securities laws establish candidates who otherwise might not purports to waive or prohibit the use of protections or create rights for security have been included in company proxy Rule 14a–11. In this regard, we note that holders, they do so individually, not in materials. although the rules we are adopting do some aggregated capacity. No provision In addition to these basic conclusions, not permit a company or its we note that there are other significant shareholders to opt out of or alter the 848–849 (Del. Ch. 2004) citing Rohe v. Reliance concerns raised by a private ordering application of Rule 14a–11, the Training Network, Inc., 2000 Del. Ch. LEXIS 108 at approach. A company-by-company amendments do contemplate that any *10–*11 (Del. Ch. July 21, 2000)); (ii) the limitation shareholder vote on the applicability of against dividing the board of directors into more additional ability to include shareholder than three classes (Del. Code Ann., tit. 8, § 141(d); Rule 14a–11 would involve substantial nominees in the company’s proxy see also Jones Apparel); (iii) the entitlement of direct and indirect, market-wide costs, materials that may be established in a stockholders to inspect the list of stockholders and and it is possible that boards of company’s governing documents will be other corporate books and records (Del. Code Ann., directors, or shareholders acting with tit. 8, §§ 219(a) and 220(b); Loew’s Theatres, Inc. v. permissible under our rules. Moreover, Commercial Credit Co., 243 A.2d 78, 81 (Del. Ch. their explicit or implicit encouragement, our amendments to Rule 14a–8 will 1968)); (iv) the right of stockholders to vote as a might seek such shareholder votes, facilitate the presentation of proposals class on certain amendments to the certificate of perhaps repeatedly, at no financial cost by shareholders to adopt company- incorporation (Del. Code Ann., tit. 8, § 242(b)(2)); to themselves but at considerable cost to (v) appraisal rights (Del. Code Ann., tit. 8, § 262(b)); and (vi) fiduciary duties of corporate directors the company and its shareholders. 51 It has been argued to us, as a basis for (Siegman v. Tri-Star Pictures, Inc., C.A. No. 9477 Another concern relates to the nature of excluding a shareholder proposal under Rule 14a– (Del. Ch. May 5, 1989, revised May 30, 1989), the shareholder vote on whether to opt 8, that Delaware law does not permit a bylaw to reported at 15 Del. J. Corp. L. 218, 236 (1990); cf. out of Rule 14a–11: Specifically, in that deprive the board of directors of the power to Del. Code Ann., tit. 8, § 102(b)(7), permitting amend or repeal it, where the corporation’s elimination of director liability for monetary context management can draw on the certificate of incorporation confers upon the board damages for breach of the duty of care). See also full resources of the corporation to the power to adopt, amend and repeal bylaws. See, Edward P. Welch and Robert S. Saunders, What We promote the adoption of an opt-out, e.g., CVS Caremark Corp., No-Action Letter (March Can Learn From Other Statutory Schemes: Freedom while disaggregated shareholders have 9, 2010). See also Del. Code Ann., tit. 8, § 109(b) And Its Limits In The Delaware General and Centaur Partners, IV v. National Intergroup, Corporation Law, 33 Del. J. Corp. L. 845, 857–859 no similarly effective platform from Inc., 582 A.2d 923, 929 (Del. 1990). (2008); Jeffrey N. Gordon, Contractual Freedom In which to advocate against an opt-out. 52 See Beth Young, The Corporate Library, ‘‘The Corporate Law: Articles & Comments; The In addition, the path to shareholder Limits of Private Ordering: Restrictions on Mandatory Structure Of Corporate Law, 89 Colum. adoption of a procedure to include Shareholders’ Ability to Initiate Governance Change L. Rev. 1549, 1554 n.16 (1989) (identifying several nominees in company proxy materials is and Distortions of the Shareholder Voting Process’’ of these and other mandatory aspects of Delaware (November 2009), available at http://www.sec.gov/ corporation law). by no means free of obstructions. While comments/s7-10-09/s71009-568.pdf. See, e.g., Ind. 49 See letters from Grundfest; Form Letter Type A. shareholders may ordinarily have the Code § 23–1–39–1; Okla. Stat., tit. 18, § 18–1013. Cf. letter from Nine Law Firms. State law right to adopt bylaws 53 Throughout this release, when we refer to ‘‘a 50 In the case of a non-U.S. domiciled issuer that providing for inclusion of shareholder nomination pursuant to Rule 14a–11,’’ a ‘‘Rule 14a– does not qualify as a foreign private issuer (as 11 nomination,’’ or other similar statement, we are defined in Exchange Act Rule 3b–4), we will look nominees in company proxy materials referring to a nomination submitted for inclusion in to the underlying law of the jurisdiction of even in the absence of an explicit a company’s proxy materials pursuant to Rule 14a– organization. See Rule 14a–11(a). authorizing statute like Delaware’s, the 11.

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specific procedures for including any event, Congress confirmed our Rule 14a–11 with significant shareholder nominees for director in authority in this area and removed any modifications in response to the company proxy materials, and our doubt that we have authority to adopt a comments. We believe that the new rule adoption of new Exchange Act Rule rule such as Rule 14a–11.57 As will benefit shareholders and protects 14a–18 (which requires disclosure described more fully below, Rule 14a– investors by improving corporate concerning the nominating shareholder 11 is necessary and appropriate in the suffrage, the disclosure provided in or group and the nominee or nominees public interest and for the protection of connection with corporate proxy that generally is consistent with that investors.58 Additionally, as explained solicitations, and communication currently required in an election below, the terms and conditions of Rule between shareholders in the proxy contest) will help assure that investors 14a–11 are also in the interests of process. Consistent with the Proposal, are adequately informed about shareholders and for the protection of Rule 14a–11 will apply only when shareholder nominations made through investors.59 Therefore, this challenge is applicable State law or a company’s such procedures. now moot. governing documents do not prohibit In contrast, if State law 54 or a Although our statutory authority to shareholders from nominating a provision of the company’s governing adopt Rule 14a–11 is no longer at issue, candidate for election as a director. In documents were ever to prohibit a the constitutionality of Rule 14a–11 also addition, as adopted, the rule will apply shareholder from making a nomination has been challenged by commenters. We to a foreign issuer that is otherwise (as opposed to including a validly disagree with their arguments.60 Proxy subject to our proxy rules only when nominated individual in the company’s regulations do not infringe on corporate applicable foreign law does not prohibit proxy materials), Rule 14a–11 would First Amendment rights both because shareholders from making such not require the company to include in ‘‘management has no interest in nominations. Also consistent with the its proxy materials information about, corporate property except such interest Proposal, companies may not ‘‘opt out’’ and the ability to vote for, any such as derives from the shareholders,’’ and of the rule—either in favor of a different nominee. The rule defers entirely to because such regulations ‘‘govern speech framework for inclusion of shareholder State law as to whether shareholders by a corporation to itself’’ and therefore director nominees in company proxy have the right to nominate directors and ‘‘do not limit the range of information materials or no framework. In addition, what voting rights shareholders have in that the corporation may contribute to as was proposed, the rule will apply the election of directors. the public debate.’’ 61 Even if statements regardless of whether any specified While we have concluded that we in proxy materials are viewed as more event has occurred to trigger the rule should provide shareholders the means than merely internal communications, and will apply regardless of whether the to have nominees included in proxy this communication is of a company is subject to a concurrent materials in certain circumstances, we commercial—not political—nature, and proxy contest.63 Also as proposed, the also are mindful that to accomplish this regulation of such statements through final rule will apply to companies that goal the regulatory structure must arrive Rule 14a–11 is consistent with are subject to the Exchange Act proxy at a solution that ultimately is workable. applicable First Amendment rules, including investment companies Accordingly, we are adopting a number standards.62 and controlled companies, but will not of significant changes to the rules we apply to ‘‘debt-only’’ companies. The C. Summary of the Final Rules proposed in order to address the many rule will apply to smaller reporting thoughtful and constructive comments As noted above, we carefully companies, but we have decided to we received on the specifics of our considered the comments and have delay the rule’s application to these proposed amendments. The changes decided to adopt new Exchange Act companies for three years. We believe that we are making to the amendments that a delayed effective date for smaller are described in detail throughout this not narrowly train [S]ection 14(a) on the interest of reporting companies should allow those stockholders in receiving information necessary to release. There also were a number of the intelligent exercise of their’’ State law rights; companies to observe how the rule suggested changes that we considered Section 14(a) also ‘‘shelters use of the proxy operates for other companies and and decided not to adopt, as detailed solicitation process as a means by which should allow them to better prepare for below. stockholders * * * may communicate with each implementation of the rules. Delayed other.’’); see also, e.g., TSC Indus., Inc. v. Northway, implementation for these companies B. Our Role in the Proxy Process Inc., 426 U.S. 438, 449 n.10 (1976) (Section 14(a) is a grant of ‘‘broad statutory authority’’). The also will allow us to evaluate the Several commenters challenged our adoption of Rule 14a–11 reflects our continuing implementation of Rule 14a–11 by authority to adopt Rule 14a–11.55 We purpose to ensure that proxies are used as a means larger companies and provide us with considered those comments carefully to enhance the ability of shareholders to make informed choices, especially on the critical subject the additional opportunity to consider but continue to believe that we have the of who sits on the board of directors. whether adjustments to the rule would authority to adopt Rule 14a–11 under 57 Dodd-Frank Act § 971(a) and (b). These be appropriate for smaller reporting Section 14(a) as originally enacted.56 In provisions expressly provide that the Commission companies before the rule becomes may issue rules permitting shareholders to use an applicable to them. To use Rule 14a–11, issuer’s proxy solicitation materials for the purpose 54 In the case of a non-U.S. domiciled issuer that a nominating shareholder or group will does not qualify as a foreign private issuer, we will of nominating individuals to membership on the look to the underlying law of the jurisdiction of board of directors of the issuer. be required to satisfy an ownership organization. See footnote 50 above. 58 Exchange Act § 14(a) and Investment Company threshold of at least 3% of the voting 55 See letters from Ameriprise; AT&T; L. Behr; Act § 20(a). power of the company’s securities BRT; Burlington Northern; CMCC; Dewey; M. Eng; 59 Dodd-Frank Act § 971(b). entitled to be voted at the meeting. 60 FedEx; Grundfest; Keating Muething; OPLP; Sidley See letter from BRT. Shareholders will be able to aggregate Austin. 61 Pacific Gas and Electric Company v. Public 56 When it adopted Section 14(a) of the Exchange Utilities Comm’n of California, 475 U.S. 1, 14 n.10 their shares to meet the threshold. The Act, Congress determined that the exercise of (1986) (emphasis in original). shareholder voting rights via the corporate proxy is 62 Nor does Rule 14a–11 violate the Fifth 63 Throughout this release, the terms ‘‘proxy a matter of Federal concern, and the statute’s grant Amendment, as it does not constitute a regulatory contest,’’ ‘‘election contest,’’ and ‘‘contested election’’ of authority is not limited to regulating disclosure. taking. See, e.g., Lingle v. Chevron U.S.A., 544 U.S. refer to any election of directors in which another Roosevelt v. E.I. DuPont de Nemours & Co., 958 528, 546–47 (2005); Penn Central Transp. Co. v. party commences a solicitation in opposition F.2d 416, 421–422 (D.C. Cir. 1992) (Congress ‘‘did City of New York, 438 U.S. 104 (1978). subject to Exchange Act Rule 14a–12(c).

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required ownership threshold has been its intent to use Rule 14a–11 no earlier total number of board seats. In addition, modified from the Proposal, which than 150 days prior to the anniversary in response to public comment, we have would have required that a nominating of the mailing of the prior year’s proxy added a provision to the rule designed shareholder or group hold 1%, 3%, or statement and no later than 120 days to prevent the potential unintended 5% of the company’s securities entitled prior to this date. The final rule differs consequences of discouraging dialogue to be voted on the election of directors, from the Proposal, which would have and negotiation between company depending on accelerated filer status or, required the nominating shareholder or management and nominating in the case of registered investment group to provide notice to the company shareholders. Under this provision, companies, depending on the net assets no later than 120 days prior to the shareholder nominees of an eligible of the company. The final rule requires anniversary of the mailing of the prior nominating shareholder or group with that a nominating shareholder or group year’s proxy statement or in accordance the highest qualifying voting power must hold both investment and voting with the company’s advance notice percentage that a company agrees to power, either directly or through any provision, if applicable. As was include as company nominees after the person acting on their behalf, of the proposed, under the final rule the filing of the Schedule 14N would count securities. In calculating the ownership nominating shareholder or group will be toward the 25%. percentage held, under certain required to file on EDGAR and transmit The notice on Schedule 14N will be conditions, a nominating shareholder or to the company its notice on Schedule required to include: member of the nominating shareholder 14N on the same date. • Disclosure concerning: The rule also includes certain group would be able to include • The amount and percentage of requirements applicable to the securities loaned to a third party in the voting power of the company’s shareholder nominee. Consistent with calculation of ownership. In securities entitled to be voted by the the Proposal, the final rule provides that determining the total voting power held nominating shareholder or group the company will not be required to by the nominating shareholder or any and the length of ownership of include any nominee whose candidacy member of the nominating shareholder those securities; or, if elected, board membership would group, securities sold short (as well as • Biographical and other information violate controlling state or Federal law, securities borrowed that are not about the nominating shareholder or the applicable standards of a national otherwise excludable) must be deducted or group and the shareholder securities exchange or national from the amount of securities that may nominee or nominees, similar to the be counted towards the required securities association, except with regard to director independence disclosure currently required in a ownership threshold. In addition, a contested election; nominating shareholder (or in the case requirements that rely on a subjective • determination by the board, and such Whether or not the nominee or of a group, each member of the group) nominees satisfy the company’s will be required to have held the violation could not be cured during the provided time period.64 In addition, the director qualifications, if any (as qualifying amount of securities provided in the company’s continuously for at least three years as rule we are adopting provides that a company will not be required to include governing documents); of the date the nominating shareholder • Certifications that, after reasonable or group submits notice of its intent to any nominee whose candidacy or, if elected, board membership would inquiry and based on the nominating use Rule 14a–11 (on a filed Schedule shareholder’s or group’s knowledge, 14N), rather than for one year, as was violate controlling foreign law. As we proposed, the rule does not include any the: proposed. Consistent with the proposed • restrictions on the relationships Nominating shareholder (or where amendments, we are adopting a between the nominee and the there is a nominating shareholder requirement that the nominating nominating shareholder or group. group, each member of the shareholder or members of the group As was proposed, under Rule 14a–11, nominating shareholder group) is must continue to own the qualifying a company will not be required to not holding any of the company’s amount of securities through the date of include more than one shareholder securities with the purpose, or with the meeting at which directors are nominee, or a number of nominees that the effect, of changing control of the elected and provide disclosure represents up to 25% of the company’s company or to gain a number of concerning their intent with regard to board of directors, whichever is greater. seats on the board of directors that continued ownership of the securities Where there are multiple eligible exceeds the maximum number of after the election of directors. In nominating shareholders, the nominees that the company could addition, the nominating shareholder nominating shareholder or group with be required to include under Rule (or where there is a nominating the highest percentage of the company’s 14a–11; shareholder group, any member of the • voting power would have its nominees Nominating shareholder or group nominating shareholder group) may not included in the company’s proxy otherwise satisfies the requirements be holding the company’s securities materials, rather than the nominating of Rule 14a–11, as applicable; and with the purpose, or with the effect, of • shareholder or group that is first to Nominee or nominees satisfy the changing control of the company or to submit a notice on Schedule 14N, as we requirements of Rule 14a–11, as gain a number of seats on the board of had proposed. We also have clarified in applicable; directors that exceeds the maximum • the final rule that when a company has A statement that the nominating number of nominees that the company a classified (staggered) board, the 25% shareholder or group members will could be required to include under Rule calculation would still be based on the continue to hold the qualifying 14a–11, and may not have a direct or amount of securities through the date indirect agreement with the company 64 In the case of an investment company, the of the meeting and a statement with regarding the nomination of the nominee may not be an ‘‘interested person’’ of the regard to the nominating nominee or nominees prior to filing the company as defined in Section 2(a)(19) of the shareholder’s or group member’s Schedule 14N. Investment Company Act of 1940 (15 U.S.C. 80a– 2(a)(19)). See Section II.B.3.b. for a more detailed intended ownership of the securities The nominating shareholder or group discussion of the applicability of Rule 14a–11 to following the election of directors must provide notice to the company of registered investment companies. (which may be contingent on the

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results of the election of directors); responsible for any information checked before or at the same time as and provided by the nominating shareholder the first solicitation in reliance on the • A statement in support of each or group except where the company new exemption; and shareholder nominee, not to exceed knows or has reason to know that the • No solicitations in connection with 500 words per nominee (the statement information is false or misleading. the subject election of directors other would be at the option of the A company will not be required to than pursuant to the provisions of Rule nominating shareholder or group). include a nominee or nominees if the 14a–11 and the new exemption These requirements for Schedule 14N nominating shareholder or group or the described below. are largely consistent with the Proposal, nominee fails to satisfy the eligibility Shareholders that do not want to rely on with some modifications made in requirements of Rule 14a–11. A this new exemption could opt to rely on response to comments. Among the company that determines it may other exemptions from the proxy rules modifications is the new disclosure exclude a nominee or nominees must (e.g., Rule 14a–2(b)(2), which is limited requirement concerning whether, to the provide a notice to the Commission to solicitations of not more than 10 best of the nominating shareholder’s or regarding its intent to exclude the persons). group’s knowledge, the nominee or nominee or nominees. The company The second new exemption applies to nominees satisfy the company’s director also may submit a request for the staff’s written and oral solicitations by or on qualifications, if any (as provided in the informal view with respect to the behalf of a nominating shareholder or company’s governing documents). We company’s determination that it may group whose nominee or nominees are exclude the nominee or nominees also have revised the certifications to or will be included in the company’s (commonly referred to as ‘‘no-action’’ require certification not only with proxy materials pursuant to Rule 14a–11 requests). In addition, a company could regard to control intent, but also with in favor of shareholder nominees or for exclude a nominating shareholder’s or regard to the other nominating or against company nominees. Reliance group’s statement of support if the shareholder and nominee eligibility on this new exemption will require: statement exceeds 500 words per requirements. • That the nominating shareholder or nominee and could seek a no-action A company that receives a notice on group does not seek the power to act as letter from the staff with regard to this Schedule 14N from an eligible a proxy for another shareholder; determination if it so desired. In the nominating shareholder or group will be • Disclosing certain information event that a nominating shareholder or (including the identity of the required to include in its proxy group or nominee withdraws or is statement disclosure concerning the disqualified prior to the time the nominating shareholder or group, and a nominating shareholder or group and company commences printing the proxy prominent legend about availability of the shareholder nominee or nominees, materials, under certain circumstances the proxy materials) in all written and include on its proxy card the names communications; companies will be required to include a • of the shareholder nominees. The substitute nominee if there are other Filing all written soliciting nominating shareholder or group will be eligible nominees. Therefore, companies materials sent to shareholders in liable for any statement in the notice on seeking a no-action letter from the staff reliance on the exemption with the Schedule 14N which, at the time and in with respect to their decision to exclude Commission under cover of Schedule light of the circumstances under which any Rule 14a–11 nominee or nominees 14N with the appropriate box checked; it is made, is false or misleading with and would need to seek a no-action letter on • respect to any material fact or that omits all nominees that they believe they can No solicitations in connection with to state any material fact necessary to exclude at the outset. the subject election of directors other make the statements therein not false or We also have adopted two new than pursuant to the provisions of Rule misleading, including when that exemptions, slightly modified from the 14a–11 and this new exemption. information is subsequently included in Proposal, to the proxy rules for Consistent with the Proposal, we also the company’s proxy statement. The solicitations in connection with a Rule are amending our beneficial ownership company will not be responsible for this 14a–11 nomination. The first exemption reporting rules so that shareholders information. These liability provisions applies to written and oral solicitations relying on Rule 14a–11 would not are included in the final rules largely as by shareholders who are seeking to form become ineligible to file a Schedule proposed, but with two changes in a nominating shareholder group. 13G, in lieu of filing a Schedule 13D, response to comments. Final Rule 14a– Reliance on this new exemption will solely as a result of activities in 9(c) makes clear that the nominating require: connection with inclusion of a nominee shareholder or group will be liable for • That the shareholder not be holding under Rule 14a–11. Also consistent with any statement in the Schedule 14N or the company’s securities with the the proposed amendments, we are not any other related communication that is purpose, or with the effect, of changing adopting an exclusion from Exchange false or misleading with respect to any control of the company or to gain a Act Section 16 for activities in material fact, or that omits to state any number of seats on the board of connection with a nomination under material fact necessary to make the directors that exceeds the maximum Rule 14a–11 that may trigger a filing statements therein not false or number of nominees that the registrant requirement by nominating misleading, regardless of whether that could be required to include under Rule shareholders. In addition, after information is ultimately included in 14a–11; considering the comments, we are not the company’s proxy statement. In • Limiting the content of written adopting a specific exclusion from the addition, consistent with the existing communications to certain information definition of affiliate for nominating approach in Rule 14a–8, under Rule specified in the rule; shareholders. 14a–11 as adopted, a company will not • Filing all written soliciting Finally, consistent with the Proposal, be responsible for any information materials sent to shareholders in we are narrowing the scope of the provided by the nominating shareholder reliance on the exemption with the exclusion in Rule 14a–8(i)(8) relating to or group and included in the company’s Commission or, in the case of oral the election of directors. The revised proxy statement. Under the Proposal, a communications, a filing under cover of rule will provide that companies must company would not have been Schedule 14N with the appropriate box include in their proxy materials, under

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certain circumstances, shareholder about, and the ability to vote for, a B. Exchange Act Rule 14a–11 proposals that seek to establish a shareholder’s, or group of shareholders’, 1. Overview procedure in the company’s governing nominees for director in the companies’ documents for the inclusion of one or proxy materials. This requirement will Based on the comments received in more shareholder director nominees in apply unless State law, foreign law,66 or response to our solicitation of public a company’s proxy materials. a company’s governing documents 67 input on the Proposal and on prior As we proposed, the final rules prohibits shareholders from nominating releases and in roundtables,71 we provide that a nominating shareholder directors.68 In addition to the standards understand that shareholders face that is relying on a procedure under provided in new Rule 14a–11, significant obstacles to effectively State law or a company’s governing provisions under State law, foreign law, exercising their rights to nominate and documents to include a nominee in a or a company’s governing documents 69 elect directors to corporate boards. We company’s proxy materials would be could provide an additional avenue for have received significant public required to provide disclosure shareholders to submit nominees for comment supporting the view that concerning the nominating shareholder inclusion in company proxy materials, including shareholder nominees for and nominee or nominees to the but would not act as a substitute for director in company proxy materials company on Schedule 14N and file the Rule 14a–11. Thus, Rule 14a–11 will would be the most direct and effective Schedule 14N on EDGAR. In response to method of facilitating shareholders’ comment, we have clarified that the continue to be available to shareholders regardless of whether they also can avail rights in connection with the disclosure also would be required for nomination and election of directors.72 nominations made pursuant to foreign themselves of a provision under State On the other hand, many commenters law.65 The disclosure requirements on law, foreign law, or a company’s have expressed concern that mandating Schedule 14N for nominations made governing documents. shareholder access to company proxy pursuant to a procedure under state or Second, we are amending Rule 14a– materials would lead to more proxy foreign law, or a company’s governing 8(i)(8) to preclude companies from contests or ‘‘politicized elections,’’ 73 documents largely mirror those for a relying on Rule 14a–8(i)(8) to exclude which would be distracting, expensive, Rule 14a–11 nomination. As with Rule from their proxy materials shareholder time-consuming, and inefficient for 14a–11 nominees, a company would proposals by qualifying shareholders companies, boards, and management.74 include in its proxy materials disclosure that seek to establish a procedure under concerning the nominating shareholder a company’s governing documents for 71 See the Proposing Release; the 2003 Proposal; or group and shareholder nominee the inclusion of one or more the Election of Directors Proposing Release; and the similar to the disclosure currently shareholder director nominees in the Shareholder Proposals Proposing Release. See also required in a contested election. The company’s proxy materials. A company the Roundtable on the Federal Proxy Rules and nominating shareholder or group would must include such a shareholder State Corporation Law and the Roundtable on Proposals of Shareholders available at http:// have liability for any statement in the proposal under the final rules as long as www.sec.gov/spotlight/proxyprocess.htm. notice on Schedule 14N or in the procedural requirements of Rule 72 See letters from CII; COPERA; CtW Investment information otherwise provided to the 14a–8 are met and the proposal is not Group; L. Dallas; T. DiNapoli; Florida State Board company and included in the subject to exclusion under one of the of Administration; ICGN; D. Nappier; OPERS; Pax company’s proxy materials which, at the World; Teamsters. other substantive bases. In this regard, a 73 See letters from ABA; Advance Auto Parts; time and in light of the circumstances shareholder proposal seeking to limit or Atlas Industries, Inc. (‘‘Atlas’’); J. Blanchard; Samuel under which it is made, is false or remove the availability of Rule 14a–11 W. Bodman (‘‘S. Bodman’’); Boeing; Brink’s; BRT; misleading with respect to any material would be subject to exclusion under Burlington Northern; Callaway; Cargill (‘‘Cargill’’); Carlson; Carolina Mills; Chamber of Commerce/ fact or that omits to state any material Rule 14a–8.70 fact necessary to make the statements CMCC; Jaime Chico (‘‘J. Chico’’); Consolidated As described throughout this release, Edison, Inc. (‘‘Con Edison’’); Anthony Conte (‘‘A. therein not false or misleading. The Conte’’); W. Cornwell; Crown Battery Manufacturing company would not be responsible for we have made many changes to the final Co. (‘‘Crown Battery’’); CSX; Darden Restaurants; the information provided to the rules in response to comments received. Eaton; FedEx; FPL Group; Frontier; Hickory company and required to be included in We believe the final rules reflect a Furniture Mart (‘‘Hickory Furniture’’); IBM; Keating careful balancing of the policy, Muething; Little; Louisiana Agencies LLC the company proxy statement. (‘‘Louisiana Agencies’’); Massey Services, Inc. workability, and other comments we (‘‘Massey Services’’); John B. McCoy (‘‘J. McCoy’’); D. II. Changes to the Proxy Rules received on the Proposal. McDonald; MedFaxx; Metlife; M. Metz; Norfolk Southern Corporation (‘‘Norfolk Southern’’); O3 A. Introduction Strategies, Inc. (‘‘O3 Strategies’’); Office Depot; 66 After careful consideration of the See discussion in footnote 50 above. Victor Pelson (‘‘V. Pelson’’); PepsiCo; Pfizer; Ryder; 67 Under State law, a company’s governing comments received on the Proposal, we Sidley Austin; Southland; Style Crest; Tenet documents may have various names. When we refer Healthcare Corporation (‘‘Tenet’’); TI; tw telecom; L. are adopting amendments to the proxy to governing documents throughout the release and Tyson; United Brotherhood of Carpenters; T. White. rules to facilitate the effective exercise rule text, we generally are referring to a company’s 74 See letters from ABA; Anonymous letter dated of shareholders’ traditional State law charter, articles of incorporation, certificate of June 26, 2009 (‘‘Anonymous #2’’); Atlas; AT&T; incorporation, declaration of trust, and/or bylaws, rights to nominate and elect directors to Book Celler; Carlson; Carolina Mills; Chamber of as applicable. Commerce/CMCC; Chevron; Crespin; M. Eng; company boards of directors. Under the 68 We are not aware of any law in any state or in Erickson; ExxonMobil; Fenwick & West LLP new rules, shareholders meeting certain the District of Columbia or in any country that (‘‘Fenwick’’); GE; General Mills; Glass, Lewis & Co., requirements will have two ways to currently prohibits shareholders from nominating LLC (‘‘Glass Lewis’’); Glaspell Goals (‘‘Glaspell’’); more fully exercise their right to directors. Nonetheless, should any such law be Intelect; R. Clark King; Koppers Inc. (‘‘Koppers’’); enacted in the future, Rule 14a–11 will not apply. MCO Transport, Inc. (‘‘MCO’’); MeadWestvaco; nominate directors. First, we are 69 See discussion in Section II.C.5. below. MedFaxx; Medical Insurance; Merchants Terminal; adopting a new proxy rule, Rule 14a–11, 70 As would currently be the case if a State law Dana Merilatt (‘‘D. Merilatt’’); NAM; NIRI; NK; O3 which will, under certain permitted a company to prohibit shareholders from Strategies; Roppe Holding Company (‘‘Roppe’’); circumstances, require companies to nominating candidates for director, a shareholder Rosen Hotels and Resorts (‘‘Rosen’’); Safeway; Sara proposal seeking to prohibit shareholder Lee; Schneider National, Inc. (‘‘Schneider’’); provide shareholders with information nominations for director generally or, conversely, to Southland; Style Crest; Tenet; TI; tw telecom; Rick allow shareholder nominations for director, would VanEngelenhoven (‘‘R. VanEngelenhoven’’); 65 See Section II.C.5. below. not be excludable pursuant to Rule 14a–8(i)(8). Wachtell; Wells Fargo; Weyerhaeuser; Yahoo.

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Commenters also opined that the events. We also address the reasons why foreign law or the company’s governing increased likelihood of a contested neither an opt-in nor opt-out provision documents. In this instance, new election could discourage experienced is necessary or appropriate. Exchange Act Rule 14a–18, discussed in and capable individuals from serving on Section II.C.5. below, would require a. Interaction With State or Foreign Law boards, making it more difficult for specified disclosures concerning the companies to recruit qualified directors While we are not aware of any law in nominating shareholder or group and or create boards with the proper mix of any state or in the District of Columbia the shareholder nominee or nominees. experience, skills, and characteristics.75 that prohibits shareholders from There also may be situations where The current filing and other nominating directors, consistent with applicable state or foreign law or a requirements applicable to shareholders the Proposal, a company to which the company’s governing documents are who wish to propose an alternate slate rule would otherwise apply will not be more permissive in certain respects, and are, in the view of these commenters, subject to Rule 14a–11 if applicable more restrictive in other respects, than more appropriate than including State law or the company’s governing Rule 14a–11. For example, applicable shareholder nominees for director in documents prohibit shareholders from state or foreign law or a company’s company proxy materials.76 nominating candidates for the board of governing documents could require As we also noted in the Proposing directors. The final rule also clarifies 10% ownership to have a nominee or Release, we recognize that there are that, in the case of a non-U.S. domiciled nominees included in a company’s long-held and deeply felt views on issuer that does not meet the definition proxy materials, but allow a shareholder every side of these issues. To the extent of foreign private issuer under the that owns 10% to have nominees up to shareholders have the right to nominate Federal securities laws, the rule will not the full number of board seats included directors at meetings of shareholders, apply if applicable foreign law prohibits in a company’s proxy materials or to the Federal proxy rules should facilitate shareholders from nominating a otherwise have a change in control the exercise of this right. We believe the candidate for election as a director.78 If intent. While Rule 14a–11 would rules we are adopting today will better a company’s governing documents continue to be available in that case for accomplish this goal and will further prohibit shareholder nominations, a shareholder that is eligible to use it, our mission of investor protection. shareholders could seek to amend the a shareholder could choose to proceed New Rule 14a–11 will require provision by submitting a shareholder under the alternate procedure and companies to include information about proposal under Rule 14a–8.79 standards. In this instance, a shareholder nominees for director in Consistent with the Proposal, Rule shareholder would be required to company proxy statements, and the 14a–11 will apply regardless of whether clearly evidence its intent to rely either names of the nominee or nominees as state or foreign law or a company’s on Rule 14a–11 or on the applicable choices on company proxy cards, under governing documents prohibit inclusion state or foreign law or company’s specified conditions.77 The rule will of shareholder director nominees in governing documents, and then meet all permit companies to exclude a nominee company proxy materials or set share of the requirements of whichever or nominees from the company’s proxy ownership or other terms that are more procedure it selects.80 A shareholder materials under certain circumstances, restrictive than Rule 14a–11 under could not ‘‘pick and choose’’ different such as when a nominating shareholder which shareholder director nominees aspects of different procedures. If a or group fails to satisfy the eligibility will be included in company proxy shareholder chooses to rely on a requirements of the rule. In the materials. For example, if applicable provision under applicable state or following sections we describe, in state or foreign law or a company’s foreign law or a company’s governing detail, the final rules, comments governing documents were to require documents to include a nominee in a received on the Proposal, and changes that shareholder nominees be included company’s proxy materials, it would be made in response to the comments. in company proxy materials only if required to satisfy the disclosure submitted by a 10% shareholder of the requirements of new Rule 14a–18. 2. When Rule 14a–11 Will Apply company, a shareholder who does not b. Opt-In Not Required In this section, we address the rule’s meet the 10% threshold but does meet application, including when there are the requirements of Rule 14a–11, In the Proposing Release, we conflicting or overlapping provisions including the 3% ownership threshold requested comment on whether Rule under state or foreign law or a described below, would be able to 14a–11 should apply only if company’s governing documents, submit their nominee or nominees for shareholders of a company elect to have during concurrent proxy contests, and inclusion in the company’s proxy it apply at their company. While in the absence of any specific triggering materials pursuant to Rule 14a–11. If, on commenters did not specifically address the other hand, applicable state or the possibility of shareholders opting 75 See letters from 3M; ABA; American Electric foreign law or a company’s governing into Rule 14a–11, many commenters Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; documents sets the ownership threshold opposed the Commission’s Proposal on Boeing; BRT; Burlington Northern; Callaway; lower than the 3% ownership threshold the basis that it would create a ‘‘one size Carlson; Chamber of Commerce/CMCC; CIGNA; fits all’’ Federal rule that intrudes into Columbine Health Plan (‘‘Columbine’’); Cummins; required under Rule 14a–11, then Rule CSX; John T. Dillon (‘‘J. Dillon’’); Emerson Electric; 14a–11 would not be available to matters that traditionally have been the 81 Erickson; ExxonMobil; FedEx; Headwaters holders with ownership below the Rule province of state or local law. Those Incorporated (‘‘Headwaters’’); C. Holliday; IBM; 14a–11 threshold. Those shareholders Intelect; R. Clark King; Lange Transport (‘‘Lange’’); 80 New Schedule 14N, which is described further Louisiana Agencies; MetLife; NIRI; O3 Strategies; V. meeting the lower ownership threshold in Section II.B.8. below, includes check boxes Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara would have the ability to have their where a nominating shareholder or group must Lee; Sidley Austin; tw telecom; Wachtell; Wells nominees included in the company’s specify whether it is seeking to include the nominee Fargo; Weyerhaeuser; Yahoo. proxy materials to whatever extent is or nominees in the company’s proxy materials 76 See letters from Ameriprise; Anonymous #2; under Rule 14a–11 or pursuant to a provision in Artistic Land Designs; Chamber of Commerce/ provided under applicable state or State law, foreign law, or a company’s governing CMCC; Crown Battery; Evelyn Y. Davis (‘‘E. Davis’’); documents. Kernan; Medical Insurance; Mouton; Unitrin; R. 78 See letters from S&C; Curtis, Mallet-Prevost, 81 See letters from 26 Corporate Secretaries; ABA; VanEngelenhoven; Wells Fargo. Colt & Mosle LLP (‘‘Curtis’’). ACE; Advance Auto Parts; AGL; Aetna; Allstate; 77 See new Exchange Act Rule 14a–11. 79 See footnote 70 above. Alston & Bird; American Bankers Association;

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commenters asked the Commission to Requiring shareholders to persuade annual meeting held after the adoption permit private ordering so that other shareholders to opt into a system of the proposed rules.86 companies and shareholders could that better facilitates such State law On the other hand, several devise, if they chose to, a process for the rights would frustrate the benefits that commenters expressed support for the inclusion of shareholder director our new rule seeks to promote. uniform applicability of Rule 14a–11.87 nominees in company proxy materials These commenters expressed general that best suits their particular c. No Opt-Out support for the Commission’s Proposal circumstances. Commenters also that Rule 14a–11 apply to all companies In the Proposing Release, we sought expressed fears that the Commission’s subject to the Federal proxy rules unless comment on whether Rule 14a–11 Proposal, if adopted, would stifle future State law or the company’s governing innovations relating to inclusion of should be inapplicable where a documents prohibit shareholders from shareholder director nominees in company has or adopts a provision in its nominating candidates to the board.88 company proxy materials and corporate governing documents that provides for, Several commenters stated they oppose governance in general.82 On the other or prohibits, the inclusion of a provision that would permit hand, some commenters expressed shareholder director nominees in the companies to opt out of Rule 14a–11.89 general support for uniform company’s proxy materials. We also Some commenters expressed a general applicability of proposed Rule 14a–11, sought comment on whether Rule 14a– concern that if companies are allowed to unless State law or the company’s 11 should apply in various opt out of the rule, boards would adopt governing documents prohibit circumstances, such as where provisions in a company’s governing shareholders from nominating shareholders approve provisions in the documents that are so restrictive that it candidates to the board.83 governing documents that are more or would be impossible for shareholders to Though we considered commenters’ less restrictive than Rule 14a–11. have their candidates included in 90 views concerning a private ordering Commenters were divided on whether company proxy materials, with one approach, as discussed in Section I.A. commenter noting that the laws of most companies and shareholders should be above, we have concluded that our rules states would allow a board to adopt permitted to adopt alternative should provide shareholders the ability such provisions in a company’s bylaws requirements for shareholder director to include director nominees in without a shareholder vote.91 Further, a company proxy materials without the nominations, or to completely opt out of commenter warned that boards would need for shareholders to bear the Rule 14a–11. Many commenters use corporate funds to defeat burdens of overcoming the substantial generally supported a provision that shareholders’ attempts to change such obstacles to creating that ability on a would permit companies and board-adopted provisions through company-by-company basis. Rule 14a– shareholders to adopt alternative shareholder proposals.92 One 11 is designed to facilitate the effective requirements for shareholder director commenter argued that the ‘‘idea that exercise of shareholder director nominations that could be either more individual corporations should be given nomination and election rights. restrictive or less restrictive than those the right to ‘opt out’ of the proposed of Rule 14a–11.84 Among these regulations through bylaws or otherwise American Business Conference; American Electric commenters, some argued that creating is contrary to the Commission’s entire Power; Anadarko; Applied Materials; Artistic Land a ‘‘one-size-fits-all’’ rule that cannot be regulatory scheme’’ and referred to Designs; Association of Corporate Counsel; Avis 93 Budget; Atlantic Bingo; L. Behr; Best Buy; Biogen; altered by companies and shareholders Section 14 of the Securities Act, J. Blanchard; Boeing; T. Bonkowski; BorgWarner; conflicts with the traditional enabling which voids ‘‘[a]ny condition, Boston Scientific; Brink’s; BRT; Burlington approach of state corporation laws and stipulation, or provision binding any Northern; R. Burt; California Bar; Callaway; S. 85 person acquiring any security to waive Campbell; Carlson; Carolina Mills; Caterpillar; denies shareholder choice. Some Chamber of Commerce/CMCC; Chevron; R. Chicko; commenters advocated allowing compliance with any provision of this CIGNA; Comcast; Competitive Enterprise Institute; companies to opt out of Rule 14a–11 W. Cornwell; CSX; E. Culwell; Cummins; Darden through a shareholder-approved bylaw 86 See letters from DTE Energy (endorsing the opt- Restaurants; Daniels Manufacturing; Davis Polk; out approach described in the letter submitted by Delaware Bar; T. Dermody; Devon; DTE Energy; (including through a Rule 14a–8 the Society of Corporate Secretaries); JPMorgan Eaton; Edison Electric Institute; Eli Lilly; Emerson shareholder proposal), with some Chase; P&G; Seven Law Firms; Society of Corporate Electric; M. Eng; Erickson; ExxonMobil; FedEx; suggesting that Rule 14a–11 apply Secretaries; U.S. Bancorp. Financial Services Roundtable; Flutterby; FPL initially only to companies that have not 87 See letters from 13D Monitor; AFL–CIO; Group; Frontier; GE; A. Goolsby; Grundfest; C. CalPERS; CFA Institute; CII; Florida State Board of Holliday; IBM; ICI; Intelect; JPMorgan Chase; Jones opted out through a shareholder- Administration; ICGN; LIUNA; D. Nappier; P. Day; R. Clark King; Leggett; T. Liddell; Little; approved process by the time of the first Neuhauser; Pax World; OPERS; RiskMetrics; SWIB; McDonald’s; MeadWestvaco; MedFaxx; Medical Teamsters; USPE. Insurance; MetLife; M. Metz; Microsoft; J. Miller; M. 88 See letters from 13D Monitor; AFL–CIO; Moretti; Motorola; NACD; NAM; NIRI; O’Melveny 84 See letters from ABA; Advance Auto Parts; CalPERS; CFA Institute; CII; Florida State Board of & Myers; Office Depot; Omaha Door; P&G; PepsiCo; Aetna; American Bankers Association; American Administration; ICGN; LIUNA; D. Nappier; P. Pfizer; Realogy; J. Robert; M. Robert; RPM; Ryder; Electric Power; American Express; Applied Neuhauser; Pax World; OPERS; RiskMetrics; SWIB; Safeway; R. Saul; Shearman & Sterling; Sherwin- Materials; Association of Corporate Counsel; Best Teamsters; USPE. Buy; BRT; California Bar; Carlson; J. Chico; Cleary Williams; R. Simoneau; Society of Corporate 89 Secretaries; Southern Company; Southland; Steele Gottlieb Steen & Hamilton LLP (‘‘Cleary’’); Comcast; See letters from AFL–CIO; Amalgamated Bank; ‘‘ ’’ Group; Style Crest; Tesoro; Textron; Theragenics; Con Edison; CSX; Cummins; L. Dallas; Davis Polk; William Baker ( W. Baker ); Florida State Board of TI;. R. Trummel; T. Trummel; V. Trummel; tw Devon; Dupont; ExxonMobil; Financial Services Administration; International Association of telecom; L. Tyson; United Brotherhood of Roundtable; FPL Group; IBM; JPMorgan Chase; Machinists and Aerospace Workers (‘‘IAM’’); The Carpenters; UnitedHealth; U.S. Bancorp; VCG; Keating Muething; Koppers; Alexander Krakovsky Marco Consulting Group (‘‘Marco Consulting’’); P. Wachtell; Wellness; Wells Fargo; Whirlpool; Xerox; (‘‘A. Krakovsky’’); Group of 10 Harvard Business Neuhauser; Nine Law Firms; Norges Bank Yahoo; J. Young. School and Harvard Law School Professors (‘‘Lorsch Investment Management (‘‘Norges Bank’’); Relational; Shamrock Capital Advisors, Inc. 82 See letters from ABA; BRT; Davis Polk; et al.’’); Brett H. McDonnell (‘‘B. McDonnell’’); (‘‘Shamrock’’); TIAA–CREF; USPE; ValueAct Delaware Bar; Frontier; IBM; Protective. Motorola; O’Melveny & Myers; P&G; Pfizer; S&C; Capital. 83 ‘‘ ’’ Sara Lee; Group of Seven Law Firms (‘‘Seven Law See letters from 13D Monitor ( 13D Monitor ); 90 AFL–CIO; CalPERS; CFA Institute Centre for Market Firms’’); Shearman & Sterling; Securities Industry See letters from Florida State Board of Integrity (‘‘CFA Institute’’); CII; Florida State Board and Financial Markets Association (‘‘SIFMA’’); Administration; P. Neuhauser; Shamrock. of Administration; ICGN; LIUNA; D. Nappier; P. Society of Corporate Secretaries; Southern 91 See letter from Shamrock. Neuhauser; OPERS; Pax World; RiskMetrics; SWIB; Company; U.S. Bancorp; Wachtell. 92 See letter from P. Neuhauser. Teamsters; USPE. 85 See letters from ABA; BRT; Delaware Bar. 93 Letter from Nine Law Firms.

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title or of the rules and regulations of have the ability to do so with this rule. to companies. The concept that our the Commission* * *.’’ 94 In our view, shareholders’ electoral rules are not subject to company-by- After carefully considering the rights through the proxy process should company variation is entirely consistent comments, we have determined that not be impaired by a unilateral act of the with our mandate to protect all Rule 14a–11 should not provide an board of directors, or even by a investors. In this regard, we are not exemption for companies that have or shareholder vote supported by persuaded that we should allow our adopt a provision in their governing management. Further, as we describe rules to be altered by shareholders or documents that provides for or prohibits above, allowing some portion of boards to the potential detriment of the inclusion of shareholder director shareholders to alter the application of other shareholders. We believe that nominees in the company’s proxy Rule 14a–11 would effectively reduce having a uniform standard that applies materials. Thus, regardless of whether a choices for shareholders who do not to all companies subject to the rule will company has a provision for the favor that decision.96 simplify use of the rule for shareholders inclusion of shareholder nominees in its Finally, we considered the objections and allowing different procedures and proxy materials, Rule 14a–11 will apply. of some commenters to a ‘‘one-size-fits- requirements to be adopted by each As noted, the only exception is if state all’’ rule and concerns that for some company could add significant or foreign law or a company’s governing companies with various capital complexity and cost for shareholders documents prohibits shareholders from structures the rule may raise more and undermine the purposes of our new making director nominations. complex issues.97 As we have noted, no rule. While other procedures and We believe the rights to nominate and Federal proxy rule allows shareholders standards could be adopted by elect directors are traditional State law or boards to alter how the rules apply companies or shareholders to rights of all shareholders and we believe supplement Rule 14a–11, shareholders the current proxy rules could better 96 Our view in this regard has been sharply would benefit from the predictability of facilitate the effective exercise of these criticized. E.g., Joseph A. Grundfest, The SEC’s the uniform application of Rule 14a–11 Proposed Proxy Access Rules: Politics, Economics, State law rights. We do not believe that and the Law, 65 Bus. Law. 361, 370 (2010) (this at all companies. it is appropriate for our rules to permit article also was included as an attachment to the It is important to note that while Rule a company’s board or a majority of January 18, 2010 letter from Joseph A. Grundfest 14a–11 facilitates the existing rights of shareholders to elect to opt out of Rule (‘‘Grundfest II’’)) (‘‘there is no intellectually credible shareholders and we do not believe the argument that shareholders are * * * competent to rule should be altered, it is not the 14a–11 and thus deprive other elect directors but incompetent to determine the shareholders of an effective means to rules governing the election of directors. There is exclusive way by which a candidate exercise their State law right to also no support for the proposition that other than a management nominee may nominate directors and to freely shareholders can be trusted to relax the mandatory be put to a shareholder vote. minimum standards established by the Shareholders may continue to choose to exercise their franchise rights. Thus, Commission, but not to strengthen them.’’). In our allowing a vote to opt out of the rule view, these assertions are flawed. This is not an conduct traditional proxy contests. would contravene a fundamental issue of shareholder competence. It is, instead, a Regardless of whether a shareholder rationale of Rule 14a–11—improving the recognition that permitting a company or a group uses Rule 14a–11 or conducts a of shareholders to prevent shareholders from traditional proxy contest to nominate a degree to which shareholders effectively participating in governing the participating through the proxy process corporation through participation in the proxy candidate for director, a company are able ‘‘to control the corporation as process is fundamentally inconsistent with the goal concerned about how such a effectively as they might have by of Federal proxy regulation. See Business shareholder nominee fits into its attending a shareholder meeting.’’ 95 Roundtable, 905 F.2d at 410. particular capital structure or other 97 See letters from 26 Corporate Secretaries; ABA; unique fact patterns presumably would When shareholders have the right to ACE; Advance Auto Parts; AGL; Aetna; Allstate; nominate candidates for director at a Alston & Bird; American Bankers Association; address that concern in its proxy shareholder meeting, we believe American Business Conference; American Electric materials. Power; Anadarko; Applied Materials; Artistic Land shareholder choice is enhanced if our d. No Triggering Events rules facilitate the ability of Designs; Association of Corporate Counsel; Avis Budget; Atlantic Bingo; L. Behr; Best Buy; Biogen; Under the Commission’s 2003 shareholders to nominate candidates for J. Blanchard; Boeing; T. Bonkowski; BorgWarner; director through the proxy process. Boston Scientific; Brink’s; BRT; Burlington Proposal, a company would have been Allowing a company or a majority of its Northern; R. Burt; California Bar; Callaway; S. subject to the shareholder director shareholders to opt out of the rule Campbell; Carlson; Carolina Mills; Caterpillar; nomination requirements after the Chamber of Commerce/CMCC; Chevron; R. Chicko; occurrence of one or both of two would diminish the rights of CIGNA; Comcast; Competitive Enterprise Institute; shareholders who participate by proxy W. Cornwell; CSX; E. Culwell; Cummins; Darden possible triggering events. The first by preventing shareholder nominees Restaurants; Daniels Manufacturing; Davis Polk; triggering event was that at least one of Delaware Bar; T. Dermody; Devon; DTE Energy; the company’s nominees for the board from being included in company proxy Eaton; Edison Electric Institute; Eli Lilly; Emerson materials, thus reducing shareholder of directors for whom the company Electric; M. Eng; Erickson; ExxonMobil; FedEx; solicited proxies received withhold choice in the critical area of director Financial Services Roundtable; Flutterby; FPL elections. Similarly, allowing a Group; Frontier; GE; A. Goolsby; C. Holliday; IBM; votes from more than 35% of the votes ICI; Intelect; JPMorgan Chase; Jones Day; R. Clark cast at an annual meeting of company or a majority of its King; Leggett; T. Liddell; Little; McDonald’s; shareholders to opt out of the rule shareholders at which directors were MeadWestvaco; MedFaxx; Medical Insurance; elected.98 The second triggering event would diminish the ability of Metlife; M. Metz; Microsoft; J. Miller; M. Moretti; was that a shareholder proposal shareholders to vote for nominees put Motorola; NACD; NAM; NIRI; O’Melveny & Myers; Office Depot; Omaha Door; P&G; PepsiCo; Pfizer; submitted under Rule 14a–8 providing forth by other shareholders. Realogy; J. Robert; M. Robert; RPM; Ryder; Safeway; In addition, companies and their that a company become subject to the R. Saul; Shearman & Sterling; Sherwin-Williams; R. proposed shareholder nomination shareholders do not have the option to Simoneau; Society of Corporate Secretaries; elect to opt out of other Federal proxy Southern Company; Southland; Steele Group; Style procedure was submitted for a vote of rules and we do not believe they should Crest; Tesoro; Textron; Theragenics; TI;. R. Trummel; T. Trummel; V. Trummel; tw telecom; L. 98 This triggering event could not occur in a Tyson; United Brotherhood of Carpenters; contested election to which Rule 14a–12(c) would 94 15 U.S.C. 77n. UnitedHealth; U.S. Bancorp; VCG; Wachtell; apply or an election to which the proposed 95 Business Roundtable v. SEC, 905 F.2d 406, 410 Wellness; Wells Fargo; Whirlpool; Xerox; Yahoo; J. shareholder nomination procedure would have (D.C. Cir. 1990). Young. applied.

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shareholders at an annual meeting by a We remain concerned that the Federal proxy process to better reflect the rights shareholder or group of shareholders proxy rules may not be facilitating the shareholders would have at a that held more than 1% of the exercise of shareholders’ ability under shareholder meeting, and that company’s securities entitled to vote on State law to nominate and elect dissatisfied shareholders who are not the proposal and the shareholder or directors and this concern is not limited seeking a change in control and who group of shareholders held those to shareholders’ ability to nominate otherwise meet the eligibility criteria securities for one year as of the date the directors at companies with under Rule 14a–11 would be proposal was submitted, and the demonstrated governance issues. disenfranchised.105 The commenter proposal received more than 50% of the Indeed, allowing shareholders to stated that dissatisfied shareholders votes cast on that proposal at the include nominees in company proxy should not be forced to make a choice meeting.99 In 2003, these triggering materials before there are demonstrated between a change in control or events were included because they were governance failures could have the ‘‘business as usual.’’ Another commenter believed to be indications that a benefit of increasing director stated that contested elections have company had a demonstrated corporate responsiveness and avoiding future been conducted successfully with more governance issue, such that governance failures. In addition, we than two slates.106 shareholders should have the share the concerns of some commenters On the other hand, commenters that opportunity to include director that inclusion of triggering events would sought a limitation on use of Rule 14a– nominees in the company’s proxy introduce undue complexity to the rule. 11 during a traditional proxy contest materials. Therefore, we are adopting the rule as were concerned that Rule 14a–11 could Unlike the 2003 Proposal, our current proposed, without a triggering event proposal did not include a triggering have the effect of facilitating a change in requirement. 107 event requirement in Rule 14a–11. As control of the company. Commenters noted in the Proposing Release, we did e. Concurrent Proxy Contests noted that under certain staff 108 not include such a requirement because As proposed, Rule 14a–11 would positions, as well as the we were concerned that the Federal apply regardless of whether a company Commission’s discussion of Rule 14a– proxy rules may be impeding the is engaged in, or anticipates being 4(d)(4), as set forth in the Proxy exercise of shareholders’ ability under engaged in, a concurrent proxy contest; Disclosure and Solicitation 109 State law to nominate and elect however, we requested comment on Enhancements proposing release, a directors at all companies, not just those whether a company should be exempted dissident shareholder could ‘‘round out’’ with demonstrated governance issues. from complying with Rule 14a–11 if its short-slate proxy card by seeking In addition, we noted our concern, and another party commences or evidences authority to vote for Rule 14a–11 the concern expressed by commenters its intent to commence a solicitation in shareholder nominees, thereby on the 2003 Proposal, that the inclusion opposition subject to Rule 14a–12(c). Of facilitating a change in control.110 of triggering events would result in the commenters that responded, a few Further, commenters believed that unnecessary complexity and would stated that shareholders of a company under the Proposal shareholders that delay the operation of the rule. that is the subject of a traditional proxy submit nominees in reliance on Rule However, we solicited comment about contest should be allowed to use Rule 14a–11 would not be barred from whether triggers for the application of 14a–11 to have nominees included in actively soliciting for the nominees of a Rule 14a–11 would be appropriate. the company’s proxy materials,103 and shareholder using a traditional proxy Many commenters opposed the others stated that shareholders of a contest and, conversely, a shareholder inclusion of a triggering event company engaged in a traditional proxy using a traditional proxy contest could requirement,100 with some commenters contest should not be allowed to use actively engage in soliciting activities expressing concern that triggering Rule 14a–11 to have nominees included for Rule 14a–11 shareholder events would cause significant delays in the company’s proxy materials.104 nominees.111 Commenters also worried and introduce undue complexity into In support of enabling shareholders to that multiple groups of shareholders the rule.101 On the other hand, other use Rule 14a–11 during a traditional who simultaneously propose different commenters supported the inclusion of proxy contest, one commenter argued directors for different purposes could a triggering event requirement, believing that exempting companies subject to a lead to substantial confusion for other that such a requirement would serve as traditional proxy contest from Rule 14a– shareholders.112 Commenters warned a useful indicator of the companies with 11 would be inconsistent with the that shareholder confusion would demonstrated governance issues (e.g., Commission’s objective of changing the increase if there are two or more proxy companies that do not act within a cards with more than twice the number certain time period on a shareholder (‘‘Barclays’’); Biogen; Boeing; BRT; Burlington proposal that received majority Northern; R. Burt; Callaway; Chevron; CIGNA; CNH 105 See letter from CII. Global N.V. (‘‘CNH Global’’); Comcast; Cummins; 102 106 See letter from Florida State Board of support). Deere & Company (‘‘Deere’’); Eaton; ExxonMobil; Administration. FedEx; FMC Corp.; FPL Group; Frontier; General 107 99 Only votes for and against a proposal would Mills; C. Holliday; IBM; ITT Corporation (‘‘ITT’’); J. See letters from ABA; BRT; Davis Polk; Eli have been included in the calculation of the Kilts; Ellen J. Kullman (‘‘E.J. Kullman’’); N. Lilly; Seven Law Firms; Society of Corporate shareholder vote. Lautenbach; McDonald’s; J. Miller; Motorola; Office Secretaries. 100 See letters from AFSCME; CalSTRS; CFA Depot; O’Melveny & Myers; P&G; PepsiCo; Pfizer; 108 See Eastbourne Capital LLC No-Action Letter Institute; CII; COPERA; T. DiNapoli; Florida State Protective; Ryder; Sara Lee; Sherwin-Williams; (March 30, 2009) and Icahn Associates Corp. No- Board of Administration; ICGN; N. Lautenbach; Theragenics; TI; tw telecom; G. Tooker; Action Letter (March 30, 2009). LIUNA; D. Nappier; Nathan Cummings Foundation; UnitedHealth; Xerox. 109 Release No. 33–9052, 34–60280 (July 10, 2009) OPERS; Pax World; Relational; Sodali; SWIB; 103 See letters from CII; Florida State Board of [74 FR 35076]. TIAA–CREF; G. Tooker; USPE; ValueAct Capital. Administration; Sodali; USPE. 110 See letters from ABA; Eli Lilly; JPMorgan 101 See letters from AFSCME; CFA Institute; CII; 104 See letters from ABA; American Express; Chase; Society of Corporate Secretaries. T. DiNapoli; LIUNA. Biogen; BorgWarner; BRT; Davis Polk; Dewey; Eli 111 See letters from ABA; Society of Corporate 102 See letters from Automatic Data Processing, Lilly; Fenwick; Honeywell; JPMorgan Chase; Secretaries. Inc. (‘‘ADP’’); Alaska Air Group, Inc. (‘‘Alaska Air’’); Leggett; PepsiCo; Seven Law Firms; Society of 112 See letters from ABA; BRT; Davis Polk; Eli Allstate; American Electric Power; Anadarko; Corporate Secretaries; Tenet; U.S. Bancorp; Verizon; Lilly; PepsiCo; Seven Law Firms; Society of AT&T; Avis Budget; Barclays Global Investors Wachtell. Corporate Secretaries.

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of nominees than available slots.113 reasonable limitations on a Rule 14a–11 Rule 14a–11. We believe that to do so According to these commenters, further nomination if there is a simultaneous would, like an outright exception, be confusion would result from any proxy contest.119 inconsistent with the goal of our assumption by shareholders that the While we appreciate commenters’ rulemaking—to change the proxy Rule 14a–11 slate is allied with the concerns, we do not believe that our process to better reflect the rights insurgent slate, despite the Rule 14a–11 efforts to facilitate the exercise of shareholders would have at a representation regarding the lack of shareholders’ State law right to shareholder meeting, which are not control intent.114 One commenter also nominate directors should be limited by limited by the nomination activities of argued that, despite the Rule 14a–11 the activities of other persons engaged other persons. representation regarding the lack of in a traditional proxy contest. We also While we are not adopting an control intent, it is ‘‘easy to imagine that believe that, as described below, Rule exception from the rule for companies in some contested elections, a [R]ule 14a–11 and the related rule that are, or anticipate being, subject to 14a–11 nominee would be the swing amendments, together with our staff a concurrent proxy contest, we do vote, tipping the majority of the board review process, can adequately address understand concerns about the and thus control of the company.’’ 115 concerns about investor confusion and possibility of confusion and abuse in Citing these same concerns, another potential abuse of the process by those this area absent clear guidance.120 commenter recommended that when a seeking a change in control. Therefore, Accordingly, we have made clear in our company’s board receives notice of a we are adopting the rule as proposed, discussion, in Section II.B.10. below, traditional proxy contest, the company without an exception for companies that that a nominating shareholder or group should be permitted to exclude Rule are subject to or anticipate being subject relying on new Rule 14a–2(b)(7) or (8) 14a–11 nominees from the company’s to a concurrent proxy contest. In this to engage in an exempt solicitation to proxy materials (and, if the proxy regard, we agree with those commenters form a nominating shareholder group or materials have already been distributed, that opposed including a limitation in connection with a nomination to issue supplemental proxy materials because to do so would be inconsistent included in the company’s proxy eliminating these nominees from the with the goals of our rulemaking, which materials pursuant to Rule 14a–11 company’s materials).116 are not limited by the nomination would lose the exemption if they engage Finally, some commenters argued that activities of other persons. In addition, in a non-Rule 14a–11 solicitation for Rule 14a–11 is unnecessary when a we note that there is no current directors or another person’s solicitation company is engaged in a traditional limitation in the Federal proxy rules on with regard to the election of directors. proxy contest because the company’s the number of proxy contests that can In addition, we are adopting an shareholders are already effectively take place simultaneously and we do instruction to Rule 14a–11 121 to make exercising their rights under State law to not believe that there is sufficient reason clear that, in order to rely on Rule 14a– nominate and elect directors.117 One to provide such a limitation in this 11 to have a nominee or nominees commenter stated that if the circumstance. Companies and included in a company’s proxy Commission decides not to prohibit a shareholders have been able, to date, to materials, a nominating shareholder or concurrent vote on Rule 14a–11 successfully navigate multiple slates on group or any member of the nominating nominees and nominees presented those occasions when more than one shareholder or group may not be a through a traditional proxy contest, it person undertakes a proxy contest. In member of any other group with persons should at least provide that the addition, we believe that a company can engaged in solicitations or other nominees presented through the address commenters’ concerns through nominating activities in connection traditional proxy contest be counted disclosure in its proxy materials. For with the subject election of directors; against the number of permissible Rule example, the company may disclose in may not separately conduct a 14a–11 nominees to reduce the its proxy statement potential effects of solicitation in connection with the likelihood of a change in control.118 The electing non-management nominees subject election of directors other than commenter stated that if Rule 14a–11 (whether those nominees are included a Rule 14a–2(b)(8) exempt solicitation in could be used concurrently with a in the company’s materials or in other relation to those nominees it has traditional proxy contest, the soliciting persons’ materials), such as nominated pursuant to Rule 14a–11 or nominating shareholder should not be the potential to cause the company to for or against the company’s nominees; allowed to be a ‘‘participant’’ (as defined violate law or the independence and may not act as a participant in under Schedule 14A) in the traditional requirements of the exchange listing another person’s solicitation in proxy contest or to engage in any standards, and allow shareholders to connection with the subject election of soliciting activity for a nominee of consider that information when making directors. another shareholder. The commenter their voting decisions. Similarly, we 3. Which Companies Are Subject to also suggested that dissidents in a believe that appropriate disclosure in Rule 14a–11 traditional proxy contest be precluded the company’s proxy materials, as well from including Rule 14a–11 nominees as the dissident’s proxy materials, could a. General on their proxy card. Acknowledging the serve to potentially avoid shareholder In this section, we discuss which possibility of collusion, shareholder confusion about how many nominees a companies will be subject to new Rule confusion, and change in control, one shareholder may vote for and how to 14a–11, including the rule’s application commenter expressed support for mark the card. to investment companies, controlled We also have not revised Rule 14a–11, companies, ‘‘debt-only’’ companies, 113 See letters from ABA; Davis Polk. as suggested by commenters, to count voluntary registrants, and smaller 114 See Section II.B.4. below for a further nominees put forth by persons outside reporting companies. discussion of change in control intent and the of Rule 14a–11 for purposes of the New Rule 14a–11 will apply to certifications required by the new rules. calculation of the maximum number of 115 Letter from Davis Polk. companies that are subject to the 116 See letter from Society of Corporate nominees required to be included in the Exchange Act proxy rules, including Secretaries. company’s proxy materials pursuant to 117 See letters from BRT; Verizon. 120 See, e.g., letters from ABA; Seven Law Firms. 118 See letter from ABA. 119 See letter from P. Neuhauser. 121 See Instruction to Rule 14a–11(b).

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investment companies registered under investment company is experiencing a have very different functions from non- Section 8 of the Investment Company real governance or other failure.130 investment companies and their Act of 1940.122 The rule also will apply On the other hand, a number of boards.134 One commenter noted that to controlled companies and those commenters, largely from the the Proposal would be inappropriate companies that choose to voluntarily investment company industry, opposed and not particularly useful for most register a class of securities under the inclusion of registered investment open-end management investment Section 12(g). Smaller reporting companies in the rule.131 Commenters companies, because open-end companies will be subject to the rule, asserted that the Commission had not management investment company but on a delayed basis. Consistent with presented any empirical evidence of shares are held on a short-term basis the Proposal, we have excepted from the governance problems with respect to and open-end management investment rule’s application companies that are investment companies that would companies are not typically required to subject to the proxy rules solely because support extending the rule to them and hold annual meetings under State they have a class of debt registered that the trend for investment company law.135 under Section 12 of the Exchange Act. boards is to have strong governance Commenters also were concerned In addition, foreign private issuers are practices.132 Commenters also argued exempt from the Commission’s proxy that investment companies are subject about the costs of the Proposal, rules with respect to solicitations of to a unique regulatory regime under the particularly for fund complexes that ‘‘ ’’ their shareholders, so the rule will not Investment Company Act that provides utilize a unitary board consisting of apply to these issuers.123 additional protection to investors, such one group of individuals who serve on as the requirement to obtain shareholder the board of every fund in the complex, b. Investment Companies approval to engage in certain or ‘‘cluster’’ boards consisting of two or Under the Proposal, Rule 14a–11 transactions or activities,133 and that more groups of individuals that each would apply to registered investment investment companies and their boards oversee a different set of funds in the companies. We sought comment on complex.136 Commenters noted that if a whether Rule 14a–11 should apply to 130 See letter from J. Taub. these companies.124 131 See, e.g., letters from ABA; American Bar 134 See letters from ABA; Barclays; ICI; ICI/IDC; Several commenters supported Association (September 18, 2009) (‘‘ABA II’’); IDC; T. Rowe Price; S&C; Vanguard. However, we including registered investment Barclays; ICI; Investment Company Institute and note that, in response to the 2003 Proposal, ABA and ICI indicated that there were no reasons to treat 125 Independent Directors Counsel (‘‘ICI/IDC’’); companies in the rule. Commenters Independent Directors Council (‘‘IDC’’); S&C; T. investment companies differently from non- noted that investment company boards, Rowe Price Associates, Inc. (‘‘T. Rowe Price’’); The investment companies. See letter from Investment like other boards, must be responsive Vanguard Group, Inc. (‘‘Vanguard’’). One commenter Company Institute (December 22, 2003) on File No. and accountable to their opposed the inclusion of business development S7–19–03; letter from American Bar Association 126 companies in the rule for the same reasons that it (January 7, 2004) on File No. S7–19–03. shareholders; that some investment opposed including registered investment companies 135 See letter from ABA. See also letter from S&C company boards are ‘‘too cozy’’ with the in the rule. See letter from ICI. Business (urging that at a minimum Rule 14a–11 should not company’s investment adviser; 127 and development companies are a category of closed- apply to open-end investment companies, ‘‘which that the proposed rule will add end investment companies that are not registered do not generally hold regular meetings and for under the Investment Company Act, but are subject which compliance would be particularly competition to the board nomination to certain provisions of that Act. See Sections burdensome’’). An open-end management process, which may create some traction 2(a)(48) and 54–65 of the Investment Company Act investment company is an investment company, in board negotiations with the [15 U.S.C. 80a–2(a)(48) and 80a–53–64]. We are other than a unit investment trust or face-amount company’s investment adviser.128 A including business development companies in the certificate company, that offers for sale or has number of commenters did not believe rule for the same reasons provided below with outstanding any redeemable security of which it is respect to registered investment companies. the issuer. See Sections 4 and 5(a)(1) of the that the rule would result in 132 See letters from ICI; ICI/IDC; IDC; T. Rowe Investment Company Act [15 U.S.C. 80a–4 and 80a– unreasonable cost or an excessive Price; S&C. Among other things, commenters noted 5(a)(1)]. number of contested elections.129 One that 90% of fund complexes have boards that are 136 See letters from ABA; ICI; ICI/IDC; IDC; MFDF; commenter suggested that investment 75% or more comprised of independent directors S&C; T. Rowe Price; Vanguard. Commenters noted and the vast majority of fund boards have an that a recent survey of fund complexes representing company shareholders would use the independent director serving as chairman or as lead 93% of the industry’s total net assets indicated that rule infrequently and then only if the independent director. See letters from ICI/IDC; IDC. 83% of fund complexes had a unitary board Two letters also cited a 1992 report by Commission structure and 17% of fund complexes had a cluster 122 15 U.S.C. 80a et seq. Registered investment staff that observed that the governance model board structure. See letters from ICI/IDC; IDC. companies currently are required to comply with embodied by the Investment Company Act is sound However, one comment letter included materials the proxy rules under the Exchange Act when and should be retained with limited modifications. noting that, while the average number of registered soliciting proxies, including proxies relating to the See letters from ICI; ICI/IDC. investment companies per fund complex is five, the election of directors. See Investment Company Act 133 One joint comment letter noted that the median number of registered investment companies Rule 20a–1 [17 CFR 270.20a–1] (requiring registered Investment Company Act requires investment per fund complex is one. See letter from ICI/IDC. investment companies to comply with regulations companies to obtain shareholder approval of In cases where the fund complex consists of only adopted pursuant to Section 14(a) of the Exchange contracts with the company’s investment adviser one company, commenters’ concerns about the loss Act that would be applicable to a proxy solicitation and distributor and to change from an open-end, of the unitary board would not be present. if it were made in respect of a security registered closed-end, or diversified company; to borrow Commenters also noted that among fund pursuant to Section 12 of the Exchange Act). money; to issue senior securities; to underwrite complexes that use unitary or cluster boards there 123 Exchange Act Rule 3a12–3 [17 CFR 240.3a12– securities issued by other persons; to purchase or are other aspects of board organization that vary 3] exempts securities of certain foreign issuers from sell real estate or commodities; to make loans to from complex to complex. See letter from ICI/IDC. Section 14(a) of the Exchange Act. other persons, except in accordance with the policy For example, one board may oversee all of the open- 124 The Commission has considered the impact of in the company’s registration statement; to change end funds in the complex and all but three of its this issue on investment companies on prior the nature of its business so as to cease to be an closed-end funds, while a second board oversees occasions. See, e.g., 2003 Proposal. investment company; or to deviate from a stated the other closed-end funds. Alternatively, one board policy with respect to concentration of investments may oversee the open-end and closed-end fixed 125 See, e.g., letters from AFSCME; CalPERS; CII; in an industry or industries, from any investment income funds advised by one particular adviser, Mutual Fund Directors Forum (‘‘MFDF’’); Julian policy which is changeable only by shareholder while a second board oversees the open-end and Reid (‘‘J. Reid’’); Jennifer S. Taub (‘‘J. Taub’’); TIAA– vote, or from any stated fundamental policy. The closed-end equity and international funds advised CREF. commenters also noted that investment company by a second adviser, etc. However, the commenters 126 See letter from MFDF. shareholders have the right to bring an action did not note any specific issues that would be 127 Letter from J. Reid. against the company’s investment adviser for raised by the use of different structures among fund 128 See letter from J. Taub. breach of fiduciary duty with respect to receipt of complexes using unitary or cluster boards if the 129 See, e.g., letters from AFSCME; J. Taub. compensation. See letter from ICI/IDC. Proposal were to be adopted.

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shareholder-nominated director were to boards of other companies, have commenters have raised governance be elected to a unitary or cluster board, significant responsibilities in protecting concerns regarding the relationship the investment companies in the fund shareholder interests, such as the between boards and investment complex would incur significant approval of advisory contracts and advisers.143 additional administrative costs and fees.140 Therefore, we are not persuaded We are cognizant of the fact that the burdens (e.g., the shareholder- that exempting registered investment rule will impose some costs on nominated director would have to leave companies would be consistent with our investment companies. We believe, during discussions that pertain to the goals. We also do not believe that the however, that policy goals and the other investment companies in the regulatory protections offered by the benefits of the rule justify these costs. complex, board materials would have to Investment Company Act (including As discussed above, we believe that be customized for the director, and the requirements to obtain shareholder facilitating the exercise of traditional fund complex would face challenges in approval to engage in certain State law rights to nominate and elect preserving the status of privileged transactions and activities), the trend directors is as much of a concern for information) and the benefits of the asserted by commenters for investment investment company shareholders as it unitary or cluster board that result in companies to have good governance is for shareholders of non-investment the increased effectiveness of such practices, or the fact that open-end companies. We continue to believe that boards would be lost.137 One management investment companies are parts of the proxy process may frustrate commenter also stated that if a not required by State law to hold annual the exercise of shareholders’ rights to shareholder nomination causes an meetings serves to decrease the nominate and elect directors arising election to be ‘‘contested’’ under rules of importance of the rights that are granted under State law, and thereby fail to the New York Stock Exchange, brokers to shareholders under State law.141 In provide fair corporate suffrage. The new would not be able to vote client shares fact, the separate regulatory regime to rules seek to facilitate shareholders’ on a discretionary basis, making it which investment companies are subject effective exercise of their rights under difficult and more expensive for emphasizes the importance of State law to both nominate and elect investment companies to achieve a investment company directors in directors. In this regard, we note that quorum for a meeting.138 dealing with the conflicts of interest commenters have stated that interest in After considering these comments, we created by the external management mutual fund governance has increased agree with the commenters who believe structure of most investment in recent years.144 that Rule 14a–11 should apply to companies.142 We also note that some We recognize that it may be more registered investment companies, as was costly for investment companies to proposed. The purpose of Rule 14a–11 140 See Jones v. Harris Assocs., 130 S.Ct. 1418, achieve a quorum at shareholder is to facilitate the exercise of 1423, 176 L. Ed. 2d 265, 273–274 (2010). See also meetings if a shareholder director shareholders’ traditional State law rights S. Rep. No. 91–184; 91st Congress 1st Session; S. nomination causes an election to be 2224 (1969) (‘‘This section is not intended to to nominate and elect directors to authorize a court to substitute its business judgment ‘‘contested’’ under rules of the New York boards of directors and thereby enable for that of the mutual fund’s board of directors in Stock Exchange and brokers cannot vote shareholders to participate more the area of management fees. * * * The directors customer shares on a discretionary meaningfully in the nomination and of a mutual fund, like directors of any other basis. Furthermore, for fund complexes corporation will continue to have * * * overall election of directors at the companies in fiduciary duties as directors for the supervision of that utilize unitary or cluster boards, the which they invest. These State law all of the affairs of the fund.’’); letter from ICI/IDC election of a shareholder director rights apply to the shareholders of (‘‘The Investment Company Act of 1940 and the nominee may, in some circumstances, investment companies, including each rules under it impose significant responsibilities on increase costs and potentially decrease fund directors in addition to the duties of loyalty investment company in a fund complex, and care to which directors are typically bound the efficiency of the boards. regardless of whether or not the fund under State law.’’). We note, however, that these costs are complex utilizes a unitary or cluster 141 In the 1992 report cited by two comment associated with the State law right to board.139 Moreover, although letters in footnote 132 above, the Commission staff nominate and elect directors, and are also observed that the Investment Company Act not costs incurred for including investment companies and their boards ‘‘establishes a comprehensive regulatory framework may have different functions from non- predicated upon principles of corporate democracy’’ shareholder nominees in the company’s investment companies and their boards, and was intended to provide an additional proxy statement. With respect to fund investment company boards, like the safeguard for investors by according ‘‘voting powers complexes utilizing unitary or cluster to investment company shareholders beyond those boards, we note that any increased costs required by State corporate law.’’ Division of 137 Commenters noted that unitary and cluster Investment Management, U.S. Securities and and decreased efficiency of an boards can result in enhanced board efficiency and Exchange Commission, Protecting Investors: A Half investment company’s board as a result greater board knowledge of the many aspects of Century of Investment Company Regulation, at pp. of the fund complex no longer having a fund operations that are complex-wide in nature. 251–52, 260 (May 1992) (emphasis added). unitary or cluster board would occur, if See, e.g., letters from ABA; ICI; ICI/IDC; IDC; MFDF; 142 See, e.g., Commission Guidance Regarding the S&C; T. Rowe Price; Vanguard. For instance, Duties and Responsibilities of Investment Company at all, only in the event that investment commenters noted that many of the same Boards of Directors with Respect to Investment company shareholders elect the regulatory, valuation, compliance, disclosure, Adviser Portfolio Trading Practices, Release No. IC– shareholder nominee. Investment accounting, and business issues may arise for all of 28345 (July 30, 2008) [73 FR 45646, 45649 (August companies may include information in the funds that the unitary or cluster board oversees 6, 2008)] (‘‘In addition to statutory and common law and that consistency among funds in the complex obligations, fund directors are also subject to the proxy materials making investors greatly enhances both board efficiency and specific fiduciary obligations relating to the special aware of the company’s views on the shareholder protection. See, e.g., letter from ICI/ nature of funds under the Investment Company Act. perceived benefits of a unitary or cluster IDC. One joint comment letter also suggested that * * * A fund board has the responsibility, among board and the potential for increased ‘‘[b]ecause they are negotiating on behalf of multiple other duties, to monitor the conflicts of interest funds, unitary and cluster boards have a greater facing the fund’s investment adviser and determine ability than single fund boards to negotiate with how the conflicts should be managed to help ensure responsibilities of the independent directors of an management over matters such as fund expenses; that the fund is being operated in the best interest investment company and noting that ‘‘Each of these the level of resources devoted to technology; and of the fund’s shareholders.’’) (footnotes omitted); duties and responsibilities is vital to the proper compliance and audit functions.’’ See id. Interpretive Matters Concerning Independent functioning of fund operations and, ultimately, the 138 See letter from S&C. Directors of Investment Companies, Release No. IC– protection of fund shareholders.’’). 139 We note that ‘‘unitary’’ or ‘‘cluster’’ boards are 24083 (October 14, 1999) [64 FR 59877, 59877–78 143 See letters from J. Reid; J. Taub. not required by State law. (November 3, 1999)] (listing various duties and 144 See letters from AFSCME; J. Taub.

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costs and decreased efficiency if the we believe that investment company proxy materials in this context would be shareholder nominees are elected. shareholders should have a more ineffective and needlessly disruptive Moreover, we note that a fund complex meaningful opportunity to exercise their and costly because there is no prospect can take steps to minimize the cost and traditional State law rights to elect a that a shareholder nominee would be burden of a shareholder-nominated non-unitary or non-cluster board if they elected.154 Two of these commenters director by, for example, entering into a so choose. also noted that subjecting these confidentiality agreement in order to companies to Rule 14a–11 would c. Controlled Companies preserve the status of confidential possibly cause investor confusion.155 information regarding the fund As proposed, Rule 14a–11 would These commenters remarked that complex.145 allow eligible shareholders to submit shareholders would continue to have We believe that the costs imposed on director nominees at all companies other avenues to express their views to investment companies will be less subject to the Exchange Act proxy rules the company, such as through the Rule significant than the costs imposed on other than companies that are subject to 14a–8 process. Commenters who other companies for three reasons. First, the proxy rules solely because they have supported an exclusion for controlled to the extent investment companies do a class of debt registered under Section companies suggested that for purposes not hold annual meetings as permitted 12 of the Exchange Act. We sought of the exclusion the definition of by State law, investment company comment on whether Rule 14a–11 also ‘‘controlled company’’ should be similar shareholders will have less opportunity should provide an exception for to the definition used by the national to use the rule.146 Second, even when controlled companies. securities exchanges in connection with investment company shareholders do In response to our request for director independence requirements.156 have the opportunity to use the rule, the comment, one commenter argued that Some commenters suggested that if Rule disproportionately large and generally controlled companies should not be 14a–11 excluded controlled companies passive retail shareholder base of excluded from Rule 14a–11,150 using the same definition as the national investment companies will probably acknowledging that while there may be securities exchanges in connection with mean that the rule will be used less no mathematical possibility of a director independence requirements, frequently than will be the case with shareholder nominee submitted then the rule should contain an non-investment companies.147 Third, pursuant to Rule 14a–11 being elected at instruction providing that whether more because we have sought to limit the cost a controlled company, in a controlled than 50% of the voting power of a and burden on all companies, including company there could be an even greater company is held by an individual, investment companies, by limiting use need for non-controlling shareholders to group, or other company would be of Rule 14a–11 to shareholders who express their concerns. The commenter determined by any schedules filed have maintained significant continuous noted that a large—even if not a under Section 13(d) of the Exchange holdings in the company for at least majority—vote by non-controlling Act.157 three years, and because many funds, shareholders could send an important After considering the issue further, we such as money market funds, are held message to the board. Other commenters are persuaded that Rule 14a–11 should by shareholders on a short-term basis,148 noted that controlled companies are apply to controlled companies, as we we believe that the situations where commonly structured with dual classes proposed. As commenters noted, it is shareholders will meet the eligibility of stock, which allows shareholders of common for companies structured with requirements will be limited. the non-controlling class of stock to dual classes of stock to allow Although commenters argued that the elect a set number of directors that is shareholders of the non-controlling election of a shareholder-nominated less than the full board.151 Another class to elect a set number of directors director to a unitary or cluster board commenter noted that dual-class that is less than the full board. In that will necessarily result in decreased companies with supervoting stock often situation, it may be useful for non- effectiveness of the board, we disagree. can benefit the most from having the controlling shareholders to be able to In this regard, one commenter argued interests of non-controlling shareholders include shareholder nominations in that competition in the board better represented in the boardroom.152 company proxy materials with respect nomination process may improve This commenter encouraged the to the directors the non-controlling class efficiency by providing additional Commission to include some means by is entitled to elect. In addition, though leverage for boards in negotiations with which minority shareholders of dual- applying Rule 14a–11 to controlled the investment adviser.149 In any event, class and parent-controlled companies companies would be unlikely to result could meaningfully avail themselves of in the election of shareholder- 145 Two commenters argued in a joint comment the rule, even if a different set of nominated directors in cases in which letter that there are a number of practical and legal eligibility or disclosure requirements is issues that prevent confidentiality agreements from these are not directors elected being sufficient to address the issues that arise determined to be more appropriate in exclusively by the non-controlling when a shareholder-nominated director is elected to these cases. shareholders, we appreciate that the board of an investment company in a fund On the other hand, several shareholders at controlled companies complex using a unitary or cluster board. See letter commenters argued that controlled from ICI/IDC. We emphasize that entering into a confidentiality agreement is only one method of companies should be excluded from 154 See letters from ABA; AllianceBernstein; preserving the confidentiality of information Rule 14a–11.153 According to these Cleary; Seven Law Firms; Duane Morris; Sidley revealed in board meetings attended by the commenters, providing shareholders the Austin. shareholder-nominated director. The fund complex ability to include nominees in company 155 See letters from ABA; Seven Law Firms. can have separate meetings and board materials for 156 See letters from ABA; AllianceBernstein; the board with the shareholder-nominated director, Cleary; Seven Law Firms; Duane Morris; Sidley especially if particularly sensitive legal or other 150 See letter from P. Neuhauser. Austin. See, e.g., New York Stock Exchange Rule matters will be discussed or to protect attorney- 151 See letters from ABA; Duane Morris; Media 303A.00 and NASDAQ Stock Market LLC Rule client privilege. For a further discussion of this General, Inc. (‘‘Media General’’); The New York 5615(c) (defining ‘‘controlled companies’’ as a comment, see Section IV.E.1. Times Company (‘‘New York Times’’). company of which more than 50% of the voting 146 See letters from ABA; MFDF. 152 See letter from T. Rowe Price. power for the election of directors is held by an 147 See letter from J. Taub. 153 See letters from ABA; AllianceBernstein; individual, group or another company). 148 See letter from ABA. Cleary; Seven Law Firms; Duane Morris LLP 157 See letters from AllianceBernstein; Duane 149 See letter from J. Taub. (‘‘Duane Morris’’); Sidley Austin. Morris.

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may have other reasons for nominating e. Application of Exchange Act Rule should enjoy the same protections candidates for director.158 14a–11 to Companies That Voluntarily generally available to shareholders of Register a Class of Securities Under other companies with a class of equity d. ‘‘Debt Only’’ Companies Exchange Act Section 12(g) securities registered pursuant to Section As proposed, Rule 14a–11 would In the Proposing Release, we noted 12. Accordingly, Rule 14a–11 will apply allow eligible shareholders to submit that Rule 14a–11 would apply to to companies that have voluntarily director nominees at all companies companies that have voluntarily registered a class of equity securities pursuant to Exchange Act Section 12(g), subject to the Exchange Act proxy rules registered a class of equity securities with the same ownership eligibility other than companies that are subject to pursuant to Exchange Act Section 12(g); thresholds as those of companies that the proxy rules solely because they have however, we solicited comment on were required to register a class of a class of debt securities registered whether Rule 14a–11 should apply to equity securities pursuant to Section 12. under Section 12 of the Exchange Act. these companies.162 We also asked We sought comment on whether this whether nominating shareholders of f. Smaller Reporting Companies these companies should be subject to exclusion from Rule 14a–11 was Under the Proposal, Rule 14a–11 the same ownership eligibility appropriate. would apply to all companies subject to thresholds as those shareholders of the proxy rules, other than companies Commenters that specifically companies that were required to register that are subject to the proxy rules solely addressed this question agreed with our a class of equity securities pursuant to because they have a class of debt approach and stated generally that Rule Section 12, or whether we should adjust registered under Exchange Act Section 14a–11 should not apply to companies any other aspects of Rule 14a–11 for 12. Thus, Rule 14a–11, as proposed, subject to the Federal proxy rules solely these companies. because they have a class of debt Three commenters stated that Rule would apply to smaller reporting securities registered under Exchange 14a–11 should apply to companies that companies. We sought comment in the Act Section 12.159 Most of these voluntarily register a class of equity Proposal on what effect, if any, the commenters stated that the ability to securities under Exchange Act Section application of Rule 14a–11 would have submit nominees for inclusion in a 12(g).163 One explained that investors in on any particular group of companies, company’s proxy materials should be and in particular, smaller reporting securities registered under Section 12 166 limited to holders of equity securities should be provided some assurance that companies. A number of commenters stated registered under the Exchange Act.160 the company is subject to various rules generally that Rule 14a–11 should not One commenter warned that subjecting safeguarding their interests, such as the apply to small businesses.167 One companies with a registered class of proposed rule, and expressed concern commenter argued that Rule 14a–11 debt securities to Rule 14a–11 would that less than uniform application could deter private companies from accessing lead to investor confusion.164 One should be limited to accelerated filers and that there should possibly be a the public debt market and, in any case, commenter stated that nominating transition period where the rule was private companies typically have shareholders of voluntarily-registered only applicable to large accelerated shareholder agreements and other companies should be subject to the filers.168 That commenter believed that arrangements in place that address the same ownership thresholds as 161 shareholders of companies that were election of directors. 166 The Commission has considered this issue on We are adopting this exclusion as required to register a class of securities prior occasions. See, e.g., 2003 Proposal; Division under Exchange Act Section 12.165 proposed. We note that this approach of Corporation Finance, Briefing Paper for We agree with the commenters that Roundtable Discussion on the Proposed Security was supported by investor and Rule 14a–11 generally should apply to Holder Director Nominations Rules, February 25, corporate commenters. We believe that those companies that choose to avail 2004, available at http://www.sec.gov/spotlight/dir- nominations/dir-nom-briefing.htm. Rule 14a–11 should not apply to themselves of the obligations and companies that are subject to the 167 See letters from ABA; American Mailing; All benefits of Section 12(g) registration. As Cast; Always N Bloom; American Carpets; J. Federal proxy rules solely because they Section 12 registrants, these companies Arquilla; B. Armburst; Artistic Land Designs; C. have a class of debt securities registered are subject to the full panoply of the Atkins; Book Celler; K. Bostwick; Brighter Day under Section 12 of the Exchange Act. Painting; Colletti; Commercial Concepts; Complete Exchange Act, including Section 14(a), Home Inspection; D. Courtney; S. Crawford; and their shareholders receive proxy Crespin; Don’s; T. Ebreo; M. Eng; eWareness; Evans; 158 We note that controlled companies are not materials in connection with annual and Fluharty; Flutterby; Fortuna Italian Restaurant; excluded from Rule 14a–8 despite the same special meetings of shareholders in Future Form; Glaspell; C. Gregory; Healthcare improbability that a shareholder proposal will Practice; B. Henderson; S. Henning; J. Herren; A. receive the approval of the majority of the votes cast accordance with the proxy rules. We Iriarte; J. Jones; Juz Kidz; Kernan; LMS Wine; T. at a controlled company. Shareholders may use believe disparate treatment among these Luna; Mansfield Children’s Center; D. McDonald; Rule 14a–8 to submit a proposal to the board even Section 12 registrants is unwarranted Meister; Merchants Terminal; Middendorf; Mingo; though controlling shareholders may vote against and shareholders of these companies Moore Brothers; Mouton; D. Mozack; Ms. Dee; G. the proposal and prevent it from being approved. Napolitano; NK; H. Olson; PESC; Pioneer Heating 159 See letters from ABA; CII; Cleary; S&C. & Air Conditioning; RC; RTW; D. Sapp; SBB; SGIA; 160 See letters from ABA; Cleary; S&C. 162 A company must register a class of equity P. Sicilia; Slycers Sandwich Shop; Southern 161 See letter from S&C. This commenter also securities under Section 12(g) if, on the last day of Services; Steele Group; Sylvron; Theragenics; E. stated that Rule 14a–11 should not apply to those its fiscal year, the class of equity securities is held Tremaine; Wagner; Wagner Industries; Wellness; reporting companies who voluntarily continue to by 500 or more record holders and the company has West End; Y.M.; J. Young. file Exchange Act reports while they are not total assets of more than $10 million. An issuer 168 See letter from ABA. A large accelerated filer required to do so under Exchange Act Section 13(a) may, however, register any class of equity securities is an issuer that, as of the end of its fiscal year, had or Section 15(d). It argued that these voluntary filers under Section 12(g) even if these thresholds have an aggregate worldwide market value of voting and should be treated the same as companies with not been met. Reporting after this form of voluntary non-voting common equity held by its non-affiliates Exchange Act reporting obligations relating solely registration is distinguished from a company that of $700 million or more, as of the last business day to debt securities. We note that Rule 14a–11 will continues to file Exchange Act reports when neither of the issuer’s most recently completed second not apply to a company filing Exchange Act reports Exchange Act Section 13(a) nor Section 15(d) fiscal quarter; has been subject to the reporting when neither Exchange Act Section 13(a) nor requires that it do so. See footnote 161 above. requirements of Section 13(a) or 15(d) of the Section 15(d) requires that it do so (for example, to 163 See letters from ABA; CII; USPE. Exchange Act for at least 12 calendar months; has comply with a covenant contained in an indenture 164 See letter from USPE. filed at least one annual report pursuant to Section relating to outstanding debt securities). 165 See letter from ABA. 13(a) or 15(d) of the Act; and is not eligible to use

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smaller companies would have trouble disproportionately burdens small rule would be appropriate for smaller recruiting directors because the pool of issuers.175 reporting companies before the rule qualified directors is already small for After considering the comments, becomes applicable to them. Therefore, smaller companies, and directors would amended Section 14(a), and Section we are delaying implementation for not want to risk the exposure to a proxy 971(c) of the Dodd-Frank Act, we companies that meet the definition of contest. Another commenter argued that continue to believe that Rule 14a–11 smaller reporting company in Exchange we should implement Rule 14a–11 on a should apply regardless of company Act Rule 12b–2.176 New Rule 14a–11 pilot basis for large accelerated filers for size, as was proposed. As noted above, will become effective for these two years and then revisit whether the purpose of Rule 14a–11 is to companies three years after the date that application of the rule would be facilitate the exercise of shareholders’ the rules become effective for appropriate for smaller companies.169 traditional State law rights to nominate companies other than smaller reporting and elect directors to company boards of companies. In addition, as discussed Other commenters stated that smaller directors and thereby enable below, in an effort to limit the cost and reporting companies should not be shareholders to participate more burden on all companies subject to the excluded from the application of Rule meaningfully in the nomination and rule, including smaller reporting 14a–11.170 One commenter agreed with election of directors at the companies in companies, we have limited use of Rule the Commission that exempting small which they invest. We are not 14a–11 to nominations by shareholders entities would be inconsistent with the persuaded that exempting smaller who have maintained significant stated goals of the Proposal and the reporting companies would be continuous holdings in the company for costs and burden for such entities consistent with these goals. As stated 171 an extended period of time. As would be minimal. Other above, we expect the rule changes will discussed further below, we have commenters believed that small further investor protection by extended the required holding period to companies are ‘‘just as likely’’ to have facilitating shareholder rights to at least three years at the time the notice poorly functioning boards as their larger nominate and elect directors and of nomination is filed with the 172 counterparts. Another commenter providing shareholders a greater voice Commission and transmitted to the argued that Rule 14a–11 would not in the governance of the companies in company. In addition, we have made impose a material burden on any which they invest. We believe modifications to the ownership company subject to the proxy rules shareholders of smaller reporting threshold that, in combination with the because companies already have to companies should be afforded these three-year holding period, we believe distribute proxy cards and it would not same protections. should facilitate shareholders’ ability to be an imposition if they were required Nonetheless, we recognize that exercise their State law rights to to add additional nominees to those smaller reporting companies may have nominate and elect directors without 173 cards. had less experience with existing forms unduly burdening companies, including In the recently enacted Dodd-Frank of shareholder involvement in the proxy smaller reporting companies. We Act, Congress confirmed our authority process (e.g., Rule 14a–8 proposals), and proposed a tiered ownership threshold to require inclusion of shareholder thus may have less developed that included a 5% ownership threshold nominees for director in company proxy infrastructures for managing these for non-accelerated filers; however, we materials.174 In addition, in Section matters. We believe that a delayed are adopting a 3% ownership threshold 971(c) of the Dodd-Frank Act Congress effective date for smaller reporting for all companies subject to the rule. In specifically provided the Commission companies should allow those adopting the uniform 3% ownership with the authority to exempt an issuer companies to observe how the rule threshold, we carefully considered, or class of issuers from requirements operates for other companies and among other factors, the potential that adopted for the inclusion of shareholder should allow them to better prepare for director nominations in company proxy implementation of the rules. We also 176 See Exchange Act Rule 12b–2. A smaller materials. In doing so, this provision believe that delayed implementation for reporting company is defined as ‘‘an issuer that is these companies will allow us to not an investment company, an asset-backed issuer, instructs the Commission to take into or a majority-owned subsidiary of a parent that is account whether such requirement for evaluate the implementation of Rule not a smaller reporting company and that: had a the inclusion of shareholder nominees 14a–11 by larger companies and provide public float of less than $75 million as of the last for director in company proxy materials us with the additional opportunity to business day of its most recently completed second consider whether adjustments to the fiscal quarter, computed by multiplying the aggregate worldwide number of shares of its voting the requirements for smaller reporting companies and non-voting common equity held by non- for its annual and quarterly reports. See Exchange 175 Dodd-Frank Act § 971(c). A comment letter on affiliates by the price at which the common equity Act Rule 12b–2(2). July 28, 2010 from the Society of Corporate was last sold, or the average of the bid and asked 169 See letter from Theragenics. See also letter Secretaries & Governance Professionals invoked this prices of common equity, in the principal market from Alston & Bird, recommending that we new legislation in support of a request to re-open for the common equity; or in the case of an initial consider adopting a phase-in approach, whereby the period for comment on the Proposal as it relates registration statement under the Securities Act or companies would be permitted to follow a phase- to small companies. As noted, we did specifically Exchange Act for shares of its common equity, had in schedule for mandatory compliance based on request comment in the Proposal on the rule’s effect a public float of less than $75 million as of a date their size, similar to the Commission’s rules on smaller reporting companies, and we received within 30 days of the date of the filing of the regarding internal controls reporting and XBRL. See and have considered numerous comments on this registration statement, computed by multiplying the Management’s Report on Internal Control Over topic. Accordingly, we believe we have aggregate worldwide number of such shares held by Financial Reporting and Certification of Disclosure substantially achieved the objective stated in that non-affiliates before the registration plus, in the in Exchange Act Periodic Reports, Release No. 33– letter, namely to identify and evaluate any ‘‘unique case of a Securities Act registration statement, the 8238; 34–47968 [69 FR 9722] (June 5, 2003) and and significant challenges that access to the proxy number of such shares included in the registration Interactive Data to Improve Financial Reporting, will create for small and mid-sized companies.’’ statement by the estimated public offering price of Release No. 33–9002; 34–59324 [74 FR 6776] (Jan. Moreover, our determination to delay the shares; or in the case of an issuer whose public 30, 2009). implementation of Rule 14a–11 in respect of float as calculated under paragraph (1) or (2) of this smaller companies will further allow us to evaluate definition was zero, had annual revenues of less 170 See letters from AFSCME; CII; D. Nappier. the implementation of Rule 14a–11 by larger than $50 million during the most recently 171 See letter from CII. companies and provide us with the additional completed fiscal year for which audited financial 172 See letters from AFSCME; D. Nappier. opportunity to consider whether adjustments to the statements are available.’’ Whether or not an issuer 173 See letter from USPE. rule would be appropriate for smaller reporting is a smaller reporting company is determined on an 174 Dodd-Frank Act §§ 971(a) and (b). companies. annual basis.

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the rule would have a disproportionate power (calculated as required under the • Includes the certifications required impact on small issuers. Despite rule) 180 of the company’s securities that in the shareholder notice on Schedule identifying that concern in the Proposal, are entitled to be voted on the election 14N.188 however, the comments we received did of directors at the annual meeting of b. Ownership Threshold not substantiate that concern, and shareholders (or, in lieu of such an comments from companies annual meeting, a special meeting of As proposed, a nominating overwhelmingly supported uniform shareholders) or on a written consent in shareholder or group would have been ownership thresholds for all public lieu of a meeting; 181 required to beneficially own 1%, 3%, or companies. Moreover, the data we • Has held the qualifying amount of 5% of the company’s securities entitled examined did not indicate any securities used to satisfy the minimum to be voted on the election of directors substantial difference in share ownership threshold continuously for at at the shareholder meeting, depending ownership concentrations between large least three years as of the date of the on the company’s accelerated filer status accelerated filers and non-accelerated shareholder notice on Schedule 14N (in or, in the case of registered investment filers. Thus, we expect that the the case of a shareholder group, each companies, depending on the net assets eligibility requirements will help member of the group must have held the of the company. We received significant achieve the stated objectives of the rule amount of securities that are used to comment on this topic, which we without disproportionately burdening satisfy the ownership threshold discuss further below, and have made any particular group of companies. continuously for at least three years as alterations to the final rule to reflect the of the date of the shareholder notice on concerns expressed by commenters. 4. Who Can Use Exchange Act Rule 182 As adopted, to rely on Rule 14a–11, 14a–11 Schedule 14N); • Continues to hold the required a nominating shareholder or group will be required to hold, as of the date of the a. General amount of securities used to satisfy the shareholder notice on Schedule 14N, ownership threshold through the date of In an effort to facilitate fair corporate either individually or in the aggregate, the shareholder meeting; 183 suffrage, we could have proposed and at least 3% of the voting power of the • Is not holding any of the company’s adopted a rule pursuant to which the company’s securities that are entitled to securities with the purpose, or with the ability to use Rule 14a–11 would be be voted on the election of directors at effect, of changing control of the conditioned solely on whether the the annual (or a special meeting in lieu company or to gain a number of seats on shareholder lawfully could nominate a of the annual) meeting of shareholders the board of directors that exceeds the director, and not include any ownership or on a written consent in lieu of a maximum number of nominees that the thresholds or holding period. However, meeting. The nominating shareholder or company could be required to include we believe it is appropriate to take a group or member of a nominating under Rule 14a–11; 184 measured approach that balances shareholder group will be required to • Does not have an agreement with competing interests and seeks to ensure hold both the power to dispose of and the company regarding the investor protection. Accordingly, Rule the power to vote the securities, as nomination; 185 14a–11 will be available to shareholders discussed below. The nominating • Provides a notice to the company that hold a significant, long-term shareholder or member of a nominating on Schedule 14N, and files the notice interest in the company, have provided shareholder group also will be required with the Commission,186 of the timely notice of their intent to include to have held the qualifying amount of nominating shareholder’s or group’s a nominee in the company’s proxy securities for at least three years as of intent to require that the company materials, and provide specified the date of the notice on Schedule 14N, include that nominating shareholder’s disclosure concerning themselves and and to hold that amount through the or group’s nominee in the company’s their nominees. More specifically, as date of the election of directors. Each proxy materials no earlier than 150 described in detail in this section, a aspect of the ownership requirement is calendar days, and no later than 120 company will be required to include a discussed further below. shareholder nominee or nominees if the calendar days, before the anniversary of nominating shareholder or group: 177 the date that the company mailed its • proxy statement, increasing the year by one, and Holds, as of the date of the proxy materials for the prior year’s counting back 150 calendar days and 120 calendar shareholder notice on Schedule 14N,178 annual meeting; 187 and days for the beginning and end of the window either individually or in the period, respectively. In this regard, we note that the aggregate,179 at least 3% of the voting 180 See Instruction 3 to new Rule 14a–11(b)(1). deadline could fall on a Saturday, Sunday or 181 See new Rule 14a–11(b)(1). holiday. In such cases, the deadline should be treated as the first business day following the 182 See new Rule 14a–11(b)(2). The three-year 177 In some circumstances, the requirements of Saturday, Sunday or holiday, similar to the holding period requirement applies only to the Rule 14a–11 applicable to a nominating shareholder treatment filing deadlines receive under Exchange amount of securities that are used for purposes of group must be satisfied by each member of the Act Rule 0–3. See Instruction 1 to Rule 14a– determining the ownership threshold. group individually (e.g., no member of the group 11(b)(10). If the company did not hold an annual 183 may be holding the company’s securities with the See new Rule 14a–11(b)(2). meeting during the prior year, or if the date of the purpose of, or with the effect, of changing control 184 See new Rule 14a–11(b)(6). meeting has changed by more than 30 days from the of the company or to gain more than the maximum 185 See new Rule 14a–11(b)(7). prior year, then the nominating shareholder or number of nominees that the registrant would be 186 See Section II.B.8. for a discussion of new group must provide notice pursuant to new Item required to include under the rule). See also Section Schedule 14N and the disclosures required to be 5.08 a reasonable time before the company mails its II.B.4. filed. The Schedule 14N may be filed by an proxy materials, as specified by the company in a 178 Throughout this release, when we say ‘‘as of individual shareholder that meets the ownership Form 8–K filed within four business days after the the date of the notice on Schedule 14N’’ we mean threshold, an individual shareholder that is a company determines the anticipated meeting date. the date the nominating shareholder or group files member of a nominating shareholder group that is See new Rule 14a–11(b)(10) and Instruction 2 to the Schedule 14N with the Commission and aggregating the individual members’ securities to that paragraph. See further discussion in Section transmits the notice to the company. See Section meet the ownership threshold but is choosing to file II.B.8.c.ii. II.B.8.c.ii. below for a further discussion of the the notice on Schedule 14N individually, or a 188 See new Rule 14a–11(b)(11) and Item 8 of new timing requirements for filing a Schedule 14N. nominating shareholder group through their Schedule 14N. Pursuant to new Schedule 14N, the 179 The manner in which a nominating authorized representative, as provided for in Rule nominating shareholder or group would be required shareholder or group would establish its eligibility 14n–1(b)(1). to include in its notice to the company a to use new Rule 14a–11 is discussed further in 187 The dates would be calculated by determining certification that the nominating shareholder or Section II.B.4.b.iv. below. the release date disclosed in the previous year’s group satisfies the requirements in Rule 14a–11.

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i. Percentage of Securities commenters questioned whether the seriously concerned about the We proposed tiered ownership data on shareholdings discussed in the governance of portfolio companies will 200 thresholds for large accelerated, Proposal in relation to the proposed have a seat at the table.’’ accelerated, and non-accelerated filers thresholds took into account the fact With regard to an appropriate uniform in an effort to address the possibility that shareholders could aggregate their ownership threshold, commenters that certain companies could be affected holdings in order to use Rule 14a–11.192 recommended a number of different disproportionately based on their One of these commenters described possibilities, including: • size.189 Many commenters criticized the formation of a nominating group as ‘‘the At least 1% of the company’s proposed ownership thresholds or most likely scenario’’ to qualify for use outstanding shares for an individual recommended generally higher of Rule 14a–11,193 and another shareholder and 5% for a group of thresholds.190 Of these, most commenter submitted that with a shareholders; 201 commenters criticized the tiered significant ownership threshold an • At least 2% of a company’s voting ownership thresholds and ‘‘inability to aggregate shareholders to securities; 202 recommended a uniform ownership reach the ownership threshold is • 3% of a company’s shares; 203 threshold generally higher than the unreasonable.’’ 194 • 5% of the company’s voting proposed thresholds.191 Many of these A few commenters criticized securities for an individual shareholder generally the proposed thresholds as too and 10% for a group of shareholders; 204 189 Similarly, we proposed tiered ownership high and recommended lower • 5% of a company’s outstanding thresholds for registered investment companies thresholds.195 One commenter opposed shares; 205 with the tiers based on net assets. the tiered ownership thresholds because • 5% of a company’s outstanding 190 See letters from 26 Corporate Secretaries; a number of companies regularly move ABA; Australian Council of Superannuation shares for an individual shareholder and Investors (‘‘ACSI’’); ADP; Advance Auto Parts; from one category of filer to another as a higher but unspecified threshold for a Aetna; Alaska Air; Alcoa Inc. (‘‘Alcoa’’); Allstate; the aggregate worldwide market value of group of shareholders; 206 American Express; Anadarko; Applied Materials; their voting and non-voting common • With regard to investment Association of Corporate Counsel; AT&T; Avis equity changes from fiscal year to fiscal 207 Budget; Barclays; Best Buy; J. Blanchard; Boeing; companies, a 5% threshold; BorgWarner; BRT; Burlington Northern; R. Burt; year, which the commenter believed • From 5% to 10% of a company’s Calvert Group, Ltd. (‘‘Calvert’’); Caterpillar; CFA would lead to uncertainty under the shares; 208 Institute; Chevron; J. Chico; Committee on Commission’s tiered approach.196 • 10% of the company’s shares; 209 Investment of Employee Benefit Assets (‘‘CIEBA’’); • CIGNA; Peter Clapman (‘‘P. Clapman’’); Cleary; CNH Commenters from the investment 10% of the company’s outstanding Global; Comcast; Con Edison; Capital Research and company industry noted that the shares for an individual shareholder and Management Company (‘‘CRMC’’); CSX; Cummins; proposed eligibility thresholds were 15% of the outstanding shares for a Darden Restaurants; Davis Polk; Deere; Dewey; W. based on data for non-investment group of shareholders; 210 Brinkley Dickerson, Jr. (‘‘W. B. Dickerson’’); J. • Dillon; DTE Energy; DuPont; Craig Dwight (‘‘C. companies and were not supported by 5% to 15% of the company’s Dwight’’); Eaton; Edison Electric Institute; Eli Lilly; empirical data analysis for investment outstanding shares; 211 Emerson Electric; eWareness; ExxonMobil; FedEx; companies.197 Financial Services Roundtable; FMC Corp.; FPL On the other hand, we also received 200 Letter from AFL–CIO. Group; GE; General Mills; A. Goolsby; Home Depot; 201 See letter from Deere. Honeywell; IBM; ICI; Intel; ITT; JPMorgan Chase; J. comment generally supporting the 202 Kilts; Koppers; E.J. Kullman; N. Lautenbach; proposed tiered ownership See letter from ADP. Leggett; Lionbridge Technologies, Inc. (‘‘Lionbridge thresholds.198 One commenter 203 See letters from CSI; Calvert; CFA Institute; Technologies’’); Lorsch et al.; M. Metz; McDonald’s; expressed general support for the Labour Union Co-operative Retirement Fund MeadWestvaco; J. Miller; Motorola; Norfolk (‘‘LUCRF’’); S. Ranzini. Southern; Northrop Grumman Corporation proposed thresholds and stated that the 204 See letters from Advance Auto Parts; Alaska (‘‘Northrop’’); Office Depot; PepsiCo; Pfizer; P&G; proposed thresholds would achieve the Air; American Express; Association of Corporate Praxair, Inc. (‘‘Praxair’’); Protective; Stephen Lange Commission’s and commenter’s shared Counsel; Avis Budget; Best Buy; J. Blanchard; Ranzini (‘‘S. Ranzini’’); Rosen; Ryder; Sara Lee; S&C; objective of facilitating the exercise of Boeing; BRT; Burlington Northern; Callaway; CIGNA; CNH Global; Comcast; Con Edison; Darden Seven Law Firms; Shearman & Sterling; Sherwin- 199 Williams; SIFMA; Society of Corporate Secretaries; shareholders’ nomination rights. Restaurants; Dewey; J. Dillon; DTE Energy; DuPont; Southern Company; Tenet; Tesoro; Textron; TI; Another commenter explained that the Eaton; Edison Electric Institute; Eli Lilly; Emerson TIAA–CREF; Tidewater Inc. (‘‘Tidewater’’); thresholds would ‘‘ensure[ ] that only Electric; ExxonMobil; FedEx; FMC Corp.; FPL Tompkins Financial Corporation (‘‘Tompkins’’); G. those long-term shareholders who are Group; General Mills; Home Depot; Intel Tooker; T. Rowe Price; tw telecom; L. Tyson; Corporation (‘‘Intel’’); JPMorgan Chase; E.J. Kullman; UnitedHealth; U.S. Bancorp; ValueAct Capital; McDonald’s; N. Lautenbach; PepsiCo; Praxair; Vanguard; Verizon Communications Inc. telecom; L. Tyson; UnitedHealth; U.S. Bancorp; Protective (recommending this threshold if its (‘‘Verizon’’); Bruno de la Villarmois (‘‘B. ValueAct Capital; Vanguard; Verizon; proposed 35% withhold vote triggering event is not Villarmois’’); Wachtell; Wells Fargo; Weyerhaeuser; Weyerhaeuser; Xerox. included; if included, it recommended a 3% Xerox. 192 See letters from ABA; ABA II; BRT; Business threshold); Sara Lee; Seven Law Firms; Sherwin- 191 See letters from ACSI; ADP; Advance Auto Roundtable (January 19, 2010) (‘‘BRT II’’); Cleary; Williams; Society of Corporate Secretaries; Textron; Parts; Allstate; American Express; Applied Davis Polk; Honeywell; SIFMA. Tompkins; G. Tooker; Weyerhaeuser; Xerox. Materials; Association of Corporate Counsel; AT&T; 193 Letter from BRT II. 205 See letters from Applied Materials; R. Burt; Avis Budget; Barclays; Best Buy; J. Blanchard; 194 Letter from California State Teachers’ CSX; Financial Services Roundtable; IBM Boeing; BRT; Burlington Northern; R. Burt; Calvert; Retirement System (Nov. 18, 2009)(‘‘CalSTRS II’’). (recommending 5% as one of the two acceptable Caterpillar; CFA Institute; J. Chico; CIGNA; CNH 195 See letters from Committee of Concerned thresholds); ITT; J. Kilts; Shearman & Sterling; Global; Comcast; Con Edison; CSX; Darden Shareholders (‘‘Concerned Shareholders’’); L. Dallas; Southern Company; Tesoro; TIAA–CREF; T. Rowe Restaurants; Davis Polk; Deere; Dewey; W. B. USPE. Price; tw telecom; UnitedHealth; U.S. Bancorp; Dickerson; J. Dillon; DTE Energy; DuPont; Eaton; 196 See letter from Shearman & Sterling. Verizon. Edison Electric Institute; Eli Lilly; Emerson Electric; 206 197 See, e.g., letters from ICI; S&C; T. Rowe Price. See letters from Applied Materials; U.S. ExxonMobil; FedEx; Financial Services Roundtable; Bancorp. FMC Corp.; FPL Group; General Mills; Home Depot; 198 See letters from AFL–CIO; AFSCME; British 207 See letters from S&C; TIAA–CREF. IBM; Intel; ITT; JPMorgan Chase; J. Kilts; E.J. Insurers; CalPERS; CalSTRS; COPERA; CRMC; 208 Kullman; Lorsch et al.; McDonald’s; M. Metz; Florida State Board of Administration; Glass Lewis; See letters from Davis Polk; Lorsch et al. Motorola; N. Lautenbach; Office Depot; PepsiCo; IAM; ICGN; LACERA; Marco Consulting; D. 209 See letters from Allstate; Caterpillar; J. Chico; Praxair; Protective; S. Ranzini; Sara Lee; S&C; Seven Nappier; Nathan Cummings Foundation; P. W. B. Dickerson; IBM (recommending 10% as one Law Firms; Shearman & Sterling; Sherwin- Neuhauser; Norges Bank; OPERS; Pax World; of the two acceptable thresholds); ICI; M. Metz; Williams; Society of Corporate Secretaries; RiskMetrics; David E. Romine (‘‘D. Romine’’); Office Depot; L. Tyson; ValueAct Capital; Vanguard. Southern Company; Tesoro; Textron; TI; TIAA– Shamrock; Sodali; Teamsters; WSIB. 210 See letter from Motorola. CREF; Tompkins; G. Tooker; T. Rowe Price; tw 199 See letter from CII. 211 See letter from Barclays.

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• 15% of the company’s shares; 212 requiring a significant ownership concern we expressed in the Proposal— and threshold is appropriate to use Rule that companies could be • 20% of a company’s shares.213 14a–11. Indeed, we believe that the 3% disproportionately affected by adoption Two of the commenters that criticized ownership threshold—combined with of the rule based on their size—was not the proposed threshold as too high the other requirements of the rule— supported by comments of potentially recommended that Rule 14a–11 have properly addresses the potential affected companies; to the contrary, the same ownership threshold as Rule practical difficulties of requiring comments from companies 14a–8,214 with one of these commenters inclusion of shareholder director overwhelmingly supported uniform expressing the belief that the proposal, nominations in a company’s proxy ownership thresholds.219 In addition, as with its ownership thresholds, would materials, and some concerns that both discussed below, we are deferring enable only institutional shareholders to company management and other implementation of Rule 14a–11 for 215 access the corporate ballot. Another shareholders may have about the smaller reporting companies.220 of the commenters opposing the application of Rule 14a–11. Providing proposed thresholds asserted that the this balanced, practical, and measured A comparison of the share ownership threshold for non-accelerated filers is limitation in Rule 14a–11 is consistent concentrations in large accelerated filers too high and cited figures indicating with the approach we have taken in and non-accelerated filers produced that a significant number of such filers many of our other proxy rules 217 and relatively minor observable difference. do not have any shareholders that reflects our desire to proceed cautiously The results, adjusted to give effect to a would satisfy the proposed threshold.216 with these new amendments to our three-year holding period requirement, 221 This commenter suggested that for an rules. are summarized in the table below: individual shareholder or a group of We also considered whether the shareholders, the threshold should be ownership threshold we adopt for Rule 219 See letters from General Mills; Tesoro; T. 14a–11 should be tiered based on the Rowe Price; ValueAct Capital; Verizon (explicitly based on the dollar value of the shares opposing variation in percentage ownership held (e.g., $250,000) or a lower size and related filing status (or net requirement based on issuer size); and letters percentage of shares (e.g., 0.25%). assets) of the company, or uniform for identified in footnotes 199–211 above (commenters After considering the comments, we all companies, and what percentage of supporting various uniform ownership thresholds). believe that it is appropriate to apply a ownership would be most appropriate. 220 As noted in Section II.B.3.f., we have adopted We have decided to adopt a uniform a three-year delay in implementation for smaller uniform 3% ownership threshold to all reporting companies. companies subject to the rule, regardless standard for all companies for several 221 The percentages in the table are derived from of whether they are classified as large reasons. First, we determined that a the data set described in the Proposing Release accelerated, accelerated, or non- uniform standard would reduce the involving companies that have held meetings accelerated filers under the Federal complexities of Rule 14a–11. As noted between January 1, 2008 and April 15, 2009 (the 218 ‘‘Proposing Release data’’). See Section III.B.3. of the securities laws. As an initial matter, as by one commenter, the potential for Proposing Release. The percentages have been we did at the time we issued the the filing status of a company to change adjusted, however, because the Proposing Release Proposing Release, we considered would result in uncertainty about the data did not give effect to any holding period whether and why Rule 14a–11 should availability of the provisions of Rule requirement, and we have attempted to estimate 14a–11 as a result of market fluctuations what those percentages would have been had they include any ownership threshold. given effect to the three-year holding period we are Because the Commission’s proxy rules in share prices, acquisitions, or adopting. By the calculation described below, we seek to enable the corporate proxy divestitures. A uniform standard avoids have estimated a reasonable adjustment to the process to function, as nearly as that uncertainty and the resulting reported percentages in the Proposing Release data potential for the costs and burdens of by using the data presented in a November 24, 2009 possible, as a replacement for in-person memorandum based on the analysis of Schedule participation at a meeting of disputes over the selection of the 13F filings, data which did give effect to holding shareholders, some may argue that once appropriate tier. Elimination of that period requirements. See Memorandum from the a shareholder has satisfied any uncertainty, moreover, would make the Division of Risk, Strategy, and Financial Innovation availability of Rule 14a–11 more regarding the Share Ownership and Holding Period procedural requirements to a director Patterns in 13F data (November 24, 2009), available nomination that a company is allowed predictable and therefore more useful at http://www.sec.gov/comments/s7-10-09/s71009- to impose under State law, then that for shareholders in planning 576.pdf (the ‘‘November 2009 Memorandum’’). The nomination should be included in the nominations in reliance on the rule. A two data sets have overlapping statistics that can be uniform standard also will avoid any used for comparison and adjustment: Both sets company’s proxy materials. Each time report percentages of a broad sample of public we consider and adopt amendments to ability on the part of management to companies and identify percentages of companies our rules, however, we balance structure corporate actions to modify having (i) at least one shareholder with holdings of competing interests. the impact of Rule 14a–11 by placing 3% of more, (ii) at least two shareholders with the company in a different tier. The holdings of 3% or more, (iii) at least one Based on our consideration of these shareholder with holdings of 1% or more, and (iv) competing interests, including at least two shareholders with holdings of 1% or balancing and facilitating shareholders’ 217 See, e.g., Exchange Act Rule 14a–8(b) more. Comparing the percentages reflected in the ability to participate more fully in the (requiring shareholders to have ‘‘continuously held November 2009 Memorandum (giving effect to a at least $2,000 in market value, or 1%, of the three-year holding period requirement) with the nomination and election process against company’s securities entitled to be voted on the percentages in the Proposing Release data (not the potential cost and disruption of the proposal at the meeting for at least one year by the reflecting any holding period requirement), we amendments, we have determined that date’’ they submit a shareholder proposal); observe that the percentages reported in the Exchange Act Rule 14a–6(g) (requiring a soliciting Proposing Release data exceed the percentages person that ‘‘owns beneficially securities of the class reported in the November 2009 memorandum by 212 See letter from TI. which is the subject of the solicitation with a amounts ranging from 56% to 69%. In order to 213 See letter from AT&T. market value of over $5 million’’ to file a notice derive the approximate percentages in the table, we 214 See letters from Concerned Shareholders; with the Commission); Regulation S–K, Item 404(a) adjusted downward by 62.5% the percentages USPE. (requiring disclosure of transactions with related reported in the Proposing Release data, to account 215 See letter from Concerned Shareholders. parties that exceed $120,000). at least approximately for the application of the 216 See letter from L. Dallas. 218 See letter from Shearman & Sterling. three-year holding period requirement.

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Non-accelerated Large accelerated filers filers (approximate (approximate percentages) percentages)

Companies with at least one 1% shareholder ...... 37 37 Companies with at least one 3% shareholder ...... 33 32 Companies with at least one 5% shareholder ...... 22 16 Companies with at least two 1% shareholders ...... 36 37 Companies with at least two 1.5% shareholders ...... 33 33 Companies with at least two 2.5% shareholders ...... 27 25

Our further review of relevant data has We note that we considered a lower but ‘‘would not be so large as to prevent persuaded us that applying different threshold, such as 1%, and a higher all but the largest institutional ownership thresholds to large threshold, such as 5%, both of which shareowners to submit nominees for accelerated filers and non-accelerated were thresholds in the proposed tiers. [large accelerated filers].’’ 228 filers is not justified.222 Quite a few commenters, including a In light of such comments we have As noted above, we have decided to number who generally supported the determined not to adopt the 1% adopt a uniform ownership threshold adoption of Rule 14a–11, advocated for threshold we had proposed with respect for all categories of public companies. an ownership threshold higher than the to large accelerated filers. We also have We determined that a 3% ownership 1% level we proposed for large determined not to adopt, as the uniform threshold is an appropriate standard for accelerated filers.224 One large standard, the 5% threshold we had all such companies—not just institutional investor, for example, proposed for non-accelerated filers. accelerated filers. We believe that the ‘‘strongly urg[ed] the adoption of Several commenters from the investor 3% threshold, while higher for many proposed Rule 14a–11’’ and argued that community explicitly opposed a 5% companies and lower for others than the ‘‘existing reforms are incomplete as long uniform threshold, maintaining that it thresholds advanced in the Proposal, as boards retain the exclusive control of would as a practical matter exclude all properly balances our belief that Rule the proxy card and sole discretion over but the largest institutional investors.229 14a–11 should facilitate shareholders’ the mechanisms that govern their own On the other hand, although some traditional State law rights to nominate elections,’’ but also stated the belief that companies supported a uniform 5% and elect directors with the potential ‘‘in order to use company resources to threshold,230 most other companies costs and impact of the amendments on nominate a director, a significant urged the adoption of a substantially companies. The ownership threshold amount of capital must be represented higher threshold, either for individual we are establishing should not expose and 5% is an acceptable threshold.’’ 225 shareholders or for shareholder groups, issuers to excessively frequent and Similarly, the manager of a large family or both. For example, companies and costly election contests conducted of investment companies stated its their counsel generally believed a higher through use of Rule 14a–11, but it is ‘‘support [for] the Commission’s intent threshold should apply to group also not so high as to make use of the to facilitate shareholders’ rights to nominations and overwhelmingly rule unduly inaccessible as a practical participate in the governance process,’’ recommended a 10% minimum matter. yet commented that ‘‘a 1% threshold is ownership requirement for nominations We selected the uniform 3% too low, in our opinion, to maintain the by shareholder groups.231 We note, threshold based upon comments critical balance between serving the however, that at a 10% threshold for received, our analysis of the data interests of eligible nominating groups, the likelihood of forming a available to us, and the fact that the rule shareholders and serving the interests of group sufficient to meet the minimum allows for shareholders to form groups a company’s shareholder base at ownership requirement would likely be to aggregate their holdings to meet the large.’’ 226 That commenter significantly reduced compared to a 3% threshold. We also considered that our recommended a ‘‘flat 5% threshold for threshold. Given a three-year holding amendments to Rule 14a–8 remove all companies’’ because it ‘‘represents period, the data in the November 2009 barriers to the ability of shareholders to significant economic stake.’’ Other Memorandum identify combinations have proposals included in company commenters recommended a uniform proxy materials to establish a procedure 3% ownership threshold in the interest 228 Letter from CFA Institute. under a company’s governing of avoiding ‘‘frivolous or vexatious 229 See letters from CFA Institute; P. Neuhauser; documents for the inclusion of one or nominations,’’ 227 or because it ‘‘is not so RiskMetrics. more nominees in the company’s proxy 230 See letters from CSX; ITT; Southern Company; small that it would allow a board Tesoro; tw telecom; UnitedHealth; Verizon. materials. Because of these nomination for only a de minimis 231 See letters from Advance Auto Parts; Alaska amendments, shareholders who believe investment in [a non-accelerated filer],’’ Air; American Express; Association of Corporate the 3% threshold is too high can take Counsel; Avis Budget; Best Buy; J. Blanchard; Boeing; BRT; Burlington Northern; Callaway; steps to seek to establish a lower company’s governing documents for the inclusion CIGNA; CNH Global; Comcast; Con Edison; Darden 223 of one or more shareholder director nominees in the ownership threshold. Restaurants; Dewey; J. Dillon; DTE Energy; DuPont; company’s proxy materials. Such a shareholder Eaton; Edison Electric Institute; Eli Lilly; Emerson proposal would, of course, have to satisfy the other 222 See letter from P. Neuhauser (suggesting only Electric; ExxonMobil; FedEx; FMC Corp.; FPL requirements of the rule, like other Rule 14a–8 two ownership eligibility tiers because data show Group; General Mills; Home Depot; Intel; JPMorgan shareholder proposals. ‘‘almost no difference in ownership characteristics Chase; E.J. Kullman; McDonald’s; N. Lautenbach; 224 between smaller accelerated filers and non- See letters from ACSI (advocating a uniform PepsiCo; Praxair; Protective (recommending this accelerated filers.’’). 3% threshold); Calvert (same); LUCRF (same); S. threshold if its proposed 35% withhold vote 223 As noted in Section II.C., we are adopting an Ranzini (same); TIAA–CREF (advocating a uniform triggering event is not included; if included, it amendment to Rule 14a–8(i)(8) to preclude 5% threshold); T. Rowe Price (same). recommended a 3% threshold); Sara Lee; Seven companies from relying on that basis to exclude 225 Letter from TIAA–CREF. Law Firms; Sherwin-Williams; Society of Corporate from their proxy materials shareholder proposals 226 Letter from T. Rowe Price. Secretaries; Textron; Tompkins; G. Tooker; that seek to establish a procedure under a 227 Letters from SCSI and LUCRF. Weyerhaeuser; Xerox.

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totaling 10% or more but involving five for the purpose of submitting director whose aggregate holdings exceed 3% or fewer shareholders as achievable in nominations pursuant to Rule 14a– but whose individual holdings do not as little as 7% of public companies, 11.236 Commenters also pointed to bring the company within any of the compared to at least 21% of public instances of coordinated shareholder categories identified in the data. companies at a 5% threshold and at activity in recent ‘‘vote no’’ campaigns as We are concerned, however, that use least 31% of public companies at a 3% support for the ability of shareholders to of Rule 14a–ndash;11 may not be threshold. In addition, the data suggest form groups.237 We have adopted a consistently and realistically viable, that it would be even more unlikely that number of amendments to our rules that even by shareholder groups, if the a company would have an individual will facilitate the formation of groups uniform ownership threshold were set shareholder that would meet a 10% for this purpose.238 We understand the at 5% or higher. At the 5% minimum ownership threshold.232 While some result of our ownership threshold ownership requirement for individuals commenters suggested a 5% threshold determination may be that shareholders as advocated by many of those same was appropriate because that amount is will need to convince other commenters, only 20% of public consistent with other filing shareholders to support their attempt to companies had even one shareholder requirements such as Schedule 13D and use Rule 14a–11. We believe this satisfying that requirement. Finally, 13G,233 we ultimately were not outcome reduces the potential for even applying a 5% threshold for persuaded because the underlying excessive costs to be incurred by shareholder groups, the data identify principles of such filing companies and their shareholders. combinations involving five or fewer requirements 234 are quite different from The data available to us also suggest shareholders that add up to 5% or more those underlying the ownership that reaching the 3% ownership as theoretically achievable in as few as condition to Rule 14a–11. After threshold we are adopting is possible for 21% of public companies—at least 25% considering the comments and available a significant number of shareholders fewer than with a 3% threshold.240 data, we have decided that a 3% either individually or by a number of All of these data thus suggest that a ownership threshold—including where shareholders aggregating their holdings uniform 5% ownership requirement shareholders form groups to satisfy the in order to satisfy the ownership would be substantially more difficult to threshold—is an appropriate and requirement. In particular, the data satisfy than the 3% requirement we are workable approach for the rule. presented in the November 2009 adopting. Moreover, our resulting In adopting a uniform 3% threshold Memorandum indicate that a sizeable concern about the viability of a 5% for all companies, as opposed to a lower percentage (33%) of public companies ownership threshold is exacerbated by ownership threshold for all companies, have at least one institutional investor several limitations on the data reported we are mindful that the rule will allow owning at least 3% of their securities for in the November 2009 Memorandum. shareholders to form a group by at least three years, and thus potentially While those data do account for the aggregating their holdings to meet the qualified to meet the Rule 14a–11 application of a three-year holding ownership threshold.235 Indeed, as we ownership threshold individually. As period requirement, they may overstate assumed in the Proposing Release and noted, however, the data are based on in several ways the potential to meet the as some commenters told us, in many Form 13F filings, which include holders ownership threshold. First, they may cases shareholders will need to form that are custodians and may not be include controlling shareholders that groups to meet the ownership threshold likely users of the rule. The data in the may be unlikely to rely on Rule 14a–11. November 2009 Memorandum also Second, the data are based on filings on 232 The data in the November 2009 Memorandum suggest that forming nominating Form 13F, in which ownership is suggest that just 4% of companies would have at shareholder groups with holdings defined differently than under Rule least one shareholder with 10%. 14a–11, and thus may yield a higher 233 See, e.g., letters from CSX; ITT; Shearman & aggregating 3% is achievable at many Sterling; Tesoro; T. Rowe Price; tw telecom. companies by a relatively small number number of larger shareholdings. Finally, 234 See, e.g., Release No. 34–26598, Reporting of of shareholders. Even factoring in the the data include large shareholdings by Beneficial Ownership in Publicly-Held Companies requirement of continuous ownership institutions which report aggregated (March 6, 1989) (‘‘The beneficial ownership for three years, 31% of public holdings of securities held for multiple reporting requirements embodied in Sections 13(d) 241 and 13(g) of the [Exchange Act] and the regulations companies have three or more holders beneficial owners. adopted thereunder are intended to provide to with at least 1% share ownership each; Nevertheless, and principally because investors and to the subject issuer information and 29% have two or more holders with they give effect to holding period about accumulations of securities that may have the 239 requirements, we considered the data in ability to change or influence control of the at least 2% share ownership each. issuer.’’). See also Release No. 34–50699 (proposing Moreover, neither of these categories to require disclosure of persons holding 5% of an includes companies with one holder of 240 At the 10% threshold for groups urged by ownership interest in a securities exchange because 2% and another holder of at least 1%, many commenters, for example, the likelihood of the principles underlying such disclosure were forming a group sufficient to meet the minimum similar to those underlying other filing and none of these percentages includes ownership requirement would be more sharply requirements: ‘‘The 5% reporting threshold and the companies having a relatively small constrained: the data in the November 2009 information proposed to be required to be disclosed number (e.g. four to ten) of holders Memorandum identify combinations totaling 10% about such ownership is modeled on the beneficial or more but involving five or fewer shareholders as ownership reporting requirements of the Williams theoretically achievable in as little as 7% of public 236 ‘‘ Act, embodied in Sections 13(d) and 13(g) of the See letters from AFL–CIO ( [I]t will be companies. Exchange Act and the rules and regulations necessary to permit aggregation of holdings to 241 On the other hand, the data in the November thereunder. These Exchange Act provisions are prevent the Proposed Access Rule from being 2009 Memorandum may understate the number of intended to provide information to the issuer and usable only by hedge funds.’’); Florida Board of large shareholdings, because the data may exclude the marketplace about accumulations of securities Administration (‘‘Public funds would need to form smaller holdings in multiple institutions that are that may have the potential to change or influence a nominating group in order to meet the hurdle in subject to common voting control, and in any event, control of an issuer.’’ (footnotes omitted)). nearly all cases.’’). do not include holdings of less than 1% at all, even 237 235 Some commenters suggested that the data on See letter from BRT II. though such holdings could contribute to the share ownership dispersion referred to in the 238 See, e.g., Rule 14a–2(b)(7). formation of a group eligible to use Rule 14a–11. Proposing Release were insufficient because we did 239 We note that it is unlikely that the ownership Likewise, those data do not include securities held not focus on the possibility that shareholders could test used in calculating the data tracks the by institutions holding less than $100 million in form groups to satisfy the minimum ownership definition that we are adopting for Rule 14a–11. As securities because Exchange Act Section 13(f) does requirement. See letters from American Bar a result, the percentages in the data may be over- not require such institutions to report their Association (January 19, 2010) (‘‘ABA III’’); BRT II. or under-inclusive. holdings. See letters from ABA III; BRT II.

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the November 2009 Memorandum to be shareholder nominating groups will or commenters suggested a 5% ownership the most pertinent to our selection of a will not be formed at any particular threshold for investment companies, uniform minimum ownership combination of percentage ownership both of these commenters also suggested percentage. We received additional data and holding period requirements or of a 5% threshold for non-investment relating to large companies, however, the likelihood that persons with large companies.250 that offer some additional indication securities holdings would be inclined or We believe that it is appropriate to about the number of shareholders disinclined to use Rule 14a–11.246 apply to registered investment potentially available to form a group to Taking all of this information into meet the 3% ownership threshold. One account, overall we believe that our companies and business development study indicated that in the top 50 selection of a 3% ownership threshold companies the same 3% ownership companies by market capitalization as strikes an appropriate balance between threshold that we are applying to other of March 31, 2009, the five largest the benefits of facilitating shareholder companies. We also believe that, similar institutional investors held from 9.1% participation in the process of electing to non-investment companies, our to 33.5% of the shares, and an average directors of public companies and the selection of a 3% ownership threshold of 18.4% of the shares.242 That same costs and disruption associated with strikes an appropriate balance between study found that among a sample of 50 contested elections of directors the benefits of facilitating shareholder large accelerated filers, the median conducted pursuant to new Rule 14a– participation in the process of electing number of shareholders holding at least 11. We also believe, and as noted, many directors of investment companies and 1% of the shares for at least one year commenters supported, that a threshold the costs and disruption associated with was 10.5, with 45 of the 50 companies tied to a significant commitment to the contested elections of directors in the sample having at least seven such company is an important feature of our conducted pursuant to Rule 14a–11. shareholders.243 Another study that was amendments. Of course, to the extent We are not adopting the suggestion of 244 reported to us similarly suggests that shareholders believe the 3% commenters that the eligibility relatively high concentration of share threshold is too high our amendments to thresholds for investment companies be ownership. According to that analysis of Rule 14a–8 will facilitate their ability to based on the holdings for the fund 247 S&P 500 companies, 14 institutional adopt a lower ownership percentage. complex in the case of unitary boards or We proposed to apply the same investors could satisfy a 1% threshold at the cluster in the case of cluster more than 100 companies, eight could thresholds for registered investment boards.251 We believe that eligibility meet that threshold at over 200 companies and business development should be based on holdings for the companies, five could meet it at over companies as for non-investment investment company, not the entire 300 companies, and three could meet it companies, except that the applicability at 499 of the 500. Information from of the particular thresholds for fund complex or cluster, because under specific large issuers likewise suggests registered investment companies would State law, shareholder voting is the achievability of shareholder groups have depended on the net assets of the determined based on the holdings in the aggregating 3%.245 company, rather than the company’s investment company. Fund complexes We realize these data likely overstate accelerated filer status. No commenters have flexibility to organize their funds the number of eligible shareholders or recommended a higher threshold for into one or more investment companies. shareholders whose holdings could be investment companies than for non- Thereafter, State law governs which grouped to meet the ownership investment companies. While some shareholders vote as a group for threshold, as these data generally do not commenters noted the absence of data directors. Because Rule 14a–11 is appear to reflect any continuous holding specifically relating to the impact of intended to facilitate the exercise of requirement. various ownership thresholds on traditional State law rights to nominate In any event, our assessment of the investment companies,248 no and elect directors, we believe that the percentage of companies with various commenter supplied any data rule should follow State law. share ownership concentrations cannot suggesting the need for an ownership be taken as an assurance that threshold for investment companies However, the data also indicate that the vast different from that applicable to non- majority of funds are significantly larger, and would 242 See ‘‘Report on Effects of Proposed SEC Rule investment companies.249 Although two therefore require a significantly larger investment to 14a–11 on Efficiency, Competitiveness and Capital meet the 3% threshold (e.g., 90% of long-term Formation, in Support of Comments by Business mutual funds, money market funds, and closed-end 246 Roundtable’’ by NERA Economic Consulting See letter from Council of Institutional funds have total net assets greater than $19 million, (‘‘NERA Report’’), Appendix Table 1, submitted Investors (January 14, 2010) (‘‘CII II’’). This comment $100 million, and $57 million, respectively; the with the letter from BRT. refers to research indicating that in a small sample median long-term mutual fund, money market fund, 243 Id. at 13–14, Figure 2. of accelerated and non-accelerated filers, the and closed-end fund have total net assets of $216 holdings of the ten largest public pension funds, if 244 See letter from JPMorgan Chase. million, $844 million, and $216 million, aggregated, would not exceed 5% and would also respectively). 245 See letters from AT&T (eight shareholders be unlikely to meet a 3% threshold, while a 1% 250 owning 1% or more, although holding periods not See letters from S&C (recommending ‘‘with threshold could be met. Apart from the sample size, respect to the ownership thresholds applicable to identified); AGL Resources (same); CIGNA (20 1%+ however, this research itself appears limited in that shareholders, although holding periods not shareholders of [registered investment companies], it apparently does not include other types of identified); Cummins (36 1+% shareholders, a minimum percentage of no less than the 5% shareholders and is not adjusted for any holding although holding periods not identified); General threshold recommended in the Seven Law Firm period. Mills (one 5%+ shareholder holding for at least 6 Letter’’ (to which Sullivan & Cromwell was a party 247 years, over 12 1%+ shareholders, and over 25 See footnote 223 above. and which recommended that ownership 0.5%+ shareholders, although holding periods not 248 See, e.g., letters from ICI; S&C; T. Rowe Price. thresholds of non-investment companies be identified); ITT (14 1%+ shareholders, although 249 One joint comment letter provided data adjusted upwards to 5% for individual shareholders holding periods not identified); McDonald’s (10 regarding the net assets of investment companies and higher for groups of shareholders)); TIAA– holders owning 1% or more, one shareholder and the dollar value of the shares that would be CREF (recommending ‘‘that the Commission adopt owning 5%, although holding periods not necessary to meet the proposed 1%, 3%, or 5% a 5% ownership requirement across the board identified); UnitedHealth (four 3%+ shareholders, thresholds. See letter from ICI/IDC. The data regardless of the company’s size’’ and ‘‘[w]ith six 2%+ shareholders, nine 1%+ shareholders, 20 provided by the commenters suggest that there are respect to investment companies, * * * that the 5% 0.5%+ shareholders, 32 0.25% shareholders, a limited number of small investment companies requirement be applied at the fund complex level applying a 2-year holding period); Weyerhaeuser with net assets ranging from $50,000 to $351,000, rather than at the individual fund level’’). (three 5%+ shareholders, 20 1%+ shareholders, where the 3% threshold could be met by an 251 See letters from Barclays; T. Rowe Price; although holding periods not identified). investment ranging from $1,500 to $10,530. TIAA–CREF.

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ii. Voting Power voting power.257 If a company has concerned that without requiring net multiple classes of stock that do not long ownership, shareholders could We proposed that the ownership vote together in the election of all engage in hedging strategies to obtain threshold be determined as a percentage directors (where, for example, each class the requisite amount of ownership of the securities entitled to be voted on elects a subset of directors), then voting while eliminating or reducing their the election of directors. Some power would be determined only on the economic exposure.262 Some commenters sought clarification of how basis of the voting power of the class or commenters expressed the view that the ownership threshold would be classes of stock that would be voting shares loaned to a third party should be calculated where companies have together on the election of the person or taken into account when determining multiple classes of stock with varying persons sought to be nominated by the whether the nominating shareholder or voting rights.252 These commenters nominating shareholder or group, rather group satisfies the relevant ownership observed that the proposed rule did not than the voting power of all classes of threshold.263 Commenters explained adequately address voting regimes stock.258 We believe this approach that institutional investors who hold where the voting rights have been properly bases the availability of Rule shares for the long-term may lend their separated from the economic rights of 14a–11 on the right to vote for the shares to others periodically while ownership.253 One commenter nominees that may be included in the retaining the right to recall those shares explained that in situations where company’s proxy materials, which is to cast votes.264 Commenters suggested ownership of securities does not both consistent with the intent of the several conditions for counting these correlate with voting power,254 shares provisions of a company’s governing shares: the shareholder has a legal right will have voting rights disproportionate documents and in accord with the to recall the shares and cast votes; 265 to the number of shares held, and that principle that class directors are elected the shareholder discloses in the creates a disparity between the two by the votes of the holders of the class. Schedule 14N an intention to vote the shares; 266 the shareholder holds the classes in terms of the economic value iii. Ownership Position of a single vote.255 One commenter shares through the date of the advised that further clarification was In the Proposing Release, we solicited meeting; 267 and the shares are held past needed for companies with two or more comment about whether beneficial the date of the election.268 outstanding classes of voting securities ownership is the appropriate standard After considering the comments, we with disparate voting rights, including of ownership to use for purposes of the have modified in several respects the those companies with classes of voting minimum ownership threshold in the ownership requirement of Rule 14a–11 securities and non-voting securities, so rule or whether another standard would so that it is consistent with our intent that those companies would be treated be more appropriate. In this regard, we to limit use of Rule 14a–11 to long-term requested comment about whether a net in a manner consistent with companies shareholders with significant ownership long requirement should be used and, if that have one class of voting interests. First, in order to satisfy the so, what other modifications would be securities.256 ownership requirement, the nominating required. We received a number of shareholder or member of the In proposing that the ownership comments addressing the appropriate nominating shareholder group must threshold be determined as a percentage standard of ownership and supporting hold a class of securities subject to the of securities entitled to be voted on the the inclusion of a net long proxy solicitation rules.269 Limiting election of directors, our goal was to requirement.259 Commenters suggested Rule 14a–11 nominations to holders of have the requirement tie to the that we adopt an ‘‘ultimate’’ beneficial securities that are subject to the proxy percentage of votes that could be cast for owner definition that included, among rules appropriately excludes from the the director nominees. In response to other things, a requirement that the calculation private classes of voting these commenters, we have revised the nominating shareholder or group hold securities held by persons that would rule text to clarify that the ownership the entire bundle of voting and have no expectation that our proxy rules threshold will be determined as a economic rights to any securities used would be available to facilitate their percentage of voting power of the to determine eligibility under the State law nomination rights. Further, if securities entitled to be voted on the rule.260 At least one of these we included securities not covered by election of directors at the meeting, commenters thought the ownership rather than as a percentage of securities definition should be adopted this way 262 See letters from 26 Corporate Secretaries; entitled to be voted on the election of in order to remove the possibility that ABA; Advance Auto Parts; Alaska Air; Allstate; directors, as was proposed. Accordingly, multiple parties may count the same Applied Materials; Association of Corporate Counsel; AT&T; J. Blanchard; Biogen; BRT; CIEBA; where a company has multiple classes securities toward their individual Cleary; Devon; Dewey; Headwaters; IBM; JPMorgan of stock with unequal voting rights and securities ownership totals.261 Chase; PepsiCo; Sara Lee; Seven Law Firms; the classes vote together on the election Moreover, many commenters were Shearman & Sterling; Sidley Austin; Society of of directors, then voting power would Corporate Secretaries; Verizon. 263 See letters from AFL–CIO; CalPERS; CII; 257 See Rule 14a–11(b)(1) and Instruction 3 and be calculated based on the collective COPERA; IAM, LIUNA; Marco Consulting; P. the discussion below. Neuhauser; D. Nappier; Sheet Metal Workers 258 See Instruction 3 to Rule 14a–11(b)(1). 252 See letters from ABA; Duane Morris; Media National Pension Fund (‘‘Sheet Metal Workers’’); 259 See letters from 26 Corporate Secretaries; General; P. Neuhauser; New York Times. These SWIB. Advance Auto Parts; Aetna; Alaska Air; Alcoa; 264 See letters from AFL–CIO; Marco Consulting; letters illustrated a scenario where one publicly- Alston & Bird; American Express; BorgWarner; Sheet Metal Workers; SWIB. issued class of stock is entitled to one vote per BRT; Burlington Northern; CSX; L. Dallas; Dewey; 265 share, while the privately-held controlling class of DuPont; FPL Group; Florida State Board of See letters from CalPERS; CII; COPERA; IAM; stock is entitled to 10 votes per share and both Administration; GE; Honeywell; ICI; JPMorgan LIUNA; D. Nappier. classes vote together on the election of directors. Chase; Kirkland & Ellis LLP (‘‘Kirkland & Ellis’’); 266 See letters from AFL–CIO; CalPERS; CII; IAM; 253 See letters from ABA; P. Neuhauser; Duane Leggett; P. Neuhauser; PepsiCo; Protective; Seven D. Nappier. Morris; Media General. Law Firms; SIFMA: Society of Corporate 267 See letters from CalPERS; CII; IAM; D. 254 See, e.g., discussion in footnote 252 of Secretaries; T. Rowe Price; tw telecom; Nappier. common ten-to-one voting provisions of a structure UnitedHealth; ValueAct Capital; Xerox. 268 See letters from COPERA. with Class A and Class B securities. 260 See letters from BRT; Devon; IBM; P. 269 This would include securities registered 255 See letter from ABA. Neuhauser; Society of Corporate Secretaries. pursuant to Section 12 of the Exchange Act or 256 See letter from Duane Morris. 261 See letter from ABA. subject to Investment Company Act Rule 20a–1.

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the proxy rules in the calculation, those additional language also covers group may potentially be inflated securities could dilute the relative relationships, such as parent and because the calculation could include holdings of shareholders holding subsidiary, when for organizational or votes that the nominating shareholder or securities that our rules are designed to tax reasons, among others, investment member of a nominating shareholder protect. Second, the nominating and voting power is held by an entity group cannot actually cast. shareholder or member of the that is controlled by another entity. This In determining the total voting power nominating shareholder group must provision, however, would not include of the company’s securities held by or hold both investment and voting power, securities that are held in a pooled on behalf of the nominating shareholder either directly or through any person investment vehicle in which the or any member of the nominating acting on their behalf, of the securities. nominating shareholder or member of a shareholder group, the voting power By requiring that a nominating nominating shareholder group does not would be reduced by the voting power shareholder or member of a nominating have voting and investment power over of any of the company’s securities that shareholder group hold investment and the securities held in the pooled the nominating shareholder or any voting power of the securities that are investment vehicle. member of a nominating shareholder used for purposes of determining Third, we have adopted a provision in group has sold in a short sale during the whether the ownership requirement has the ownership requirement in Rule 14a– relevant periods.275 In addition, the rule been met, we are addressing the 11 that, subject to specific conditions, text explicitly excludes borrowed shares concerns raised by certain commenters allows for securities that have been because the rule is intended to be used that the provisions of Rule 14a–11 loaned to a third party by or on behalf by holders with a significant long-term should only be available to shareholders of the nominating shareholder or commitment to the company, and that possess ultimate ownership rights member of a nominating shareholder including shares that are merely over the shares. group to be considered in the borrowed is inconsistent with that Similar to the provisions in Exchange calculation. We recognize that share purpose. The instruction makes clear Act Rule 13d–3,270 the definition of lending is a common practice, and we that to the extent borrowed securities voting power for purposes of Rule 14a– believe that loaning securities to a third are not already excluded through the 11 includes the power to vote, or to party is not inconsistent with a long- subtraction of securities sold short, direct the voting of, such securities and term investment in a company.273 To borrowed securities would be subtracted investment power for purposes of Rule capture only securities where voting in computing the relevant amount. We 14a–11 includes the power to dispose, power can ultimately be exercised by recognize that by requiring the voting or to direct the disposition of, such the nominating shareholder or member power of securities sold short or securities.271 Unlike the provisions in of a nominating shareholder group in borrowed for purposes other than a Rule 13d–3, however, the ownership the election of directors, however, short sale to be subtracted from the requirement of Rule 14a–11 includes securities that have been loaned by or ownership calculation, we are both voting and investment power—as on behalf of the nominating shareholder potentially reducing the eligibility of opposed to just one or the other—and or any member of the nominating certain shareholders to rely on Rule voting and investment power for shareholder group to another person 14a–11.276 Nevertheless, as noted above, purposes of Rule 14a–11 does not exist may be counted toward the ownership over securities that a nominating requirement only if the nominating 275 See Instruction 3.b.3 to Rule 14a–11(b)(1). We shareholder or member of the note that in a typical short sale the person selling shareholder or member of a nominating the securities short would not have the power to shareholder group merely has the right nominating shareholder group: • Has the right to recall the loaned vote the securities subject to the short sale. to acquire. For example, a nominating Nevertheless, the provisions of Rule 14a–11 require securities; and that the voting power of the securities subject to the shareholder or member of a nominating • will recall the loaned securities shareholder group will not be able to short sale be deducted from the voting power held upon being notified that any of the directly or on behalf of the nominating shareholder count securities that could be acquired, nominees will be included in the or member of the nominating shareholder group to such as securities underlying options company’s proxy materials. address our concerns about limiting the application that are currently exercisable but have of Rule 14a–11 to shareholders that retain Absent satisfaction of these significant ownership interests in a company. not yet been exercised. Likewise, a person whose ownership of shares For purposes of meeting the conditions—in addition to holding the requisite investment power over the arises solely from borrowing them for purposes of ownership threshold in Rule 14a–11, a short sale would be deemed to have no share loaned securities—we believe it is nominating shareholder or group will ownership for purposes of the ownership appropriate to exclude securities that include investment and voting power of requirement of Rule 14a–11(b)(1). have been loaned to another person 276 The ownership provisions related to short the company’s securities that is held from the calculation of voting power sales do not apply to securities that have been sold ‘‘either directly or through any person because, generally, the person to whom in a short sale where the nominating shareholder acting on their behalf.’’ We are adopting or member of the nominating shareholder group the securities have been loaned has the the ownership provisions with this had no control over such transactions. See ability to vote those securities.274 If the Instruction 3.b.3. to Rule 14a–11(b)(1) (covering language to account for the common rule were to allow loaned securities that short sales by ‘‘the nominating shareholder or any situation when financial intermediaries, either will not or cannot be recalled to member of the nominating shareholder group, as the case may be, or any person acting on their such as banks or brokers, hold securities be included for purposes of the on behalf of their clients.272 This behalf * * *’’). For example, a nominating ownership calculation, then the voting shareholder would not be required to exclude power of a nominating shareholder or securities that have been sold short by a pooled 270 17 CFR § 240.13d–3. Like the approach under member of a nominating shareholder investment vehicle in which the nominating Rule 13d–3, we are including and excluding certain shareholder or member of a nominating shareholder securities from the determination of who has voting group has invested as long as the shareholder does power for policy reasons. Those inclusions and use the provisions of Rule 14a–11. See Instruction not have the ability to direct the investments held exceptions and the policy reasons underlying them 3.c. to Rule 14a–11(b)(1). in the pooled investment vehicle. Similarly, are discussed throughout this section. 273 See letters from AFL–CIO; CalPERS; CII; securities held by the pooled investment vehicle 271 See Instruction 3.c. to Rule 14a–11(b)(1). COPERA; IAM; LIUNA; Marco Consulting; P. with respect to which the shareholder does not 272 The rule also clarifies that financial Neuhauser; D. Nappier; Sheet Metal Workers; have the ability to direct the investments held in intermediaries, such as banks or brokers, that may SWIB. the pooled investment vehicle would not be hold securities on behalf of their clients could not 274 See letter from P. Neuhauser. Continued

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we believe that eligibility for Rule 14a– (subject to the conditions previously company would have the ability to 11 should be limited to those noted) and must be reduced by the independently verify the shareholder’s shareholders that have a significant number of votes attributable to any ownership. Where the nominating interest in the company.277 We agree securities that have been sold in a short shareholder or member of the with commenters who suggested that sale that is not closed out as of that date nominating shareholder group is not the selling a company’s securities short may or borrowed for purposes other than a registered holder of the securities, the divest that shareholder of the economic short sale. This adjusted number of nominating shareholder or member of risks of ownership.278 votes is the qualifying number of votes the nominating shareholder group For purposes of determining whether eligible to be used as the numerator in would be required to demonstrate the nominating shareholder or any calculating the percentage held of the ownership by attaching to the Schedule member of a nominating shareholder company’s total voting power. The 14N a written statement from the group has sold a company’s securities number of securities to which these ‘‘record’’ holder of the nominating short, the term ‘‘short sale’’ will have the qualifying votes are attributable is the shareholder’s shares (usually a broker or meaning provided in Exchange Act Rule amount of securities that must be used bank) verifying that, at the time of 200(a).279 Under that rule, a short sale for evaluating compliance with the submitting the shareholder notice to the is ‘‘any sale of a security which the continuous holding period requirements company on Schedule 14N, the seller does not own or any sale which specified in Rule 14a–11(b)(2), and nominating shareholder or member of is consummated by the delivery of a discussed below. the nominating shareholder group security borrowed by, or for the account In determining the total voting power continuously held the securities being of, the seller.’’ of the company’s securities, nominating used to satisfy the applicable ownership In calculating the voting power shareholders and members of a threshold for a period of at least one required to satisfy the 3% voting power nominating shareholder group will be year.282 In the alternative, if the eligibility requirement described above, entitled to rely on the most recent nominating shareholder or member of nominating shareholders or members of quarterly, annual or current report filed the nominating shareholder group has a nominating shareholder group must by the company unless the nominating filed a Schedule 13D, Schedule 13G, first determine the total number of votes shareholder or member of a nominating Form 3, Form 4, and/or Form 5, or that can be derived from their holdings shareholder group knows or has reason amendments to those documents, the of securities that are subject to the proxy to know that the information in the shareholder or group member may so rules. This determination is made as of reports is inaccurate.280 We believe that state and attach a copy or incorporate the date the Schedule 14N is filed. The a nominating shareholder or member of that filing or amendment by reference. total number of votes can be increased a nominating shareholder group should Commenters generally did not object by the number of votes attributable to be able to rely on the filings made by the to the proposed methods of securities which have been loaned company in making the calculation of demonstrating ownership; however, voting power for purposes of Rule 14a– they did suggest some revisions to the included in the amount of holdings of the shareholder. 11 even if the number of securities rule. Two commenters believed that the 277 We recognize that selling a company’s outstanding has changed since the last nominating shareholder or group, if securities short is only one of a number of ways that report so that a nominating shareholder requested by the company, should be a shareholder can hedge the economic risk of its or member of a nominating shareholder required to provide evidence from its investment. Indeed, a number of commenters group can easily make a determination suggested that we adopt a beneficial ownership broker-dealer or custodian certifying definition for purposes of Rule 14a–11 that netted about the percentage of voting power that its ownership position meets the all hedging arrangements (derivatives, swaps, etc.). that they hold. requisite threshold through a date that We believe, however, that it is appropriate at this is within five days of the shareholders’ time to adopt the ownership threshold for Rule iv. Demonstrating Ownership 283 14a–11 with the provision only relating to short meeting. Another commenter sales as it contributes significantly towards the goal Under the Proposal, a nominating recommended a revision to the of excluding votes from the ownership calculation shareholder or member of a nominating proposed rule to allow the written securities where the voting and economic interests shareholder group would be able to statement to be dated no more than are separated and does not unduly complicate the demonstrate ownership in several seven days prior to the date of rule. Further, by excluding securities that the 281 holder merely has the right to acquire (such as ways. If the nominating shareholder submission of the nomination to the securities underlying options) and securities that or member of the nominating company.284 The commenter explained have been loaned and cannot be recalled, we have shareholder group is the registered that it may be difficult for a group of further narrowed the application of the rule to holder of the shares, he or she could address concerns about separating economic nominating shareholders to obtain interest and voting power. state as much. In this instance, the letters from the ‘‘record’’ holders on the 278 See letters from 26 Corporate Secretaries; exact same date they submit the ABA; Advance Auto Parts; Alaska Air; Allstate; 280 See Instruction 1 to Rule 14a–11(b)(1). In the nomination to the company and file a Applied Materials; Association of Corporate case of a registered investment company, in Counsel; AT&T; J. Blanchard; Biogen; BRT; CIEBA; determining the total voting power of the securities Schedule 14N and cited similar Cleary; Devon; Dewey; Headwaters; IBM; JPMorgan that are entitled to be voted on the election of problems in the context of the Rule 14a– Chase; PepsiCo; Sara Lee; Seven Law Firms; directors for purposes of establishing whether the 8 process as an example. Another Shearman & Sterling; Sidley Austin; Society of 3% voting power threshold has been met, the commenter recommended more Corporate Secretaries; Verizon. nominating shareholder or group may rely on 279 17 CFR 242.200(a). We note that certain of the information set forth in the following documents, generally that the written statement be provisions in Exchange Act Rule 200, including unless the nominating shareholder or group knows dated a short period before the filing of when a ‘‘person shall be deemed to own a security’’ or has reason to know that the information the Schedule 14N.285 Other commenters as defined in Rule 200(b), differ from the provisions contained therein is inaccurate: (1) In the case of submitted various suggestions as to who we have adopted for purposes of Rule 14a–11. For a series company, a Form 8–K that will be required instance, Rule 200(b) extends ownership of a to be filed in connection with the meeting where 282 security to options that have been exercised. As directors are to be elected; or (2) in the case of other See the discussion below regarding the noted above, however, we have not extended registered investment companies, the company’s holding period we are adopting. ownership for purposes of Rule 14a–11 to options. most recent annual or semi-annual report filed with 283 See letters from BorgWarner; Society of We believe that these different, but not conflicting, the Commission on Form N–CSR. See Instruction 2 Corporate Secretaries. approaches are appropriate and reflect the policy to Rule 14a–11(b)(1). 284 See letter from CII. objectives for adopting each rule. 281 See Item 5 of proposed Schedule 14N. 285 See letter from P. Neuhauser.

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should provide the required written to Schedule 14N describes more fully example, expressed a belief that statement.286 what information should be provided if increasing the duration of the minimum While we are adopting the a nominating shareholder or any holding period would ensure that use of requirements to demonstrate ownership member of the nominating shareholder Rule 14a–11 is limited to holders of a as proposed, we agree with the group holds the securities through a significant, long-term interest and commenters that additional clarity is broker or bank (e.g., in an omnibus would dissuade shareholders from using needed with regard to how far in account) that is not a participant in DTC the rule to nominate and elect directors advance of the notice date the statement or a similar clearing agency.289 to make short-term gains at the expense of the broker or bank may be dated, as We note that satisfying the of long-term shareholders.292 A small well as what type of bank or broker may requirement in Rule 14a–11(b)(3) to number of commenters believed that provide the written statement on behalf demonstrate ownership is different from Rule 14a–11 should not include a of the shareholder. We believe the date satisfying the requirement in Rules 14a– holding period requirement.293 One should be as close as practicable to the 11(b)(1) and 14a–11(b)(2) that a commenter believed that all holders of notice date, and believe that seven shareholder or shareholder group hold the same securities should have the calendar days should provide a the requisite amount of the company’s same rights under Rule 14a–11 workable time frame that is still close in securities that are entitled to be voted regardless of how long the securities time to the notice date. Accordingly, we on the election of directors for three have been held.294 Another commenter have revised the rule to clarify that the years, as calculated pursuant to the stated that a short-term shareholder has statement from the registered holder, Instruction to paragraph (b)(2). It is the same risk as long-term shareholders; broker, or bank may be dated within possible for a shareholder to be able to thus their rights under Rule 14a–11 seven calendar days prior to the date the demonstrate ownership pursuant to should be equal.295 nominating shareholder or group Rule 14a–11(b)(3), and yet not satisfy After considering the comments, we submits the notice on Schedule 14N.287 the total voting power and holding have decided to adopt a three-year Also, to provide additional clarity period requirements in Rules 14a– holding requirement, rather than the about these requirements, the final rule 11(b)(1) and (b)(2). proposed one-year requirement. This decision is based on our belief that includes an example of a form of written c. Holding Period statement verifying share ownership holding securities for at least a three- that may be used if the nominating With respect to duration of year period better demonstrates a shareholder or any member of the ownership, we proposed a one-year shareholder’s long-term commitment nominating shareholder group (i) is not holding requirement for each and interest in the company.296 We also the registered holder of the shares, (ii) nominating shareholder or member of a based our decision to have a holding is not proving ownership by providing nominating shareholder group. period longer than one year on the previously filed Schedules 13D or 13G Although many commenters supported strong support of a variety of or Forms 3, 4, or 5, and (iii) holds the the proposed one-year holding commenters. For instance, we received 290 shares in an account with a broker or period, the majority of commenters bank that is a participant in the suggested a holding period longer than Avis Budget; Biogen; J. Blanchard; Boeing; Depository Trust Company (‘‘DTC’’) or a the proposed one-year period, with BorgWarner; BRT; Burlington Northern; Caterpillar; many recommending alternative Chevron; CIEBA; CIGNA; CNH Global; P. Clapman; similar clearing agency acting as a Comcast; Con Edison; CSX; CtW Investment Group; securities depository.288 An instruction holding periods ranging from 18 months Cummins; L. Dallas; Darden Restaurants; E. Davis; to four years.291 Some commenters, for Deere; Devon; Dewey; DTE Energy; DuPont; Eaton; 286 See letters from ABA; CII; ICI; P. Neuhauser; Eli Lilly; ExxonMobil; FedEx; Fenwick; FMC Corp.; Schulte Roth & Zabel; Seven Law Firms; S&C. Schedule 14N or incorporate it by reference into the FPL Group; General Mills; Headwaters; Home Litigation subsequent to the Proposal has Schedule. We note that the calculation of voting Depot; Honeywell; IAM; IBM; ICI; Intel; ITT; underscored the utility of clarifying the source of power of a company’s securities for purposes of JPMorgan Chase; Lionbridge Technologies; LIUNA; verification of ownership by shareholders who are Rule 14a–11 differs from the determination of Marco Consulting; McDonald’s; M. Metz; J. Miller; not themselves registered owners of the shares. See beneficial ownership for purposes of those NACD; D. Nappier (expressing a willingness to Apache Corp. v. Chevedden, 696 F.Supp.2d 723 schedules and forms. In addition, as adopted, we accept a two-year holding period instead of the (S.D.Tex. Mar. 10, 2010) (interpreting the proof of are clarifying that the schedules or forms used to proposed one-year holding period); Northrop; ownership requirement in Rule 14a–8(b)(2)). provide proof of ownership must reflect ownership Office Depot; OPERS; Pfizer; P&G; Praxair; Protective; RiskMetrics (accepting a two-year 287 We note that a nominating shareholder may of the securities as of or before the date on which holding period as alternative to the proposed one- have changed brokers or banks during the time the three-year eligibility period begins. year holding period); Sara Lee; S&C; Sheet Metal period in which it has held the shares it is using 289 See the Instruction to Item 4 of new Schedule Workers; Sidley Austin; SIFMA; Society of to meet the ownership threshold. In such cases, the 14N. Corporate Secretaries; Southern Company; nominating shareholder would need to obtain a 290 See letters from ADP; AFSCME; Callaway; Teamsters; Tesoro; Textron; Theragenics; TI; TIAA– written statement from each broker or bank with CalPERS; CalSTRS; Calvert; CFA Institute; J. Chico; CREF; Tidewater; Time Warner Cable Inc. (‘‘Time respect to the shares held and specify the time CII; Corporate Library; Dominican Sisters of Hope Warner Cable’’); tw telecom; L. Tyson; period in which the shares were held. (‘‘Dominican Sisters of Hope’’); GovernanceMetrics UnitedHealth; U.S. Bancorp; Wells Fargo; 288 International (‘‘GovernanceMetrics’’); ICGN; Lorsch This form of written statement from a bank or Weyerhaeuser; Xerox; Vanguard; Verizon; B. et al.; LUCRF; Mercy Investment Program (‘‘Mercy broker is a modification to the Proposal, and is Villiarmois. provided as a non-exclusive example of an Investment Program’’); Motorola; D. Nappier; 292 See letters from BRT; CIEBA; IBM; acceptable method of satisfying the requirement in Nathan Cummings Foundation; P. Neuhauser; McDonald’s; Society of Corporate Secretaries. Rule 14a–11(b)(3). See Instruction to Item 4 of new Norges Bank; Pax World; RiskMetrics; Shamrock; 293 Schedule 14N. We note that the written statements Shearman & Sterling; Sisters of Mercy Regional See letters from 13D Monitor; ACSI; British would not reflect all aspects of the ownership Community of Detroit Charitable Trust (‘‘Sisters of Insurers; Ironfire Capital LLC (‘‘Ironfire’’); LUCRF. requirement, such as the percentage of voting power Mercy’’); Social Investment Forum; Sodali; Tri-State 294 See letter from British Insurers. held, and thus, would not be dispositive with Coalition for Responsible Investment (‘‘Tri-State 295 See letter from 13D Monitor. regard to whether the nominating shareholder or Coalition’’); Trillium; T. Rowe Price; Ursuline 296 One commenter pointed to the Aspen group satisfied the ownership threshold. For Sisters of Tildonk (‘‘Ursuline Sisters of Tildonk’’); Principles, available at http:// purposes of complying with Rule 14a–11(b)(3), USPE; ValueAct Capital; Walden Asset www.aspeninstitute.org/sites/default/files/content/ loaned securities may be included in the amount of Management (‘‘Walden’’). docs/pubs/Aspen_Principles_with_signers_ securities set forth in the written statements. 291 See letters from 26 Corporate Secretaries; April_09.pdf, suggesting that companies that are Consistent with the Proposal, a nominating ABA; Advance Auto Parts; Aetna; AFL–CIO; Alaska often forced to react to short-term investors are shareholder or group proving ownership by using Air; Alcoa; Allstate; Alston & Bird; Amalgamated constrained from creating valuable goods and a previously filed Schedule 13D or 13G or Form 3, Bank; American Express; Anadarko; Applied services, investing in innovations, and creating jobs. 4, or 5 could attach a copy of the filing to the Materials; Association of Corporate Counsel; AT&T; See also letter from AFL–CIO.

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comments that advised that we should 3% ownership threshold continuously requires the amount of securities to be ‘‘adopt a more reasonable holding period for at least three years.301 Similar to the adjusted for stock splits, of at least two years,’’ 297 and ‘‘a calculation of voting power discussed reclassifications or other similar minimum holding period of at least two above, in order to satisfy the three-year adjustments made by the company years is appropriate’’ because a ‘‘shorter holding requirement, the nominating during the period.305 holding period would allow shareholder or member of the A commenter suggested that we shareholders with a short-term focus to nominating shareholder group must clarify that a nominating shareholder or nominate directors who, if elected, have investment and voting power over each member of the group must have would be responsible for dealing with a the amount of securities, and the continuously held only the minimum company’s long-term issues.’’ 298 amount of securities held during the number of shares used to satisfy the Another commenter stated that ‘‘three period will have to be reduced by the ownership requirement.306 We agree years would be a more reasonable test amount of securities of the same class that a nominating shareholder or with respect to longevity of stock that are the subject of short positions or member of a nominating shareholder ownership.’’ 299 Although two are borrowed for purposes other than a group is not required to have commenters suggested even longer short sale during the period.302 The rule continuously held shares in excess of holding periods,300 we believe that a also allows securities loaned to a third the amount used to attain eligibility for three year holding period reflects our party to be considered held during the purposes of Rule 14a–11. For example, goal of limiting use of the rule to period, provided that the nominating under Rule 14a–11(b)(2), which requires significant, long-term holders and shareholder or group has the right to continuous holding of ‘‘the amount of appropriately responds to commenters’ recall the loaned securities during the securities that are used for purposes of suggestions regarding the length of the period.303 As discussed above, we do satisfying the minimum ownership holding period. In this regard, as noted not believe that the common practice of required of paragraph (b)(1) * * *, ’’ if previously, some commenters suggested lending securities is inconsistent with a a nominating shareholder owns 400,000 a two year holding period, but others long-term investment. While we believe shares and those shares comprise 4% of stated it should be ‘‘at least’’ two years. it is important to include both of the the issuer’s voting power as of the date Given the support expressed for a recall provisions for purposes of of filing of the Schedule 14N, that significant holding period, we believe a allowing loaned securities to be used in shareholder is not required to have held three year holding period, rather than the 3% ownership threshold calculation 400,000 shares continuously during the one or two years, strikes the appropriate in Rule 14a–11(b)(1), we believe it is preceding three years and through the balance in providing shareholders with only necessary for the nominating date of election of directors. Rather, the a significant, long-term interest with the shareholder or member of a nominating nominating shareholder would be ability to have their nominees included shareholder group to have the right to required to continuously hold the in a company’s proxy materials while recall the loaned securities to satisfy the minimum amount of shares required to limiting the possibility of shareholders three-year holding period satisfy the 3% ownership threshold in attempting to use Rule 14a–11 requirement.304 Finally, the rule paragraph (b)(1), assuming no inappropriately, as discussed further adjustments (in this example, at least below. 301 As proposed, a nominating shareholder or 300,000 shares). We also factored our desire to limit group would have been required to hold ‘‘the We also believe that it is important the use of Rule 14a–11 to shareholders securities that are used for purposes of determining the applicable ownership threshold’’ and intend to that any shareholder or member of a who do not possess a change in control continue to hold ‘‘those securities’’ through the date nominating shareholder group that intent with regard to the company into of the meeting. See proposed Rule 14a–11(b)(2). The intends to submit a nominee to a our decision to extend the holding Proposal also would have required the nominating company for inclusion in the company’s period. Although we have, as noted shareholder or group to provide a statement that the nominating shareholder or group intends to proxy materials continue to maintain below, adopted specific requirements in continue to own the ‘‘requisite shares’’ through the the qualified minimum amount of Rule 14a–11 to address the control date of the meeting. See proposed Rule 14a–18(f). securities in the company needed to issue, we believe that a longer holding As adopted, we are modifying Rule 14a–11 to satisfy the ownership provisions in the period is another safeguard against require the nominating shareholder or each member of the nominating shareholder group to have held rule through the date of the meeting at shareholders that may attempt to the ‘‘amount of securities’’ that are used for which the shareholder’s or group’s inappropriately use Rule 14a–11 as a satisfying the ownership requirement and to nominee is presented to a vote of means to quickly gain control of a continue to hold that amount of securities through shareholders. To meet the eligibility company. Finally, we note that if the date of the meeting, rather than referring to the ‘‘requisite securities.’’ In addition, even though the criteria in proposed Rule 14a–11(b)(2), a shareholders believe that the three-year ownership requirement is based on the percentage nominating shareholder or member of a period should be shorter, the of voting power held, the requirement refers to nominating shareholder group would amendment that we decided to adopt to ‘‘amount’’ rather than ‘‘percentage’’ so that have been required to ‘‘intend to Rule 14a–8 will remove barriers to satisfaction of the ownership requirement can be accurately determined. We believe it would be continue to hold’’ the securities used to proposals that seek to establish a unduly burdensome to require that a nominating meet the ownership threshold through different procedure with a lesser (or no) shareholder or group determine whether its the date of the meeting. Commenters on holding period condition. holdings exceeded 3% of the company’s voting the Proposing Release generally power continuously for a three-year period prior to The requirement we are adopting is supported a holding requirement that shareholders seeking to use Rule the filing of the Schedule 14N. 302 See the Instruction to Rule 14a–11(b)(2). For 14a–11 to have a nominee or nominees purposes of this calculation, the amount of the short may not be certain that its nominee or nominees included in a company’s proxy position or borrowed securities at any point in time will be included in the company’s proxy materials. materials must have held the minimum during the three year holding period would be We do not believe it is necessary to require a amount of securities used to satisfy the deducted from the amount of securities otherwise nominating shareholder or group to recall loaned held at that point in time. shares that it has the right to recall and vote prior 303 Id. to the time that the nominating shareholder or 297 Letter from Teamsters. 304 Id. The recall provisions are discussed in group is notified that its nominee or nominees will 298 Letter from BRT. Section II.B.4.b.iii. above. We note that at the time be included in the company’s proxy materials. 299 Letter from Tesoro. the nominating shareholder or group calculates its 305 See the Instruction to Rule 14a–11(b)(2). 300 See letters from E. Davis; Fenwick. ownership and submits a nominee or nominees, it 306 See letter from AFSCME.

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through the date of the meeting,307 and meeting.311 In addition, we proposed commitment to the director nominee one commenter suggested that we that nominating shareholders or and the election process. In addition, we clarify that shareholders would be members of a nominating shareholder are adopting the disclosure requirement, required to hold the securities used for group disclose their intent with regard as proposed, concerning the nominating determining ownership through the to continued ownership of their shares shareholder’s or group member’s intent election of directors.308 We agree with after the election (which may be with respect to continued ownership of the suggestion and are modifying the contingent on the election’s outcome). their shares after the election.316 We are language in Rule 14a–11(b)(2) to clarify As noted above, commenters generally not, however, adopting a requirement that a nominating shareholder or supported the requirement for the for a nominating shareholder or member member of a nominating shareholder nominating shareholder or group to of a nominating shareholder group to group ‘‘must continue to hold’’ the hold the requisite amount of securities continue to hold their shares for a requisite amount of securities through through the date of the meeting, certain period of time after the date of the date of the meeting.309 If a although some commenters expressed the election. We believe that disclosure opposition to the proposed disclosure of a nominating shareholder’s or group nominating shareholder or member of a requirement or any requirement for the member’s intent with respect to nominating shareholder group fails to nominating shareholder or group to continued ownership in a Schedule 14N continue to hold the requisite amount of disclose their intent to hold the or amended Schedule 14N will provide securities as required by the rule, a company’s shares after the date of the investors with the information they company could exclude the nominee or election.312 One commenter explained need for this purpose. nominees submitted by the nominating that the nominating shareholder or 310 d. No Change in Control Intent shareholder or group. group may not know its intent at the We also are adopting, as proposed, the time the Schedule 14N is filed and, Under the Proposal, to rely on Rule requirement that a nominating depending on the outcome of the 14a–11, a nominating shareholder or shareholder or member of a nominating director election, the nominating member of a nominating shareholder shareholder group provide a statement shareholder or group may, in fact, group would have been required to as to the nominating shareholder’s or purchase more stock or sell some provide a certification in the filed group member’s intent to continue to stock.313 Another commenter observed Schedule 14N that it did not hold the hold the qualifying minimum amount of that it is impractical for shareholders to securities with the purpose, or with the securities through the date of the represent that they would hold their effect, of changing the control of the position beyond the election and company or gaining more than a limited 317 307 See letters from ABA; Advance Auto Parts; instead favored disclosure in an number of seats on the board. We Alston & Bird; American Express; Association of amended Schedule 14N of any change noted that this certification, along with Corporate Counsel; J. Blanchard; BorgWarner; in the ownership of more than 1% of the the other required disclosures, would CalPERS; CII; Cleary; Comcast; CSX; Dewey; W. B. assist shareholders in making an Dickerson; Florida State Board of Administration; voting shares or net economic position General Mills; Headwaters; JPMorgan Chase; during a period after the election (e.g., informed decision with regard to any Nathan Cummings Foundation; Protective; Schulte 60 days).314 Other commenters nominee or nominees put forth by the Roth & Zabel; Seven Law Firms; Shearman & supported the proposed disclosure nominating shareholder or group, in Sterling; Society of Corporate Secretaries; tw requirement regarding the nominating that the information would enable telecom; ValueAct Capital. shareholders to gauge the nominating 308 See letter from ABA. shareholder’s or group’s intent to hold 309 For purposes of determining whether the shares after the meeting, or shareholder’s or group’s interest in the requirement to hold the specified amount of recommended that the Commission company, longevity of ownership, and securities from the date of the filing of the Schedule require instead that the nominating intent with regard to continued 14N through the date of the election of directors is shareholder or group hold the requisite ownership in the company. satisfied, a nominating shareholder or group must Most commenters on this aspect of the hold (as determined pursuant to the instruction to amount of shares for a specific period the rule) the qualifying minimum amount of after the date of the meeting.315 Proposal agreed generally that Rule 14a– securities, which can include securities that are We believe that a requirement to hold 11 should not be available to loaned to a third party if the nominating the securities through the date of the shareholders seeking to effect a change shareholder or group has the right to recall the in control of a company (or to obtain securities, and will recall them upon being notified election of directors is appropriate to that any of the nominees will be included in the demonstrate the nominating more than a specified number of board company’s proxy materials. Of course, between the shareholder’s or group member’s seats) and supported a certification date of the filing of the Schedule 14N and the date requirement regarding the lack of of the election of directors previously loaned 311 change in control intent.318 Some securities may be returned. Likewise, the amount of See new Rule 14a–11(b)(4) and proposed Rule securities held during the period from the filing of 14a–18(f). the Schedule 14N through the date of the election 312 See letters from Alston & Bird; Amalgamated 316 See new Rule 14a–11(b)(5) and new Item 4(b) of directors must be reduced by the amount of Bank; Calvert; CII; Florida State Board of of Schedule 14N. securities of the same class that are sold in a short Administration; P. Neuhauser; Norges Bank; 317 See Item 8 of proposed Schedule 14N. sale. Schulte Roth & Zabel; TIAA–CREF; USPE; ValueAct 318 See letters from ABA; Advance Auto Parts; 310 See new Rule 14a–11(b)(2) and Rule 14a– Capital. American Bankers Association; American Express; 11(g). The company would be required to provide 313 See letter from CII. Americans for Financial Reform (‘‘Americans for notice to the staff in accordance with Rule 14a– 314 See letter from Cleary. Financial Reform’’); BRT; CalSTRS; CII; Cleary; 11(g) and could seek a no-action letter from the staff 315 See letters from 26 Corporate Secretaries; COPERA; Corporate Library; Dewey; Dominican with regard to the determination to exclude the ABA; Aetna; AGL; Alaska Air; Alcoa; Anadarko; Sisters of Hope; Eli Lilly; Emerson Electric; Florida nominee at that time if the company so wished. In Applied Materials; Association of Corporate State Board of Administration; A. Goolsby; the event that the nominating shareholder’s or Counsel; Avis Budget; BRT; Burlington Northern; GovernanceMetrics; ICI; JPMorgan Chase; Sen. Carl group’s failure to continue to hold the securities Callaway; Caterpillar; Comcast; L. Dallas; Darden Levin (‘‘C. Levin’’); Mercy Investment Program; comes to light after the company has printed its Restaurants; Devon; W. B. Dickerson; Dupont; Eli Metlife; Nathan Cummings Foundation; P. proxy materials, the company would be permitted Lilly; FPL Group; General Mills; Home Depot; Neuhauser; Protective; RiskMetrics; Seven Law to exclude the nominee or nominees and send a Honeywell; Intel; Lionbridge Technologies; Lorsch Firms; SIFMA; Sisters of Mercy; Social Investment revised proxy card to its shareholders. For et al.; Keating Muething; Office Depot; PepsiCo; Forum; Society of Corporate Secretaries; Sodali; additional information about a company’s Pfizer; Protective; Sara Lee; SIFMA; Tesoro; SWIB; TIAA–CREF; Trillium; Tri-State Coalition; T. obligations in the event a nominee withdraws or is Textron; TI; UnitedHealth; U.S. Bancorp; Verizon; Rowe Price; tw telecom; Ursuline Sisters of disqualified, see Section II.B.7.b. below. Xerox. Tildonk; Wachtell; Walden; B. Villiarmois.

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commenters, however, expressed provides that the rule is available only request).328 In addition, a nominating concern about the lack of a remedy if the nominating shareholder or group shareholder and each member of a when a certification regarding control members do not have an intent to nominating shareholder group will have intent proves to be false or when a change control of the company 326 or liability under Rule 14a–9 for a nominating shareholder or group gain more seats on the board than the materially false or misleading changes its intent.319 Suggested maximum provided for under Rule 14a– certification in the Schedule 14N. remedies included excluding the 11. We slightly revised the language of Questions concerning the nomination nominee of any nominating shareholder the requirement to clarify our intended also may be resolved by the parties or group that changes intent and barring meaning. The Proposal used the outside the staff process provided in the nominating shareholder or group language ‘‘gain more than a limited Rule 14a–11(g), including through from using the rule for the following number of seats on the board,’’ which private litigation where necessary, two annual meetings,320 requiring was intended to refer to the limitations similar to the way they resolve issues disclosure of a change of intent and within the rule on the maximum arising in traditional proxy contests.329 resignation of the Rule 14a–11 number of nominees required to be Finally, we note that the Commission director,321 and imposing liability under included in the company’s proxy also could take enforcement action with Rule 14a–9.322 materials. The final rule states this more respect to companies that We are adopting this requirement explicitly. inappropriately exclude nominees with some modifications from the Finally, we have added an instruction under Rule 14a–11 or shareholders that Proposal. To rely on Rule 14a–11, the to clarify that in order to rely on Rule provide false certifications in their nominating shareholder (or where there 14a–11 to include a nominee or Schedule 14N. We believe these is a nominating shareholder group, any nominees in a company’s proxy measures should provide sufficient member of the nominating shareholder materials, a nominating shareholder or a means to address situations in which a group) must not be holding any of the member of a nominating shareholder nominating shareholder or member of a company’s securities with the purpose, group may not be a member of any other nominating shareholder group provides or with the effect, of changing control of group with persons engaged in a false certification regarding change in 323 the company or to gain a number of solicitations or other nominating control intent. seats on the board of directors that activities in connection with the subject exceeds the maximum number of election of directors; may not separately e. Agreements With the Company nominees that the registrant could be conduct a solicitation in connection In the Proposing Release, we noted required to include under Rule 14a–11 with the subject election of directors that a shareholder nomination process and must provide a certification to this other than a Rule 14a–2(b)(8) exempt that includes limits on the number of effect in its filed Schedule 14N.324 solicitation in relation to those nominees that a company is required to The final requirement differs from the nominees it has nominated pursuant to include in its proxy materials presents Proposal in three respects. First, in Rule 14a–11 or for or against the the potential risk of nominating addition to requiring the certification to company’s nominees; and may not act shareholders or groups acting merely as address the absence of change in control as a participant in another person’s a surrogate for the company or its intent or intent to gain more than the solicitation in connection with the management in order to block usage of maximum number of seats provided subject election of directors.327 the rule by another nominating under the rule, we also have added this We understand that companies have shareholder or group. We proposed to condition as an explicit requirement to concerns that shareholders using Rule 325 address this concern by providing that the rule. We believe that this more 14a–11 may inaccurately assert that they a nominating shareholder or group directly achieves our intent—that the do not have a change in control intent, using Rule 14a–11 would be required to rule not be used by shareholders that and that this can be a difficult factual represent that no agreement between the have an intent to change the control of issue. If a company determines that it nominating shareholder or group and the company or gain more than the can exclude a nominee based on this the company and its management maximum number of seats specified in eligibility condition, it will be required exists.330 the rule. to notify the nominating shareholder, To avoid any uncertainty Second, we have clarified the members of the nominating shareholder about the breadth of this requirement, language of the requirements so that it group, or, where applicable, the the Proposal included an instruction nominating shareholder group’s noting that prohibited agreements 319 See letters from American Bankers would not include unsuccessful Association; Dewey; Emerson Electric; A. Goolsby; authorized representative, of a deficiency in its notice on Schedule 14N negotiations with the company to have Metlife; Protective; Seven Law Firms; SIFMA. the nominee included in the company’s 320 See letter from Seven Law Firms. and provide the nominating shareholder 321 See letter from Protective. or group the opportunity to respond. proxy materials as a management 322 See letter from P. Neuhauser. The company also would be required to nominee, or negotiations that are 323 Although Rule 14a–11 does not contain a submit a notice to the Commission limited to whether the company is requirement that the shareholder nominee or required to include the shareholder nominees do not have an intent to change the stating its intent to exclude a nominee control of the company, a nominating shareholder’s from its proxy materials (which would or group’s ability to meet the requirement and be required to include a description of 328 See Section II.B.9.b. below for further certify that it does not have such an intent will be discussion of determinations to exclude a nominee impacted by the intentions and actions of its the company’s basis for exclusion) and, or nominees. nominee or nominees. For example, a nominating if it wished to, it could seek the staff’s 329 See Sections II.B.8. and II.B.9. for an shareholder would not be able to certify that it does informal view with regard to its explanation of the disclosure requirements not hold the company’s securities for the purpose, determination to exclude the nominee applicable to a nomination made pursuant to Rule or with the effect, of changing the control of the (commonly referred to as a ‘‘no-action’’ 14a–11 and the process for excluding a nominee. company if its nominee is engaged in its own proxy 330 In this regard, we also proposed to require a contest or tender offer while the Rule 14a–11 nominating shareholder or group to represent that nomination is pending. 326 A change in control includes, but is not no relationships or agreements between the 324 See certifications in Item 8 of new Schedule limited to, an extraordinary corporate action, such nominee and the company and its management 14N. as a merger or tender offer. exist. This aspect of the rule is discussed in Section 325 See Rule 14a–11(b)(6). 327 See new Instruction to Rule 14a–11(b). II.B.5.c. below.

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nominee in the company’s proxy proxy materials under Rule 14a–11 if companies. However, we believe this materials under Rule 14a–11. the nominating shareholder, group, or concern is more appropriately Commenters generally supported the any member of the nominating addressed in the method of calculation proposed requirement, including the shareholder group, has any agreement of the maximum number of permissible clarifying instruction regarding certain with the company with respect to the nominees, and the question of whether 331 negotiations with the company. One nomination. We have revised the rule to that number should include commenter specifically supported the make it clearer that this is an eligibility management nominees that were portion of the proposed rule providing condition by listing it as a condition in originally put forward as shareholder that unsuccessful negotiations or the rule, rather than only a nominees under Rule 14a–11. Our negotiations that were limited to representation required in Schedule revisions to that provision are discussed whether the company is required to 337 14N. We have incorporated, as in Section II.B.6. below. include a shareholder nominee under proposed, the instruction with respect Rule 14a–11 would not be deemed to be to unsuccessful negotiations (i.e. f. No Requirement To Attend the a direct or indirect agreement.332 One negotiations that do not result in an Annual or Special Meeting commenter was concerned about agreement) regarding whether a possible manipulation by companies company is required to include a Under Rule 14a–11 as proposed, a and supported a prohibition on nominee in order to make clear that nominating shareholder or group would agreements.333 According to that those negotiations would not be have no obligation to attend the annual commenter, negotiations that resulted in disqualifying. or special meeting at which its nominee a nomination being included in the As described above, a nominating or nominees is being presented to proxy statement should be treated as a shareholder or group will not be eligible shareholders for a vote. We received company nominee and not a to use Rule 14a–11 if there is an comment on the Proposal, however, shareholder nominee under Rule agreement with the company regarding suggesting that we require a nominating 14a–11. the nomination of the nominee.338 shareholder or group, or a qualified Some commenters encouraged us to When a nominating shareholder or representative of the nominating allow negotiations that resulted in group files its Schedule 14N, this shareholder or group, to attend the inclusion of shareholder nominees as requirement will apply, and the company’s shareholder meeting and management nominees and cautioned certification required by Schedule 14N that the proposal could discourage nominate its director candidate(s) in will have the effect of confirming that person.339 One commenter explained constructive dialogue between there are no agreements. We believe this companies and shareholders.334 Three that this requirement would be is an important safeguard to prevent consistent with State law requirements commenters opposed limits on some or actions that could undermine the all relationships between the company for nominations and many companies’ purpose of the rule. If, after the and the nominating shareholder, group, advance notice bylaws.340 Another Schedule 14N is filed, a nominating or shareholder nominee.335 These commenter suggested that, as required shareholder or group reached an commenters believed that the under Rule 14a–8(h)(3) for shareholder agreement with the company for the Commission should not prohibit proposals, if the nominating shareholder nominee to be included in the agreements between a company and a company’s proxy materials as a or group (or its qualified representative) nominating shareholder or group. They management nominee, the nominating fails, without good cause, to appear and warned that restricting the ability of shareholder or group would no longer nominate the candidate, the company companies to reach agreements with a be proceeding under Rule 14a–11. should be permitted to exclude from its nominating shareholder or group would proxy materials for the following two limit the dialogue between companies Consequently, there is no need to revise the ‘‘no agreements’’ requirement in Rule years all nominees submitted by that and investors. One commenter nominating shareholder or members of suggested that proposed Rule 14a–18(d) 14a–11 to address that fact pattern. ‘‘ the nominating group.341 be revised to permit a company to agree Although we are adopting the no ’’ not to contest the eligibility of a agreements requirement largely as We have decided not to include a shareholder nominee.336 The proposed, we are persuaded by requirement that the nominating commenter also suggested that if a commenters that we should revise our shareholder or qualified representative company settled a threatened election final rules so that they do not appear at the meeting and present the contest by placing a shareholder unnecessarily discourage constructive nominee because we believe that nominee on the board, additional dialogue between shareholders and shareholders will have sufficient shareholder nominees should not be incentive to take steps to assure that 337 We note that a nominating shareholder or permitted for a specified period of time. members of a nominating shareholder group will be their nominees are voted on at the After careful review of the comments, required to provide a certification in the Schedule meeting, whether through attending the we continue to believe that it is 14N that the requirements of Rule 14a–11 are meeting or sending a qualified appropriate to provide that a satisfied, which will include the ‘‘no agreements’’ requirement. A nominating shareholder or member representative, or through other nominating shareholder or group will of a nominating shareholder group will be liable, arrangements with the company, and we not be eligible to have a nominee or pursuant to Rule 14a–9(c), for a false or misleading do not want to add unnecessary nominees included in a company’s certification provided in Schedule 14N. complexities and burdens to the rule. 338 See Rule 14a–11(b)(7). See also Rule 14a– We note that State law will control what 331 See letters from ADP; BRT; Calvert; CFA 11(d)(7) which clarifies that if a nominee, Institute; CII; Seven Law Firms; TIAA–CREF; USPE. nominating shareholder or any member of a happens if a candidate is not nominated nominating group has an agreement with the 332 See letter from CII. at the meeting because the person company or an affiliate of the company regarding 333 See letter from USPE. the nomination of a candidate for election, other supporting the candidate does not 334 See letters from BRT; Seven Law Firms; than as specified in Rule 14a–11(d)(5) or (6), any Society of Corporate Secretaries. nominee or nominees from such shareholder or 339 See letters from ABA; BRT. 335 See letters from ABA; Steve Quinlivan (‘‘S. group shall not be counted in calculating the Quinlivan’’); Verizon. number of shareholder nominees for purposes of 340 See letter from ABA. 336 See letter from S. Quinlivan. Rule 14a–11(d). 341 See letter from BRT.

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attend the meeting or make other election.346 One commenter pointed out Federal Trade Commission Act.350 One arrangements.342 that management nominees are not commenter, for example, explained that subject to similar limits.347 After banking laws and regulations impose g. No Limit on Resubmission consideration of the comments we do their own eligibility standards for Under the Proposal, a nominating not believe it is necessary or appropriate directors.351 One commenter stated shareholder’s or group’s ability to use to include a limitation on use of Rule more generally that it does not oppose Rule 14a–11 would not be impacted by 14a–11 by nominating shareholders or the proposed requirement that a prior unsuccessful use of the rule. In groups that have previously used the company would not have to include a response to our request for comment, a rule. We continue to believe that such shareholder nominee in its proxy number of commenters supported a a limitation would not facilitate materials if the nominee’s candidacy or provision that would render a shareholders’ traditional State law rights election would violate Federal law or nominating shareholder or group and would add unnecessary complexity State law and such violation could not ineligible to use Rule 14a–11 for a to the rule’s operation. be cured.352 It noted, however, that period of time (e.g., one, two, or three ‘‘there is not a lot of law’’ that years) if the nominating shareholder or 5. Nominee Eligibility Under Exchange disqualifies a person from serving as a group presented a nominee who failed Act Rule 14a–11 director and described concerns about to receive significant shareholder a. Consistent With Applicable Law and State law barriers as a ‘‘red herring.’’ support in a previous election (e.g., Regulation On the other hand, one commenter 10%, 15%, 25%, or 30%).343 stated that a company should not be One Under the Proposal, a company would commenter indicated that this allowed to exclude a shareholder have been able to exclude a nominee nominee from its proxy materials resubmission threshold would have a where the nominee’s candidacy or, if dual purpose: (i) when the nominee because the election of the nominee elected, board membership would would result in the violation of State failed to garner significant support from violate controlling State law, Federal shareholders, it would be inappropriate law or Federal law.353 The commenter law, or rules of a national securities explained that allowing such exclusion to require the company to expend exchange or national securities resources repeatedly to include the ‘‘would make it prohibitively expensive 344 association (other than rules of a for most shareowners to submit unsuccessful nominee; and (ii) other national securities exchange or national shareholders would have an nominations under the proposed rule. It securities association that set forth would lead to many shareowner opportunity to submit their own requirements regarding the nominations.345 On the other hand, nominees being disqualified based on independence of directors, which the technicalities or invented legal some commenters opposed a provision rule addresses separately) and such that would render a nominating theories.’’ violation could not be cured.348 shareholder or group ineligible to use After considering the comments, we Commenters generally supported this Rule 14a–11 for a period of time if the continue to believe that Rule 14a–11 requirement.349 These commenters nominating shareholder or group should address Federal law, State law, suggested that the rule require the presented a nominee who failed to and applicable exchange requirements nominating shareholder or group to receive a specified percentage of (other than the requirements related to provide any information necessary to shareholder votes at a previous objective independence standards, ensure compliance with these laws or which are addressed separately under regulations. Some of these commenters the rule). Requiring compliance with 342 While state statutes are largely silent on the subject of presentation of nominations, motions or noted that there are various Federal and basic legal requirements regarding other business at meetings of shareholders, the State laws that govern or affect the nominees should encourage nominating chairman of the meeting typically has broad ability of a person to serve as a director, shareholders to bring forward discretionary authority over its conduct (see, e.g., such as the Federal Power Act and candidates that may be more likely to be Model Business Corporation Act § 7.08(b)). As we understand, it is prevailing practice for the related FERC regulations, Federal able to be elected and serve as directors, chairman to invite nominations of directors from maritime laws and regulations, and should reduce disruption and the meeting floor. See David A. Drexler, et al., Department of Defense security expense for companies of opposing a Delaware Corporation Law and Practice, ¶ 24.05[3] clearance requirements, Department of candidate who could not serve on the (2009 supp.); Carroll R. Wetzel, Conduct of a Stockholders’ Meeting, 22 Bus. Law. 303, 313–314 State export licensing requirements, board if elected because their service (1967); American Bar Association Corporate Laws bank holding company laws, FCC would violate law.354 Thus, under Rule Committee and Corporate Governance Committee, licensing requirements, state gaming 14a–11, a nominee will not be eligible Business Law Section, Handbook for the Conduct licensing requirements, Federal Reserve to be included in a company’s proxy of Shareholders’ Meetings (2d ed. 2010) at 151. materials if the nominee’s candidacy, or 343 See letters from 26 Corporate Secretaries; regulations, FDIC regulations, U.S. ABA; ADP; Advance Auto Parts; Aetna; Alcoa; government procurement regulations, if elected, board membership will AllianceBernstein; Anadarko; Applied Materials; Section 8 of the Clayton Act, Section 1 violate Federal law, State law, or Avis Budget; Boeing; BorgWarner; BRT; Burlington of the Sherman Act, and Section 5 of the applicable exchange requirements, if Northern; Caterpillar; Chevron; CIGNA; Cleary; any,355 other than those related to Comcast; CSX; Darden Restaurants; Deere; Dewey; DTE Energy; Dupont; Eaton; FedEx; Florida State 346 See letters from CII; Norges Bank; Solutions; Board of Administration; FMC Corp.; FPL Group; USPE; Walden. 350 See letters from American Bankers General Mills; Headwaters; Intel; ITT; JPMorgan 347 See letter from CII. Association; BRT; Emerson Electric; GE; O’Melveny Chase; Kirkland & Ellis; E.J. Kullman; Leggett; P. 348 In the Proposing Release, we described an & Myers; Sidley Austin; Tenet. Neuhauser; Northrop; PepsiCo; Pfizer; Protective; exception from the provision if the violation could 351 See letter from American Bankers Association. RiskMetrics; Sara Lee; Seven Law Firms; SIFMA; be cured. We inadvertently did not include 352 See letter from CII. Society of Corporate Secretaries; Southern language for this provision in the proposed 353 See letter from USPE. Company; T. Rowe Price; tw telecom; U.S. Bancorp; regulatory text. 354 We note that this condition would not Wells Fargo; Weyerhaeuser; Whirlpool; Xerox. 349 See letters from 26 Corporate Secretaries; disqualify a nominee unless the violation could not 344 See discussion in Section II.B.5.e. below with American Bankers Association; Association of be cured during the time period in which a regard to resubmission of unsuccessful shareholder Corporate Counsel; BRT; Dewey; Emerson Electric; nominating shareholder or group has to respond to nominees. Financial Services Roundtable; GE; Intel; JPMorgan a company’s notice of deficiency. 345 See letter from Society of Corporate Chase; O’Melveny & Myers; Protective; Sidley 355 We are not aware of other exchange Secretaries. Austin; Tenet; Xerox. requirements related to director qualifications, but

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independence standards, and such Proposal, the representation would not Section 2(a)(19) test is more appropriate violation could not be cured during the cover subjective determinations. Also, for investment company directors than time period provided in the rule.356 the representation would not cover the independence standard applied to additional independence or director non-investment company directors,362 b. Independence Requirements and Other Director Qualifications qualification requirements imposed by a with one noting that the Section 2(a)(19) board on its independent members, test is tailored to the types of conflicts Under the Proposal, the nominating although we requested comment on of interest faced by investment company shareholder or each member of the whether it should. directors and that the Section 2(a)(19) nominating shareholder group would Commenters generally supported the provision is critical given that have been required to provide a requirement regarding the objective investment companies must have a representation that the shareholder independence standards.359 specified percentage of independent nominee meets the objective criteria for Institutional and other investors agreed directors to be able to comply with ‘‘independence’’ of the national that nominating shareholders should certain statutory and regulatory securities exchange or national not be required to represent that requirements.363 securities association rules applicable to nominees satisfy the subjective A significant number of commenters the company, if any, or, in the case of independence standards of the relevant from the corporate community stated a registrant that is an investment exchange or national securities generally that shareholder nominees company, a representation that the association, and also agreed that they should satisfy not just the objective nominee is not an ‘‘interested person’’ of should not be subject to any director director independence standards of the the registrant, as defined in Section independence or qualification standards relevant exchange or national securities 2(a)(19) of the Investment Company set by the board or the nominating associations, but all of the company’s 357 Act. For registrants other than committee.360 One of these commenters director qualifications and investment companies, the expressed agreement with the Proposal independence standards (including, if representation would not have been that where a company is not subject to applicable, more stringent objective required in instances where a company the independence standards of an independence standards imposed by the is not subject to the requirements of a exchange or national securities board, subjective director independence national securities exchange or a association, the nominating shareholder standards, director qualification national securities association. We also or group should not be required to standards, board service guidelines, and noted that exchange rules regarding provide disclosure concerning whether code of conduct in the company’s director independence generally include nominees would be independent.361 To governance principles and committee some standards that depend on an the extent that a company has charters) applicable to all directors and objective determination of facts and independence standards that are more director nominees.364 Many commenters other standards that depend on stringent than those of an exchange, warned that exempting shareholder subjective determinations.358 Under our then the commenter would not oppose nominees from a company’s director the application of those standards to the independence and qualification should an exchange adopt new requirements, this provision would apply. shareholder nominee as long as the standards could cause the company to 356 As discussed in Section II.B.9.b., a company standards are objective. Two be exposed to legal issues, lower the that intends to exclude a shareholder nominee or commenters expressed the view that the quality and diversity of the board, and nominees will be required to notify the nominating create difficulties in recruiting qualified shareholder or group of the basis on which the NASDAQ Listing Rules require a company’s board 365 company plans to exclude the nominee or nominees directors. Other commenters also to make an affirmative determination that and the nominating shareholder or group will have believed that exempting shareholder individuals serving as independent directors do not 14 calendar days to cure the deficiency (where have a relationship with the company that would nominees from the subjective director curable). impair their independence. The NASDAQ rules independence standards of the relevant 357 Pursuant to proposed Rule 14a–18(c), a include certain objective criteria, similar to those nominating shareholder or group would include a exchange or national securities provided in NYSE Section 303A.02(b), for making representation in its notice to the company that the association would put companies at risk such a determination. See NASDAQ Rule 5605(a)(2) nominee satisfies the existing independence or and IM–5605. of noncompliance with the exchange’s ‘‘interested person’’ standards. 359 See letters from ABA; ACSI; Advance Auto 358 See proposed Rule 14a–18(c) and the Parts; Aetna; Alaska Air; Alcoa; Anadarko; Avis 362 See letters from ABA II; ICI. Instruction to paragraph (c). For example, the NYSE Budget; Biogen; The Board Institute (‘‘Board 363 See letter from ICI. One commenter stated that listing standards include both subjective and Institute’’); BorgWarner; BRT; Burlington Northern; the application of the ‘‘interested person’’ standard objective components in defining an ‘‘independent Callaway; CalSTRS; Caterpillar; CIGNA; Cleary; of Section 2(a)(19) is unnecessary. See letter from director.’’ As an example of a subjective Comcast; Con Edison; CII; COPERA; CSX; Norges Bank. determination, Section 303A.02(a) of the NYSE 364 Listed Company Manual provides that no director Cummins; Darden Restaurants; Deere; Dewey; DTE See letters from ABA; Advance Auto Parts; will qualify as ‘‘independent’’ unless the board of Energy; Eaton; Edison Electric Institute; Einstein Aetna; Alaska Air; Alcoa; Anadarko; Avis Budget; ‘‘ ’’ directors ‘‘affirmatively determines that the director Noah Restaurant Group, Inc. ( Einstein Noah ); Biogen; Board Institute; BorgWarner; BRT; has no material relationship with the listed Emerson Electric; ExxonMobil; FedEx; FMC Corp.; Burlington Northern; Callaway; Caterpillar; CIGNA; company (either directly or as a partner, FPL Group; General Mills; A. Goolsby; Headwaters; Cleary; Comcast; Con Edison; CSX; Cummins; shareholder or officer of an organization that has a Home Depot; Honeywell; Horizon Lines, Inc. Darden Restaurants; Deere; Dewey; DTE Energy; relationship with the company).’’ On the other (‘‘Horizon’’); C. Horner; IBM; Intel; JPMorgan Chase; Eaton; Edison Electric Institute; Einstein Noah; hand, Section 303A.02(b) provides that a director is Keating Muething; E.J. Kullman; LUCRF; Emerson Electric; ExxonMobil; FedEx; FMC Corp.; not independent if he or she has any of several McDonald’s; Merchants Terminal; Metlife; P. FPL Group; General Mills; A. Goolsby; Headwaters; specified relationships with the company that can Neuhauser; Norfolk Southern; Northrop; Office Home Depot; Honeywell; Horizon; C. Horner; IBM; be determined by a ‘‘bright-line’’ objective test. For Depot; O’Melveny & Myers; P&G; PepsiCo; Pfizer; Intel; JPMorgan Chase; Keating Muething; E.J. example, a director is not independent if ‘‘the Protective; S&C; Seven Law Firms; Sidley Austin; Kullman; McDonald’s; Merchants Terminal; director has received, or has an immediate family SIFMA; Society of Corporate Secretaries; Southern Metlife; Norfolk Southern; Northrop; Office Depot; member who has received, during any twelve- Company; Tenet; Tesoro; Theragenics; TI; TIAA– O’Melveny & Myers; P&G; PepsiCo; Pfizer; month period within the last three years, more than CREF; Tompkins; tw telecom; UnitedHealth; U.S. Protective; S&C; Seven Law Firms; Sidley Austin; $120,000 in direct compensation from the listed Bancorp; ValueAct Capital; Verizon; Wells Fargo; SIFMA; Society of Corporate Secretaries; Southern company, other than director and committee fees Weyerhaeuser. Company; Tenet; Tesoro; Theragenics; TI; and pension or other forms of deferred 360 See letters from ACSI; CalSTRS; CII; COPERA; Tompkins; tw telecom; UnitedHealth; U.S. Bancorp; compensation for prior service (provided such LUCRF; P. Neuhauser; TIAA–CREF; ValueAct Verizon; Wells Fargo; Weyerhaeuser. compensation is not contingent in any way on Capital. 365 See letters from Board Institute; BRT; Con continued service).’’ Similar to the NYSE rules, the 361 See letter from CII. Edison; C. Horner; TI; Verizon.

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or association’s rules regarding A nominating shareholder or group the commenter who noted that the independent directors, burden the also will be required to provide a ‘‘interested person’’ test under Section remaining independent directors with statement in Schedule 14N that the 2(a)(19) is tailored to the types of additional duties by forcing them to nominee or nominees meets the conflicts of interest faced by investment serve on more board committees, make objective independence standards of the company directors and that the Section it more difficult for companies to recruit applicable exchange rules.368 For this 2(a)(19) provision is critical given that the independent directors needed for purpose, the nominee would be investment companies must have a the board committees, and force required to meet the definition of specified percentage of independent companies to increase the size of the ‘‘independent’’ that is applicable to directors to be able to comply with board and conduct additional searches directors of the company generally and certain statutory and regulatory for directors qualifying as not any particular definition of requirements.372 Accordingly, under the independent.366 independence applicable to members of final rule, a company will be required After carefully considering the the audit committee of the company’s to include a shareholder nominee in its comments, we are adopting the board of directors.369 To the extent a proxy materials if the shareholder requirement largely as proposed. We rule imposes a standard regarding nominee meets the objective criteria for believe that the Rule 14a–11 process independence that requires a subjective ‘‘independence’’ of the national should be limited to nominations of determination by the board or a group securities exchange or national board candidates who meet any or committee of the board (for example, securities association rules applicable to objective independence standards of the requiring that the board of directors or the company, if any, or, in the case of relevant securities exchange. While we any group or committee of the board of a company that is an investment understand the concerns expressed by directors make a determination that the company, the nominee is not an ‘‘ ’’ many commenters from the corporate nominee has no material relationship interested person of the registrant, as with the listed company), this element defined in Section 2(a)(19) of the community, particularly with respect to 373 the risk of noncompliance with listing of an independence standard would not Investment Company Act. 370 As noted above, we did not propose standards, we continue to believe that have to be satisfied. Where a to require a shareholder nominee the rule should not extend to subjective company (other than an investment submitted pursuant to Rule 14a–11 to be independence standards. We note that company) is not subject to the standards subject to the company’s director Rule 14a–11 only addresses when a of a national securities exchange or national securities association, the qualification standards. With regard to company must include a nominee in its these standards, we believe that a proxy materials—it does not preclude a requirement would not apply. While we acknowledge commenters’ nominee’s compliance with a nominee from ultimately being subject company’s director qualifications is best to any subjective determination of concerns about nominees not being subject to subjective independence addressed through disclosure. Under independence for board committee State law, shareholders generally are positions. We believe the concerns requirements, we believe that including such requirements would create undue free to nominate and elect any person to regarding independent directors being the board of directors, regardless of forced to take on additional duties, uncertainty for shareholders seeking to nominate directors and make it difficult whether the candidate satisfies a companies needing to increase the size company’s qualification requirement at of the board or conducting additional to evaluate the board’s conclusion 374 regarding independence. In addition, if the time of nomination and election. searches for independent directors are Many commenters recommended a a board believes a nominee would not best addressed through disclosure. A requirement that the shareholder be considered independent under its company could include disclosure in its nominee complete the company’s subjective independence evaluation, it proxy materials advising shareholders standard director questionnaire or could describe its reasons for that view that the shareholder nominee would not otherwise provide information required in its proxy statement. In this regard, we meet the company’s subjective criteria, of other nominees.375 While we do not as appropriate. This would provide note that in a traditional proxy contest an insurgent’s nominee or nominees do shareholders with the opportunity to which time the company may resolve this make an informed choice with regard to not have to comply with any deficiency. See, e.g., NASDAQ Rule 5810(c)(3)(E) the candidates for director. requirements, including the (‘‘If a Company fails to meet the majority board independence requirement in Rule 5605(b)(1) due We believe that it is in both the independence requirements applicable to the company.371 We also agree with to one vacancy, or because one director ceases to company’s and shareholders’ interest for be independent for reasons beyond his/her the company to continue to meet any reasonable control, the Listing Qualifications 368 See Item 5(f) of new Schedule 14N. Department will promptly notify the Company and applicable listing standards, and 369 See new instruction to paragraph (b)(9) in Rule inform it has until the earlier of its next annual requiring that Rule 14a–11 nominees 14a–11. shareholders meeting or one year from the event meet the objective independence 370 The rule addresses only the requirements that caused the deficiency to cure the deficiency.’’). standards will further that interest. It under Rule 14a–11 to be included in a company’s 372 See letter from ICI. also should help reduce disruption and proxy materials—it would not preclude a nominee 373 See new Rule 14a–11(b)(9). from ultimately being subject to the subjective 374 See, e.g., Triplex Shoe Co. v. Rice & Hutchins, expense for companies opposing a determination test of independence for board Inc., 152 A. 342, 375 (Del. 1930). See also 1–13 candidate it believes would cause it to committee positions. A company could include David A. Drexler et al., Delaware Corporation Law violate applicable listing standards. To disclosure in its proxy materials advising and Practice § 13.01 n. 42 (citing Triplex for the clarify that this is an affirmative shareholders that the shareholder nominee for proposition that ‘‘a bylaw requiring a director to be director would not meet the company’s subjective a stockholder required a director to own stock prior requirement for Rule 14a–11 nominees, criteria, as appropriate. If a shareholder nominee is to entering into the office of director, not prior to we have revised the rule to include this elected and the board determines that the nominee election’’). provision as an eligibility requirement is not independent, the board member presumably 375 See letters from 26 Corporate Secretaries; rather than a representation.367 would be included in the group of non-independent Advance Auto Parts; Alaska Air; Anadarko; Aetna; directors for purposes of applicable listing American Express; Association of Corporate standards. Counsel; BorgWarner; BRT; Callaway; Caterpillar; 366 See letters from Metlife; O’Melveny & Myers; 371 If a shareholder nominee did not meet the Dewey; DTE Energy; Dupont; Emerson Electric; Seven Law Firms; Wells Fargo. independence requirements of a listed market, that eWareness; ExxonMobil; Financial Services 367 See Rule 14a–11(b)(9). listed market may provide for a cure period during Roundtable; IBM; ICI; McDonald’s; O’Melveny &

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believe nominees submitted pursuant to board of a company to have the nominee explained that an independence Rule 14a–11 should be required to included in the company’s proxy requirement would reduce the risk that complete a company’s director materials, where the negotiations were a successful shareholder nominee questionnaire, we are persuaded that unsuccessful or were limited to whether would represent only the nominating information should be provided the company was required to include shareholder or group, avoid potential regarding whether the nominee meets the nominee in accordance with Rule disruptions and divisiveness from the company’s director qualifications, if 14a–11, would not represent a direct or having ‘‘special interest’’ directors, any. Accordingly, although we have not indirect agreement with the ameliorate the issue of preserving revised the rule to allow exclusion of company.379 confidentiality within the boardroom nominees who do not meet any director Commenters generally supported this and avoiding misuse of material non- qualification requirements, we have proposed requirement.380 Most of the public information, and lessen the adopted a requirement that a comments addressed negotiations or likelihood that Rule 14a–11 would be nominating shareholder or group agreements between the nominating used for change in control attempts.384 disclose under Item 5 of Schedule 14N shareholder or group and the company With regard to the degree of whether, to the best of their knowledge, rather than the relationship or independence needed and types of the nominating shareholder’s or group’s agreements between a nominee and the relationships that should be prohibited, nominee meets the company’s director company.381 numerous commenters recommended a qualifications, if any, as set forth in the Consistent with our approach to prohibition on any affiliation between company’s governing documents.376 agreements with nominating the nominating shareholder or group The company also may choose to shareholders, we are adopting the and the shareholder nominee.385 Some provide disclosure in its proxy requirement that there not be any commenters recommended that Rule statement about whether it believes a agreements between the nominee and 14a–11 prohibit a shareholder nominee nominee satisfies the company’s the company and its management from being (1) a nominating director qualifications, as is currently regarding the nomination of the shareholder, (2) a member of the done in a traditional proxy contest. nominee largely as proposed. In this immediate family of any nominating Where a company’s governing regard, we believe it would undermine shareholder, or (3) a partner, officer, documents establish certain the purpose of the rule to allow director or employee of a nominating qualifications for director nominees nominees under Rule 14a–11 to have shareholder or any of its affiliates.386 that, consistent with State law, would such agreements with the company They noted that a similar limitation was preclude the company from seating a because of the potential risk of a included in the 2003 Proposal. Two director who does not meet these nominating shareholder or group acting commenters recommended that the qualifications, we believe this would be merely as a surrogate for a company. In Commission impose the same important disclosure for shareholders. order to clarify that this is an affirmative restrictions and disclosure requirements requirement of Rule 14a–11, we have that were included in the 2003 c. Agreements With the Company revised the rule to make clear that this Proposal.387 As discussed above with regard to the is an eligibility condition by listing it as One commenter noted the eligibility requirements for a nominating a condition in the rule, rather than only Commission’s assertion in the Proposing shareholder or group, we recognize that in a representation required in Schedule Release that ‘‘such limitations may not certain limitations of the rule create the 14N. be appropriate or necessary’’ because, if elected, a director would be subject to potential risk of nominating d. Relationship Between the Nominating State law fiduciary duties owed to the shareholders or groups acting merely as Shareholder or Group and the Nominee a surrogate for the company or its company.388 The commenter, however, management in order to block usage of We did not propose a requirement expressed skepticism that fiduciary the rule by another nominating that the nominee must be independent obligations would adequately resolve shareholder or group.377 Under the or unaffiliated with the nominating the issue of ‘‘special interest’’ directors. Proposal as it relates to nominee shareholder or group, but we requested One commenter would not require eligibility, a nominating shareholder or comment on whether we should include independence between the nominating group would have been required to such a requirement.382 A large number shareholder or group and the nominee represent that no agreements between of commenters supported generally an if the nominating shareholder or group the nominee and the company and its independence requirement that would could use Rule 14a–11 to nominate only management exist regarding the limit some or all relationships between one candidate; however, if the nomination of the nominee.378 The the nominating shareholder or group nominating shareholder or group is Proposal included an instruction and its nominee.383 Commenters allowed to nominate more than one clarifying that negotiations between a nominating shareholder or group, 379 See instruction to proposed Rule 14a–18(d). Southern; Office Depot; O’Melveny & Myers; Pax 380 See letters from ADP; BRT; Calvert; CFA World; Protective; Sara Lee; Seven Law Firms; nominee, and nominating committee or Institute; CII; Seven Law Firms; TIAA–CREF; USPE. SIFMA; Society of Corporate Secretaries; Southern 381 See Section II.B.4.e. above for a further Company; Tenet; U.S. Bancorp; Vinson & Elkins Myers; PepsiCo; Praxair; Seven Law Firms; Society discussion of the comments. LLP (‘‘Vinson & Elkins’’); Wells Fargo; of Corporate Secretaries; Theragenics; 382 The 2003 Proposal included such a Weyerhaeuser. UnitedHealth; U.S. Bancorp; Xerox. requirement. For a discussion of this aspect of the 384 See letters from ABA; Alaska Air; Eli Lilly; 376 See Item 5(e) of new Schedule 14N. 2003 Proposal and the comments received, see the Leggett. 377 See the discussion in Section II.B.4.e. above Proposing Release. 385 See letters from Advance Auto Parts; Aetna; regarding relationships or agreements between the 383 See letters from ABA; Advance Auto Parts; Association of Corporate Counsel; Avis Budget; nominating shareholder or group and the company Aetna; Alaska Air; Association of Corporate Boeing; Brink’s; CIGNA; Cummins; Deere; Eaton; and its management. Counsel; Avis Budget; Biogen; Boeing; BorgWarner; FedEx; FMC Corp.; FPL Group; General Mills; E.J. 378 In this regard, we also proposed to require a Brink’s; BRT; Callaway; Caterpillar; CIGNA; Kullman; Pax World; Protective; Sara Lee. nominating shareholder or group to represent that Comcast; Cummins; Darden Restaurants; Deere; 386 See letters from Alaska Air; BorgWarner; no relationships or agreements between the Dewey; Dupont; Eaton; Eli Lilly; ExxonMobil; Caterpillar; JPMorgan Chase; O’Melveny & Myers; nominee and the company and its management FedEx; Financial Services Roundtable; FMC Corp.; Society of Corporate Secretaries. exist. This aspect of the rule is discussed in Section FPL Group; General Mills; Headwaters; Honeywell; 387 See letters from BRT; Intel. II.B.5.d. below. JPMorgan Chase; E.J. Kullman; Leggett; Norfolk 388 Letter from BRT.

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candidate using Rule 14a–11, then the that no such restriction or prohibition stand as a nominee under the rule based commenter believed independence applies to current director candidates, on prior unsuccessful nominations between the nominating shareholder or some of whom have various personal under the rule. A number of group and the nominees is needed.389 and professional links to the company commenters supported a provision The commenter asserted that a lack of and its executives.395 Another under which a shareholder nominee an independence requirement between commenter noted that the NYSE who failed to receive a specified multiple nominees and the nominating recognized the issue of share ownership threshold (e.g., 10%, 15%, 25%, or shareholder could give rise to control when crafting its director independence 30%) of support at a previous election issues because the nominees, if elected, rules and determined that even would be ineligible to be nominated could be beholden to a single significant share ownership should not again pursuant to Rule 14a–11 for a nominating shareholder or group. In be dispositive as to a determination of specified period (e.g., one, two, or three addition, the commenter claimed that a a director’s independence.396 Two years).400 One commenter reasoned that lack of independence could give rise to commenters opposed a prohibition on ‘‘[t]his would allow more shareholders ‘‘single issue’’ or ‘‘special interest’’ any affiliation between the nominating to participate in the process and would directors, thereby causing balkanization shareholder and its nominee because motivate them to propose high quality of boards. According to this commenter, they believed that fears regarding the candidates.’’ 401 On the other hand, if independence is not required, then election of ‘‘special interest’’ directors other commenters opposed a provision Schedule 14N should require detailed are unfounded or exaggerated, as any under which a shareholder nominee disclosure about the nature of nominee would have to gain the support who failed to receive significant support relationships between the nominating of a broad array of shareholders to be at a previous election would be shareholder or group and the elected.397 One commenter asserted that ineligible to be nominated again nominees.390 existing fiduciary duties are an adequate pursuant to Rule 14a–11 for a specified A few commenters recommended safeguard against ‘‘special interest’’ period.402 One commenter reasoned that requiring disclosure in the Schedule directors.398 ‘‘[s]imilar resubmission requirements 14N of any direct or indirect We continue to believe that such aren’t applicable to management’s relationships between the nominating limitations are not appropriate or candidates, so they shouldn’t apply to shareholder or group and the nominee, necessary. Rather, we believe that Rule candidates suggested by including family or employment 14a–11 should facilitate the exercise of shareowners.’’ 403 We agree with those relationships, ownership interests, shareholders’ traditional State law rights commenters who opposed a provision commercial relationships and any other and afford a shareholder or group that would limit the ability of a arrangements or agreements.391 One meeting the requirements of the rule the shareholder nominee to be nominated commenter recommended that a ability to propose a nominee for director based on the level of support received nominating shareholder or group that, in the nominating shareholder’s in a prior election. We do not believe provide ‘‘[d]isclosure about any view, better represents the interests of that such a limitation would facilitate agreements or relationships with the shareholders than those put forward by shareholders’ traditional State law rights Rule 14a–11 nominee other than those the nominating committee or board. We and would add undue complexity to the relating to the nomination of the note that once a nominee is elected to rule’s operation. nominee.’’ 392 the board of directors, that director will 6. Maximum Number of Shareholder Other commenters opposed generally be subject to State law fiduciary duties Nominees To Be Included in Company any requirement that the nominating and owe the same duty to the Proxy Materials shareholder or group be independent corporation as any other director on the from the shareholder nominee.393 Of board.399 To the extent a company board a. General these, some commenters recommended is concerned that a director nominee Under the Proposal, a company would the Commission require full disclosure will not represent the views of be required to include no more than one of any affiliations and business shareholders, the board could address shareholder nominee or the number of relationships instead of an outright those points in the company’s proxy nominees that represents 25% of the prohibition.394 One commenter noted materials opposing the candidate’s company’s board of directors, election. In addition, we believe the whichever is greater.404 Where the term 389 See letter from Seven Law Firms. disclosure requirements about the of a director that was nominated 390 Id. The recommended disclosures included: relationships between a nominating familial relationships with a nominating 400 See letters from 26 Corporate Secretaries; shareholder or group member; ownership interests shareholder or group and the nominee ABA; Aetna; Anadarko; BorgWarner; BRT; (or other participation) in a nominating that we are adopting, combined with the Burlington Northern; Caterpillar; Cummins; Dewey; shareholder, group member, or affiliates; fact that any nominee elected will be Headwaters; JPMorgan Chase; Kirkland & Ellis; employment history with a nominating shareholder, subject to fiduciary duties, should help Leggett; P. Neuhauser; Northrop; PepsiCo; Pfizer; group member, or affiliates; prior advisory, address any ‘‘special interest’’ concerns. Protective; Sara Lee; SIFMA; Society of Corporate consulting or other compensatory relationships Secretaries; TIAA–CREF; T. Rowe Price; Xerox. with a nominating shareholder, group member, or e. No Limit on Resubmission of 401 Letter from Northrop. affiliates; and agreements with a nominating 402 shareholder, group member, or affiliates (other than Shareholder Director Nominees See letters from CII; Corporate Library; relating to the nomination). Dominican Sisters of Hope; First Affirmative Under the Proposal, an individual ‘‘ ’’ 391 Financial Network LLC ( First Affirmative ); Mercy See letters from O’Melveny & Myers; SIFMA; would not be limited in their ability to Investment Program; Sisters of Mercy; Social UnitedHealth. See also letter from CII. Investment Forum; Tri-State Coalition; Trillium; 392 Letter from IBM. Ursuline Sisters of Tildonk; USPE. 395 See letter from CII. 393 See letters from Amalgamated Bank; CalSTRS; 403 396 Letter from CII. CFA Institute; CII; COPERA; Nathan Cummings See letter from Relational. 404 397 See proposed Rule 14a–11(d)(1). According to Foundation; P. Neuhauser; Norges Bank; Pershing See letters from CII; Nathan Cummings information from RiskMetrics, based on a sample of Square; Relational; RiskMetrics; Solutions by Foundation. 1,431 public companies, in 2007, the median board Design (‘‘Solutions’’); TIAA–CREF; USPE; B. 398 See letter from TIAA–CREF. size was 9, with boards ranging in size from 4 to Villiarmois. 399 See E. Norman Veasey & Christine T. 23 members. Approximately 40% of the boards in 394 See letters from CFA Institute; CII; COPERA; DiGuglielmo, How Many Masters Can a Director the sample had 8 or fewer directors, approximately P. Neuhauser; Pershing Square; Relational; USPE; B. Serve? A Look at the Tensions Facing Constituency 60% had between 9 and 19 directors, and less than Villiarmois. Directors, 63 Bus. Law. 761 (2008). 1% had 20 or more directors.

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pursuant to Rule 14a–11 continues past expressed a general concern that the however, we are adopting the limitation the meeting date, that director would proposed limit would affect a significant largely as proposed. We believe the rule continue to count for purposes of the portion of the board, disrupt the board, we are adopting strikes the appropriate 25% maximum. facilitate a change in control of the balance in allowing shareholders to As noted in the Proposing Release, we company, and possibly require more effectively exercise their rights to do not intend for Rule 14a–11 to be companies to integrate numerous new nominate and elect directors, but does available for any shareholder or group directors into their boards each year.411 not provide nominating shareholders or that is seeking to change the control of Other commenters wanted more groups using the rule with the ability to the company or to gain more than a shareholder nominees to be allowed change control of the company. The limited number of seats on the board.405 because they feared that a single limitation on the number of Rule 14a– The existing procedures regarding shareholder-nominated director would 11 nominees that a company is required contested elections of directors are be ineffective due to the lack of a second to include should also limit costs and intended to continue to fulfill that for motions at board meetings, hostile disruption as compared to a rule purpose.406 We also noted that by board members, possible exclusion from without such a limit. We also believe allowing shareholder nominees to be key committees, and being effectively 412 that a lower threshold, such as 10% or included in a company’s proxy cut out of key discussions. 15%, may result in only one Commenters’ suggestions as to the materials, part of the cost of the shareholder-nominated director at many appropriate limitation on the number of solicitation is essentially shifted from companies. In addition, we note that our shareholder nominees ranged from a the individual shareholder or group to rule only addresses the inclusion of limit of one shareholder nominee, the company and thus, all of the nominees in the company’s proxy 407 regardless of the size of the board,413 to shareholders. We do not believe that materials. After reviewing all of the we should require that an election at least two nominees, but less than a majority of the board.414 Other disclosures provided by the company contest conducted by a shareholder to and the nominating shareholder or change the control of the company or to commenters recommended various limits ranging from 10% to 15% of the group, shareholders will be able to make gain a number of seats on the board of an informed decision as to whether to directors that exceeds the maximum board.415 We carefully considered commenters’ vote for and elect a shareholder number of nominees that the registrant nominee. We believe that the could be required to include under Rule concerns regarding the limitation on the number of Rule 14a–11 nominees; modifications we are making to the rule, 14a–11 be funded out of corporate as described below, help to alleviate assets. concerns that the election of Some commenters supported Buy; J. Blanchard; Boeing; BorgWarner; BRT; Burlington Northern; R. Burt; Callaway; CalPERS; shareholder nominees would unduly generally the proposed limit on the Caterpillar; CIGNA; CII; Cleary; CNH Global; disrupt the board. As to concerns about number of shareholder nominees.408 Comcast; Concerned Shareholders; COPERA; the possibility that a single shareholder- While agreeing that the Commission’s Cummins; L. Dallas; Darden Restaurants; Deere; Dupont; Eaton; Eli Lilly; Dale C. Eshelman (‘‘D. nominated director would be ineffective proposed limit on the number of Eshelman’’); ExxonMobil; FedEx; FMC Corp.; FPL due to actions of other members of the shareholder nominees is needed to Group; Frontier; GE; General Mills; Headwaters; C. board, the rule is not intended to ensure a more measured approach Holliday; Honeywell; IBM; ICI; ITT; JPMorgan address the interactions of board towards inclusion of shareholder Chase; J. Kilts; E. J. Kullman; N. Lautenbach; Leggett; C. Levin; Lionbridge Technologies; LUCRF; members after the election of directors. nominees in company proxy materials, McDonald’s; Motorola; Office Depot; O’Melveny & In this respect, we note that any one commenter supported the general Myers; OPERS; P&G; Nathan Cummings shareholder-nominated directors and principle that shareholders should be Foundation; Northrop; Pax World; PepsiCo; Sara board-nominated directors would be entitled to nominate as many directors Lee; S&C; Schulte Roth & Zabel; Sherwin-Williams; Sidley Austin; SIFMA; Society of Corporate as necessary to focus the board’s subject to fiduciary duties under State Secretaries; Solutions; SWIB; Teamsters; TI; G. law. attention on optimizing company Tooker; tw telecom; Universities Superannuation; performance, profitability and U.S. Bancorp; Verizon; USPE; B. Villiarmois; As adopted, Rule 14a–11(d) will not sustainable returns.409 On the other Wachtell; Wells Fargo; Weyerhaeuser; WSIB. require a company to include more than 411 See letters from BRT (citing a July 2009 survey hand, many commenters disagreed with showing many companies would have to integrate one shareholder nominee or the number the proposed limit or recommended multiple new directors); CII; Eaton; N. Lautenbach; of nominees that represents 25% of the different limits.410 Some commenters McDonald’s; Sherwin-Williams; Sidley Austin; company’s board of directors, Society of Corporate Secretaries; G. Tooker; WSIB. whichever is greater.416 Consistent with 412 See letters from CII; L. Dallas; C. Levin; 405 The final rule clarifies the second part of this Nathan Cummings Foundation; Universities the Proposal, where a company has a requirement by specifying that a nominating Superannuation. director (or directors) currently serving shareholder or group may not be seeking to gain a 413 number of seats on the board of directors that See letters from Advance Auto Parts; Avis on its board of directors who was exceeds the maximum number of nominees that the Budget; BRT; Caterpillar; CIGNA; CNH Global; elected as a shareholder nominee registrant could be required to include under Rule Comcast; Cummins; Darden Restaurants; Deere; Eaton; Eli Lilly; FedEx; FMC Corp.; FPL Group; pursuant to Rule 14a–11, and the term 14a–11. of that director extends past the date of 406 Frontier; General Mills; ICI; ITT; E. J. Kullman; N. See, e.g., Exchange Act Rule 14a–12(c). Lautenbach; Leggett; McDonald’s; Office Depot; the meeting of shareholders for which 407 In this regard, we anticipate that shareholders O’Melveny & Myers; PepsiCo; Sherwin-Williams; the company is soliciting proxies for the seeking election of nominees included in the TI; G. Tooker; tw telecom; Verizon; Wachtell; company’s proxy materials may need to engage in Weyerhaeuser. election of directors, the company will solicitation efforts for which they will incur 414 See letters from ACSI; Americans for Financial not be required to include in its proxy expenses. Reform; CalPERS; CII (stating that while it supports materials more shareholder nominees 408 See letters from CalPERS; CalSTRS; CFA the Commission’s proposed limit, shareholders than could result in the total number of Institute; ICGN; Nathan Cummings Foundation; P. should be allowed to nominate two candidates in Neuhauser; Norges Bank; Protective; RiskMetrics; all cases); COPERA; C. Levin; LUCRF; Nathan directors serving on the board that were TIAA–CREF; T. Rowe Price; WSIB. Cummings Foundation; SWIB; Teamsters. elected as shareholder nominees being 409 See letter from CalPERS. 415 See, e.g., Aetna; Association of Corporate greater than one shareholder nominee or 410 See letters from 13D Monitor; ABA; ACSI; Counsel; Barclays; J. Blanchard; BorgWarner; 25% of the company’s board of Advance Auto Parts; Aetna; Alcoa; Allstate; Dewey; ExxonMobil; Headwaters; Honeywell; American Express; Americans for Financial Reform; Lionbridge Technologies; Northrop; Sidley Austin; Association of Corporate Counsel; Avis Budget; Best Society of Corporate Secretaries; U.S. Bancorp. 416 See new Rule 14a–11(d)(1).

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directors, whichever is greater.417 We appropriate balance and is an pay dividends.425 Another commenter believe this limitation is appropriate to appropriate safeguard to assure that the argued that, as proposed, Rule 14a–11 reduce the possibility of a nominating Rule 14a–11 process is not used as a would not allow companies with shareholder or group using Rule 14a–11 means to effect a change in control. multiple classes of voting shares the as a means to gain a number of seats on Though we are adopting this ability to make choices about how to the board of directors that exceeds the requirement largely as proposed, we best implement access to the company’s maximum number of nominees that the have added certain clarifications, which proxy to fit their capital structure.426 company could be required to include are described below, to address One commenter suggested that Rule under Rule 14a–11 or to effect a change situations at companies where 14a–11 address how it would apply to in control of the company by repeatedly shareholders are able to elect only a companies with multiple classes of nominating additional candidates for subset of the board, revised the standard stock to prevent shareholders from director. One commenter requested that for determining which nominating using the rule to change control of the we explain how Rule 14a–11 would shareholder or group will have their class of directors those shareholders apply to different board structures, and nominee or nominees included in the have the right to elect.427 Other in particular, classified boards.418 In the company’s proxy materials where there commenters, by contrast, believed that case of a staggered board, the rule is more than one eligible nominating the maximum number of nominees that provides that the 25% limit will be shareholder or group, and made other companies should be required to calculated based on the total number of modifications designed to facilitate include should be based on the total board seats,419 not the lesser number negotiations between companies and number of director seats, regardless of that are being voted on because it is the nominating shareholders. whether a class of shares only gets to size of the full board, not the number up elect a subset of the board.428 for election, that would be relevant for b. Different Voting Rights With Regard to Election of Directors We also sought comment on how to considering the effect on control. calculate the maximum number of We note that in the 2003 Proposal, the Several commenters responded to the nominees where the company is Commission proposed to require Commission’s request for comment contractually obligated to permit a companies to include a set number of about how to calculate the maximum certain shareholder or group to elect a nominees, rather than a percentage of number of candidates a nominating set number of directors to the board. 420 the board. We believe that using a shareholder or group could nominate Commenters’ views differed on how to percentage in the rule will promote ease under Rule 14a–11 when certain calculate the maximum number of of use and alleviate any concerns that a directors are not elected by all nominees a shareholder or shareholder company may increase its board size in shareholders. Some commenters noted group may nominate in that case. Some an effort to reduce the effect of a that controlled companies are commenters believed that the maximum shareholder nominee elected to the commonly structured with dual classes number of nominees should be based on board. of stock which allow shareholders of the the total board size, regardless of We understand the concerns non-controlling class of stock to elect a whether a company has granted rights to addressed by some commenters that this set number of directors that is less than nominate.429 One such commenter limitation could result in shareholder- 423 the full board. noted that if Rule 14a–11 contained an nominated directors being less In the context of a company where exception for board seats subject to influential,421 as well as the concerns of shareholders are only entitled to elect a contractual rights, companies would other commenters that the possibility of subset of the total number of directors, have an incentive to enter into 25% of the board changing through the the rule as proposed potentially would contractual agreements in order to evade Rule 14a–11 process could present have allowed shareholders to nominate 430 significant changes to the board.422 For its application. Other commenters, more candidates than may be elected by however, asserted that the maximum the reasons discussed above, we believe the nominating shareholders. Two the limitation as adopted strikes an number of nominees that shareholders commenters argued that Rule 14a–11 should be permitted to nominate under should be modified so that the 417 Rule 14a–11 should be limited to 25% See new Rule 14a–11(d)(2). This requirement maximum number of shareholder is adopted as it was proposed in Rule 14a–11(d)(2). of the ‘‘free’’ seats on the board—that is, Depending on board size, 25% of the board may not nominees is based on the number of only those board seats that are not result in a whole number. In those instances, the directors that may be elected by the subject to a contractual nomination right maximum number of shareholder nominees for class of securities held by the director that a registrant will be required to include that existed as of the date of the in its proxy materials will be the closest whole shareholders making the nomination, as submission and filing of a Schedule number below 25%. See the Instruction to opposed to the number of total 14N.431 These commenters suggested paragraph (d)(1). directors.424 Another commenter urged taking board seats subject to contractual 418 See letter from ABA. us to revise Rule 14a–11 so that it would nomination rights ‘‘off the table’’ and 419 See Rule 14a–11(d)(2). be limited to a percentage of the number 420 Comments on the 2003 Proposal provided a basing the 25% calculation on the range of views regarding the appropriate number of of directors that are elected by the number of nominees that the shareholder nominees. Commenters that supported public shareholders (rather than a nominating committee is free to name. the use of a percentage, or combination of a set percentage of all directors) and would One such commenter remarked that number and a percentage, to determine the number not apply to directors that are elected by of shareholder nominees suggested percentages unless board seats subject to contractual ranging from 20% to 35%. See Comment File No. shareholders of a class of stock having nomination rights are excluded, S7–19–03, available at http://www.sec.gov/rules/ a right to nominate and elect a specified proposed/s71903.shtml. number or percentage of directors, or 425 See letter from Sidley Austin. 421 See letters from CII; L. Dallas; C. Levin; preferred shareholders having such right 426 See letter from BRT. Nathan Cummins Foundation; Universities 427 See letter from Media General. Superannuation. as a result of the company’s failure to 428 422 See letters from BRT (citing a July 2009 survey See letters from CII; P. Neuhauser. 429 showing many companies would have to integrate 423 See letters from ABA; Duane Morris; Media Id. multiple new directors); CII; Eaton; N. Lautenbach; General; New York Times. 430 See letter from P. Neuhauser. McDonald’s; Sherwin-Williams; Sidley Austin; 424 See letters from Media General; New York 431 See letters from Seven Law Firms; Sidley Society of Corporate Secretaries; G. Tooker; WSIB. Times. Austin; ValueAct Capital.

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companies may be limited in their c. Inclusion of Shareholder Nominees in shareholders that are not affiliated with ability to offer contractual nominating Company Proxy Materials as Company or not working on behalf of the rights to shareholders without running a Nominees company. heightened risk of change of control, As discussed in Section II.B.4.e. In the Proposing Release, we which could result in increased costs of above, commenters expressed concern requested comment as to whether it capital and a decrease in the number of that the rule, as proposed, might would be appropriate for the rule to take strategic alternatives.432 discourage constructive dialogue into account incumbent directors who were nominated pursuant to Rule 14a– We believe that the maximum number between shareholders and companies.436 These commenters noted 11 for purposes of determining the of candidates a shareholder can maximum number of shareholder nominate using Rule 14a–11 at that companies would be discouraged from discussing potential board nominees, or whether there should be a companies with multiple classes of different means to account for such stock should be based on the total board candidates with shareholders planning to use Rule 14a–11 and including them incumbent directors. One commenter size, as is the case at other companies. argued that incumbent Rule 14a–11 Thus, we are adopting this requirement as management nominees because such nominees would not reduce the directors should not count towards the as proposed. We believe the changes we 438 maximum number of shareholder 25% limit. It reasoned that, once are adopting with regard to calculating elected, the Rule 14a–11 director ownership and voting power, as nominees that the company would be required to include under Rule 14a–11. represents all shareholders and that discussed above, should address Subject to certain safeguards, we believe future use of concerns about the possibility that the Rule 14a–11 by other shareholders our rule should not discourage dialogue rule could be used to change control of should not be restricted. A number of between nominating shareholders and the company or to affect the rights of commenters stated that incumbent Rule companies and agree that the rule, as shareholders as established by a 14a–11 directors should count towards proposed, could have the effect of particular company’s capital the maximum number of shareholder discouraging constructive dialogue if 433 nominees allowed under the rule,439 structure. Where shareholders have shareholder nominees nominated by a with some suggesting that this should be the right to elect a subset of the full company as a result of that dialogue do the case in limited circumstances, such board, however, we believe it is not count toward the maximum number appropriate to provide that the as when a Rule 14a–11 director is re- of shareholder nominees a company is nominated by the board or as long as the maximum number of nominees a required to include in its proxy company may be required to include director continues on the board.440 materials. Consequently, under our final Commenters expressed concerns that under Rule 14a–11 may not exceed the rule, where a company negotiates with number of director seats the class of the method of calculating the maximum the nominating shareholder or group number of directors subject to Rule 14a– shares held by the nominating that has filed a Schedule 14N before 434 11 nominations—which as proposed shareholder is entitled to elect. We beginning any discussion with the believe the right to nominate is an would not include directors previously company about the nomination and that elected following a Rule 14a–11 integral part of the right to elect, otherwise would be eligible to have its therefore we are linking the ability nomination unless they are nominated nominees included in the company’s again by a shareholder using Rule 14a– under Rule 14a–11 for a shareholder to proxy materials, and the company nominate directors to instances in 11—would not encourage boards to agrees to include the nominating integrate these directors.441 Some which the shareholder can elect shareholder’s or group’s nominees on directors. Limiting the number of commenters asserted that failing to the company’s proxy card as company count such a director toward the 25% nominations to the number of director nominees, those nominees will count seats the class of shares held by the limit would cause boards to be toward the 25% maximum set forth in disinclined to include these directors as nominating shareholder is entitled to the rule.437 As noted, this would only elect presumably would allow to be company nominees in future apply where the nominating 442 fully expressed the views of the elections. They viewed this as shareholder or group has filed its notice counterproductive to efficient board shareholder about who should sit in the on Schedule 14N before beginning director seats in respect of which the integration and functioning. discussions with the company. While we appreciate commenters’ shareholder has nomination rights. Although this limitation may reduce views, we are not persuaded that it is The shareholder nomination somewhat the utility of this provision, appropriate to provide an exception to provisions in Rule 14a–11 are available we believe limiting the treatment to the general method of calculating the only for holders of classes of securities situations in which the nominating maximum number of Rule 14a–11 that are subject to the Exchange Act shareholder or group has filed a nominees in the case of a shareholder- proxy rules, provided that a company is Schedule 14N will reduce the nominated incumbent director that is re- otherwise subject to the rule. If a possibility that this exception is used by nominated by the company. As noted company subject to Rule 14a–11 has a company to avoid having to include multiple classes of eligible securities, shareholder director nominees 438 See letter from Florida State Board of however, the maximum number of submitted by shareholders or groups of Administration. candidates a shareholder can nominate 439 See letters from ABA; Aetna; American 436 See letters from BRT; Seven Law Firms; Express; BorgWarner; BRT; Chevron; Cleary; Davis will be determined based on the number Polk; DTE Energy; Dupont; Edison Electric Institute; of director seats the class of shares held Society of Corporate Secretaries. 437 See new Rule 14a–11(d)(4). In this regard, we Eli Lilly; ExxonMobil; FPL Group; Home Depot; ICI; by the nominating shareholder is note that we would view such an agreement as a JPMorgan Chase; Metlife; P. Neuhauser; Pfizer; entitled to elect.435 termination of a Rule 14a–11 nomination. Thus, the Protective; RiskMetrics; S&C; Seven Law Firms; nominating shareholder or group would be required Sidley Austin; SIFMA; Society of Corporate to file an amendment to Schedule 14N to disclose Secretaries; Verizon; Vinson & Elkins; Wells Fargo. 432 See letter from Seven Law Firms. the termination of the nomination as a result of the 440 See letters from P. Neuhauser; RiskMetrics. 433 See Section II.B.4.b. above. agreement with the company regarding the 441 See letters from ABA; BRT; Seven Law Firms. 434 See new Rule 14a–11(d)(3). inclusion of the nominee or nominees. See Item 7 442 See letters from Davis Polk; Society of 435 See new Rule 14a–11(d)(3). of Schedule 14N and Rule 14n–2. Corporate Secretaries.

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previously, by adopting Rule 14a–11 we expressed concern that the first-in by shareholders friendly to are seeking to facilitate shareholders’ approach would rush shareholders to management.450 ability under State law to nominate and submit nominations.444 One commenter Many commenters that opposed the elect directors, not necessarily to worried that even if the Commission first-in approach suggested alternatives. enhance shareholder representation on included a window period for Of these, the majority preferred to give the board. We do not believe that a submission of shareholder nominees in priority to the largest shareholder or Commission rule is needed to facilitate the final rule, the first-in approach group that submits a nomination.451 the working relationship between the would encourage a race to file, Noting that the 2003 Proposal included shareholder-nominated director and the discourage constructive dialogue this standard and that it received the company-nominated directors, or to between shareholders and management, most support, one commenter argued provide an incentive for the board to and encourage a ‘‘gamesmanship’’ that what matters most is not who is the integrate the shareholder-nominated attitude among possible nominating fastest to nominate but which director into its activities. To the extent shareholders or groups.445 Another shareholder or group has the ‘‘greatest that a shareholder nominee is elected to commenter argued that the first-in stake in the director election and, the board, the company-nominated approach would undercut the ultimately, the long-term performance of directors and the shareholder- Commission’s stated objectives in the company’’ (with the added benefits nominated director will have a fiduciary proposing Rule 14a–11.446 One of avoiding ‘‘gamesmanship’’ and duty to act in the best interests of the commenter worried that the ‘‘first in’’ ‘‘administrative challenges’’).452 Further, company and its shareholders. approach would favor large commenters believed that an approach shareholders, who have greater 7. Priority of Nominations Received by based on the largest holdings would resources to prepare their submission a Company provide sufficient certainty because the materials, over small shareholders who number of shares of the largest a. Priority When Multiple Shareholders must aggregate to reach the ownership shareholder or group could be Submit Nominees threshold and need to pool resources to determined from the Schedule 14N Proposed Rule 14a–11(d)(3) addressed prepare their submission materials.447 filing.453 situations where more than one Some commenters expressed general Commenters presented a wide range shareholder or group would be eligible concern about how companies should of views or recommendations for to have its nominees included in the handle multiple nominations received determining priority. Some commenters 448 company’s form of proxy and disclosed on the same date. Two commenters suggested that when the largest in its proxy statement pursuant to the worried that it would be difficult for shareholder or group nominates fewer proposed rule. In those situations, the companies to determine which than the maximum number of nominees company would have been required to nomination was received first because allowed under Rule 14a–11, then the include in its proxy materials the nominations could be submitted by second largest shareholder or group nominee or nominees of the first various methods (e.g., fax transmission, should have the right to have its nominating shareholder or group from mail, hand delivery) or arrive on the nominees included (up to the maximum which it receives timely notice of intent same date.449 Another commenter to nominate a director pursuant to the feared that a company that receives 450 See letter from USPE. rule, up to and including the total several nominations on the same date 451 See letters from 13D Monitor; 26 Corporate number of shareholder nominees could choose the nomination submitted Secretaries; ABA (recommending this approach as required to be included by the company. one of several recommendations); ACSI; Advance Auto Parts; Aetna; AFL–CIO; AFSCME; Allstate; We proposed this standard because we Darden Restaurants; Deere; Devon; Dewey; T. Amalgamated Bank; Anadarko; Applied Materials; DiNapoli; Dominican Sisters of Hope; DuPont; believed that there would be a benefit to Avis Budget; BCIA; Best Buy; Boeing; BorgWarner; Eaton; Emerson Electric; ExxonMobil; FedEx; enabling companies to begin preparing Burlington Northern; CalPERS; CalSTRS; Financial Services Roundtable; First Affirmative; Caterpillar; CFA Institute; Chevron; CIGNA their proxy materials and coordinating Florida State Board of Administration; FMC Corp.; (recommending this approach as an alternative to with the nominating shareholder or FPL Group; Frontier; General Mills; A. Goolsby; another recommendation that the shareholder that Honeywell; IAM; IBM; ICI; Intel; JPMorgan Chase; group immediately upon receiving an held the shares the longest be given priority); CII; Kirkland & Ellis; C. Levin; Leggett; LIUNA; LUCRF; eligible nomination rather than Cleary; Con Edison; COPERA; Corporate Library; Marco Consulting; J. McCoy; McDonald’s; Joel M. Cummins; Darden Restaurants; Deere; Devon; requiring companies to wait to see McTague (‘‘J. McTague’’); MeadWestvaco; Mercy Dominican Sisters of Hope; DuPont; Eaton; Emerson whether another nomination from a Investment Program; Metlife; Motorola; D. Nappier; Electric; ExxonMobil; FedEx; Financial Services Nathan Cummings Foundation; P. Neuhauser; larger nominating shareholder or group Roundtable; First Affirmative; Florida State Board Norfolk Southern; Norges Bank; Office Depot; was submitted before the notice of Administration (supporting this approach as an OPERS; PACCAR Inc. (‘‘PACCAR’’); Pershing alternative to the first-in approach); FMC Corp.; deadline. Square; PepsiCo; Pfizer; S. Quinlivan; Frontier; A. Goolsby; IAM; ICI; JPMorgan Chase; Commenters were almost uniformly RacetotheBottom; RiskMetrics; Ryder; Sara Lee; Kirkland & Ellis; C. Levin; Leggett; LIUNA; LUCRF; Social Investment Forum; Seven Law Firms; opposed to the proposed ‘‘first-in’’ Marco Consulting; J. McCoy; McDonald’s; J. Shearman & Sterling; Sheet Metal Workers; Sidley standard. A large number of McTague; Mercy Investment Program; Metlife; D. Austin; SIFMA; Sisters of Mercy; Society of Nappier; Nathan Cummings Foundation; P. commenters expressed general Corporate Secretaries; Sodali; Southern Company; Neuhauser; Norfolk Southern; Office Depot; opposition to the proposed first-in SWIB; Teamsters; Tenet; TI; TIAA–CREF; Tri-State PACCAR; Pershing Square; PepsiCo; Pfizer; Coalition; Trillium; T. Rowe Price; Textron; tw approach, with many presenting their RiskMetrics; Ryder; Sara Lee; Shamrock; Social telecom; Universities Superannuation; Ursuline own recommendations.443 Commenters Investment Forum; Sodali; Seven Law Firms; Sisters of Tildonk; U.S. Bancorp; USPE; ValueAct Shearman & Sterling; Sheet Metal Workers; Sidley Capital; Verizon; Wachtell; Walden; Wells Fargo; 443 Austin; SIFMA; Sisters of Mercy; Society of See letters from 13D Monitor; 26 Corporate Weyerhaeuser; Whirlpool; WSIB; Xerox. Corporate Secretaries; Southern Company; SWIB; Secretaries; ABA; ACSI; Advance Auto Parts; Aetna; 444 See letters from ABA; BRT; Con Edison; First Teamsters; Tenet; TI; TIAA–CREF; Tri-State AFL–CIO; AFSCME; Allstate; Alston & Bird; Affirmative; C. Levin; Verizon. Amalgamated Bank; American Bankers Association; Coalition; Trillium; T. Rowe Price; Textron; tw 445 Letter from ABA. Anadarko; Applied Materials; Avis Budget; Blue telecom; Universities Superannuation; Ursuline 446 Collar Investment Advisors (‘‘BCIA’’); Best Buy; See letter from BRT. Sisters of Tildonk; U.S. Bancorp; Verizon; Wachtell; Boeing; BorgWarner; Brink’s; BRT; Burlington 447 See letter from Con Edison. Walden; Wells Fargo; Whirlpool; WSIB. Northern; CalPERS; CalSTRS; Caterpillar; CFA 448 See letters from IBM; S. Quinlivan; USPE; 452 Letter from CII. Institute; Chevron; CIGNA; CII; Cleary; Con Edison; Verizon; Xerox. 453 See letters from CII; Society of Corporate COPERA; Corporate Library; CSX; Cummins; 449 See letters from IBM; Verizon. Secretaries.

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number allowable), and so on.454 argued that this approach would be will be required to include in its proxy Commenters also suggested that a more consistent with the Commission’s materials the nominee or nominees of nominating shareholder or group be stated goal of making Rule 14a–11 the nominating shareholder or group required to ‘‘rank’’ their nominees in the available to shareholders with a long- with the highest qualifying voting order of preference to facilitate any term interest. power percentage.468 In this regard, in necessary ‘‘cutbacks.’’ 455 Some commenters preferred to give light of the comments received, we are A few commenters stated that in the priority based on a combination of concerned that a first-in standard would case of competing nominations factors, such as length of ownership and result in shareholders rushing to submit submitted by shareholders with equally- size of ownership stake.462 Several nominations, discourage constructive sized holdings, the shareholder that commenters preferred to let companies dialogue between shareholders and held the shares for the longest period of (e.g., the nominating committee) choose management, and encourage time should be allowed to include its either the shareholder nominees or the gamesmanship among possible nominees.456 Two commenters method for deciding which shareholder nominating shareholders or groups. recommended that when determining nominees are included in the proxy When there are multiple qualifying the order of priority, an individual materials when there are multiple nominations, giving priority to the shareholder should have priority over a nominations.463 Under this approach, shareholder or group with the highest nominating group.457 companies would disclose the method voting power percentage is consistent One commenter recommended that in the previous year’s proxy statement with our overall approach to facilitate nominees be ordered in accordance with or in a Form 8–K. director nominations by shareholders the largest qualifying shareholdings, but A small number of commenters with significant commitments to subject to the qualification that the supported the proposed first-in companies. Finally, we seek to avoid the Commission impose a cap on either the approach.464 While understanding the confusion that could result if multiple permitted number of members in a concern about ‘‘a rush to the nominating shareholders or groups nominating group or on the aggregate courthouse,’’ one commenter indicated submitted their notices on the same day. holdings of a nominating group and that this concern may not necessarily be We believe that the standard we are limit each nominating shareholder or justified because the ‘‘ ‘first’ proponent adopting, under which the nominating group to only one Rule 14a–11 may have sufficiently prepared shareholder or group with the highest nomination at an annual meeting.458 If beforehand for the nomination qualifying voting power percentage will shareholders are not limited to one process.’’ 465 Further, the commenter have its nominees included in the nomination, then companies should be believed that ‘‘[a]llowing the largest company’s proxy materials, up to the allowed to order the nominees based on shareholder group to essentially trump maximum of 25% of the board, the largest holdings. Alternatively, the the first smaller, but no less committed addresses these concerns. We are commenter recommended awarding or relevant, shareholder submission is persuaded that this standard is more Rule 14a–11 nomination slots first to the not good governance.’’ Another consistent with the other limitations of nominating shareholder or group with commenter believed that the first-in Rule 14a–11 that seek to balance the largest holdings, next to the approach would best give effect to the facilitating shareholder rights to nominating shareholder or group with proposed rule.466 If the standard was nominate directors with practical the longest holding period, then to the based on the amount of securities held considerations. As adopted, Rule 14a–11 addresses next largest holder, and so on. instead, the commenter would be situations where more than one One commenter stated that priority concerned that long-term owners of shareholder or group would be eligible should be given to the largest companies with index-tracking to have its nominees included on the nominating shareholder or group based portfolios might be frozen out of the process. One commenter believed the company’s proxy card and disclosed in on the number of voting securities over its proxy statement pursuant to the rule. which such shareholder or group has first-in approach would provide certainty, but companies should be Given that we are adopting a highest voting control (as opposed to beneficial qualifying voting power percentage 459 required to set the dates in calendar ownership). Another commenter standard rather than a first-in standard, stated that in the case of nominating form and announce the dates in Form 8– K filings at least 30 days prior to the the company will determine which groups, the determination of the largest shareholders’ nominees it must include holder should be based on the largest date of effectiveness.467 After considering the comments, we in its proxy statement and on its proxy shareholder within the nominating card by considering which eligible group.460 have revised the manner in which the rule addresses multiple qualifying nominating shareholder or group has Other commenters recommended that the highest qualifying voting power the shareholder or group holding a nominations. Rather than a first-in standard, as was proposed, a company percentage, as opposed to which eligible company’s shares for the longest period nominating shareholder or group be permitted to submit nominees under submitted a timely notice first. A 461 given priority); Cummins; Darden Restaurants; FPL Rule 14a–11. These commenters Group; General Mills; IBM (recommending this company will be required to include in approach as an alternative to its recommendation its proxy statement and on its proxy 454 See letters from Amalgamated Bank; CII; that the largest shareholder be given priority); card the nominee or nominees of the COPERA; P. Neuhauser; Protective; T. Rowe Price. Motorola; TIAA–CREF; Xerox. nominating shareholder or group with 455 See letters from Amalgamated Bank; CFA 462 See letters from L. Dallas; T. DiNapoli; Nathan Institute; CII; COPERA; P. Neuhauser; Protective; T. Cummings Foundation; OPERS; Southern Rowe Price. Company. 468 See Rule 14a–11(e). Rule 14a–11(e)(4) 456 See letters from Allstate; Boeing; Pfizer. 463 See letters from Alston & Bird; CSX; Textron. prescribes a limited variation on this principle where the company has more than one class of 457 See letters from Honeywell; Sara Lee. 464 See letters from Calvert; Florida State Board of voting shares subject to the proxy rules and eligible 458 See letter from ABA. Administration; Hermes Equity Ownership Services nominating shareholders or shareholder groups 459 Ltd. (‘‘Hermes’’); Protective. See letter from Kirkland & Ellis. from more than one of those classes submit 465 460 See letter from Seven Law Firms. Letter from Calvert. nominations that exceed the 25% maximum. In this 461 See letters from BRT; CIGNA (recommending 466 See letter from Hermes. circumstance, priority of nominations will be this approach as an alternative to its 467 See letter from Florida State Board of determined by reference to the relative voting recommendation that the largest shareholder be Administration. power of the classes in question.

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the highest qualifying voting power due to a failure to own the requisite In the Proposing Release, we solicited percentage in the company’s securities number of shares, then the entire group comment on how we should address as of the date of filing the Schedule 14N, and its nominee also should be situations where a nomination is up to and including the total number of ineligible to use Rule 14a–11.473 On the submitted and the nominating shareholder nominees required to be other hand, one commenter shareholder subsequently becomes included by the company.469 Where the recommended that a nominating ineligible under the rule. We also sought nominating shareholder or group with shareholder group should be allowed to comment as to the circumstances under highest qualifying voting power change its composition to correct an which a second shareholder or group percentage that is otherwise eligible to identified deficiency, such as the failure should be able to have its nominees use the rule and that filed a timely of the group to meet the requisite included in a company’s proxy notice does not nominate the maximum threshold.474 The commenter also materials. Some commenters stated that number of directors allowed under the addressed a situation in which a if a nominating shareholder or group rule, the nominee or nominees of the nominating shareholder group qualifies does not remain eligible, the company nominating shareholder or group with to use Rule 14a–11, provides the should be allowed to withdraw the the next highest qualifying voting power necessary notice, submits its nominees, nominating shareholder’s or group’s percentage that is otherwise eligible to but then becomes disqualified before the candidate from its proxy materials.477 use the rule and that filed a timely meeting at which its nominees would Some commenters believed that a notice of intent to nominate a director have been put to a shareholder vote. The company should not be required to pursuant to the rule would be included commenter stated that while it include a substitute shareholder in the company’s proxy materials, up to ‘‘generally believe[s] that the nominating nominee if the original shareholder and including the total number of shareowner should have a short window nominee is excluded by a company after shareholder nominees required to be within which to add a shareowner who receiving a no-action letter from the included by the company. This process would meet all eligibility requirements, Commission staff regarding the would continue until the company a lapse that cannot be cured in that nomination, is withdrawn by the included the maximum number of fashion should be remedied by going to nominating shareholder or group, or nominees it is required to include in its the ‘second’ candidate(s).’’ otherwise becomes ineligible.478 These proxy statement and on its proxy card Consistent with the Proposal, under commenters generally argued that a or the company exhausts the list of our final rules, neither the composition company would not have enough time eligible nominees. If the number of of the nominating shareholder group nor to seek the exclusion of such a eligible nominees exceeds the maximum the shareholder nominee may be substitute nominee. Still other number required under Rule 14a–11 and changed as a means to correct a commenters argued that a nominating the shareholder or group with the next deficiency identified in the company’s shareholder or group should be allowed highest qualifying voting power notice to the nominating shareholder or to submit a new nominee if its original percentage submitted more nominees nominating shareholder group—those nominee is determined to be than there are remaining available matters must remain as they were ineligible,479 especially if the company director slots, the nominating described in the notice to the sought and obtained a no-action letter shareholder would have the option to company.475 We believe that to allow from the staff concerning the company’s specify which of its nominees are to be otherwise could serve to undermine the determination to exclude the included in the company’s proxy purpose of the notice deadline provided nominee.480 One commenter worried materials.470 for in the rule. Thus, a nominating that a prohibition on substitute shareholder nominees would encourage b. Priority When a Nominating shareholder or group should be sure that it and its nominees meet the an unduly adversarial approach by both Shareholder or Group or a Nominee sides.481 Another commenter Withdraws or Is Disqualified requirements of the rule—including the ownership and holding period recommended that if the first Under the Proposal, we did not requirements—before it files its nominating shareholder or group address what would be expected of a Schedule 14N, as a nominating becomes ineligible, then the nominating company if a nominating shareholder or shareholder or group will not be shareholder or group with the second- group or nominee withdraws or is permitted to add or substitute another largest holdings should be allowed to disqualified after the company has shareholder or nominee in order to submit their own nominees.482 provided notice to the nominating satisfy the requirements.476 Our final rule provides that if a shareholder or group of its intent to nominating shareholder or group include the nominee in the company’s 473 See letters from CFA Institute; Verizon. withdraws or is disqualified (e.g., proxy materials. One commenter asked 474 See letter from CII. because the nominating shareholder or for guidance on how to handle such 475 See Instruction 2 to Rule 14a–11(g) and a member of the group 483 failed to situations.471 Another commenter stated proposed Rule 14a–11(f)(6). that it opposed allowing a nominating 476 In this regard, we note that if a member of a 477 See letters from BorgWarner; Society of nominating shareholder group withdraws, the shareholder group to change its Corporate Secretaries. nominating shareholder group and its nominee or 478 See letters from 26 Corporate Secretaries; composition to correct an identified nominees would continue to be eligible so long as ABA; Allstate; American Express; BorgWarner; DTE deficiency, such as a failure of the group the group continues to meet the requirements of the Energy; Dupont; FPL Group; Honeywell; IBM; to meet the requisite ownership rule. If the withdrawal of a member of the Pfizer; RiskMetrics; Seven Law Firms; Society of nominating shareholder group would result in the 472 Corporate Secretaries; Xerox. threshold. Two commenters believed group failing to meet the ownership threshold, a 479 See letters from AFL–CIO; P. Neuhauser; that if any member of a nominating company would no longer be required to include USPE. any nominees submitted by the nominating shareholder group becomes ineligible 480 shareholder group. As another example, if after a See letter from P. Neuhauser. nominating shareholder or group submits one 481 See letter from Universities Superannuation. 469 See new Rule 14a–11(e) and proposed Rule nominee for inclusion in a company’s proxy 482 See letter from CFA Institute. 14a–11(d)(3). materials and the nominee subsequently withdraws 483 If one member of a group becomes ineligible 470 See Instruction 2 to new Rule 14a–11(e). or is disqualified, a company will not be required to use the rule but the group continues to qualify 471 See letter from Best Buy. to include a substitute nominee from that to use the rule without that member, the group 472 See letter from ABA. nominating shareholder or group. would remain eligible overall.

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continue to hold the qualifying amount substitute nominee or nominees. We group’s interest in the company, length of securities) after the company believe that at that point in the process of ownership, and eligibility to use Rule provides notice to the nominating it would be too difficult and costly for 14a–11. The notice on Schedule 14N shareholder or group of the company’s a company to change course to include also would include disclosure required intent to include the nominee or a new nominee or nominees. If a by proposed Rule 14a–18 about the nominees in its proxy materials, the nominating shareholder or group or nominating shareholder or group and company will be required to include in nominee withdraws or is disqualified the nominee for director, as well as its proxy statement and form of proxy after the company has commenced disclosure regarding the nature and the nominee or nominees of the printing its proxy materials, the extent of relationships between the nominating shareholder or group with company may determine whether it nominating shareholder or group and the next highest voting power wishes to print (and furnish) additional nominee or nominees and the company. percentage that is otherwise eligible to materials and a proxy card, delete the The disclosure provided by the use the rule and that filed a timely disqualified or withdrawn nominee, or nominating shareholder or group would notice in accordance with the rule, if instead provide disclosure through be similar to the disclosure currently any.484 This process would continue additional soliciting materials informing required in a contested election and until the company included the shareholders about the change.486 would be included by the company in maximum number of nominees it is 8. Notice on Schedule 14N its proxy materials. required to include in its proxy In addition, as proposed, the notice materials or the company exhausts the a. Proposed Notice Requirements on Schedule 14N also would include list of eligible nominees. As proposed, in order to submit a the following representations by the If a nominee withdraws or is nominee for inclusion in the company’s nominating shareholder or group: disqualified after the company provides proxy statement and form of proxy, Rule • The nominee’s candidacy or, if notice to the nominating shareholder or 14a–11 would require that the elected, board membership, would not group of the company’s intent to nominating shareholder or group violate controlling State or Federal law, include the nominee in its proxy provide a notice on Schedule 14N to the or rules of a national securities materials, the company will be required company of its intent to require that the exchange or national securities to include in its proxy materials any company include that shareholder’s or association other than rules relating to other eligible nominee submitted by that group’s nominee or nominees in the director independence; 489 485 nominating shareholder or group. If company’s proxy materials.487 The • The nominating shareholder or that nominating shareholder or group shareholder notice on Schedule 14N group satisfies the eligibility conditions did not include any other nominees in also would be required to be filed with in Rule 14a–11; 490 its notice filed on Schedule 14N, then the Commission on the date it is first • In the case of a company other than the company will be required to include sent to the company. an investment company, the nominee the nominee or nominees of the We proposed to require the notice to meets the objective criteria for nominating shareholder or group with be provided to the company and filed ‘‘independence’’ of the national the next highest voting power with the Commission by the date securities exchange or national percentage that is otherwise eligible to specified in the company’s advance securities association rules applicable to use the rule and that filed a timely notice bylaw provision, or where no the company, if any, or, in the case of notice in accordance with the rule, if such provision is in place, no later than a company that is an investment any, until the maximum number of 120 calendar days before the date the company, the nominee is not an nominees is included in the company’s company mailed its proxy materials for ‘‘interested person’’ of the company as proxy materials or the list of eligible the prior year’s annual meeting. If the defined in Section 2(a)(19) of the nominees is exhausted. company did not hold an annual 491 We believe that these requirements Investment Company Act of 1940; meeting during the prior year, or if the are appropriate in order to give effect to and date of the meeting changes by more • the intent of our rule—to facilitate Neither the nominee nor the than 30 calendar days from the prior shareholders’ ability to nominate and nominating shareholder (or any member year, the nominating shareholder must elect directors. If the nominating of a nominating shareholder group) has provide notice a reasonable time before shareholder or group with the highest an agreement with the company voting power percentage used all the company mails its proxy materials. regarding the nomination of the 492 available Rule 14a–11 nominations in a The company would be required to nominee. company’s proxy materials and the disclose the date by which the Proposed Item 8 of Schedule 14N nominating shareholder or group with shareholder must submit the required would have required a certification from the second highest voting power notice in a Form 8–K filed pursuant to the nominating shareholder or each percentage had its nominees excluded proposed Item 5.07 within four business member of the nominating shareholder even after one or more nominees from days after the company determines the 488 489 the nominating shareholder or group anticipated meeting date. See proposed Rule 14a–18(a). Proposed Rule As proposed, the notice on Schedule 14a–11 also included this provision as a direct with the highest voting power 14N would include disclosures relating requirement. Thus, a company would not be percentage withdrew or was required to include a shareholder nominee in its to the nominating shareholder’s or disqualified, we believe the purpose of proxy materials if the nominee’s candidacy or, if our rule would be undermined. elected, board membership would violate 486 We note that pursuant to Exchange Act Rule controlling State law, Federal law, or rules of a However, in order to address practical 14a–4(c)(5) a completed proxy card containing a national securities exchange or national securities considerations, Rule 14a–11(e)(2) disqualified or withdrawn nominee or nominees association (other than rules of a national securities provides that once a company has could, under certain circumstances, confer exchange or national securities association that set commenced printing its proxy materials discretionary authority to vote on the election of a forth requirements regarding the independence of substitute director or directors. directors). it will not be required to include a 487 See proposed Rule 14a–11(c), Rule 14a–18 and 490 See proposed Rule 14a–18(b) (which referred Rule 14n–1. to the requirements in proposed Rule 14a–11(b)). 484 See new Rule 14a–11(e)(2). 488 See proposed Instruction 2 to Rule 14a–11(a) 491 See proposed Rule 14a–18(c). 485 See new Rule 14a–11(e)(3). and proposed Rule 14a–18. 492 See proposed Rule 14a–18(d).

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group that the securities used for controlled by the nominating the nominating shareholder or group purposes of meeting the ownership shareholder or group.500 and the nominee: 504 • threshold in Rule 14a–11 are not held We also sought comment on the The name and address of the for the purpose, or with the effect, of proposed representations to be provided nominating shareholder or each member changing control of the company or to by the nominating shareholder or group of the nominating shareholder group; • gain more than a limited number of in Schedule 14N. One commenter stated Information regarding the amount seats on the board. that the proposed representations are and percentage of securities held and b. Comments on the Proposed Notice appropriate and no additional entitled to vote on the election of Requirements representations are needed.501 This directors at the meeting and the voting commenter opposed a requirement for a power derived from securities that have Commenters generally supported the been loaned or sold in a short sale that proposed content requirements of shareholder nominee to make any representation either in addition to, or remains open, as specified in Schedule 14N on the general principle Instruction 3 to Rule 14a–11(b)(1); 505 that the Commission should impose instead of, those made by the • nominating shareholder or group. One A written statement from the disclosure requirements on nominating registered holder of the shares held by 493 commenter stated simply that none of shareholders and their nominees. the nominating shareholder or each Two of these commenters also stated the proposed representations in Schedule 14N should be eliminated.502 member of the nominating shareholder that additional disclosures or group, or the brokers or banks through representations are not needed.494 In It also observed generally that the shareholder nominee should be required which such shares are held, verifying addition, some commenters that, within seven calendar days prior to recommended that all nominees be to make the representations (e.g., submitting the notice on Schedule 14N subject to any new disclosure rules regarding independence) because he or to the company, the shareholder adopted by the Commission as part of she would know the facts relating to the continuously held the qualifying its proxy disclosure and solicitation representations and therefore should amount of securities for at least three enhancements rulemaking.495 Four accept responsibility. One commenter years; 506 commenters asked that companies be opposed the requirement for a • A written statement of the allowed to require additional disclosure representation that a shareholder from a nominating shareholder or group nomination (or election of the nominating shareholder’s or group’s intent to continue to hold the qualifying through, for example, the advance shareholder nominee) would not violate amount of securities through the notice bylaws, as long as such State law, Federal law, or listing shareholder meeting at which directors requirements are consistent with State standards.503 The commenter also are elected. Additionally, the law.496 One commenter argued that the believed it would be inappropriate to nominating shareholder or group would nominating shareholder, group, or require a representation that the provide a written statement regarding nominee should provide any disclosure nomination complies with any the nominating shareholder’s or group’s required under a company’s governing independence requirement under documents as long as such disclosure is intent with respect to continued Federal law, State law, or listing 507 required of all nominees.497 One ownership after the election; standards. • commenter asked that all content A statement that the nominee requirements be set forth in Schedule c. Adopted Notice Requirements consents to be named in the company’s 14N itself, as it found the structure of proxy statement and form of proxy and, We are adopting the notice the Schedule and the references to if elected, to serve on the board of requirements substantially as proposed, 508 disclosure requirements to be directors; • unnecessarily complicated.498 The with differences noted below. In Disclosure about the nominee as commenter recommended that we addition, we agree that the rules as would be provided in response to the include a requirement that the proposed could be streamlined to disclosure requirements of Items 4(b), nominating shareholder or group reduce complexity. As adopted, 5(b), 7(a), (b), and (c) and, for disclose information about the nature Schedule 14N will contain the investment companies, Item 22(b) of and extent of the relationships between disclosure items that were included in Schedule 14A, as applicable; 509 the nominating shareholder, group and the Schedule as proposed, as well as the • Disclosure about the nominating the nominee and the company or its disclosures proposed in Rule 14a–11, shareholder or each member of a affiliates.499 Another commenter Rule 14a–18 and Rule 14a–19. We nominating shareholder group as would recommended the rules include a believe that the disclosure requirements be required in response to the disclosure representation that the nominee is not we are adopting will provide transparency and facilitate shareholders’ 504 The disclosure requirements proposed in Rule 493 See letters from ABA; Alston & Bird; ability to make an informed voting 14a–18(e)–(l) are now contained in new Item 4(b) Americans for Financial Reform; CalSTRS; CFA decision on a shareholder director and new Item 5 of Schedule 14N. Institute; CII; Corporate Library; Dominican Sisters nominee or nominees without being 505 See Item 3 of new Schedule 14N. of Hope; Florida State Board of Administration; 506 See Item 4(a) of new Schedule 14N. A GovernanceMetrics; ICI; Mercy Investment Program; unnecessarily burdensome on nominating shareholder would not be required to Protective; RiskMetrics; Sisters of Mercy; Tri-State nominating shareholders or groups. provide this statement if the nominating Coalition; Ursuline Sisters of Tildonk; USPE; shareholder is the registered holder of the shares or Walden. i. Disclosure is attaching or incorporating by reference a 494 See letters from CII; USPE. previously filed Schedule 13D, Schedule 13G, Form 495 See letters from ABA; Alaska Air; Robert A. Schedule 14N will require a 3, Form 4, and/or Form 5, or amendments to those Bassett (‘‘R. Bassett’’); BorgWarner; Eli Lilly; NACD; nominating shareholder or group to documents to prove ownership. O’Melveny & Myers; Pfizer; Society of Corporate provide the following information about 507 See Item 4(b) of new Schedule 14N. These Secretaries; UnitedHealth. requirements were proposed in Rule 14a–18(f) and 496 See letters from ABA; Chevron; Sidley Austin; Item 5(b) of Schedule 14N. SIFMA. 500 See letter from IBM. 508 See Item 5(a) of new Schedule 14N and 497 See letter from Cleary. 501 See letter from CII. proposed Rule 14a–18(e). 498 See letter from ABA. 502 See letter from ABA. 509 See Item 5(b) of new Schedule 14N and 499 Id. 503 See letter from USPE. proposed Rule 14a–18(g).

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requirements of Items 4(b) and 5(b) of shareholder or any member of the required by Items 4(b), 5(b), 7, and 22, Schedule 14A, as applicable; 510 nominating shareholder group and/or as applicable, of Schedule 14A from • Disclosure about whether the the nominee is a party or a material both the company and the insurgent nominating shareholder or any member participant, and that involves the when the contest relates to an annual of a nominating shareholder group has company, any of its officers or directors, election of directors. The new Schedule been involved in any legal proceeding or any affiliate of the company; and 14N disclosure requirements are during the past ten years, as specified in • Any other material relationship somewhat more expansive in that they Item 401(f) of Regulation S–K;511 between the nominating shareholder or also include the disclosures concerning • Disclosure about whether, to the any member of the nominating ownership amount, length of best of the nominating shareholder’s or shareholder group, the nominee, and/or ownership, intent to continue to hold group’s knowledge, the nominee meets the company or any affiliate of the the shares through the date of the the director qualifications set forth in company not otherwise disclosed; 515 meeting and with respect to continued the company’s governing documents, if • Disclosure of any Web site address ownership after the meeting, and any; 512 on which the nominating shareholder or disclosure regarding the nature and • A statement that, to the best of the group may publish soliciting extent of the relationships between the nominating shareholder’s or group’s materials; 516 and nominating shareholder or group and knowledge, in the case of a company • If desired to be included in the nominee and the company or any other than an investment company, the company’s proxy statement, a statement affiliate of the company. We believe that nominee meets the objective criteria for in support of the shareholder nominee these disclosures will assist ‘‘independence’’ of the national or nominees, which may not exceed 500 shareholders in making an informed securities exchange or national words per nominee.517 voting decision with regard to any securities association rules applicable to The disclosure provided by the nominee or nominees put forth by the the company, if any, or, in the case of nominating shareholder or group in nominating shareholder or group using a company that is an investment Item 5 of Schedule 14N would be Rule 14a–11, in that the disclosures will company, the nominee is not an included by the company in its proxy enable shareholders to gauge the ‘‘interested person’’ of the company as materials,518 along with the company’s nominating shareholder’s or group’s defined in Section 2(a)(19) of the disclosure in response to Items 4(b) and interest in the company, longevity of Investment Company Act of 1940; 513 5(b) of Schedule 14A.519 ownership, and intent with regard to • Disclosure about the nature and In a traditional proxy contest, continued ownership in the company. extent of the relationships between the shareholders receive the disclosure These disclosures also will be important nominating shareholder or group, the to the company in determining whether nominee, and/or the company or any 515 See Item 5(g) of new Schedule 14N and the nominating shareholder or group is affiliate of the company,514 such as: proposed Rule 14a–18(j). eligible to rely on Rule 14a–11 to • 516 Any direct or indirect material See Item 5(h) of new Schedule 14N and require the company to include a proposed Rule 14a–18(k). interest in any contract or agreement nominee or nominees in the company’s between the nominating shareholder or 517 See Item 5(i) of new Schedule 14N and proposed Rule 14a–18(l). This requirement is proxy materials. any member of the nominating discussed in more detail in this section. If a In some cases, the requirements in shareholder group, the nominee, and/or nominating shareholder or group submits a new Schedule 14N are slightly different the company or any affiliate of the statement in support that exceeds 500 words per than we proposed. We have clarified company (including any employment nominee, a company will be required to include the nominee or nominees, provided that the eligibility that the nominating shareholder or agreement, collective bargaining requirements are met, but may exclude the group will be required to include agreement, or consulting agreement); statement in support from its proxy materials disclosure in the Schedule 14N • pursuant to Rule 14a–11(g). In this instance, the Any material pending or threatened concerning specified relationships litigation in which the nominating company would provide notice to the staff and could, if desired, seek a no-action letter from the between the nominating shareholder or staff. See new Rule 14a–11(c) and Rule 14a–11(g). group and the nominee or nominees. As 510 See Item 5(c) of new Schedule 14N and The 500 words would be counted in the same proposed Rule 14a–18(h). If a nominating manner as words are counted under Rule 14a–8. discussed in Section II.B.5.d. above, we shareholder is organized in a form other than a Any statements that are, in effect, arguments in received comment suggesting that, in corporation or partnership, comparable disclosure support of the nomination would constitute part of the absence of a limitation on with respect to persons in similar capacities would the supporting statement. Accordingly, any ‘‘title’’ relationships between the nominating be required. or ‘‘heading’’ that meets this test would be counted 511 See Item 5(d) of new Schedule 14N and toward the 500-word limitation. Inclusion of a Web shareholder or group and their nominee proposed Rule 14a–18(i). As proposed, the rule site address in the supporting statement would not or nominees, we should adopt a would have required disclosure regarding a violate the 500-word limitation; rather, the Web site disclosure requirement concerning nominating shareholder’s involvement in any legal address would be counted as one word for purposes relationships between the parties.520 proceedings during the past five years. Recently, the of the 500-word limitation. Commission amended Item 401(f) of Regulation S– 518 See Item 7(e) of Schedule 14A. Similarly, if a Similarly, and as discussed in Section K to require disclosure regarding involvement in company receives a nominee for inclusion in its II.B.5.b., we have added a requirement legal proceedings for the prior ten years. See Proxy proxy materials pursuant to a procedure set forth that a nominating shareholder or group Disclosure Enhancements, Release No. 33–9089; under applicable state or foreign law, or the disclose whether, to the best of their 34–61175 (Dec. 16, 2009) [74 FR 68334] (‘‘Proxy company’s governing documents providing for the Disclosure Enhancements Adopting Release’’). inclusion of shareholder director nominees in the knowledge, the nominating Accordingly, as adopted, Item 5(d) will require company’s proxy materials, the disclosure provided shareholder’s or group’s nominee meets disclosure about a nominating shareholder’s by the nominating shareholder or group in response the company’s director qualifications, if involvement in legal proceedings during the past to Item 6 of Schedule 14N would be included in any, as set forth in the company’s ten years. the company’s proxy materials. See Item 7(f) of 521 512 See Item 5(e) of new Schedule 14N. Schedule 14A. governing documents. We added this 513 See Item 5(f) of new Schedule 14N. 519 Instruction 3 to Rule 14a–12(c) clarifies that requirement because we believe that 514 We note that this disclosure requirement though inclusion of a nominee pursuant to Rule this information will be useful to would apply to relationships between the 14a–11 or solicitations by a nominating shareholder shareholders in making a voting nominating shareholder or group and the nominee, or nominating shareholder group that are made in as well as the relationships between the nominating connection with that nomination would constitute shareholder or group or the nominee and the solicitations in opposition subject to Rule 14a– 520 See letters from CII; IBM; O’Melveny & Myers; company or its affiliates. See Item 5(g) of new 12(c), they would not be treated as such for SIFMA; UnitedHealth. Schedule 14N. purposes of Exchange Act Rule 14a–6(a). 521 See Item 5(e) of new Schedule 14N.

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decision by enabling them to consider proxy materials. Two commenters stated certify, in its notice on Schedule 14N whether shareholder nominees would that a limit of 500 words would be filed with the Commission, that it does meet a company’s director appropriate,524 five commenters not have a change in control intent or qualifications. Shareholders will recommended that a nominating an intent to gain more than the provide this disclosure ‘‘to the best of shareholder or group be permitted to maximum number of board seats their knowledge’’ to address the fact that include a supporting statement of more provided for under Rule 14a–11 and the standards will be company than 500 words,525 and four that the nominating shareholder and the standards and thus could be subject to commenters proposed a limit of either nominee satisfies the applicable interpretation. 750 or 1000 words.526 We believe it is requirements of Rule 14a–11.530 We We also have added an instruction to appropriate to allow a nominating have retained the certification with Item 4 of Schedule 14N to provide a shareholder or group to provide a regard to no change in control intent or form of written statement that may be statement in support of the shareholder intent to gain more than the maximum used for verifying the amount of nominee or nominees which may not number of board seats provided for securities held by the nominating exceed 500 words for each nominee, under Rule 14a–11, even though this is shareholder, and that the qualifying rather than 500 words for all nominees also a direct requirement in Rule 14a– amount of securities has been held in total,527 if the nominating 11 as adopted, because we believe it is continuously for at least three years.522 shareholder or group elects to have such important to highlight this requirement A statement will be required from a a statement included in the company’s for nominating shareholders or groups nominating shareholder that is not the proxy materials. We believe that a signing the certification. As was registered holder of the securities and is limitation of 500 words per nominee is proposed, the nominating shareholder not proving ownership by providing sufficient for a nominating shareholder or each member of the nominating previously filed Schedules 13D or 13G, or group to express their support for a shareholder group (or authorized or Forms 3, 4, or 5. We believe that nominee. In this regard, we note that representative) will be required to providing a form of written statement shareholders and companies are familiar certify when signing the Schedule 14N will make it easier for nominating with the 500 word limitation, as it is the that, ‘‘after reasonable inquiry and to the shareholders and the persons through limit on the number of words that may best of my knowledge and belief,’’ the which they hold their securities to be used to support a shareholder information in the statement is ‘‘true, comply with the requirement and proposal submitted under Rule 14a–8. complete and correct.’’ Though all reduce complexity for shareholders and While we believe it is appropriate to disclosure in the Schedule 14N would companies in determining whether limit the length of the supporting be covered by this representation, we satisfactory proof of ownership has been statement that the company is required have specifically included it in the 523 provided. In addition, as noted to include, we note that if a nominating certifications concerning compliance above, Item 5(d) will require disclosure shareholder or group wishes to provide with the requirements of Rule 14a–11 as about each nominating shareholder’s additional information, it is free to do so well. involvement in legal proceedings during in supplemental materials, provided it We have revised the rule to delete the the past ten years rather than the past complies with the requirements of Rule provision that had the effect of allowing five years as proposed, consistent with 14a–2(b)(8). If a nominating shareholder exclusion of a nominee if any required the changes recently adopted by the representation or certification was or group submits a statement in support 531 Commission for board nominees in that exceeds 500 words per nominee, a materially false or misleading. Rather general. than allowing companies to exclude company will be required to include the In connection with our revisions to Rule 14a–11 nominees on that basis, we nominee or nominees, provided that the the rule concerning calculation of believe companies should address any eligibility requirements are met, but the ownership, we also have added new concerns regarding false or misleading company may exclude the statement in Items 3(c) and (d) to the Schedule 14N disclosures through their own support from its proxy materials to require disclosure of the voting power disclosures, as in traditional proxy provided it provides notice to the staff attributable to securities that have been contests. This change will limit the of its intent to do so.528 loaned or sold in a short sale that is not bases on which a company may exclude As noted above, we proposed to closed out, or that have been borrowed a nominee,532 but we emphasize that the require certain representations to be for purposes other than a short sale, as nominating shareholder or group will specified in Instruction 3 to Rule 14a– provided in the Schedule 14N, either in the form of representations or as 11(b)(1). 530 See new Rule 14a–11(b)(11) and Item 8(a) of Finally, as proposed, a nominating certifications. As adopted, we are new Schedule 14N. We note that in some cases, an shareholder or group could provide a including the proposed representations authorized representative may file a Schedule 14N for each member of a nominating shareholder group statement in support of a shareholder and certifications as direct requirements 529 and would provide the required disclosures and nominee or nominees, which could not in Rule 14a–11. Consequently, we certifications. In such cases, each member of the exceed 500 words if the nominating have simplified the requirements so that nominating shareholder group represented by the shareholder or group elects to have such under the final rules a nominating authorized representative will be deemed to have shareholder or group will be required to provided the certifications. a statement included in the company’s 531 See proposed Rule 14a–11(a)(5). 532 524 See letters from CII; Florida State Board of See Section II.B.9. below for a discussion of 522 See the Instruction to Item 4 of new Schedule Administration. the requirements for a company receiving a 14N. nomination submitted pursuant to Rule 14a–11 and 525 See letters from ACSI; AFSCME; Hermes; Pax 523 In this regard, we note that providing proper the process for seeking a staff no-action letter with World; USPE. proof of ownership has proved to be an area of respect to a company’s decision to exclude a 526 confusion for some shareholder proponents using See letters from AFSCME; L. Dallas; P. nominee. As noted below, assertions that a Rule 14a–8 who must obtain a written statement Neuhauser; USPE. certification or disclosure provided by a nominating from the ‘‘record’’ holder of the proponent’s 527 We are adopting this modification in Item 5(i) shareholder or group is false or misleading will not securities. Thus, we believe that providing a form of Schedule 14N. be a basis for excluding a nominee or nominees. A of written statement that may be used to provide 528 See new Rule 14a–11(c) and Rule 14a–11(g). company seeking a no-action letter from the staff proof of ownership for purposes of Rule 14a– 529 See also Section II.B.4. and Section II.B.5. with regard to a determination to exclude a 11(b)(3) will alleviate any potential confusion that above, regarding nominating shareholder and nominee or nominees would need to assert that a could arise in this context. nominee eligibility. requirement of the rule has not been met.

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have Rule 14a–9 liability for any any eligibility issues presented by throughout the year.541 We agree and statement included in the Schedule 14N potential nominees, including are adopting a window period for the or which it causes to be included in a resolution through the Rule 14a–11 no- submission of the notice to the company’s proxy materials which, at the action process, Commission appeals, company. Limiting the time period time and in light of the circumstances and litigation.537 during which Rule 14a–11 nominations under which it is made, is false or We are adopting a uniform deadline could be made should help reduce misleading with respect to any material of no later than 120 calendar days before disruptions that might occur when a fact or that omits to state any material the anniversary of the date that the company receives shareholder fact necessary to make the statements company mailed its proxy materials for nominations for director submitted therein not false or misleading. In the prior year’s annual meeting for all pursuant to Rule 14a–11. In this regard, addition, as discussed in Section II.E. companies subject to the rule.538 We as noted above, commenters generally below, we have provided in the final believe that a uniform deadline will supported a 30-day window period. We rules that the company is not benefit shareholders by providing them believe that a window of 30 days is responsible for the information with one standard to comply with at all sufficient for the submission of the provided by the nominating shareholder companies and should address concerns notice on Schedule 14N because it or group in its Schedule 14N and of companies that an advance notice provides shareholders with an included by the company in its proxy bylaw deadline would provide too little opportunity to submit a nomination, as materials. time. We also believe that a deadline of well as the opportunity to consider any nominations that have been submitted ii. Schedule 14N Filing Requirements 120 calendar days will provide adequate time for companies to take the steps and whether the shareholder would like We proposed to require the notice to to submit a nomination, either be provided to the company and filed necessary to include or, where appropriate, to exclude a shareholder individually or as a group. Therefore, with the Commission by the date we are adopting a requirement that the specified in the company’s advance nominee for director that is submitted pursuant to Rule 14a–11.539 notice on Schedule 14N be transmitted notice bylaw provision, or where no to the company and filed with the such provision is in place, no later than In the Proposing Release, we solicited Commission no earlier than 150 120 calendar days before the date the comment as to whether a window calendar days, and no later than 120 company mailed its proxy materials for period should be provided for the calendar days, before the anniversary of the prior year’s annual meeting. A submission of the notice on Schedule the date that the company mailed its significant number of commenters 14N and the appropriate time period for proxy materials for the prior year’s suggested using a uniform deadline for the window. A number of commenters annual meeting. As proposed, we are all companies, as is the case in Rule recommended a window period during adopting a requirement that if the 14a–8.533 Many of these commenters which a nominating shareholder or company did not hold an annual believed that the proposed timing group could submit its Rule 14a–11 meeting during the prior year, or if the 540 requirement would create difficulties for nomination. These commenters date of the meeting has changed by companies with advance notice bylaws believed that including such a more than 30 calendar days from the providing a later deadline and, thus, requirement would prevent a race to file prior year, then the nominating would preclude those companies from among shareholders that could shareholder must provide notice a engaging in the proposed staff discourage dialogue with the board and reasonable time before the company 534 process. Some commenters supported force the board to address nominations mails its proxy materials.542 In that case, the proposed default 120 calendar day 535 deadline, while others argued that 537 See letters from ABA; BRT; Con Edison; TI. 541 The commenters generally mentioned various the 120 calendar day deadline would 538 See new Rule 14a–11(b)(10). The Schedule 30-day ranges that we requested comment on (e.g., provide too little time for companies.536 14N would, of course, have to contain all required no earlier than 180 days and no later than 150 days Some commenters worried that the disclosure as of the date of filing. before the date that the company mailed its proxy 539 We note that as with Rule 14a–8, Rule 14a– materials for the prior year’s annual meeting; no proposed deadline would not give 11 requires a company to provide notice to the earlier than 150 calendar days and no later than 120 sufficient time for companies to resolve Commission if it intends to exclude a nominee. calendar days before the date that the company Also as with Rule 14a–8, if a company determines mailed its proxy materials for the prior year’s 533 See letters from 26 Corporate Secretaries; that it may exclude a nominee, the rule does not annual meeting; no earlier than 120 calendar days ABA; Alaska Air; American Express; Anadarko; require the company to seek a no-action letter from and no later than 90 calendar days prior to the Boeing; BorgWarner; BRT; Caterpillar; CIGNA; CII; the staff with regard to the determination to exclude anniversary of the company’s last annual meeting). Dewey; Florida State Board of Administration; FPL the nominee. In this regard, we note that the 120- One commenter suggested that the Commission Group; Honeywell; JPMorgan Chase; Keating day deadline in Rule 14a–8 appears to provide limit the nomination process to a 45-day window Muething; P. Neuhauser; PepsiCo; Pfizer; Praxair; companies with sufficient time in which to period commencing four months after the Schulte Roth & Zabel; Seven Law Firms; Shearman consider complex matters. For example, companies company’s annual shareholder meeting. See letter & Sterling; Sidley Austin; Society of Corporate routinely consider whether a proposal submitted from Aetna. Another commenter suggested that Securities; Thompson Hine LLP (‘‘Thompson pursuant to Rule 14a–8 would cause the company nominations be submitted within a 30-day period Hine’’); TI; USPE; Wells Fargo; Xerox. to violate Federal or State law and submit requests commencing five months after the company’s 534 See letters from ABA; Alaska Air; BRT; for no-action letters, along with detailed legal annual meeting. See letter from SIFMA. We believe Caterpillar; CIGNA; Dewey; Honeywell; JPMorgan opinions, with respect to those proposals. We that starting the period for nominations earlier than Chase; Keating Muething; PepsiCo; Sidley Austin; believe that a company will consider nominees 150 calendar days before the anniversary of the date Society of Corporate Securities; Thompson Hine; TI; submitted pursuant to Rule 14a–11 in a similar the company mailed its proxy materials for the Wells Fargo. manner. Thus, we believe a deadline of 120 prior year’s annual meeting would not provide the 535 See letters from Alaska Air; Boeing; calendar days before the date that the company current board with sufficient opportunity to BorgWarner; CII; Dewey; JPMorgan Chase; P. mailed its proxy materials the prior year is perform its duties and demonstrate its performance, Neuhauser; O’Melveny & Myers; PepsiCo; Praxair; sufficient. nor would it provide shareholders with enough Seven Law Firms; Shearman & Sterling; Society of 540 See letters from 26 Corporate Secretaries; time to evaluate the board’s performance, to make Corporate Secretaries; Thompson Hine; USPE. Aetna; Allstate; Boeing; BorgWarner; L. Dallas; an informed decision with respect to a potential 536 See letters from 26 Corporate Secretaries; DuPont; Florida State Board of Administration; FPL nomination. ABA; Alcoa; Allstate; American Express; Boeing; Group; Kirkland & Ellis; Leggett; P. Neuhauser; 542 In addition, if a company is holding a special BRT; Con Edison; Davis Polk; FPL Group; JPMorgan PepsiCo; Pfizer; S. Quinlivan; RiskMetrics; Schulte meeting in lieu of an annual meeting, the Chase; McDonald’s; P. Neuhauser; Pfizer; Roth & Zabel; Shearman & Sterling; SIFMA; Society nominating shareholder must provide notice a Protective; RiskMetrics; Seven Law Firms; TI; of Corporate Secretaries; Southern Company; TI; reasonable time before the company mails its proxy Xerox. USPE; Wells Fargo; Xerox. materials.

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the company will be required to shareholders and groups to take the notice on Schedule 14N.551 Filing an disclose the date by which the steps necessary to obtain an EDGAR amendment to the Schedule 14N within shareholder must submit the required filing code and CIK code well in 10 days after the announcement of the notice in a Form 8–K filed pursuant to advance of the deadline for filing a final results of the election will provide new Item 5.08 within four business days notice on Schedule 14N. shareholders with information as to after the company determines the The Schedule 14N will: whether the outcome of the election anticipated meeting date.543 • Include a cover page in the form set may have altered the intent of the As noted, the notice on Schedule 14N forth in Schedule 14N with the nominating shareholder or group and must be transmitted to the company 544 appropriate box on the cover page what further plans the nominating and filed with the Commission on the marked to specify that the filing relates shareholder or group may have with same day.545 Consistent with the to a Rule 14a–11 nomination; 547 regard to the company. Proposal, the Schedule 14N must be • Be made under the subject As was proposed,552 the Schedule filed with the Commission on EDGAR. company’s Exchange Act file number (or 14N may be signed either by each To file the Schedule 14N on EDGAR, a in the case of a registered investment person on whose behalf the statement is nominating shareholder or group and company, under the subject company’s filed or his or her authorized any nominee will need to have or obtain Investment Company Act file number); representative. We assume that in many EDGAR filing codes and user and cases group members will choose to identification numbers, which may be • Be made on the date the notice is appoint an authorized representative obtained by filing electronically a Form first transmitted to the company. from among the group. If the statement ID in advance of filing the Schedule We are adopting, as proposed, a is signed on behalf of a person by his 14N.546 We encourage nominating requirement that the Schedule 14N be authorized representative other than an amended promptly for any material executive officer or general partner of 543 See new Rule 14a–11(b)(10). See also change to the disclosure and the filing person, evidence of the proposed Instruction 2 to Rule 14a–11(a) and Rule 14a–18. This would be similar to the requirement certifications provided in the originally- representative’s authority to sign on currently included in Rule 14a–5(f), which specifies filed Schedule 14N.548 In this regard, we behalf of such person must be filed with that, where the date of the next annual meeting is would view withdrawal of a nominating the statement, provided, however, that a advanced or delayed by more than 30 calendar days shareholder or group (or any member of power of attorney for this purpose from the date of the annual meeting to which the proxy statement relates, the company must disclose the group), or of a director nominee, and which is already on file with the the new meeting date in the company’s earliest the reasons for any such withdrawal, as Commission may be incorporated by possible quarterly report on Form 10–Q. Although a material change. For example, such a reference. registered investment companies generally are not required to file Form 8–K, we are requiring them withdrawal could be material because it The Schedule 14N, as filed with the to file a Form 8–K disclosing the date by which the may result in a group no longer meeting Commission, as well as any shareholder notice must be provided if the the required ownership threshold under amendments to the Schedule 14N, will company did not hold an annual meeting during Rule 14a–11. We also would view as be subject to the liability provisions of the prior year, or if the date of the meeting has changed by more than 30 calendar days from the material entering into an agreement Exchange Act Rule 14a–9 pursuant to prior year. For a further discussion of the Form 8– between the company and the new paragraph (c) to the rule.553 K filing requirement for registered investment nominating shareholder or group for the 9. Requirements for a Company That companies, see Section II.D.1. company to include a nominee in the 544 Rule 14n–3 specifies that the Schedule 14N Receives a Notice From a Nominating must be transmitted to the company at its principal company’s proxy materials as a 549 Shareholder or Group executive office. company nominee. The nominating 545 See new Rule 14n–1. In this regard, we are shareholder or group also will be a. Procedure if Company Plans To adopting an amendment to Rule 13(a)(4) of required, as proposed, to file a final Include Rule 14a–11 Nominee Regulation S–T, as proposed, to provide that a amendment to the Schedule 14N Schedule 14N will be deemed to be filed on the In the Proposing Release, we same business day if it is filed on or before 10 p.m. disclosing within 10 days of the final proposed a process for a company to Eastern Standard Time or Eastern Daylight Saving results of the election being announced follow once it received a nomination Time, whichever is currently in effect. This will by the company the nominating allow nominating shareholders additional time to submitted pursuant to Rule 14a–11. file the notice on Schedule 14N and transmit the shareholder’s or group’s intention with Upon receipt of a shareholder’s or notice to the company. regard to continued ownership of its group’s notice of its intent to require the 550 546 To file the Schedule 14N on EDGAR, a shares. As discussed above, the company to include in its proxy nominating shareholder or group and any nominee nominating shareholder or group would materials a shareholder nominee or that does not already have EDGAR filing codes, and be required to disclose its intent with to which the Commission has not previously nominees pursuant to Rule 14a–11, the assigned a user identification number, which we regard to continued ownership of the company would determine whether it call a ‘‘Central Index Key (CIK)’’ code, will need to company’s securities in its original would include the nominee or whether obtain the codes by filing electronically a Form ID (17 CFR 293.63; 249.446; and 274.402) at https:// it believed it would be desirable to, and Form ID, it would need to include the accession www.filermanagement.edgarfiling.sec.gov. The that the company had a basis upon number assigned to the electronically filed Form ID applicant also will be required to submit a as a result of its filing. See 17 CFR 232.10(b)(2). which it could rely to, exclude a notarized authenticating document. If the 547 nominee. If a company determined it authenticating document is prepared before the The Schedule 14N also would be used for applicant makes the Form ID filing, the disclosure concerning the inclusion of shareholder would include the nominee, the authenticating document may be uploaded as a nominees in company proxy materials when made company would notify in writing the Portable Document Format (PDF) attachment to the pursuant to an applicable state or foreign law provision or a company’s governing documents. See nominating shareholder or group no electronic filing. An applicant also may submit the later than 30 calendar days before the authenticating document by faxing it to the new Rule 14a–18 and proposed Rule 14a–19, as Commission within two business days before or discussed in Section II.C.5. below. after electronically filing the Form ID. The 548 See new Rule 14n–2(a). 551 See Item 4(b) of new Schedule 14N. authenticating document would need to be 549 We note that if this occurs, the nominee would 552 While the proposed Schedule 14N included manually signed by the applicant over the no longer be a Rule 14a–11 nominee. See Section the instruction regarding the signing of the applicant’s typed signature, include the information II.B.6.c. for a discussion of how this would affect Schedule by an authorized representative, we did contained in the Form ID, and confirm the the calculation of the maximum number of Rule not discuss this aspect of the proposed rule text in authenticity of the Form ID. If the authenticating 14a–11 nominees. the narrative portion of the release. document is filed after electronically filing the 550 See new Rule 14n–2(b). 553 For further discussion, see Section II.E.

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company files its definitive proxy Rule 14a–11 to include a nominee from the appropriate balance between statement and form of proxy with the a nominating shareholder or group in its companies’ needs in meeting printing Commission that it will include the proxy materials if: and filing deadlines for their nominee or nominees.554 The company • Proposed Rule 14a–11 is not shareholder meetings with shareholders’ would be required to provide this notice applicable to the company; need for adequate time to satisfy the in a manner that provides evidence of • The nominating shareholder or requirements of the rule.562 Specifically, timely receipt by the nominating group has not complied with the as proposed, a company determining shareholder or group. requirements of Rule 14a–11; that the nominating shareholder or • We are adopting this requirement as The nominee does not meet the group or nominee or nominees has not proposed, with a clarification regarding requirements of Rule 14a–11; • satisfied the eligibility requirements the timing of the company’s Any representation required to be could exclude the shareholder nominee transmission of the notice and receipt included in the notice to the company or nominees, subject to the following by the nominating shareholder or is false or misleading in any material requirements: group.555 As adopted, if a company will respect; or • • The company would notify in include a shareholder nominee, a The company has received more writing the nominating shareholder or company will be required to notify the nominees than it is required to include group of its determination. The notice nominating shareholder or group (or by proposed Rule 14a–11 and the would be required to be postmarked or their authorized representative). Rather nominating shareholder or group is not transmitted electronically no later than entitled to have its nominee included than including the proposed 14 calendar days after the company requirement that the company must under the criteria proposed in Rule 14a– 558 receives the shareholder notice of intent provide the notice in a manner that 11(d)(3). Under the Proposal, the nominating to nominate. The company would have evidences timely receipt by the to provide the notice in a manner that shareholder, we are adopting a shareholder or group would need to be notified of the company’s determination provides evidence of receipt by the requirement that the notification must 563 not to include the shareholder nominee nominating shareholder or group; be postmarked or transmitted • The company’s notice to the in sufficient time to consider the electronically no later than 30 calendar nominating shareholder or group that it validity of any determination to exclude days before it files its definitive proxy determined that the company may materials with the Commission.556 We the nominee and respond to such a notice.559 exclude a shareholder nominee or believe this will provide for ease of use In this regard, we noted the time-sensitive nature of Rule 14a–11 nominees would be required to include and administration because it should be and the interpretive issues that may an explanation of the company’s basis clear when the notice was transmitted. arise in applying the new rule. After the for determining that it may exclude the We also note that it is consistent with 564 company provided such a notice to a nominee or nominees; the transmission standard we are • nominating shareholder or group and The nominating shareholder or adopting for submitting a notice of afforded the nominating shareholder or group would have 14 calendar days after intent with respect to a nomination group the opportunity to respond, the receipt of the written notice of pursuant to Rule 14a–11(b)(10). We note company would be required to provide deficiency to respond to the notice and that while we are not adopting a a notice to the Commission regarding its correct any eligibility or procedural requirement regarding the evidence of intent not to include a shareholder deficiencies identified in the notice. The timely receipt by the nominating nominee in its proxy materials. The nominating shareholder or group would shareholder or group, we believe it is in company could seek a no-action letter have to provide the response in a a company’s interest to send the notice from the staff with respect to its manner that provides evidence of its to the nominating shareholder or group receipt by the company; 565 decision to exclude the nominee.560 • in a manner that will allow the The proposed process would have If, upon review of the nominating company to demonstrate that the afforded a nominating shareholder or shareholder’s or group’s response, the nominating shareholder or group group the opportunity to remedy certain company determines that the company received the notice, as doing so may eligibility or procedural deficiencies in still may exclude the shareholder avoid potential disputes. a nomination.561 The various time nominee or nominees, after providing the requisite notice of and time for the b. Procedure if Company Plans To deadlines set out in the proposed nominating shareholder or group to Exclude Rule 14a–11 Nominee process were determined by considering remedy any eligibility or procedural The Proposal also included a process 558 See proposed Rule 14a–11(a). More deficiencies in the nomination, the for a company to follow if it determined specifically, under the proposal a company would company would be required to provide that it could exclude a nominee not be required to include a nominee where (1) notice of the basis for its determination submitted pursuant to Rule 14a–11.557 applicable State law or the company’s governing to the Commission no later than 80 As proposed, a company could documents prohibit the company’s shareholders from nominating a candidate for director; (2) the calendar days before it files its determine that it is not required under nominee’s candidacy, or if elected, board definitive proxy statement and form of membership, would violate controlling State law, proxy with the Commission. The 554 See proposed Rule 14a–11(f)(2). Federal law or rules of a national securities Commission staff could permit the 555 See new Rule 14a–11(g)(1) and Instruction 1 exchange or national securities association; (3) the company to make its submission later to Rule 14a–11(g). nominating shareholder or group does not meet the 556 This 30-day deadline for this notice should rule’s eligibility requirements; (4) the nominating provide a nominating shareholder or group with shareholder’s or group’s notice is deficient; (5) any 562 We considered the timing requirements and sufficient time to engage in soliciting activities with representation in the nominating shareholder’s or deadlines in Rule 14a–8 when crafting the proposed respect to its nominee or nominees, if it has not group’s notice is false in any material respect; or (6) requirements and deadlines for Rule 14a–11; done so already, or pursue any legal remedies that the nominee is not required to be included in the however, due to the potential complexity of the may be available if the company determines it will company’s proxy materials due to the proposed nomination process, we determined in the proposal exclude the nominating shareholder’s or group’s limitation on the number of nominees required to that it would be appropriate to provide additional nominee or nominees. be included. time for the process. 557 The process was modeled after the staff no- 559 See proposed Rule 14a–11(f). 563 See proposed Rule 14a–11(f)(3). action process used in connection with shareholder 560 See proposed Rule 14a–11(f)(7)–(14). 564 See proposed Rule 14a–11(f)(4). proposals under Rule 14a–8. 561 See proposed Rule 14a–11(f)(3)–(6). 565 See proposed Rule 14a–11(f)(5).

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than 80 calendar days before the commenters expressed concerns about After considering the comments, we company files its definitive proxy the staff’s expertise and ability to handle believe that it is in shareholders’ and statement and form of proxy if the disputes in a timely manner.573 With companies’ interest to have a process company demonstrates good cause for respect to the timing requirements in available for seeking to resolve certain missing the deadline; 566 the proposed process, two commenters disputes regarding nominations • The company’s notice to the supported the proposed 14-day time submitted pursuant to Rule 14a–11.584 Commission would be required to period for the company to respond to a Therefore, the rules we are adopting set include: nominating shareholder’s or group’s out the process by which a company • Identification of the nominating notice.574 A number of commenters would determine whether to include a shareholder or each member of the criticized the proposed 14-day time shareholder nominee and notify the nominating shareholder group, as period as too short or requested a longer nominating shareholder or group (or applicable; their authorized representative) of its • time period for the company to The name of the nominee or respond.575 Commenters explained that determination.585 The rules also include nominees; boards would need time to consider a process by which a company would • An explanation of the company’s various issues, such as if the election of notify a nominating shareholder or basis for determining that it may a shareholder nominee would trigger group (or their authorized exclude the nominee or nominees; and representative) of a deficiency in its • A supporting opinion of counsel issues under the laws and regulations relevant to the company’s business (e.g., notice on Schedule 14N, the nominating when the company’s basis for excluding shareholder or group would have the a nominee or nominees relies on a antitrust laws, government procurement, security clearances and opportunity to respond, and the matter of State law; 567 company would send a notice to the • The company would be required to export control) as well as under listing 576 Commission if the company intends to file its notice of intent to exclude with standards and State law. Two commenters supported the proposed 14- exclude a shareholder nominee from its the Commission and simultaneously proxy materials. Consistent with the provide a copy to the nominating day time period for a nominating shareholder or group to respond to a Proposal, a company making the shareholder or each member of the determination to exclude a shareholder 568 company’s notice of deficiency.577 Two nominating shareholder or group; nominee will be required to submit a • commenters worried the 14-day time The nominating shareholder or notice to the Commission regarding its period would give too little time for a group could submit a response to the determination, and it may also choose to response and recommended instead a company’s notice to the Commission. avail itself of the process to seek a no- 21-day time period.578 One commenter The response would be required to be action letter from the staff with respect warned that the Commission is postmarked or transmitted to its decision.586 While we understand underestimating the number of boards electronically no later than 14 calendar the concerns raised by commenters that would challenge shareholder days after the nominating shareholder’s regarding the rule’s timing nominees and the level of intensity of or group’s receipt of the company’s requirements, we believe the these challenges.579 This commenter notice to the Commission. The requirements are appropriate in light of suggested that such challenges and nominating shareholder or group would the need to facilitate the process possible litigation would demand be required to provide a copy of its between a company and its shareholders significant time and resources from the response to the Commission in time for an annual meeting.587 In simultaneously to the company; 569 Commission’s staff.580 Commenters also • If requested by the company, the argued that challenges to Rule 14a–11 584 In this regard, we note that the staff process Commission staff would, at its nominations likely would raise highly for aiding in the resolution of disputes related to discretion, provide an informal complex issues that fall outside the nominations made pursuant to Rule 14a–11 is non- statement of its views (commonly scope of the staff’s expertise (e.g., exclusive. As discussed throughout this release, a company can seek the staff’s view with regard to its known as a no-action letter) to the whether a candidacy would violate determination to exclude a nominee from its proxy 581 company and the nominating State law). One commenter pointed materials, but it is not required to do so. A company shareholder or group; 570 to difficulties arising from the ‘‘dueling’’ could engage in negotiations with a nominating • The company would provide the legal opinions situation in the Rule 14a– shareholder or group and ultimately reach a 582 resolution outside of the staff process, or the parties nominating shareholder or group with 8 no-action process. A couple could avail themselves of other alternatives, such as notice, no later than 30 calendar days commenters believed that courts, rather litigation. before it files its definitive proxy than the staff, would be better able to 585 Other than the modifications to the standards statement and form of proxy with the resolve disputes regarding shareholder relating to transmission and receipt of notices and Commission, of whether it will include director nominations.583 responses, which are described below, we are adopting the process as proposed. or exclude the shareholder nominee or 586 We encourage companies and shareholders to 571 nominees. 573 See letters from ABA; Anadarko; BRT; Cleary; attempt to resolve disputes independently. To the Some commenters supported the Davis Polk; Delaware Bar; ExxonMobil; E.J. extent that a company and nominating shareholder proposed staff review process for Kullman; Protective; S. Quinlivan; Seven Law or group are able to resolve an issue at any point handling disputes regarding a Firms; Weyerhaeuser. during the staff process, the company should 574 See letters from CFA Institute; CII. withdraw its request for a no-action letter from the company’s determination to exclude a 575 See letters from 26 Corporate Secretaries; staff. shareholder nominee.572 Other Boeing; Con Edison; Honeywell; Kirkland & Ellis; 587 The final rule does not include the proposed Pfizer; Protective; UnitedHealth; USPE; Wells 30-calendar day notice requirement when a 566 See proposed Rule 14a–11(f)(7). Fargo; Whirlpool. company determines to exclude a nominee. We 567 See proposed Rule 14a–11(f)(8). 576 See letters from Boeing; Honeywell. believe this requirement is rendered unnecessary by 577 the requirement in paragraph (g)(3) of Rule 14a–11 568 See proposed Rule 14a–11(f)(10). See letters from CFA Institute; CII. that the company provide notice to the Commission 569 578 See letters from Protective; USPE. See proposed Rule 14a–11(f)(11). staff and nominating shareholder or group no later 570 579 See letter from BRT. See proposed Rule 14a–11(f)(12). than 80 calendar days before the company files its 580 571 See proposed Rule 14a–11(f)(13). Id. definitive proxy statement and form of proxy. In 572 See letters from CFA Institute; CII; P. 581 See letters from ABA; BRT. addition, if a company seeks the staff’s informal Neuhauser; Schulte Roth & Zabel; Universities 582 See letter from ABA. view with respect to the company’s determination Superannuation. 583 See letters from ABA; Delaware Bar. to exclude a nominee, promptly following receipt

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addition, the staff is committed to nominating shareholder’s or group’s length specified in the rule, we believe timely addressing these matters. response to the company’s notice must that it is appropriate to provide the We are changing and clarifying the be postmarked or transmitted ability to do so in the final rule.592 requirements related to the timing of electronically no later than 14 calendar We note that, in a change from the sending and receiving notifications. As days after receipt of the company’s Proposal, under the final rule a proposed, if a company determined that notification. We note that a timely company may not exclude a nominee or it could exclude a shareholder nominee, transmission standard applies in both a statement in support on the basis that, it would be required to notify the instances; however, we urge companies in the company’s view, the Schedule nominating shareholder or group and to send the notification, and nominating 14N (which will include the statement the notification would be required to be shareholders or groups to send a in support) contains materially false or postmarked or transmitted response, in a manner that will allow misleading statements. Nominating electronically no later than 14 calendar them to demonstrate when the days after the company received the communication is received, as doing so shareholders and groups will have notice on Schedule 14N. The proposed may avoid potential disputes. liability for any materially false or rule stated that the company would be Under new Rule 14a–11(g), a misleading information or for making a responsible for providing the notice in company may exclude a shareholder false or misleading certification in the a manner that evidences timely receipt nominee because: notice filed on Schedule 14N, and by the nominating shareholder or group. • Rule 14a–11 is not applicable to the companies will not be responsible for The proposed rule also included similar company; this information.593 We believe that requirements for a response to the • The nominating shareholder or such disputes concerning whether notice by the nominating shareholder or group or nominee failed to satisfy the information is false or misleading group. As adopted, the rules will keep eligibility requirements in Rule 14a– should be handled through disclosure, the deadlines as they were proposed but 11(b);) 589 or and if necessary, through private will use a transmission standard in • Including the nominee or nominees litigation, rather than through exclusion determining the deadlines, similar to would result in the company exceeding of the nominee under our rule. A the standard discussed above for new the maximum number of nominees it is company and the nominating Rule 14a–11(g)(1). We believe using required to include in its proxy shareholder or group will be in such a uniform standard for all statement and form of proxy.590 possession of the facts and notification aspects of the rule will In addition, a company would be circumstances regarding any disputes provide clarity and ease of use. Under permitted to exclude a statement in that arise about the truthfulness or the final rule, a company’s notification support of a nominee or nominees if the accuracy of information or must be postmarked or transmitted statement in support exceeds 500 words representations made by a nominating electronically no later than 14 calendar for each nominee.591 In such cases, a shareholder or group; thus, they will be days after the close of the window company would be required to include in a better position than the staff to period for submission of nominations the nominee or nominees, provided the resolve those disputes. In addition, we pursuant to Rule 14a–11. We believe eligibility requirements were satisfied, note that in traditional proxy contests, this change from the Proposal is but would be permitted to exclude the companies and insurgents regularly use appropriate because it will allow statement in support. Although we did disclosure to communicate with a shareholders to submit their not propose to allow for exclusion of a company’s shareholders about an nominations, and companies to receive supporting statement that exceeds the insurgent’s nominee(s) and provide all the nominations, before requiring a related information, including company to send a notice to the before the window period closed, and the company disclosure disputing the information nominating shareholder or group (or would inform the nominating shareholder that it intends to include the nominee. If, subsequent to provided by the other party. We believe their authorized representative) as to the company sending a notice to the nominating that it is appropriate for companies and whether it will include or exclude a shareholder of its intent to include the nominee, a nominating shareholders engaged in the nominee. Thus, a company will be able nominating shareholder with a higher qualifying Rule 14a–11 nomination process to ownership percentage submits a nomination for the to make an informed decision with work together to resolve these types of respect to individual nominations maximum number of nominees the company would be required to include under the rule, the company issues. While we encourage private because it will be able to evaluate and would be required to include those nominees parties to resolve disputes under this respond to all the nominations it has assuming that the company determined that it did provision, the Commission could, of received at one time, rather than not have a reason to exclude the nominees. In that course, bring enforcement actions in evaluating and responding to the situation, confusion could result because, under the rule, the company would no longer be required to appropriate instances. All filings nominations as they are received. This include the nominee submitted by the nominating associated with a nomination included approach should help reduce the shareholder during the first week of the window in the company’s proxy materials possibility of any confusion that could period, even though the company had informed the pursuant to Rule 14a–11, including the result from requiring a company to nominating shareholder it would include its nominee. Schedule 14N, the company’s proxy respond to each nomination no later 589 Specifically, the final rule provides that a statement and any additional soliciting than 14 days after it is transmitted.588 A company could exclude a shareholder nominee materials provided by the company or because the nominating shareholder or group, or the of the staff’s response a company would be required nominee, fails to satisfy the applicable eligibility the nominating shareholder, will be to provide a notice to the nominating shareholder requirements in Rule 14a–11(b). In this regard, we subject to the staff’s proxy contest or group stating whether it will include or exclude note that the nominating shareholder or each review procedures and, as noted, will be the nominee. member of the nominating shareholder group (or subject to the Rule 14a–9 prohibition 588 For example, suppose a company decided it authorized representative) would be required to did not have a reason to exclude a nominee certify that, after reasonable inquiry and to the best submitted by a nominating shareholder during the of its knowledge and belief, the nominating 592 In this regard, we note that this is consistent first week of the window period. If we were to shareholder or member of the nominating with Rule 14a–8, which specifies that a company require that a company must respond to a shareholder or group and the nominee satisfied the may exclude a proposal if the proposal, including nomination no later than 14 days after it was applicable requirements of Rule 14a–11(b). any accompanying supporting statement, exceeds transmitted, the company would be required to 590 See new Rule 14a–11(d). 500 words. respond to the nominating shareholder or group 591 See new Rule 14a–11(c). 593 See new Rule 14a–9(c) and Rule 14a–11(f).

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against materially false or misleading of support, unless otherwise shareholder nominees is exhausted. As statements. specified.595 In addition, as we described above, a company will be In the Proposing Release, we noted discussed in the Proposing Release, the required to give notice that it plans to that: staff’s responses to the submissions exclude a nominee for any nominee that • Unless otherwise provided in Rule made pursuant to new Rule 14a–11(g) it intends to exclude, and the notice 14a–11 (e.g., the nominating would reflect only informal views. The must include the reasons for the shareholder’s or group’s obligation to staff determinations reached in these exclusion. If a company anticipates that demonstrate that it responded to a responses would not, and cannot, it would seek a no-action letter from the company’s notice of deficiency, where adjudicate the merits of a company’s staff with respect to its decision to applicable, within 14 calendar days position with respect to exclusion of a exclude any Rule 14a–11 nominee or after receipt of the notice of deficiency), shareholder nominee under Rule 14a– nominees, it should seek a no-action the burden would be on the company to 11. Accordingly, a discretionary staff letter with regard to all nominees that it demonstrate that it may exclude a determination would not preclude an wishes to exclude at the outset and nominee or nominees; and interested person from pursuing a should assert all available bases for • All materials submitted to the judicial determination regarding the Commission in relation to proposed exclusion at that time. For example, if application of Rule 14a–11. a company receives more nominees than Rule 14a–11(g) would be publicly As noted above, if a nominee available upon submission. withdraws or is disqualified, a company it is required to include, its reasons for We are adopting these aspects of the will be required to include an otherwise exclusion would note that basis. In rules as proposed. We did not receive eligible nominee submitted by the addition, if the company believes it has significant comment on these aspects of shareholder or group with the next other bases to exclude the nominee, it the proposed rules, although two highest qualifying ownership should note those other bases in its commenters requested that companies percentage, if any. The company would notice and include the other bases in its bear the burden of proof when objecting be required to continue replacing request for a no-action letter. to a nominee.594 The rule, as adopted withdrawn or disqualified nominees c. Timing of Process and proposed, specifies that the burden until it included the maximum number is on the company to demonstrate that of nominees it is required to include in The process generally would operate it may exclude a nominee or statement its proxy materials or the list of as follows:

Due date Action required

No earlier than 150 calendar days, and no later than 120 calendar Nominating shareholder or group must provide notice on Schedule 14N days, before the anniversary of the date that the company mailed its to the company and file the Schedule 14N with the Commission. proxy materials for the prior year’s annual meeting. No later than 14 calendar days after the close of the window period for Company must notify the nominating shareholder or group (or its au- submission of nominations. thorized representative) of any determination not to include the nominee or nominees. No later than 14 calendar days after the nominating shareholder’s or Nominating shareholder or group must respond to the company’s defi- group’s receipt of the company’s deficiency notice. ciency notice and, where applicable, cure any defects in the nomination. No later than 80 calendar days before the company files its definitive Company must provide notice of its intent to exclude the nominating proxy statement and form of proxy with the Commission. shareholder’s or group’s nominee or nominees and the basis for its determination to the Commission and, if desired, seek a no-action letter from the staff with regard to its determination. No later than 14 calendar days after the nominating shareholder’s or Nominating shareholder or group may submit a response to the com- group’s receipt of the company’s notice to the Commission. pany’s notice to the Commission staff. As soon as practicable ...... If requested by the company, Commission staff would, at its discretion, provide an informal statement of its views to the company and the nominating shareholder or group. Promptly following receipt of the staff’s informal statement of its views Company must provide notice to the nominating shareholder or group stating whether it will include or exclude the nominee.

d. Information Required in Company statement. This disclosure will be for any materially false or misleading Proxy Materials provided by the nominating shareholder statements.597 i. Proxy Statement or group in its notice on Schedule 14N As discussed in Section II.B.8., the in response to Item 5 of that Schedule disclosures to be included in the As discussed in Section II.B.8. above, and will be included in the company’s company’s proxy statement include: • we proposed and are adopting a proxy statement pursuant to Item 7(e) A statement that the nominee requirement that a company that is (and, in the case of investment consents to be named in the company’s including a shareholder director companies, Item 22(b)(18)) of Schedule proxy statement and form of proxy and, nominee in its proxy statement and 14A.596 As we proposed, the company if elected, to serve on the company’s form of proxy pursuant to Rule 14a–11 board of directors; will not be responsible for the include certain disclosure about the • Disclosure about the nominee as nominating shareholder or group and disclosure; rather, the nominating would be provided in response to the the nominee in the company proxy shareholder or group will have liability disclosure requirements of Items 4(b),

594 See letters from CII; Universities not permissible would result in a violation of the changes made in response to these comments. We Superannuation. rule. We are adopting that provision as proposed. did not receive comment specifically on new Items 595 In the Proposal, we noted that the exclusion 596 Refer to Section II.B.8. for a discussion of 7(e) or 22(b)(18) of Schedule 14A. of a nominee or nominees where the exclusion was comments received on the proposed disclosure and 597 See new Rule 14a–11(f).

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5(b), 7(a), (b) and (c) and, for investment The disclosures set out in Items 4(b) The company also will include in its companies, Item 22(b) of Schedule 14A, and 5(b) of Schedule 14A are proxy statement disclosure about the as applicable; specifically tailored to contested management nominees responsive to • Disclosure about the nominating elections and currently are provided by Items 4(b), 5(b), 7(a), (b) and (c) and, for shareholder or each member of a both companies and insurgents in investment companies, Item 22(b) of nominating shareholder group as would traditional proxy contests. The Schedule 14A, as applicable, as well as be required of a participant in response disclosures required pursuant to Item disclosure concerning the persons to the disclosure requirements of Items 4(b) include: making the solicitation for the 4(b) and 5(b) of Schedule 14A, as • Who is making the solicitation and management nominees responsive to applicable; the methods of solicitation; Items 4(b) and 5(b) of Schedule 14A, as • Disclosure about whether the • If employees of the soliciting party applicable. We did not amend the nominating shareholder or any member are engaged in the solicitation, what disclosure requirements in this regard, of a nominating shareholder group has types of employees are engaged in the as companies are already required to been involved in any legal proceeding solicitation and the manner and nature make these disclosures in the context of during the past ten years, as specified in of their employment; a ‘‘solicitation in opposition,’’ under Item 401(f) of Regulation S–K; • If specially engaged employees are Rule 14a–12(c).598 • Disclosure about whether, to the engaged in the solicitation, the material In addition, as discussed in Section best of the nominating shareholder’s or features of the engagement, the cost, and II.B.8., we proposed and adopted a group’s knowledge, the nominee meets the number of employees; requirement that the company include the director qualifications set forth in • The total amount estimated to be in its proxy statement the nominating the company’s governing documents, if spent and the total expenditures to date shareholder’s or group’s statement in any; for the solicitation; support of the shareholder nominee or • A statement that, to the best of the • Who will bear the cost of the nominees, if the nominating shareholder nominating shareholder’s or group’s solicitation; and or group elects to have such statement • knowledge, in the case of a registrant The terms of any settlement included in the company’s proxy other than an investment company, the between the company and the soliciting materials. As discussed in Section nominee meets the objective criteria for parties, including the cost to the II.B.8., we had proposed that this ‘‘independence’’ of the national company. statement not exceed 500 words total, securities exchange or national The disclosures included pursuant to but in response to commenters’ securities association rules applicable to Item 5(b) include: • concerns, we have revised this the company, if any, or, in the case of Any substantial interest of the provision in the final rule to enable a a registrant that is an investment soliciting party in the matter to be voted nominating shareholder or group to company, the nominee is not an on; • include up to 500 words for each ‘‘interested person’’ of the registrant as Certain biographical information nominee. The company also would have defined in Section 2(a)(19) of the about the soliciting party, such as name the option to include a statement of Investment Company Act of 1940; and business address, principal • support for the management The following information occupation, and any criminal nominees.599 regarding the nature and extent of the convictions in the past 10 years; relationships between the nominating • The amount of company securities ii. Form of Proxy shareholder or group, the nominee, and/ beneficially owned and owned of Under the Proposal, a company that is or the company or any affiliate of the record; required to include a shareholder • company: Dates and amounts of any securities nominee or nominees on its form of • Any direct or indirect material purchased or sold within the past two proxy could identify the shareholder interest in any contract or agreement years and the amount of funds borrowed nominees as such and recommend between the nominating shareholder or and owed to purchase the securities; • any member of the nominating Whether the soliciting person is or 598 We have clarified in new Instruction 3 to Rule shareholder group, the nominee, and/or was within the past year a party to any 14a–12 that inclusion of a shareholder director the company or any affiliate of the contracts, arrangements or nominee pursuant to Rule 14a–11, an applicable company (including any employment understandings with respect to the state or foreign law provision, or a company’s governing documents as they relate to the inclusion agreement, collective bargaining company’s securities and the terms of of shareholder director nominees in the company’s agreement, or consulting agreement); the contract, arrangement or proxy materials, or solicitations that are made in • Any material pending or threatened understanding; connection with that nomination, constitute litigation in which the nominating • Beneficial ownership of company solicitations subject to Rule 14a–12(c), except for purposes of the requirement for the company to file shareholder or any member of the securities by any associate of the their proxy statement in preliminary form pursuant nominating shareholder group and/or soliciting person; to Rule 14a–6(a). the nominee is a party or a material • Beneficial ownership by the 599 In the Proxy Disclosure Enhancements participant, and that involves the soliciting person of any parent or Adopting Release, we amended our rules to require company, any of its officers or directors, subsidiary of the company; disclosure about directors that will provide • investors with more meaningful disclosure to or any affiliate of the company; Disclosure responsive to Item 404(a) enable them to determine whether and why a • Any other material relationship of Regulation S–K with regard to the director or nominee is an appropriate choice for a between the nominating shareholder or soliciting person and any associate; particular company. The information is required in any member of the nominating • Disclosure of any arrangements the company’s proxy statement for each director nominee and each director who will continue to shareholder group, the nominee, and/or concerning future employment or serve after the shareholder meeting. Under revised the company or any affiliate of the transactions with the company; and Item 401 of Regulation S–K, a nominating company not otherwise disclosed; and • Any substantial interest in the vote, shareholder or group will be required to discuss the • The Web site address on which the either by security holdings or otherwise, particular experience, qualifications, attributes or skills of the nominee or nominees that led the nominating shareholder or nominating held by a party to an arrangement or nominating shareholder or group to conclude that shareholder group may publish understanding related to a director the person should be put forward as a candidate for soliciting materials, if any. nominee. director on the company’s board of directors.

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whether shareholders should vote for, candidates. Vote for no more than five.’’ consequently have more difficulty in against, or withhold votes on those Another commenter argued that the achieving a quorum.608 nominees and management nominees advantage of voting for each individual We are adopting this aspect of the on the form of proxy.600 In addition, the nominee is the de facto plurality voting Proposal largely as proposed,609 because company could determine the order in standard that would result.603 we continue to believe that grouping the which its nominees and any shareholder Numerous commenters opposed the company’s nominees and permitting nominees are listed in the form of proposed amendments to Rule 14a–4 them to be voted on as a group would proxy. The company would otherwise and argued that the form of proxy make it easier to vote for all of the be required to present the nominees in should allow shareholders to vote for company’s nominees than to vote for the an impartial manner in accordance with the entire slate of management shareholder nominees in addition to Rule 14a–4. nominees.604 Many of these commenters some of the company nominees. This Under the current rules, a company believed that such an option is needed would result in an advantage to the may provide shareholders with the to minimize shareholder confusion,605 management nominees and would be option to vote for or withhold authority with several commenters justifying such inconsistent with an impartial approach to vote for the company’s nominees as an option on the basis that boards and the goals of Rule 14a–11. The final a group, provided that shareholders also expend considerable efforts in selecting rule clarifies that the change would are given a means to withhold authority the complete slate of management apply not only when a nominee is for specific nominees in the group. In nominees (e.g., considering issues as the included pursuant to Rule 14a–11, our view, as we stated in the Proposal, independence of the board as whole).606 applicable State law, or a company’s this option would not be appropriate One commenter stated that individual governing documents, but also where a where the company’s form of proxy shareholders (unlike large institutional nominee is included pursuant to a includes shareholder nominees, as investors who have outsourced the provision in foreign law. grouping the company’s nominees may actual proxy voting process for their We believe that potential confusion make it easier to vote for all of the portfolio) would be discouraged from that may result from not providing the company’s nominees than to vote for the voting if the proxy voting process option to vote for the company’s slate shareholder nominees in addition to becomes overly tedious as a result of the can be mitigated to the extent that some of the company nominees. inability to vote for (or withhold votes companies provide clear voting Accordingly, when a shareholder for) a group of nominees.607 The instructions, particularly with respect to nominee is included (either pursuant to commenter analogized to the the number of candidates for which a Rule 14a–11, an applicable State law shareholders’ voting options for shareholder can vote. In addition, we do provision, or a company’s governing shareholder proposals, where not believe that requiring shareholders documents), we proposed an shareholders are allowed to vote on all to vote for candidates individually, amendment to Rule 14a–4 to provide matters as recommended by rather than as a group, creates a burden that a company may not give management through the exercise of that will result in discouraging shareholders the option of voting for or discretionary voting authority. It noted shareholders from voting at all in withholding authority to vote for the that, under the existing proxy rules, director elections. In this regard, we company nominees as a group, but companies often allow shareholders to note that a company could clearly instead must require that shareholders vote ‘‘For All, except’’ and then allow designate the nominees on its form of vote on each nominee separately. them to identify the specific nominees proxy as company nominees or Commenters were mixed on the for whom the proxy is not authorized to shareholder nominees. appropriate presentation of nominees on vote. The commenter recommended that the form of proxy. Several commenters companies be permitted to have this e. No Preliminary Proxy Statement supported the proposed amendments to same option when there are shareholder Under the Proposal, inclusion of a Rule 14a–4 to prohibit the option of nominees included in the proxy shareholder nominee in the company’s voting for management’s slate as a materials (with a clear statement in the proxy materials would not require the whole,601 with one of these commenters form of proxy that the shareholder company to file a preliminary proxy characterizing the current option of should indicate a vote for the statement provided that the company ‘‘elect all directors’’ as ‘‘a convenience in shareholder nominee in the space was otherwise qualified to file directly uncontested director elections’’ but provided for that nominee). One in definitive form. In this regard, the warning that providing that option in commenter argued that the ability to Proposal made clear that inclusion of a contested elections ‘‘tilts the scales vote on the entire slate is essential in shareholder nominee would not be unduly in favor of management.’’ 602 The the event that the proposed rules are deemed a solicitation in opposition.610 commenter believed that shareholders applied to investment companies, as We did not receive a significant amount would not have any difficulty in such entities have a far higher of comment on this aspect of the rule, identifying the management nominees proportion of retail shareholders than although two commenters agreed that and disagreed with the argument that a most operating companies and inclusion of a Rule 14a–11 shareholder form of proxy listing all nominees nominee should not require the 603 See letter from RiskMetrics. would be confusing. As a possible company to file preliminary proxy solution, the commenter suggested a 604 See letters from 26 Corporate Secretaries; ABA; Aetna; Alcoa; American Express; Anadarko; legend such as ‘‘There are six Boeing; BorgWarner; BRT; ExxonMobil; Fenwick; 608 See letter from ICI. Honeywell; ICI; Intel; JPMorgan Chase; Pfizer; 609 See new Rule 14a–4(b)(2)(iv). We anticipate 600 This would be similar to the current practice Seven Law Firms; Society of Corporate Secretaries; that companies would continue to be able to solicit with regard to shareholder proposals submitted Tenet; U.S. Bancorp. discretionary authority to vote a shareholder’s pursuant to Rule 14a–8 where companies identify 605 See letters from Aetna; American Express; shares for the company nominees, as well as to the shareholder proposals and provide a Boeing; BorgWarner; JPMorgan Chase; Seven Law cumulate votes for the company nominees in recommendation to shareholders as to how they Firms; Society of Corporate Secretaries; U.S. accordance with applicable State law, where such should vote on each of those proposals. Bancorp. State law or the company’s governing documents 601 See letters from CII; COPERA; P. Neuhauser; 606 See letters from BorgWarner; Pfizer; Society of provide for cumulative voting. RiskMetrics; USPE. Corporate Secretaries; Tenet. 610 See proposed revisions to Rule 14a–6(a)(4) and 602 Letter from CII. 607 See letter from ABA. Note 3 to that rule.

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materials.611 We are adopting this under Rule 14a–11, State law, or a • The exemption should not be provision largely as proposed. As company’s governing documents available if the shareholder or any adopted, a company would not be generally should be exempt, with no member of the nominating group uses required to file a preliminary proxy filing requirement prior to giving the another available exemption for a statement in connection with a company notice and filing a Schedule nomination to be presented at the same nomination made pursuant to Rule 14a– 14N.617 Another commenter also shareholder meeting;624 11, an applicable state or foreign law recommended that any exemption also • The exemption should not be provision, or a company’s governing cover solicitations for nominations available for a ‘‘data gathering strategy’’ documents.612 submitted under State law or a in which a shareholder is ‘‘testing the company’s governing documents.618 10. Application of the Other Proxy waters’’ for other purposes, such as for Finally, one commenter expressed Rules to Solicitations by the Nominating a traditional proxy contest;625 support for the proposed exemption so Shareholder or Group shareholders could communicate with • The shareholder should certify that a. Rule 14a–2(b)(7) other investors to explain their it has a bona fide intent to present a As noted in the Proposing Release, we nominee’s qualifications and the Rule 14a–11 nomination and the anticipate that shareholders may engage rationale for submitting their shareholder should be prohibited from in communications with other nominations as long as they file all nominating directors at the same shareholders in an effort to form a materials with the Commission and do meeting through means other than Rule nominating shareholder group to not solicit proxies on behalf of their 14a–11;626 and 619 aggregate their holdings to meet the nominees. • The exemption should not be applicable minimum ownership On the other hand, several available if the company or another threshold to nominate a director. While commenters opposed the creation of a shareholder has publicly announced consistent with the purpose of Rule new exemption for soliciting activities that the company would be facing a to form a nominating group.620 Two of 14a–11, such communications would be traditional proxy contest.627 deemed solicitations under the proxy these commenters stated that the One commenter stated generally that rules. Accordingly, we proposed an proposed exemption in Rule 14a–2(b)(7) allowing the ‘‘permitted activity among exemption from the proxy rules for is unnecessary, given the existing shareholders wishing to nominate a written communications made in exemptions available to nominating ’’ ‘‘ connection with using proposed Rule shareholders (e.g., Rule 14a–2(b)(2) director would increase the need for 14a–11 613 that are limited in content exemption for communications with up the Commission to police group activity and filed with the Commission.614 As to 10 shareholders and Rule 14a–2(b)(6) that may be undertaken with an 628 noted in the Proposal, we believed this for communications in an electronic undisclosed control intent.’’ limited exemption would facilitate shareholder forum).621 One commenter Two commenters agreed with the shareholders’ use of proposed Rule 14a– indicated that a solicitation to form a Commission that the Rule 14a–2(b)(7) 11 and remove concerns shareholders ‘‘control’’ group could have significant exemption should not be available for seeking to use the rule may have implications affecting control of a solicitations conducted through oral regarding certain communications with company if there are no limits on the communications.629 These commenters other shareholders regarding their intent number of shareholders or aggregated warned that there would be no way to 622 to submit a nomination pursuant to the holdings of a nominating group. The ensure that orally-communicated rule. commenter asserted that, absent these information is being provided to Some commenters supported the limits, a shareholder could build a shareholders in a consistent manner and proposed exemption for soliciting nominating group with hundreds of in accordance with the rule’s activities by shareholders seeking to shareholders owning far in excess of the requirements. One commenter form a group for purposes of Rule 14a– ownership threshold needed to use Rule recommended specific changes to the 11.615 One of these commenters stated 14a–11. The commenter warned that the rule to clarify that the exemption is not that because ‘‘many institutional proposed exemption could facilitate available for oral communications.630 investors lack incentives to invest avoidance of the proposed requirements On the other hand, several commenters actively in seeking governance benefits of Rule 14a–11 because the exempt believed that oral communications solicitations could be the first stage of that would be shared by their fellow should be exempt.631 Some commenters a campaign against incumbent directors shareholders,’’ the rule should avoid pointed out that such communications and in favor of shareholder nominees. imposing unnecessary hurdles or costs are exempt in other contexts and are This commenter also believed that the on shareholders organizing or joining a difficult to monitor in any case.632 To 616 exemption should not apply to nominating group. Another supporter mitigate the risk of inappropriate solicitations undertaken by shareholders of the exemption stated that soliciting communications, one commenter to form a nominating shareholder group activities to form a group for the suggested that the Commission require in order to submit nominees pursuant to purpose of submitting nominations that oral communications made in State law or a company’s governing 623 reliance on the exemption not be 611 documents. See letters from ABA; CII. inconsistent with any communications 612 See also discussion in footnote 598 above. Commenters also suggested the 613 Under the Proposal, the exemption would not following changes to the proposed apply to solicitations made when seeking to have exemption: 624 See letters from ABA; Seven Law Firms. a nominee included in a company’s proxy materials 625 Id. pursuant to a procedure specified in the company’s 626 617 See letter from ABA. governing documents or pursuant to applicable See letter from CII. 627 State law (as opposed to pursuant to Rule 14a–11). 618 See letter from P. Neuhauser. See letters from ABA; Seven Law Firms. 628 614 See proposed Rule 14a–2(b)(7)(i). 619 See letter from RiskMetrics. Letter from Biogen. 629 615 See letters from Group of 80 Professors of Law, 620 See letters from ABA; Anadarko; BRT; Seven See letters from ABA; Seven Law Firms. Business, Economics and Finance (‘‘Bebchuk, et Law Firms. 630 See letter from Seven Law Firms. al.’’); CalSTRS; CII; P. Neuhauser; RiskMetrics; 621 See letters from ABA; Seven Law Firms. 631 See letters from CII; Cleary; P. Neuhauser; Schulte Roth & Zabel; USPE. 622 See letter from ABA. Schulte Roth & Zabel; USPE. 616 Letter from Bebchuk, et al. 623 Id. 632 See letters from CII; USPE.

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previously filed by the shareholder in materials used in reliance on the Rule New Rule 14a–2(b)(7) provides an connection with the nomination.633 14a–2(b)(7) exemption: exemption from the generally applicable Two commenters expressed general • The period that the soliciting disclosure, filing, and other support for the proposal requiring that shareholder held the specified number requirements of the proxy rules for a nominating shareholder or group file of shares; solicitations by or on behalf of any any soliciting materials published, sent • A description of any short positions shareholder in connection with the or given to shareholders pursuant to the or other hedging arrangements through formation of a nominating shareholder exemption no later than the date that which the soliciting shareholder group, provided that the shareholder is the material is first published, sent, or reduced or otherwise altered its not holding the company’s securities given.634 One commenter argued that if economic stake in the company; with the purpose, or with the effect, of the Commission retains the requirement • A description of any contracts, changing control of the company or to that solicitations be in writing, then it arrangements, understandings or gain a number of seats on the board of should relax the ‘‘date of first use’’ filing relationships between the soliciting directors that exceeds the maximum deadline (with a three business day shareholder and any other person with number of nominees that the registrant deadline being its preference).635 One respect to any securities of the could be required to include under Rule commenter supported the filing company; and 14a–11(d). In addition, any written requirement ofRule 14a–2(b)(7)(ii) for • A description of any plans or communication may include no more soliciting materials published, sent or proposals of the shareholder or group than: given to shareholders solicited to with respect to the organization, • A statement of the shareholder’s become part of a nominating group,636 business or operations of the intent to form a nominating shareholder while three commenters opposed the company.643 group in order to nominate a director filing requirement.637 Of those opposing under Rule 14a–11; One commenter added that the required • the requirement, one commenter noted disclosure should be consistent with Identification of, and a brief that under the Williams Act, persons that required by Items 4 and 6 of statement regarding, the potential contemplating an actual change in Schedule 13D,644 while another nominee or nominees or, where no control are not required to publicly commenter stated that shareholders nominee or nominees have been disclose their activities until a group should be permitted to include a brief identified, the characteristics of the owning 5% of the company’s shares has statement of the reasons for the nominee or nominees that the been formed.638 One commenter stated 645 shareholder intends to nominate, if any; formation of the nominating group. • that it is possible that a group of After considering the comments, we The percentage of voting power of shareholders ultimately may decide not are adopting the proposed exemption the company’s securities that are to submit a shareholder nominee.639 with certain modifications, including entitled to be voted on the election of Therefore, this commenter believed, any modifications to enable shareholders to directors that each soliciting requirement for filings before the group communicate orally, to require the filing shareholder holds or the aggregate submits a nominee would place an of a cover page in the form set forth in percentage held by any group to which unfair disadvantage on the process of Schedule 14N (with the appropriate box the shareholder belongs; and • The means by which shareholders first determining if a nomination is the on the cover page marked) no later than right course of action, and if so, who the may contact the soliciting party. when the solicitation commences, and Any written soliciting material nominee should be. Another commenter to clarify the circumstances under published, sent or given to shareholders suggested that the filing requirement be which the exemption will be in accordance with the terms of this triggered on the date the shareholder 646 available. We believe that this limited provision must be filed with the proposes a nominee, not on the date of exemption will facilitate shareholders’ Commission by the nominating solicitation.640 The commenter believed use of Rule 14a–11 and remove shareholder or group, under the that a shareholder should not be concerns shareholders seeking to use company’s Exchange Act file number (or burdened with the filing requirement at the rule may have regarding certain in the case of a registered investment the initial stages of determining the communications with other company, under the company’s feasibility of forming a group. shareholders regarding their intent to Investment Company Act file number), Three commenters recommended that submit a nomination pursuant to the no later than the date the material is communications made for the purpose rule. first published, sent or given to of forming a nominating shareholder shareholders. The soliciting material 643 See letters from ABA; Seven Law Firms. group should be permitted to identify would be required to be filed with a possible or proposed nominees,641 with 644 See letter from ABA. 645 cover page in the form set forth in one commenter adding the condition See letter from Schulte Roth & Zabel. 646 Shareholders also would have the option to Schedule 14N, with the appropriate box that the nominee first agree to being structure their solicitations in connection with the 642 on the cover page marked to identify the named. Two commenters formation of a nominating shareholder group, filing as soliciting material pursuant to recommended the following additional whether written or oral, to comply with an existing Rule 14a–2(b)(7).647 This requirement is disclosure in any written soliciting exemption from the proxy rules, including the exemption for solicitations of no more than 10 largely consistent with the Proposal; shareholders (Exchange Act Rule 14a–2(b)(2)) and however, under the final rule, the 633 See letter from Cleary. the exemption for certain communications that take solicitation will be filed on Schedule 634 See letters from ABA; CII. place in an electronic shareholder forum (Exchange 14N rather than as definitive additional 635 See letter from Schulte Roth & Zabel. Act Rule 14a–2(b)(6)). For example, a shareholder 636 See letter from ABA. could rely on Rule 14a–2(b)(2) to solicit no more 647 637 See letters from CalSTRS; COPERA; P. than 10 shareholders in an effort to form a Materials filed in connection with the new Neuhauser. nominating shareholder group. If the shareholder’s solicitation exemptions will be filed under a cover efforts did not result in the formation of a group page of Schedule 14N and will appear as a 638 See letter from P. Neuhauser. large enough to meet the ownership thresholds, the Schedule 14N–S on EDGAR. See new Rule 14a– 639 See letter from COPERA. shareholder could then rely on Rule 14a–2(b)(7) to 2(b)(7)(ii). We note that written communications 640 See letter from CalSTRS. continue its efforts to form a nominating include electronic communications, such as e-mails 641 See letters from ABA; CII; USPE. shareholder group for the purpose of submitting a and Web site postings, and scripts used in 642 See letter from ABA. nomination pursuant to Rule 14a–11. connection with oral solicitations.

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soliciting materials on Schedule 14A, as 11 when the new solicitation exemption and/or shareholders would have was proposed. We have made this is used to pursue such a nomination. determined the parameters of the change to avoid confusion between We do not believe that the filing shareholder’s or group’s access to the soliciting materials filed in connection requirement is burdensome, particularly company’s proxy materials. Given the with the formation of a nominating in light of the fact that we are providing range of possible criteria companies shareholder group under Rule 14a–11 shareholders with the opportunity to and/or shareholders could establish for (or in connection with a Rule 14a–11 engage in activities for which they nominations, we continue to believe it nomination), as discussed further would otherwise need to file a proxy would not be appropriate to extend the below, and other proxy materials that statement or have another exemption exemption to those circumstances. Also may be filed by companies or by available. consistent with the Proposal, we have participants in a traditional proxy More generally, we understand not extended the exemption to contest. commenters’ concerns regarding the nominations made pursuant to We also have expanded the solicitation exemptions, including the applicable State law provisions,649 again exemption to cover oral solicitations. As exemption for oral communications because State law could establish any noted in the Proposal, we originally when seeking to form a group, being number of possible criteria for proposed to limit the exclusion to used as a means to engage in a contest nominations. A shareholder would need written communications to address our for control, but we believe that requiring to determine whether one of the existing concern that oral communications could a nominating shareholder or group to exemptions applies to their solicitation not easily satisfy the filing requirement file a Schedule 14N to provide notice of conducted in connection with a (which would make it more difficult to such communications, along with the nomination made pursuant to a monitor use of the exemption). other limitations in the rule we are company’s governing documents or However, after further consideration, we adopting, should mitigate these State law. agree with commenters that oral concerns. In response to commenters’ b. Rule 14a–2(b)(8) communications should be included concerns, we have clarified in the rule Both the nominating shareholder or within the exemption because it is that a shareholder or group that chooses group and the company may wish to likely that shareholders will need to to rely on new Rule 14a–2(b)(7) would solicit in favor of their nominees for speak to each other in order to lose that exemption if they subsequently director by various means, including effectively form a nominating engaged in a non-Rule 14a–11 orally, by U.S. mail, electronic mail, and shareholder group. Oral nomination or solicitation in connection Web site postings. While the company communications will not be limited in with the subject election of directors ultimately would file a proxy statement content in the way that written other than solicitations exempt under and therefore could rely on the existing communications are limited. In an effort Rule 14a–2(b)(8), or if they become a proxy rules to solicit outside the proxy to better monitor and avoid abuse under member of a group, as determined under statement,650 shareholders could be the exemption, however, a shareholder Section 13(d)(3) of the Exchange Act limited in their soliciting activities seeking to form a nominating and Rule 13d–5(b)(1), or otherwise, with under the current proxy rules. shareholder group in reliance on the persons engaged in soliciting or other Accordingly, our Proposal included a exemption in Rule 14a–2(b)(7) will be nominating activities in connection 648 new exemption to the proxy rules for required to file a Schedule 14N notice with the subject election of directors. solicitations by or on behalf of a of commencement of the oral This could result in the shareholder or nominating shareholder or group in solicitation. Because there are no limits group being deemed to have engaged in support of its nominee who is included on the number of holders that can be a non-exempt solicitation in violation of in the company’s proxy statement and solicited in reliance on the new rule, or the proxy rules. In addition, we have form of proxy. the contents of the oral clarified that, consistent with Rule 14a– As proposed, the exemption would be communications, we believe it is 11, the exemption is available only available only where the shareholder is important for our staff and the markets where the shareholder is not holding the not seeking proxy authority. In addition, to be aware of the commencement of company’s securities with the purpose, any written communications would be these activities. or with the effect, of changing control of required to include specified The Schedule 14N filing for oral the company or to gain a number of disclosures, including: solicitations will consist of a cover page seats on the board of directors that • in the form set forth in Schedule 14N, exceeds the maximum number of The identity of the nominating shareholder or group; with the appropriate box on the cover nominees that the registrant could be • page marked to identify the filing as a required to include under Rule 14a– A description of his or her direct or notice of solicitation pursuant to Rule 11(d). Thus, we do not believe that it is indirect interests, by security holdings or otherwise; and 14a–2(b)(7). This filing would be made likely that a shareholder or group will • under the company’s Exchange Act file use the exemption as a means to engage A legend advising shareholders that number (or in the case of a registered in a contest for control. a shareholder nominee is or will be investment company, under the Consistent with the Proposal, neither included in the company’s proxy company’s Investment Company Act file this exemption nor the exemption set statement and that they should read the number), no later than the date of the forth in Rule 14a–2(b)(8) (discussed company’s proxy statement when first communication made in reliance below) will apply to solicitations made available and that the proxy statement, on the rule. when seeking to have a nominee other soliciting material, and any other As noted above, some commenters included in a company’s proxy relevant documents are or will be were opposed to the filing requirement materials pursuant to a procedure available at no charge on the for solicitations for various reasons. We specified in the company’s governing Commission’s Web site. have decided to adopt the filing documents (as opposed to pursuant to requirement because we believe it is Rule 14a–11). As we noted in the 649 Similarly, the exemption would not be available for solicitations in connection with important to provide companies and Proposal, in this instance, companies nominations made pursuant to foreign law shareholders with information about provisions. potential nominations under Rule 14a– 648 See new Instruction to Rule 14a–2(b)(7). 650 See Exchange Act Rule 14a–12.

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Under the Proposal, written soliciting also believed that the exemption should • Each written communication materials also would be required to be be available for any written solicitation includes:660 filed with the Commission under the by or on behalf of a nominating • The identity of the nominating company’s Exchange Act file number no shareholder or group in support of a shareholder or group and a later than the date the material is first nominee included in a company’s proxy description of his or her direct or published, sent or given to materials pursuant to State law or the indirect interests, by security shareholders.651 The soliciting material company’s governing documents, as holdings or otherwise; would be required to include a cover long as the nominating shareholder or • A prominent legend in clear, plain page in the form set forth in Schedule group does not use a form of proxy that language advising shareholders that 14A, with the appropriate box on the differs from that of the company, does a shareholder nominee is or will be cover page marked.652 not furnish or otherwise request a form included in the company’s proxy Three commenters supported the of revocation, abstention, consent or statement and that they should read proposed Rule 14a–2(b)(8) exemption authorization, and files its solicitation the company’s proxy statement for soliciting activities by or on behalf material for its nominees (or against the when available because it includes of a nominating shareholder or group in management nominees) with the important information. The legend support of the shareholder nominees Commission on the date of first use. also must explain to shareholders included in a company’s proxy To the extent that it is not included that they can find the proxy materials, with soliciting materials filed in either the company’s proxy materials statement, other soliciting material, no later than the date that the materials or Schedule 14N, the commenter also and any other relevant documents are first used.653 Two of these recommended that additional disclosure at no charge on the Commission’s commenters explained that because Web site; and be required to be included in • management would solicit votes against solicitations made pursuant to Rule Any soliciting material published, the shareholder nominees and for their 14a–2(b)(8).657 Another commenter also sent or given to shareholders in own nominees, the nominating stated that Rule 14a–2(b)(8) should accordance with this exemption must shareholder, group, and shareholder apply only to solicitations in favor of a be filed by the nominating nominees should have the same ability shareholder nominee that occur after the shareholder or group with the to solicit, so long as they do not request mailing of a company’s proxy Commission on Schedule 14N, under 654 proxy authority. Another commenter materials.658 Further, the commenter the company’s Exchange Act file number or, in the case of an stated that the exemption should apply explained that solicitations should not investment company registered under to solicitations for nominations made occur at a time when shareholders do the Investment Company Act of 1940, pursuant to Rule 14a–11, State law, or not have access to the more complete 655 under the company’s Investment a company’s governing documents. and balanced disclosure about all of the Company Act file number, no later The commenter opposed any limitations nominees in a company’s proxy than the date the material is first on the soliciting activities by a materials. published, sent or given to nominating shareholder or group and As adopted, Rule 14a–2(b)(8) provides shareholders. Three copies of the viewed such soliciting activities as the an exemption from the generally material would at the same time be same as a company’s disclosure applicable disclosure, filing, and other filed with, or mailed for filing to, each opposing a shareholder proposal. One requirements of the proxy rules for national securities exchange upon commenter supported the Rule 14a– solicitations by or on behalf of a which any class of securities of the 2(b)(8) exemption for solicitations by a nominating shareholder or group, company is listed and registered. The nominating shareholder or group in provided that: soliciting material would be required favor of a shareholder nominee who is • The soliciting party does not, at any to include a cover page in the form set included in a company’s proxy time during such solicitation, seek forth in Schedule 14N, with the materials (or against a management directly or indirectly, either on its nominee), but recommended that the appropriate box on the cover page own or another’s behalf, the power to marked.661 rule specify that the exemption only act as proxy for a shareholder and applies to solicitations in favor of a does not furnish or otherwise request, We are adopting certain modifications shareholder nominee (or against a board or act on behalf of a person who to Rule 14a–2(b)(8) from the Proposal to clarify when a party may begin to rely nominee) that occur after the furnishes or requests, a form of distribution of the company’s proxy on the exemption and to require that all revocation, abstention, consent or materials—this would help avoid soliciting material be filed on new authorization;659 confusion and misunderstandings about Schedule 14N.662 The exemption is whether solicitation may occur before 657 The recommended disclosures included: the otherwise consistent with the Proposal. the company’s proxy materials are period that the soliciting shareholder held the We have added a new instruction to available.656 This commenter also specified number of shares; a description of any the exemption clarifying that a recommended that the exemption not be short positions or other hedging arrangements available if the company or another through which the soliciting shareholder reduced or Solicitation Enhancements proposing release of our otherwise altered its economic stake in the view of the scope of the term ‘‘form of revocation’’ shareholder has publicly announced company; a description of any contracts, within the meaning of Rule 14a–2(b)(1) and the that the company would be facing a arrangements, understandings or relationships proposed amendment to that rule to clarify that the traditional proxy contest, even from an between the soliciting shareholder and any other term does not include an unmarked copy of the unrelated shareholder. The commenter person with respect to any securities of the company’s proxy card that is requested to be company; and a description of any plans or returned directly to management. See Securities Act proposals of the shareholder or group with respect Release No. 33–9052; 34–60280 (July 10, 2009) [74 651 For a registered investment company, the to the organization, business or operations of the FR 35076]. If we act on the proposed amendments filing would be made under the company’s company. to Rule 14a–2(b)(1), we would expect to make Investment Company Act file number. 658 See letter from Seven Law Firms. conforming changes to Rule 14a–2(b)(8). 652 See proposed Rule 14a–2(b)(8)(iii). 659 See new Rule 14a–2(b)(8)(i). The language in 660 See new Rule 14a–2(b)(8)(ii). 653 See letters from CII; COPERA; P. Neuhauser. this provision generally follows the language in 661 See new Rule 14a–2(b)(8)(iii). 654 See letters from COPERA; P. Neuhauser. Rule 14a–2(b)(1) and, therefore, we interpret both 662 As noted above, the soliciting material will be 655 See letter from CII. provisions in the same manner. In this regard, we filed under cover of Schedule 14N and will appear 656 See letter from ABA. note the discussion in the Proxy Disclosure and as Schedule 14N–S on EDGAR.

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nominating shareholder or group may number (or in the case of a registered Sections II.B.2.e. and II.B.10.a. above, rely on the exemption provided in Rule investment company, under the under Rule 14a–11 a company will not 14a–2(b)(8) after receiving notice from company’s Investment Company Act file be required to include a nominee or the company in accordance with Rule number), no later than the date the nominees if the nominating shareholder 14a–11(g)(1) or (g)(3)(iv) that the material is first published, sent or given or group is a member of any other group company will include the nominating to shareholders. The soliciting material with persons engaged in solicitations in shareholder’s or group’s nominee or would be required to be filed with a connection with the subject election of nominees.663 As proposed, a nominating cover page in the form set forth in directors or other nominating activities; shareholder or group would not have Schedule 14N, with the appropriate box separately conducts a solicitation in been able to rely on the exemption until on the cover page marked to identify the connection with the subject election of their nominee or nominees are actually filing as soliciting material pursuant to directors other than a Rule 14a–2(b)(8) included in the company’s proxy Rule 14a–2(b)(8). This requirement is exempt solicitation in relation to those materials. We received little comment largely consistent with the Proposal, nominees it has nominated pursuant to on the appropriate timing for however, under the final rule, the Rule 14a–11 or for or against the commencement of soliciting activities solicitation will be filed on Schedule company’s nominees; or is acting as a under the proposed exemption, with 14N rather than as definitive additional participant in another person’s one commenter suggesting that Rule soliciting materials on Schedule 14A, as solicitation in connection with the 14a–2(b)(8) apply only to solicitations was proposed. As noted above, we subject election of directors. All of these that occur after the mailing of a received comment supporting the filing restrictions are designed to address company’s proxy materials,664 and of soliciting materials,667 however, the commenters’ concerns about collusion another suggesting generally that there commenters did not specifically address and potential abuse of the process. We should be no limitations on soliciting whether the filing should be made also believe these restrictions are activities by nominating shareholders or under cover of Schedule 14N or consistent with the desire to limit Rule groups.665 Schedule 14A. As discussed above with 14a–11 to those shareholders or groups After further consideration, we have respect to filings made pursuant to Rule that do not have an intent to change the determined that a nominating 14a–2(b)(7),we have made the change to control of the company or to gain a shareholder or group should be able to Schedule 14N to avoid confusion number of seats on the board of begin soliciting once there is certainty between soliciting materials filed in directors that exceeds the maximum as to whether their nominees will be connection with the formation of a number of nominees that the registrant included in the company’s proxy nominating shareholder group under could be required to include under Rule materials rather than being required to Rule 14a–11 (or in connection with a 14a–11. Finally, we have clarified in an wait for the company to furnish its Rule 14a–11 nomination) and other instruction to Rule 14a–2(b)(8)669 that proxy materials. In this regard, we note proxy materials that may be filed by Rule 14a–2(b)(8) is the only exemption that the exemption is consistent with companies or by participants in a upon which Rule 14a–11 nominating the treatment of insurgent soliciting traditional proxy contest. shareholders or groups may rely for materials in a traditional proxy contest, As described in Section II.B.2.e. their soliciting activities in support of as an insurgent may rely on Rule 14a– above, the rules we are adopting today nominees that are or will be included in 12(a) to engage in soliciting activities will not prohibit shareholders from the company’s proxy materials or for or before furnishing shareholders with a submitting Rule 14a–11 nominations for against company nominees. This will proxy statement provided that the inclusion in company proxy materials help ensure that these persons will not soliciting party provides certain when a proxy contest is being seek proxy authority and will file disclosure and files a definitive proxy conducted by another person written communications in connection statement before or at the same time as concurrently. We are, however, adding with their soliciting efforts and, we the forms of proxy, consent or a clarification to new Rule 14a–2(b)(8), believe, will help to address some of authorization are furnished to or similar to Rule 14a–2(b)(7), in response commenters’ concerns with regard to requested from shareholders.666 We to commenters’ concern that the confusion and potential abuse of the have included the requirement that the exemptions could be used as the first exemption. nominating shareholder or group have stage of a contest for control. As Consistent with the Proposal and as received notice that their nominee or adopted, the exemption will be lost if a discussed above with regard to Rule nominees will be included in the shareholder or group subsequently 14a–2(b)(7), the exemption will not company’s proxy materials before engages in a non-Rule 14a–11 apply to solicitations made when commencing solicitations to avoid nomination or solicitation in connection seeking to have a nominee included in confusion and potential abuse of the with the subject election of directors or a company’s proxy materials pursuant exemption. if they become a member of a group, as to a procedure specified in the We also have modified the filing determined under Section 13(d)(3) of company’s governing documents (as requirements for written soliciting the Exchange Act and Rule 13d–5(b)(1), opposed to pursuant to Rule 14a–11). As materials. Similar to the filing or otherwise, with persons engaged in we noted in the Proposal, in this requirements for relying on Rule 14a– soliciting or other nominating activities instance, companies and/or 2(b)(7), any written soliciting material in connection with the subject election shareholders would have determined published, sent or given to shareholders of directors. The risk of losing the Rule the parameters of the shareholder’s or in accordance with the terms of Rule 14a–2(b)(8) exemption and potential group’s access to the company’s proxy 14a–2(b)(8) must be filed with the liability for engaging in non-exempt materials. Given the range of possible Commission on a Schedule 14N, under solicitations should prevent nominating criteria that companies and/or the company’s Exchange Act file shareholders or groups from soliciting shareholders could establish for in relation to any other person’s nominations, we continue to believe it 663 See Instruction 1 to Rule 14a–2(b)(8). nominees.668 Further, as discussed in would not be appropriate to extend the 664 See letter from ABA. exemption to those circumstances. Also 665 See letter from CII. 667 See letters from CII; COPERA; P. Neuhauser. 666 See Exchange Act Rule 14a–12(a). 668 See Instruction 3 to Rule 14a–2(b)(8). 669 See Instruction 2 to Rule 14a–2(b)(8).

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consistent with the Proposal, we have When the Commission adopted the directors and promote fair corporate not extended the exemption to current language of Rule 14a–8(i)(8) in suffrage, while still providing nominations made pursuant to December 2007,672 it noted that many appropriate disclosure and liability applicable State law provisions, again disclosures are required for election protections. because State law could establish any contests that are not provided for in Under the proposed amendment, the number of possible criteria for Rule 14a–8.673 In this regard, several shareholder proposal would have to nominations.670 A shareholder would Commission rules, including Exchange meet the procedural requirements of need to determine whether one of the Act Rule 14a–12, regulate contested Rule 14a–8 (e.g., the proposal could be existing exemptions applies to their proxy solicitations to assure that excluded if the shareholder proponent solicitation conducted in connection investors receive disclosure to enable did not meet the ownership threshold with a nomination made pursuant to a them to make informed voting decisions under Rule 14a–8) and not be subject to company’s governing documents or in elections. The requirements to one of the other substantive bases for State law. provide these disclosures to exclusion in the rule.675 The proposed shareholders from whom proxy revision of Rule 14a–8(i)(8) would not 11. 2011 Proxy Season Transition Issues authority is sought are grounded in Rule restrict the types of amendments that a Rule 14a–11 contains a window 14a–3, which requires that any party shareholder could propose to a period for submission of shareholder conducting a proxy solicitation file with company’s governing documents to nominees for inclusion in company the Commission, and furnish to each address the company’s provisions proxy materials of no earlier than 150 person solicited, a proxy statement regarding nomination procedures or calendar days, and no later than 120 containing the information in Schedule disclosures related to shareholder calendar days, before the anniversary of 14A. Items 4(b) and 5(b) of Schedule nominations, although any such the date that the company mailed its 14A require numerous specified proposals that conflict with proposed proxy materials for the prior year’s disclosures if the solicitation is subject Rule 14a–11 or State law could be annual meeting.671 Shareholders to Rule 14a–12(c), and Item 7 of excluded.676 seeking to use new Rule 14a–11 would Schedule 14A also requires important In the Proposal, we stated that we be able to do so if the window period specified disclosures for any director continued to believe that, under certain for submitting nominees for a particular nominee. Finally, all of these circumstances, companies should have company is open after the effective date disclosures are covered by the the right to exclude proposals related to of the rules. For some companies, the prohibition on making a solicitation particular elections and nominations for window period may open and close containing materially false or director from company proxy materials before the effective date of the new misleading statements or omissions that where those proposals could result in an rules. In those cases, shareholders is found in Rule 14a–9. election contest between company and would not be permitted to submit 2. Proposed Amendment shareholder nominees without the nominees pursuant to Rule 14a–11 for important protections provided for in In the Proposal, we proposed an inclusion in the company’s proxy the proxy rules. Therefore, while amendment to Rule 14a–8(i)(8), the materials for the 2011 proxy season. For proposing the revision to Rule 14a– election exclusion, to enable other companies, the window period 8(i)(8) as discussed above, we also shareholders, under certain may open before the effective date of the proposed to codify certain prior staff rules, but close after the effective date. circumstances, to require companies to include in their proxy materials interpretations with respect to the types In those cases, shareholders would be of proposals that would continue to be able to submit a nominee between the shareholder proposals that would amend, or that request an amendment excludable pursuant to Rule 14a–8(i)(8). effective date and the close of the As proposed, a company would be window period. to, a company’s governing documents regarding nomination procedures or permitted to exclude a proposal under C. Exchange Act Rule 14a–8(i)(8) Rule 14a–8(i)(8) if it: disclosures related to shareholder • nominations, provided the proposal Would disqualify a nominee who is 1. Background standing for election; does not conflict with proposed Rule • Currently, Rule 14a–8(i)(8) allows a 14a–11.674 The purpose of the proposed Would remove a director from company to exclude from its proxy office before his or her term expired; amendment was to further facilitate • statement a shareholder proposal that shareholders’ rights to nominate Questions the competence, business relates to a nomination or an election for judgment, or character of one or more membership on the company’s board of 672 nominees or directors; See Election of Directors Adopting Release. • directors or a procedure for such 673 See Election of Directors Adopting Release. Nominates a specific individual for nomination or election. This provision 674 Under the Proposal, Rule 14a–8(i)(8) would election to the board of directors, other currently permits the exclusion of a allow shareholders to propose additional means, than pursuant to Rule 14a–11, an other than Rule 14a–11, for inclusion of shareholder applicable State law provision, or a proposal that would result in an nominees in company proxy materials. Therefore, immediate election contest or would set under the Proposal, a shareholder proposal that company’s governing documents; or up a process for shareholders to conduct sought to provide an additional means for including • Otherwise could affect the outcome an election contest in the future by shareholder nominees in the company’s proxy of the upcoming election of directors. materials pursuant to the company’s governing requiring the company to include documents would not be deemed to conflict with shareholders’ director nominees in the Rule 14a–11 simply because it would establish 675 Currently, Rule 14a–8 requires that a company’s proxy materials for different eligibility thresholds or require more shareholder proponent have continuously held at subsequent meetings. extensive disclosures about a nominee or least $2,000 in market value, or 1%, of the nominating shareholder than would be required company’s securities entitled to be voted on the under Rule 14a–11. A shareholder proposal would proposal at the meeting for a period of at least one 670 Similarly, the exemption would not be conflict with proposed Rule 14a–11, however, to year by the date the proponent submits the available for solicitations in connection with the extent that the proposal would purport to proposal. See Rule 14a–8(b). These requirements nominations made pursuant to foreign law prevent a shareholder or shareholder group that met would remain the same. provisions. the requirements of proposed Rule 14a–11 from 676 In this regard, the proposed revision to Rule 671 See Rule 14a–11(b)(10) and discussion in having their nominee for director included in the 14a–8(i)(8) would not make a distinction between Section II.B.8.c.ii. above. company’s proxy materials. binding and non-binding proposals.

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The proposed codification was not and other commenters supporting the commenter expressed concerns that the intended to change the staff’s prior amendments while opposing Rule 14a– proposed amendments to Rule 14a– interpretations or limit the application 11.678 Some commenters expressly 8(i)(8) are broader than necessary to of the exclusion; it was intended to supported the adoption of both Rule allow proposals seeking to establish provide more clarity to companies and 14a–11 and amendments to Rule 14a– access to a company’s proxy materials shareholders regarding the application 8(i)(8).679 Some commenters indicated and have the potential of significantly of the exclusion. that the adoption of only the proposed changing the administration of Rule amendments to Rule 14a–8(i)(8), 3. Comments on the Proposal 14a–8(i)(8) with respect to other types of without Rule 14a–11, would not address proposals.684 The commenter also noted The proposal to amend Rule 14a–8 to current shortcomings in corporate that the fact that only four types of revise the election exclusion received governance and achieve the proposals have been addressed by the widespread support. Numerous Commission’s stated objectives.680 Of staff in the Rule 14a–8 process could be commenters expressed general support the commenters that supported the Rule attributed to the fact that the current for the proposed amendments to Rule 14a–8 amendments but opposed Rule standard under Rule 14a–8(i)(8) 14a–8(i)(8), with many of the 14a–11, many believed the amendments operated to avoid other impermissible commenters supporting the to Rule 14a–8 would allow procedures proposals from being presented in the 677 Commission’s proposal as a whole for the inclusion of shareholder first place. If the current standard is nominees in company proxy materials repealed, this commenter worried that 677 See letters from 13D Monitor; ACSI; AFL–CIO; to evolve and private ordering under the staff would have no basis upon AFSCME; Joseph Ahearn (‘‘J. Ahearn’’); Rahim Ali (‘‘R. Ali’’); AllianceBernstein; Amalgamated Bank; State law to continue, unfettered by the which to assess proposals that attempt Americans for Financial Reform; Australian Reward complexities of a Federal standard that to circumvent or supplement the Investment Alliance (‘‘ARIA’’); AUST(Q) would apply uniformly to differently Commission’s proxy solicitation rules. Superannuation (‘‘AUST(Q)’’); W. Baker; Barclays; situated companies operating under The commenter believed that BCIA; Bebchuk, et al.; R. Blake; William B. Bledsoe 681 (‘‘W. Bledsoe’’); Brigham and Associates, LLC diverse State law regimes. eliminating the current standard would (‘‘Brigham’’); British Insurers; Ethan S. Burger (‘‘E. While supporting the amendments to go beyond what is needed to permit Burger’’); J. Burke; CalPERS; CalSTRS; Calvert; Cbus Rule 14a–8(i)(8), some commenters shareholders to submit proposals (‘‘Cbus’’); CFA Institute; John P. Chaney (‘‘J. expressed concerns about certain Chaney’’); The Christopher Reynolds Foundation of seeking to amend, or request an New York (‘‘Christopher Reynolds Foundation’’); aspects of the amendments or amendment to, a company’s governing CII; COPERA; Corporate Library; Central Pension recommended certain changes.682 Two documents to establish a procedure for Fund of the International Union of Operating commenters expressed concerns about including shareholder-nominated Engineers (‘‘CPF’’); CRMC; L. Dallas; Mike G. Dill the codification of staff policies and (‘‘M. Dill’’); T. DiNapoli; Dominican Sisters of Hope; candidates for director in a company’s Andrew H. Dral (‘‘A. Dral’’); D. Eshelman; First interpretations under the current proxy materials. The commenter Affirmative; Florida State Board of Administration; version of Rule 14a–8(i)(8).683 One suggested retaining the current standard Martin Fox (‘‘M. Fox’’); Raymond E. Frechette (‘‘R. in Rule 14a–8(i)(8) and amending the Frechette’’); Glass Lewis; James J. Givens (‘‘J. Corporate Governance Alliance (‘‘Value Alliance’’); language only to specifically authorize Givens’’); Governance for Owners (‘‘Governance for R. VanEngelenhoven; Walden; B. Wilson; Leslie Owners’’); GovernanceMetrics; Michael D. Wolfe (‘‘L. Wolfe’’); Steve Wolfe (‘‘S. Wolfe’’); Neil proposals seeking to establish access to Grabowski (‘‘M. Grabowski’’); Greenlining Institute Wollman (‘‘N. Wollman’’); WSIB; Marcelo Zinn (‘‘M. a company’s proxy materials and (‘‘Greenlining’’); Hermes; HESTA Super Fund Zinn’’). require the disclosure provided in (‘‘HESTA’’); Sheryl Hogan (‘‘S. Hogan’’); David G. 678 See letters from 26 Corporate Secretaries; 3M; proposed Rule 14a–19. Hood (‘‘D. Hood’’); IAM; ICGN; Frank Coleman ABA; Advance Auto Parts; Aetna; AGL; Alcoa; Inman (‘‘F. Inman’’); Ironfire; Melinda Katz (‘‘M. Allstate; Alston & Bird; Ameriprise; American 4. Final Rule Amendment Katz’’); Michael E. Kelley (‘‘M. Kelley’’); Peter C. Bankers Association; American Express; Anadarko; Kelly (‘‘P. Kelly’’); Key Equity Investors, Inc. (‘‘Key Applied Materials; Association of Corporate As noted above in Section I.A., we do Equity Investors’’); Victor Kimball (‘‘V. Kimball’’); Counsel; Avis Budget; Best Buy; Boeing; Boston not believe that adopting changes to Jeffery Kondracki (‘‘J. Kondracki’’); A. Krakovsky; Scientific; Brink’s; BRT; Burlington Northern; Paul E. Kritzer (‘‘P. Kritzer’’); LACERA; C. Levin; Rule 14a–8(i)(8) alone, without adopting California Bar; Callaway; Caterpillar; Chevron; P. Rule 14a–11, will achieve our goal of Lanny D. Levin (‘‘L. Levin’’); LIUNA; LUCRF; Marco Clapman; Comcast; CSX; Cummins; Davis Polk; Consulting; Maine Securities Corporation (‘‘Maine Deere; Devon; DTE Energy; DuPont; Eaton; Einstein facilitating shareholders’ ability to Securities’’); B. McDonnell; James McRitchie (‘‘J. Noah; Eli Lilly; ExxonMobil; FedEx; Financial exercise their traditional State law rights McRitchie’’); Mercy Investment Program; M. Metz; Services Roundtable; FMC Corp.; FPL Group; David B. Moore (‘‘D. Moore’’); Karen L. Morris (‘‘K. to nominate directors. We believe that Frontier; GE; General Mills; A. Goolsby; C. revising Rule 14a–8 will provide an Morris’’); Robert Moulton-Ely (‘‘R. Moulton-Ely’’); Holliday; Home Depot; Honeywell; IBM; ICI; Intel; Motor Trades Association of Australia JPMorgan Chase; E. J. Kullman; N. Lautenbach; additional avenue for shareholders to Superannuation Fund Pty Limited (‘‘MTAA’’); MetLife; Microsoft; J. Miller; Motorola; NACD; NIRI; indirectly exercise those rights; Murray & Murray & Co., LPA (‘‘Murray & Murray’’); O’Melveny & Myers; Office Depot; P&G; PepsiCo; William J. Nassif (‘‘W. Nassif’’); Tom Nappi (‘‘T. therefore, the final rules include a Pfizer; Piedmont; Praxair; Protective; Ryder; S&C; revision to Rule 14a–8(i)(8). As adopted, Nappi’’); D. Nappier; Nathan Cummings Safeway; Seven Law Firms; Shearman & Sterling; Foundation; P. Neuhauser; Nine Law Firms; New Sherwin-Williams; SIFMA; Simpson Thacher; companies will no longer be able to rely Jersey State Investment Council (‘‘NJSIC’’); Norges Society of Corporate Secretaries; Southern on Rule 14a–8(i)(8) to exclude a Bank; Non-Government School Superannuation Company; Tenet; Tesoro; Textron; Theragenics; Fund (‘‘Non-Government’’); Ontario Teachers’ proposal seeking to establish a Tidewater; Tompkins; G. Tooker; tw telecom; procedure in a company’s governing Pension Plan Board (‘‘Ontario Teachers’’); OPERS; United Brotherhood of Carpenters; U.S. Bancorp; Thomas Paine (‘‘T. Paine’’); Pax World; Pershing The Valspar Corporation (‘‘Valspar’’); Wachtell; documents for the inclusion of one or Square; Karl Putnam (‘‘K. Putnam’’); S. Ranzini; Wells Fargo; Xerox. more shareholder nominees for director RacetotheBottom; Joan Reekie (‘‘J. Reekie’’); 679 See letters from AFL–CIO; CFA Institute; CII; 685 Relational; RiskMetrics; D. Roberts; D. Romine; in the company’s proxy materials. Governance for Owners; C. Levin; Marco Joseph Rozbicki (‘‘J. Rozbicki’’); Schulte Roth & Consulting; SWIB. Zabel; Shamrock; Shareowners.org; Sheet Metal 684 See letter from ABA. 680 Workers; Sisters of Mercy; Social Investment See letters from CII; USPE. 685 As we stated in the Proposing Release, a Forum; Sodali; Solutions; Laszlo Sterbinszky (‘‘L. 681 See letters from American Express; Brink’s; proposal would continue to be subject to exclusion Sterbinszky’’); Stringer Photography (‘‘Stringer’’); BRT; CSX; Davis Polk; DuPont; C. Holliday; GE; under other provisions of Rule 14a–8. For example, SWIB; J. Taub; Teamsters; Aleta Thielmeyer (‘‘A. General Mills; MetLife; Safeway; Tenet; Verizon. a proposal would be excludable under Rule 14a– Thielmeyer’’); TIAA–CREF; Trillium; TriState 682 See letters from ABA; BorgWarner; CII; J. 8(i)(2) if its implementation would cause the Coalition; T. Rowe Price; L. Tyson; Ursuline Sisters McRitchie; P. Neuhauser; O’Melveny & Myers; company to violate any State, Federal, or foreign of Tildonk; Universities Supernnuation; USPE; Seven Law Firms. law to which it is subject, or under Rule 14a–8(i)(3), ValueAct Capital; The Value Alliance and 683 See letters from ABA; Seven Law Firms. Continued

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In addition, we are adopting the in adopting amendments to a company’s 5. Disclosure Requirements proposed amendment to codify the prior governing documents to establish We did not propose any new staff interpretations largely as proposed. procedures for the inclusion of one or disclosure requirements for a As adopted, companies will be more shareholder nominees for director shareholder that submits a proposal that permitted to exclude a shareholder in the company’s proxy materials, we would amend, or that requests an proposal pursuant to Rule 14a–8(i)(8) if note that the provision would be an amendment to, a company’s governing it: additional avenue for shareholders to documents to address the company’s • Would disqualify a nominee who is submit nominees for inclusion in nomination procedures for inclusion of standing for election; company proxy materials, not a shareholder nominees in company • Would remove a director from substitute for, or restriction on, Rule proxy materials or disclosures related to office before his or her term expired; 14a–11. While such amendments those shareholder provisions.688 We • Questions the competence, business proposed by shareholders through Rule solicited comment on whether judgment, or character of one or more 14a–8 would not be excludable under additional disclosure from a shareholder nominees or directors; submitting such a proposal would be • Rule 14a–8(i)(8) as amended, a company Seeks to include a specific may seek to exclude such a proposal on appropriate. Three commenters opposed individual in the company’s proxy another basis. For example, to the extent requiring disclosure from shareholders materials for election to the board of a proposal sought to limit the who submit such a proposal pursuant to directors; or application of Rule 14a–11, a company Rule 14a–8 that differs from disclosure • Otherwise could affect the outcome could seek to exclude the proposal required of shareholders who submit of the upcoming election of directors.686 689 pursuant to Rule 14a–8(i)(3) on the basis other types of Rule 14a–8 proposals. Three commenters recommended We believe that shareholders and that it is contrary to the proxy rules. We generally that a shareholder who companies will benefit from the considered whether permitting submits a Rule 14a–8 proposal regarding enhanced clarity that the amended rule proposals to allow additional means for will provide concerning the application a procedure to include shareholder shareholder director nominees to be of the rule. We do not believe that the nominees for director in a company’s included in company proxy materials amendments will result in confusion proxy materials should be required to would create confusion or lack of with regard to the rule’s application provide additional disclosure (e.g., because the amendments do not change certainty for companies and their disclosure about its long-term interest in the manner in which Rule 14a–8(i)(8) shareholders in light of the final the company and intentions regarding has been, and will continue to be, provisions of Rule 14a–11. In the end, the shareholder proposal) so that other interpreted by the staff with respect to however, we have concluded that this shareholders could make a fully- other types of proposals. possibility of confusion can be informed voting decision.690 They The amendments to Rule 14a–8(i)(8) addressed through disclosure and is argued that disclosure at the time of a could result in shareholders proposing more than offset by the benefits of nomination pursuant to such a amendments to a company’s governing facilitating shareholders’ ability to procedure would relate only to the documents that would establish determine that their companies should election of specific nominees; it would procedures under a company’s have additional provisions allowing for not provide shareholders with enough governing documents for the inclusion inclusion of shareholder nominees in information to make a voting decision of one or more shareholder nominees for company proxy materials. on the proposed procedure and its director in company proxy materials. One commenter opposed the effect. These proposals could seek to include a application of proposed Rule 14a–8(i)(8) As we stated in the Proposing Release, it is our view that disclosure at the time number of provisions relating to to investment companies for the same a nominee is submitted and an actual nominating directors for inclusion in reasons that it opposed the application vote is taken on a shareholder nominee company proxy materials, and of proposed Rule 14a–11 to investment is sufficient. Therefore, we are not disclosures related to such nominations, companies.687 We have decided to make that require a different ownership adopting any new disclosure amended Rule 14a–8(i)(8) applicable to requirements for a shareholder simply threshold, holding period, or other investment companies for the same qualifications or representations than submitting such a proposal because we reasons that we are making Rule 14a–11 those contained in Rule 14a–11. To the believe that a shareholder may simply applicable to investment companies. extent that shareholders are successful want to amend the company’s Rule 14a–8(i)(8) is intended to further procedures for including shareholder if the proposal or supporting statement was facilitate shareholders’ traditional State nominees in company proxy materials, contrary to any of the Commission’s proxy rules. law rights to nominate directors, which but may not intend to nominate any 686 We note that the rule text adopted differs apply to the shareholders of investment particular individual.691 slightly from the proposed rule text as a result of companies. As discussed above, we do technical modifications we made to better reflect 688 our intent with respect to the rule. We are adopting not believe that the regulatory Shareholders submitting a proposal that seeks amended Rule 14a–8(i)(8) with the language ‘‘seeks protections offered by the Investment to establish a procedure under a company’s to include a specific individual in the company’s governing documents for the inclusion of one or Company Act or the fact that open-end more shareholder director nominees in the proxy materials for election to the board of management investment companies are directors’’ rather than ‘‘nominates a specific company’s proxy materials would be subject to Rule individual for election to the board of directors, not required by State law to hold annual 14a–8’s current requirements. See footnote 685 other than pursuant to Rule 14a–11, an applicable meetings serves to decrease the above. 689 State law provision, or a company’s governing importance of the rights that are granted See letters from CII; Florida State Board of documents.’’ The change in the language from Administration; United Brotherhood of Carpenters. ‘‘nominates’’ to ‘‘seeks to include’’ more accurately to shareholders under State law. For 690 See letters from ICI; Keating Muething; reflects the fact that Rule 14a–8 cannot be used as further discussion of our reasons for O’Melveny & Myers. a means to nominate a candidate for election to the applying the rule to investment 691 This approach is different from the disclosure board of directors. We also deleted the language companies, see Section II.B.3.b. requirements the Commission proposed in the regarding Rule 14a–11, an applicable State law Shareholder Proposals Release in 2007; however, it provision, or a company’s governing documents is consistent with the overall requirements relating because we believe it is unnecessary. 687 See letter from ICI. to the submission of shareholder proposals—

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In proposing amendments to Rule inclusion in the company’s proxy litigation in which the nominating 14a–8(i)(8), we noted that the statement; 695 shareholder or group or nominee is amendments could result in shareholder • Disclosure about the nominee a party or a material participant, proposals that would establish complying with the requirements of and that involves the company, any procedures for nominating directors and Item 4(b), Item 5(b), and Items 7(a), (b) of its officers or directors, or any disclosures related to such nominations and (c) and, for investment affiliate of the company; and that require a different ownership companies, Item 22(b) of Exchange • Any other material relationship threshold, holding period, or other Act Schedule 14A, as applicable, for between the nominating qualifications or representations than inclusion in the company’s proxy shareholder or group or the those proposed in Rule 14a–11. In statement; 696 nominee and the company or any • addition, a state could set forth in its Disclosure about the nominating affiliate of the company not 692 shareholder or members of a otherwise disclosed; 699 and corporate code, or a company may • choose to amend its governing nominating shareholder group Disclosure of any Web site address on documents, to establish nomination or consistent with the disclosure which the nominating shareholder or disclosure provisions in addition to currently required pursuant to Item group may publish soliciting 700 those provided pursuant to Rule 14a–11 4(b) and Item 5(b) of Schedule materials. 14A; 697 These disclosures would be included in (e.g., a company could choose to allow • shareholders to have their nominees Disclosure about whether the the company’s proxy materials pursuant included in the company’s proxy nominating shareholder or any to proposed new Item 7(f) of Schedule materials regardless of ownership—in member of a nominating shareholder 14A, or in the case of investment that instance, the company’s provision group has been involved in any legal companies, proposed Item 22(b)(19) of would apply for certain shareholders proceeding during the past five years, Schedule 14A. as specified in Item 401(f) of who otherwise could not have their In addition, under the Proposal, the Regulation S–K. Disclosure pursuant nominees included in the company’s nominating shareholder or group would to this section need not be provided proxy materials pursuant to Rule 14a– be required to identify the shareholder if provided in response to Items 4(b) 11). Accordingly, we proposed or group making the nomination and the and 5(b) of Schedule 14A; 698 amendments to our proxy rules to amount of their ownership in the • The following disclosure regarding address the disclosure requirements company on Schedule 14N. The filing the nature and extent of the when a nomination is made pursuant to would be required to include, among relationships between the nominating other disclosures: such a provision.693 shareholder or group and nominee • The name and address of the As proposed, Rule 14a–19 would and the company or any affiliate of nominating shareholder or each member apply to a shareholder nomination for the company: of the nominating shareholder group; director for inclusion in the company’s • Any direct or indirect material and proxy materials made pursuant to interest in any contract or • Information regarding the aggregate procedures established pursuant to State agreement between the nominating number and percentage of the securities law or by a company’s governing shareholder or group or the entitled to be voted, including the documents. The proposed rule would nominee and the company or any amount beneficially owned and the require a nominating shareholder or affiliate of the company (including number of shares over which the group to include in its shareholder any employment agreement, nominating shareholder or each member notice on Schedule 14N (which, under collective bargaining agreement, or of the nominating shareholder group has the Proposal, also would be filed with consulting agreement); or shares voting or disposition power. the Commission on the date provided to • Any material pending or threatened We did not receive a significant the company) disclosures about the amount of comment specifically nominating shareholder or group and 695 See proposed Rule 14a–19(a). addressing proposed Rule 14a–19. One their nominee that are similar to what 696 See proposed Rule 14a–19(b). This commenter believed that the disclosure would be required in an election information would identify the nominee, describe requirements of Rules 14a–18 and 14a– contest.694 certain legal proceedings, if any, related to the 19 should be virtually identical.701 The nominee, and describe certain of the nominee’s Specifically, the notice on Schedule transactions and relationships with the company. commenter highlighted certain 14N, as proposed, would be required to See Items 7(a), (b), and (c) of Schedule 14A. This discrepancies, such as the intent to include: information also would include biographical retain the requisite shares through, and information and information concerning interests of subsequent to, the date of election. • the nominee. See Item 5(b) of Schedule 14A. With A statement that the nominee respect to a nominee for director of an investment Another commenter saw no need for a consents to be named in the company, the disclosure would include certain separate rule to deal with nominations company’s proxy statement and to basic information about the nominee and any submitted under State law or a serve on the board if elected, for arrangement or understanding between the nominee company’s governing documents and and any other person pursuant to which he was selected as a nominee; information about the therefore urged the Commission not to generally, shareholder proponents are not required positions, interests, and transactions and adopt Rule 14a–19.702 The commenter to provide any specific type of disclosure along relationships of the nominee and his immediate believed there are no policy grounds to with their proposal. family members with the company and persons justify disparate treatment of 692 See North Dakota Publicly Traded related to the company; information about the Corporations Act, N.D. Cent. Code § 10–35–08 amount of equity securities of funds in a fund nominations submitted under State law (2009). In 2007, North Dakota amended its complex owned by the nominee; and information or a company’s governing documents. It corporate code to permit five percent shareholders describing certain legal proceedings related to the warned that a separate rule would only to provide a company notice of intent to nominate nominee, including legal proceedings in which the create confusion. Another commenter directors and require the company to include each nominee is a party adverse to, or has a material such shareholder nominee in its proxy statement interest adverse to, the company or any of its and form of proxy. See N.D. Cent. Code § 10–35 et affiliated persons. See paragraph (b) of Item 22 of 699 See proposed Rule 14a–19(e). al. (2007). Schedule 14A. 700 See proposed Rule 14a–19(f). 693 See proposed Rule 14a–19. 697 See proposed Rule 14a–19(c). 701 See letter from P. Neuhauser. 694 See proposed Rule 14a–19. 698 See proposed Rule 14a–19(d). 702 See letter from Cleary.

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suggested that we extend the disclosure with a Rule 14a–11 nomination, the D. Other Rule Changes requirement to nominations submitted nominating shareholder or group would 1. Disclosure of Dates and Voting pursuant to a provision under foreign be liable for any materially false or Information law.703 misleading statements in these As we stated in the Proposing Release, disclosures pursuant to new paragraph As proposed, if a company did not we believe the proposed additional (c) of Rule 14a–9.705 hold an annual meeting during the prior disclosure requirements are necessary to year, or if the date of the meeting has provide shareholders with full and fair As noted above, we have restructured changed by more than 30 days from the disclosure of information that is Rule 14a–11, Rule 14a–18, and prior year, within four business days of material when a choice among directors Schedule 14N. Similarly, while we are determining the anticipated meeting to be elected is presented; thus, we are adopting the disclosure requirements date a company would be required to adopting the disclosure requirement largely as proposed in Rule 14a–19,706 file a Form 8–K to disclose the date by largely as proposed.704 As noted above, they are now included in Item 6 of which a nominating shareholder or one commenter suggested that the Schedule 14N. In addition, because we group must submit notice to include a disclosure standard should apply to moved the disclosure requirements for nominee in the company’s proxy nominations made pursuant to foreign Rule 14a–11 from proposed Rule 14a–18 materials pursuant to Rule 14a–11.708 law. We agree that the disclosure is into Schedule 14N, the requirements for The date disclosed as the deadline for necessary regardless of the source of the shareholders submitting nominations such shareholder nominations for ability to nominate candidates for pursuant to a provision in State law or director would be required to be a director. We therefore have clarified that a company’s governing documents are reasonable time before the company the disclosure requirement extends not being adopted as new Rule 14a–18. mails its proxy materials for the only to nominations made pursuant to meeting. We also proposed to require a State law or a company’s governing Under the Proposal, a shareholder registered investment company that is a documents, but also pursuant to foreign submitting a nomination pursuant to a series company to file a Form 8–K law (in the case of a non-U.S. domiciled State law provision or a provision in a disclosing the company’s net assets as of company that does not qualify as a company’s governing documents would June 30 of the calendar year foreign private issuer). We continue to be required to file a Schedule 14N (with immediately preceding the calendar believe that these disclosures will assist the disclosures required by that year of the meeting and the total number shareholders in making an informed Schedule) by the date specified in the of the company’s shares that are voting decision with regard to any advance notice provision, or where no outstanding and entitled to vote for the nominee or nominees put forth by the such provision is in place, no later than election of directors (or if votes are to nominating shareholder or group, in 120 calendar days before the date the be cast on a basis other than one vote that the disclosures would enable company mailed its proxy materials for per share, then the total number of votes shareholders to gauge the nominating the prior year’s annual meeting.707 We entitled to be voted and the basis for shareholder’s or group’s interest in the are adopting this requirement as allocating votes) at the annual meeting company. We understand the concern proposed. We note that it is likely that of shareholders (or, in lieu of such an that a separate disclosure rule for a State or foreign law provision or a annual meeting, a special meeting of nominations made pursuant to State or provision in a company’s governing shareholders) as of the end of the most foreign law provisions, or a company’s documents will provide a deadline for recent calendar quarter. governing documents could create We did not receive much comment on submission of nominations made confusion. We note, however, that this aspect of the rule. One commenter certain disclosure provisions or pursuant to those provisions. While we urged the Commission not to require the certifications applicable to Rule 14a–11 believe that shareholders submitting Form 8–K filing for investment nominations may not be applicable to nominations pursuant to those companies, which generally are not nominations made pursuant to other provisions should provide the required to file Form 8–K.709 The provisions. For example, State or foreign disclosure required by Schedule 14N, commenter favored instead a law provisions, or the company’s we believe it is appropriate to defer to requirement for investment companies governing documents may require the deadline, if any, set forth in those to inform shareholders through another different ownership thresholds or provisions. In this regard, we note that method (or combination of methods) of holding periods. Therefore, we believe it timing concerns present in the Rule disclosure reasonably designed to is necessary to have separate disclosure 14a–11 nomination context (e.g., timing provide notice of the date, including via requirements for nominations made requirements for engaging in the staff a press release or posting information on pursuant to State or foreign law, or a no-action process) are not present in the company’s Web site. One company’s governing documents. As this context. commenter supported the proposed with disclosures made in connection instruction to Item 5.07 of Form 8–K.710 We are adopting this requirement 703 See letter from Curtis. 705 See proposed Rule 14a–9(c). substantially as proposed, although the 704 As noted in footnote 511 above, the applicable 706 As adopted, Item 6(d) of Schedule 14N will requirement will be in new Item 5.08 of disclosure requirement in Item 401(f) of Regulation require disclosure about a nominating shareholder’s S–K was amended in the Proxy Disclosure Form 8–K. A company will be required Enhancements Adopting Release to require involvement in legal proceedings during the past to file a Form 8–K, within four business disclosure regarding legal proceedings for the past ten years, rather than five years as was proposed. days of determining the anticipated date 10 years as opposed to past five years. Thus, This is due to the Commission’s recent amendment of the meeting, disclosing the date by disclosure would be required about a nominee’s or of Item 401(f) of Regulation S–K. See footnotes 511 nominating shareholder’s participation in legal and 704 above. which a nominating shareholder or proceedings during the past 10 years. We also are 707 If a company did not hold an annual meeting group must submit notice to include a making clarifying changes to the disclosure during the prior year, or if the date of the meeting nominee in the company’s proxy required regarding the nature and extent of relationships between the nominating shareholder has changed by more than 30 calendar days from or group and/or nominee and/or the company or its the prior year, then the nominating shareholder or 708 See proposed Item 5.07 to Form 8–K. affiliates. See footnote 514 and accompanying text group must provide notice a reasonable time before 709 See letter from ICI. in Section II.B.8.c.i. above. the registrant mails its proxy materials. 710 See letter from ABA.

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materials pursuant to Rule 14a–11, Exchange Act Rule 14a–5 requires than 5% of a class of equity securities which date shall be a reasonable time registrants to disclose in a proxy registered under Exchange Act Section before the registrant mails its proxy statement the deadlines for submitting 12 must report that ownership by filing materials for the meeting.711 We also shareholder proposals and matters an Exchange Act Schedule 13D with the have clarified that where a company is submitted pursuant to advance notice Commission.716 There are exceptions to required to include shareholder director bylaws. We are amending Rule 14a–5 to this requirement, however, that permit nominees in the company’s proxy also require companies to disclose the such a person to report that ownership materials pursuant to an applicable state deadline for submitting nominees for on Schedule 13G rather than Schedule or foreign law provision, or a provision inclusion in the company’s proxy 13D. One exception permits filings on in the company’s governing documents materials for the company’s next annual Schedule 13G for a specified list of then the company is required to disclose meeting of shareholders. This provision qualified institutional investors who the date by which a nominating will apply with respect to inclusion of have acquired the securities in the shareholder or nominating shareholder nominations in a company’s proxy ordinary course of their business and group must submit the Schedule 14N materials pursuant to Rule 14a–11, an with neither the purpose nor the effect required pursuant to Rule 14a–18. applicable state or foreign law of changing or influencing control of the 717 A registered investment company that provision, or a company’s governing company. A second exception 714 applies to persons who beneficially own is a series company also must disclose documents. We believe that it is more than 5% of a subject class of the total number of the company’s necessary to conform the existing securities if they acquired the securities shares that are outstanding and entitled requirements in Rule 14a–5, consistent with neither the purpose nor the effect to vote for the election of directors (or with the proposal to give adequate of changing or influencing control of the if votes are to be cast on a basis other notice to shareholders about their ability company and they are not directly or than one vote per share, then the total to submit a nominee or nominees for indirectly the beneficial owner of 20% number of votes entitled to be voted and inclusion in a company’s proxy or more of the subject class of the basis for allocating such votes) at the materials pursuant to Rule 14a–11. The change should help to avoid any securities.718 shareholder meeting as of the end of the Central to Schedule 13G eligibility most recent calendar quarter.712 We potential confusion regarding the date by which shareholders seeking to have under the exceptions discussed above is believe it is important to provide that the shareholder be a passive shareholders with information regarding a nominee included in a company’s proxy materials would need to submit a investor that has acquired the securities the deadline for submitting such without the purpose, or the effect, of nominations in the event that the date Schedule 14N pursuant to Rule 14a–11 or Rule 14a–18. changing or influencing control of the of the meeting at which the election of company. In addition, shareholders who directors will take place changes 2. Beneficial Ownership Reporting are filing as qualified institutional significantly. Moreover, we have Requirements investors must have acquired the decided to require registered investment As adopted, Rule 14a–11 requires that securities in the ordinary course of their companies to make the disclosures on business. Typically, persons who seek Form 8–K, as proposed, rather than a nominating shareholder or group hold at least 3% of the voting power of the to nominate candidates for a company’s through another method or combination board of directors would be unable to of methods because we believe that the company’s securities entitled to be voted on the election of directors. meet these eligibility requirements to information that we are requiring is file on Schedule 13G. As we stated in important information that should be Although unnecessary to be able to use the rule, it is possible that in aggregating the Proposing Release, however, we filed with the Commission and believe that the formation of a accessible on EDGAR rather than merely shares to meet the ownership requirement, a nominating shareholder shareholder group solely for the purpose disclosed on a Web site or in a press of nominating one or more directors release.713 or group will trigger the reporting requirements of Regulation 13D–G, pursuant to proposed Rule 14a–11, the which requires that a shareholder or nomination of one or more directors 711 See new Item 5.08 of Form 8–K and new pursuant to proposed Rule 14a–11, or General Instruction B.1. to Form 8–K. A late filing group that beneficially owns more than 5% of a voting class of any equity soliciting activities in connection with of such form would result in the registrant not being such a nomination (including soliciting current or timely for purposes of rules and security registered pursuant to Section in opposition to a company’s nominees) regulations related to form eligibility and the resale 12 file beneficial ownership reports.715 of securities. The company would be deemed should not result in a nominating Therefore, nominating shareholders will current once the Form 8–K is filed. shareholder or nominating shareholder 712 need to consider whether they have See General Instruction B.1 and Item 5.08(b) group losing its eligibility to file on of Form 8–K; Rules 13a–11(b)(3) and 15d–11(b)(3); formed a group under Exchange Act Schedule 13G. As a result, we proposed and Instruction 2 to Rule 14a–11(b)(1). In the case Section 13(d)(3) and Rule 13d–5(b)(1) of registered investment companies, nominating to revise the requirement that the first that is required to file beneficial shareholders may rely on the information contained and second categories of persons who ownership reports. Any person (which in the Form 8–K filed in connection with the may report their ownership on Schedule meeting, unless the nominating shareholder or includes a group as defined in Rule 13G must have acquired the securities group knows or has reason to know that the 13d–5(b)(1)) who is directly or information contained therein is inaccurate. See without the purpose or effect of indirectly the beneficial owner of more discussion in footnote 280. changing or influencing control of the 713 We are not adopting the proposed requirement company and, in the case of Rule 13d– that a registered investment company that is a series 714 See new Rule 14a–5(e)(3). company file a Form 8–K disclosing the company’s 715 The term equity security also includes any 1(b), in the ordinary course of business, net assets as of June 30 of the calendar year equity security of any insurance company which to provide an exception for activities immediately preceding the calendar year of the would have been required to be registered pursuant solely in connection with a nomination meeting. We proposed this requirement in to Section 12 of the Exchange Act except for the under Rule 14a–11. connection with our proposal to use tiered exemption contained in Section 12(g)(2)(G) of the thresholds based on net assets to determine Act or any equity security issued by a closed-end eligibility under Rule 14a–11. Since the rule we are investment company registered under the 716 See Exchange Act Rule 13d–1. adopting does not use tiered thresholds, the Investment Company Act of 1940. See Exchange 717 See Exchange Act Rule 13d–1(b). proposed requirement is no longer necessary. Act Rule 13d–1(i). 718 See Exchange Act Rule 13d–1(c).

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Comments on the proposal were the Commission to provide that, under It is important to note that any mixed. Some commenters generally all circumstances, a shareholder or activity other than those provided for supported the proposed exceptions from group seeking to nominate a director, in under Rule 14a–11 would make the the Schedule 13D filing obligation for a opposition to the election of incumbent exception inapplicable. For example, nominating shareholder or group directors, is not seeking to ‘‘influence’’ approaching a company’s board and conducting activities solely in control of the company. One commenter urging them to consider strategic connection with a Rule 14a–11 stated that most election contests would alternatives (e.g., sale of non-core assets nomination so that it would be eligible fall within the concept of ‘‘influencing or a leveraged recapitalization) would to report on Schedule 13G rather than the control of the issuer’’ because they constitute activities outside of the Rule Schedule 13D.719 One such commenter focus on the governance, strategic 14a–11 nomination, and any nominating added that the exceptions also should direction and policy initiatives of the shareholder or group engaging in such be available to a nominating shareholder company.726 Another commenter noted activities most likely would be or group submitting nominees pursuant that the Schedule 14N certifications ineligible to file on Schedule 13G. The to State law or a company’s governing require only that a nominating rule changes will not apply to documents.720 One commenter shareholder has no intention of nominating shareholders or groups that predicted the amendment would ‘‘changing control’’ of the company, but submit a nomination pursuant to an encourage use of Rule 14a–11 by large does not require the nominating applicable state or foreign law shareholders who are knowledgeable shareholder to certify that it has no provision, or a company’s governing about the company but may be reluctant intention of ‘‘influencing control.’’ 727 documents because in those instances to take action that may jeopardize their Several commenters expressed concerns the applicable provisions may not limit 721 Schedule 13G filer status. One about inadequate disclosures that would the number of board seats for which a commenter observed more generally result from the proposed exceptions or shareholder or group could nominate that a Schedule 13D filing is pointed to the useful disclosure candidates or include a requirement that unnecessary if the filing requirement of required by Schedule 13D.728 One the nominating shareholder or group Rule 14a–2(b)(7) is retained because commenter observed that if a lack intent to change the control of the such filings would provide sufficient nominating shareholder or group has no issuer or to gain a number of seats on notice to the market.722 Even if such plans regarding significant changes in the board of directors that exceeds the filing requirement is not retained, the the company or relationships with other maximum number of nominees that the commenter believed that a Schedule parties regarding securities of the registrant could be required to include 13D is unnecessary because the company, a Schedule 13D filing would under Rule 14a–11 (as is the case under underlying assumption of Rule 14a–11 not require significant information from Rule 14a–11). Accordingly, we do not is that there is no control intent. a nominating shareholder or group believe it would be appropriate to make On the other hand, other commenters a general determination by rule as to opposed generally the proposed beyond that required by Schedule 14N.729 This commenter noted that if a whether a nominating shareholder or exceptions from the Schedule 13D filing group under an applicable state or obligation.723 Some of these nominating shareholder or group, however, has more complicated foreign law provision, or a company’s commenters expressed reservations governing documents would be eligible about creating a broad exemption or relationships or intentions relating to the company or its securities, the to file on Schedule 13G. Instead, this carve-out from Exchange Act Section would be a fact-specific inquiry. 13(d) ‘‘control’’ concepts.724 One Schedule 13D filing would provide We believe that the disclosures about commenter noted that Rules 13d–1(b), additional information that shareholders 730 the nominating shareholder or group (c) and (e) track the use of the phrase would find useful. required by Rule 14a–11 and Schedule ‘‘changing or influencing control of the We continue to believe that it is 14N are adequate to allow shareholders issuer’’ from Exchange Act Section appropriate to provide an exception for to make an informed decision and to 13(d)(5).725 This commenter did not activities solely in connection with a keep the market apprised of believe there is a persuasive basis for nomination pursuant to Rule 14a–11 to allow a nominating shareholder or developments regarding board nomination activities, and do not 719 See letters from CalSTRS; CFA Institute; CII; group to report on Schedule 13G. Florida State Board of Administration; ICI; Schulte Accordingly, we are adopting, as believe that requiring the additional Roth & Zabel. Another commenter, ICGN, did not disclosures in Schedule 13D is expressly address the proposed amendment but proposed, the exception from the requirement to file a Schedule 13D (and necessary for activities solely in asked the Commission to clarify the definition of connection with a nomination under ‘‘group’’ so that shareholders would not be therefore permitting filing on Schedule dissuaded from acting collectively to use Rule 14a– 13G) for activities undertaken solely in Rule 14a–11. Because this exception is 11 out of concern that a Schedule 13D filing connection with a nomination under only available for purposes of the obligation would arise. nomination, a nominating shareholder 720 Rule 14a–11. In addition, we are See letter from CII. In contrast, two or group would need to reassess its commenters stated that the proposed exceptions adopting a change to the certifications should not be extended outside the context of Rule in Schedule 13G to reflect this eligibility to continue to report on 14a–11, and agreed that it would not be possible to exception.731 Schedule 13G as a passive or qualified address the eligibility standards in provisions of institutional investor after the election. State law or a company’s governing documents or For example, if a nominating ensure that there is no change in control attempt. 726 See letter from Seven Law Firms. See letters from ABA; Alston & Bird. 727 See letter from ABA. shareholder is also the nominee and is 721 See letter from Schulte Roth & Zabel. 728 See letters from ABA; Alston & Bird; BRT; successfully elected to the board, then 722 See letter from P. Neuhauser. Seven Law Firms; Society of Corporate Secretaries; the shareholder would likely be 723 See letters from ABA; Alston & Bird; BRT; Vinson & Elkins. ineligible to continue filing on Schedule Cleary; Microsoft; Seven Law Firms; Shearman & 729 See letter from ABA. 13G due to its ability as a director to Sterling; Society of Corporate Secretaries; Vinson & 730 Id directly or indirectly influence the Elkins. 731 We did not propose the change to the 724 See letters from ABA; Cleary; Microsoft; Seven certifications in Schedule 13G; however, we believe management and policies of the Law Firm; Shearman & Sterling. this conforming change is necessary to reflect the company. We believe the limited scope 725 See letter from ABA. intent of the exception. of the exemption addresses commenters’

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concerns about nominating shareholders standards for establishing the determining whether group members or groups influencing control of the independence of the nominee from the are 10% owners subject to Section 16. issuer while reporting on Schedule 13G. nominating shareholder, or members of Similarly, we are not adopting standards the nominating shareholder group. regarding application of the ‘‘deputized 3. Exchange Act Section 16 Although we did not propose an director’’ doctrine, which will be left to Section 16 732 applies to every person exemption from Section 16, we existing case law and courts. who is the beneficial owner of more requested comment on, among other than 10% of any class of equity security 4. Nominating Shareholder or Group things, whether a nominating Status as Affiliates of the Company registered under Exchange Act Section shareholder group should be excluded 12 (‘‘10% owners’’), and each officer and from Section 16 and whether subjecting We proposed that Rule 14a–11(a) director (collectively with 10% owners, such groups to Section 16 would be a contain a safe harbor providing that a ‘‘insiders’’) of the issuer of such security. disincentive to using Rule 14a–11. A nominating shareholder would not be We did not propose an exemption from few commenters recommended that the deemed an ‘‘affiliate’’ of the company Section 16 for groups formed solely for Commission create an exemption from under the Securities Act or the the purpose of nominating a director Section 16 for a group of shareholders Exchange Act solely as a result of using 733 pursuant to Rule 14a–11. In the that aggregated their holdings in order Rule 14a–11.741 Under the Proposal, this Proposal, we explained that we believed to submit a nominee pursuant to Rule safe harbor would apply not only to the the existing analysis of whether a group 14a–11.737 Commenters reasoned that nomination of a candidate, but also 734 has formed and whether Section 16 members of a nominating group that where that candidate is elected, 735 applies should continue to apply. We owns more than 10% of the shares provided that the nominating also explained that because the could not reasonably be considered shareholder or group does not have an proposed ownership thresholds for Rule company ‘‘insiders.’’ 738 These agreement or relationship with that 14a–11 were significantly lower than commenters noted that the group would director otherwise than relating to the 10%, we did not believe that the lack of exist for the sole purpose of nominating nomination. We were concerned that, an exclusion would have a deterrent a candidate and, absent special facts, without such a safe harbor, some effect on the formation of groups, and would have no access to inside nominating shareholders may be therefore did not believe it was information about the company. Thus, deterred from using Rule 14a–11. necessary to propose an exclusion from these commenters argued that the We solicited comment on the Section 16. statutory purpose of Section 16—the appropriateness of the proposed safe We also noted in the Proposal that prevention of insider trading—would harbor and posed some specific some shareholders, particularly not be relevant to such groups. Other questions concerning its application. institutions and other entities, may be We also asked whether we should concerned that successful use of Rule commenters did not support an exemption from Section 16.739 Some of include a similar safe harbor provision 14a–11 to include a director nominee in for nominating shareholders that submit company proxy materials may result in these commenters further agreed that no standard should be adopted regarding a nominee for inclusion in a company’s the nominating person also being proxy materials pursuant to an deemed a director under the application of the judicial doctrine concerning ‘‘deputized directors.’’ 740 applicable State law provision or a ‘‘deputization’’ theory developed by company’s governing documents rather courts in Section 16(b) short-swing After considering the comments, we continue to believe that an exclusion than using the proposed rule. profit recovery cases.736 Under this Three commenters provided from Section 16 is not appropriate for theory it is possible for a person to be statements of general support for the groups formed solely for the purpose of deemed a director subject to Section 16, proposed safe harbor.742 One even though the issuer has not formally nominating a director pursuant to Rule 14a–11, soliciting in connection with commenter believed that a safe harbor elected or otherwise named that person also would be warranted for a director. We did not propose the election of that nominee, or having that nominee elected as director. We shareholders submitting nominees pursuant to State law or a company’s 732 also believe that it is not necessary to 15 U.S.C. 78p. governing documents.743 Another 733 change the existing analysis of whether As discussed in the Proposing Release, the commenter believed the safe harbor Commission had previously proposed, in 2003, that a group has formed and whether Section a group formed solely for the purpose of nominating 16 applies. Because the ownership should not be available once the a director pursuant to Rule 14a–11, soliciting in shareholder nominee is elected.744 One connection with the election of that nominee, or threshold we are adopting for Rule 14a– 11 eligibility is significantly less than commenter recommended that having that nominee elected as a director be Instruction 1 to Rule 14a–11(a) clarify exempted from Exchange Act Section 16 reporting. 10%, shareholders will be able to form 734 See Exchange Act Rule 13d–5(b) [17 CFR groups with holdings sufficient to meet that the presence of agreements, other 240.13d–5(b)]. the Rule 14a–11 threshold without than those relating only to the 735 See Exchange Act Rule 16a–1(a)(1) [17 CFR reaching the 10% threshold in Section nomination, between a nominating 240.16a–1(a)(1)]. shareholder and a candidate or director 736 See Feder v. Martin Marietta Corp., 406 F.2d 16. Thus, we do not believe that Section 260 (2d Cir. 1969), cert. denied, 396 U.S. 1036 16 commonly will be a deterrent to use 741 This safe harbor was set forth in Instruction (1970); Blau v. Lehman, 368 U.S. 403 (1962); and of Rule 14a–11. As such, we believe that Rattner v. Lehman, 193 F.2d 564 (2d Cir. 1952). The 1 to proposed Rule 14a–11(a). The safe harbor was judicial decisions in which this theory was applied shareholders forming a group to submit intended to operate such that the determination of do not establish precise standards for determining a nominee for director pursuant to Rule whether a shareholder or group is an ‘‘affiliate’’ of when ‘‘deputization’’ may exist. However, the 14a–11 should be analyzed in the same the company would continue to be made based upon all of the facts and circumstances regarding express purpose of Section 16(b) is to prevent the way as any other group for purposes of unfair use of information by insiders through their the relationship of the shareholder or group to the relationships to the issuer. Accordingly, one factor company, but a shareholder or group would not be 737 that courts may consider in determining if Section See letters from ICI; Schulte Roth & Zabel; deemed an affiliate ‘‘solely’’ by virtue of having 16(b) liability applies is whether, by virtue of the ValueAct Capital. nominated that director. ‘‘deputization’’ relationship, the ‘‘deputizing’’ 738 See letters from ICI; Schulte Roth & Zabel. 742 See letters from CII; Protective; Schulte Roth entity’s transactions in issuer securities may benefit 739 See letters from ABA; Alston & Bird; CII; & Zabel. from the deputized director’s access to inside Seven Law Firms. 743 See letter from CII. information. 740 See letters from ABA; CII; Seven Law Firms. 744 See letter from Protective.

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would not necessarily confer affiliate engage in certain activities that would any statement which, at the time and in status on the nominating shareholder, further the general purpose of Rule 14a– the light of the circumstances under and that Rule 14a–11 is not intended to 11 due to concerns that such activities which it is made, is false or misleading change the current law regarding would jeopardize their ability to use the with respect to any material fact, or affiliate status.745 safe harbor. which omits to state any material fact Two commenters opposed the safe In this light, it does not appear that necessary in order to make the harbor.746 One commenter believed that the proposed safe harbor would statements therein not false or we should not adopt such a safe harbor meaningfully facilitate use of Rule 14a– misleading or necessary to correct any without addressing the issue of affiliate 11, if at all, and may, in fact, deter it statement in any earlier communication status more broadly.747 It argued that as because some nominating shareholders with respect to a solicitation for the long as the Commission follows the or members of nominating shareholder same meeting or subject matter which historical, facts-and-circumstances groups may limit their activities out of has become false or misleading.’’ analysis for the determination of concern that their activities would Commenters generally supported the affiliate status in other contexts, it also jeopardize reliance on the safe harbor. proposal to impose Rule 14a–9 liability should follow this practice in the Accordingly, we have decided neither to on nominating shareholders or groups context of Rule 14a–11. Both adopt a safe harbor under the rule nor that caused false or misleading commenters opposing the safe harbor to adopt a similar safe harbor for statements to be included in a also did not believe that proposed shareholders submitting nominees company’s proxy materials. One Instruction 1 to Rule 14a–11(a) would pursuant to State law or a company’s commenter supported the use of Rule significantly reduce the interpretive governing instruments. Instead, as is 14a–9 as the standard for assigning analysis needed to determine whether a currently the case in other contests, liability, as the standards under that nominating shareholder is an those who use the rule will need to rule are well known and therefore ‘‘affiliate.’’ 748 They argued that it rarely analyze affiliate status on a case-by-case would promote uniformity.749 The would be clear whether a nominating basis, taking into consideration all commenter further stated that Rule 14a– shareholder’s relationship with the relevant facts and circumstances, 9(c) makes sufficiently clear that a company would consist ‘‘solely’’ of its including the circumstances nominating shareholder or group would nominating and soliciting activities, no surrounding a nomination and election be liable for statements included in its matter how a safe harbor may be of a shareholder nominee. Schedule 14N or notice to the company that is included in the company’s proxy worded. They also expressed concern E. Application of the Liability Provisions materials. As for the consequences of that the safe harbor would discourage in the Federal Securities Laws to providing materially false information nominating shareholders from Statements Made by a Nominating or representations in a Schedule 14N, participating in potentially fruitful Shareholder or Nominating Shareholder the commenter stated that such a discussions with the company, for fear Group situation should be handled in the same that such participation would go beyond It is our intent that a nominating ‘‘solely’’ nominating and soliciting for a way as materially false statements or shareholder or group relying on Rule omissions in a Schedule 14A or other director candidate. 14a–11, an applicable state or foreign After considering the comments, we soliciting material filed in connection law provision, or a company’s governing with a proxy contest. Another do not believe that the proposed safe documents to include a nominee in harbor would provide a level of commenter suggested that the disclosure company proxy materials be liable for provided to the company by the certainty to nominating shareholders any statement included in the Schedule nominating shareholder or group and concerning their potential ‘‘affiliate’’ 14N or other related communications, or included in the company’s proxy status sufficient to warrant a departure which it causes to be included in a materials be treated as the shareholder’s from the current application of the term. company’s proxy materials, which, at or group’s soliciting materials.750 The We believe it is more appropriate to the time and in light of the commenter did not believe that Rule conduct a facts-and-circumstances circumstances under which it is made, 14a–9(c) makes clear that the analysis in this regard, as would is false or misleading with respect to nominating shareholder or group would currently be the case in other situations. any material fact or omits to state any be liable for any information included We agree with commenters’ views on material fact necessary to make the in its Schedule 14N or notice to the the limited utility of the safe harbor’s statements therein not false or company that is included in the application in practice, acknowledging misleading. To this end, we proposed to company’s proxy materials. One that a nominating shareholder would be add a new paragraph (c) to Rule 14a–9 commenter stated that members of a obligated to conduct a facts-and- to specifically address a nominating nominating group should be jointly and circumstance analysis to determine shareholder’s or group’s liability when severally liable to the company for affiliate status even if we were to adopt providing information on a Schedule material misstatements or omissions the safe harbor as proposed. We also 14N to be included in a company’s provided to the company about the recognize that some nominating proxy materials pursuant to Rule 14a– group or its members.751 Another shareholders or members of nominating 11. commenter, noting investors’ concerns shareholder groups may be reluctant to As proposed, new paragraph (c) stated about exposure to joint liability from that ‘‘no nominee, nominating participating with other investors to 745 See letter from Schulte Roth & Zabel. The shareholder or nominating shareholder commenter explained that nominees often request nominate a candidate, requested that the agreements, such as indemnification agreements, group, or any member thereof, shall Commission add additional that clearly relate only to their nomination. In other cause to be included in a registrant’s commentary about the limits of joint situations, however, nominees and nominating proxy materials, either pursuant to the liability for unapproved statements of shareholders enter into other agreements, including Federal proxy rules, an applicable State compensation agreements, which may not relate other members of a nominating exclusively to the nomination. law provision, or a registrant’s 746 See letters from ABA; Seven Law Firms. governing documents as they relate to 749 See letter from CII. 747 See letter from ABA. including shareholder nominees for 750 See letter from Protective. 748 See letters from ABA; Seven Law Firms. director in registrant proxy materials, 751 See letter from Verizon.

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group.752 One commenter suggested that repeated by the company in its proxy time-consuming litigation likely would a nominating shareholder or group statement, except where the company undermine the Commission’s goals for should be required to indemnify the knows or has reason to know that the the rule. Some commenters believed company for any costs incurred in information is false or misleading.754 A that the appropriate standard would be connection with any misstatements or similar provision was proposed in Rule the standard in Rule 14a–8(l)(2) and omissions in the information provided 14a–19 with regard to information Rule 14a–7(a)(2)(i): ‘‘the company is not to the company for inclusion in the provided by the nominating shareholder responsible for the contents of [the company’s proxy materials.753 or group in connection with a shareholder proponent’s] proposal or We are adopting Rule 14a–9(c) largely nomination made pursuant to an supporting statement.’’761 Other as proposed, but with specific applicable State law provision or a commenters recommended generally references to statements made in the company’s governing documents.755 that the Commission allow companies Schedule 14N and other related A number of commenters opposed the to provide certain disclaimers in their communications and a clarification that ‘‘knows or has reason to know’’ proxy materials regarding the statements the rule would apply where a nominee standard.756 Many commenters argued provided by the nominating shareholder is submitted pursuant to a foreign law generally that because the Commission’s or group,762 with one commenter provision in addition to a State law Proposal would eliminate the board’s suggesting that companies also should provision or the company’s governing involvement in selecting the be able to set the nominating documents. New Rule 14a–9(c) provides shareholder nominees and prevent a shareholder’s or group’s statements that ‘‘no nominee, nominating company from excluding any apart from their own statements by shareholder or nominating shareholder information from its proxy materials, using different fonts, colors, graphics or group, or any member thereof, shall the company should not be liable for other visual devices.763 cause to be included in a registrant’s information provided by the nominating Two commenters addressed the issue proxy materials, either pursuant to the shareholder, group, or nominee.757 of a company’s liability for disclosure Federal proxy rules, an applicable state Commenters further noted that provided by a nominating shareholder or foreign law provision, or a registrant’s companies would not have adequate or group that is determined to be governing documents as they relate to time or sufficient means to investigate materially false or misleading after the including shareholder nominees for the statements made by the nominating proxy materials have been sent.764 One director in registrant proxy materials, shareholder, group, or nominee.758 commenter stated that companies include in a notice on Schedule 14N, or Therefore, these commenters argued should not have liability for failing to include in any other related that it would be inappropriate to shift correct or recirculate proxy materials if, communication, any statement which, onto companies any liability for after the company mails its proxy at the time and in the light of the statements made by a nominating materials, it is notified (or learns) that circumstances under which it is made, shareholder, group, or nominee or the information provided by a is false or misleading with respect to impose a duty to investigate or nominating shareholder or group is (or any material fact, or which omits to otherwise confirm the accuracy of the has become) materially false or state any material fact necessary in information provided by a nominating misleading.765 The commenter noted order to make the statements therein not shareholder, group, or nominee.759 One that the burden of updating and false or misleading or necessary to commenter predicted that if a company correcting information provided by a correct any statement in any earlier is liable for information provided by a nominating shareholder or group should communication with respect to a nominating shareholder or group and be solely the obligation of that solicitation for the same meeting or included in a company’s proxy shareholder or group. Another subject matter which has become false materials pursuant to Rule 14a–11, an commenter provided similar views, or misleading.’’ The changes to the rule applicable State law provision, or a noting that ‘‘[i]n situations where the text are intended to clarify that a provision in a company’s governing registrant’s changes have not been nominating shareholder or group would documents, it would challenge in court permitted, and certainly after the proxy be liable for statements it makes any information provided by a materials have been published, we think regarding the nomination, regardless of nominating shareholder, group, or the burden [of correcting or whether those statements ultimately nominee that it suspects is materially recirculating proxy materials] should be appear in the company’s proxy false or misleading.760 The commenter on the nominating shareholder and that statement, as we consider any asserted that this type of expensive and the exception imposing liability on the statements that are made in the registrant should not apply.’’ 766 One Schedule 14N or in other 754 See proposed Rule 14a–11(e). commenter recommended that if Rule communications to be part of the 755 See Note to proposed Rule 14a–19. 14a–11 is adopted, the rule should state solicitation by the nominating 756 See letters from ABA; Alaska Air; American that liability is only attached when ‘‘the shareholder or group. Consistent with Bankers Association; Ameriprise; BorgWarner; BRT; company knows or is grossly negligent Caterpillar; Cleary; DTE Energy; ExxonMobil; this view, the Schedule 14N filing (as Honeywell; ICI; Protective; S. Quinlivan; Seven Law in not knowing that the information is well as any other related Firms; Sidley Austin; Society of Corporate false or misleading.’’ 767 Another communications) would be considering Secretaries; Southern Company; UnitedHealth; commenter asked that the company be soliciting materials for purposes of Verizon. liable for false and misleading Section 14(a) liability. 757 See letters from American Bankers Association; Ameriprise; BorgWarner; BRT; 761 Under the Proposal, the rule also Caterpillar; ExxonMobil; Honeywell; S. Quinlivan; See letters from ABA; BorgWarner; BRT; included express language providing UnitedHealth; Verizon. Caterpillar; Society of Corporate Secretaries; Southern Company. that the company would not be 758 See letters from Alaska Air; BorgWarner; BRT; 762 responsible for information that is DTE Energy; Protective; Seven Law Firms; Society See letters from Alaska Air; BorgWarner; BRT; of Corporate Secretaries. ICI; Protective. provided by the nominating shareholder 763 759 See letters from Alaska Air; BorgWarner; BRT; See letter from BRT. or group under Rule 14a–11 and then DTE Energy; Protective; Seven Law Firms; Sidley 764 See letters from ABA; Sidley Austin. Austin; Society of Corporate Secretaries; Southern 765 See letter from ABA. 752 See letter from Universities Superannuation. Company; United Health; Verizon. 766 Letter from Sidley Austin. 753 See letter from Verizon. 760 See letter from ABA. 767 See letter from Ameriprise.

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information provided by a nominating or misleading information from the We published a notice requesting shareholder or group only if it knew the nominating shareholder or group. comment on the collection of information was false or misleading.768 Under the Proposal, any information information requirements in the After considering the comments, we provided to the company in the notice Proposing Release for the rules, and we are adopting the proposed provision from the nominating shareholder or submitted these requirements to the stating that companies will not be group under Rule 14a–11 (and, as Office of Management and Budget for 777 responsible for information that is required, filed with the Commission by review in accordance with the PRA. provided by the nominating shareholder the nominating shareholder or group) The titles for the collections of or group under Rule 14a–11 and then and then included in the company’s information are: ‘‘ repeated by the company in its proxy proxy materials would not be (1) Proxy Statements—Regulation ’’ statement. This is the same standard incorporated by reference into any filing 14A and Schedule 14A (OMB Control used in Rule 14a–8. We modified the under the Securities Act, the Exchange No. 3235–0059); (2) ‘‘Information Statements— proposed provision in response to Act, or the Investment Company Act unless the company determines to Regulation 14C and Schedule 14C’’ commenters to remove the reference to incorporate that information by (OMB Control No. 3235–0057); information that the company knows or reference specifically into that filing.771 (3) ‘‘Form ID’’ (OMB Control No. has reason to know is false or A similar provision was proposed 3235–0328); misleading. We believe that the regarding information provided by the (4) ‘‘Schedule 14N’’; standard that currently is used in Rule nominating shareholder or group in (5) ‘‘Securities Ownership— 14a–8 is well understood and that it connection with a nomination made Regulation 13D and 13G (Commission would add unnecessary confusion and pursuant to an applicable State law Rules 13d–1 through 13d–7 and create significant uncertainty for provision or a company’s governing Schedules 13D and 13G)’’ (OMB Control companies to alter the standard in the documents.772 No. 3235–0145); context of Rule 14a–11. Using the Rule Those commenting on this provision (6) ‘‘Form 8–K’’ (OMB Control No. 14a–8 standard also is consistent with stated that information provided by a 3235–0060); and our revision to Rule 14a–11 to remove nominating shareholder, group, or (7) ‘‘Rule 20a–1 under the Investment as a basis for exclusion of a nominee nominee should not be deemed to be Company Act of 1940, Solicitations of that information in the Schedule 14N is incorporated by reference into Proxies, Consents, and Authorizations’’ false or misleading. Accordingly, the Securities Act, Exchange Act or (OMB Control No. 3235–0158). final rule contains express language Investment Company Act filings,773 but These regulations, rules and forms providing that the company will not be if it is, it should be treated as the were adopted pursuant to the Exchange responsible for information that is responsibility of the nominating Act and the Investment Company Act, provided by the nominating shareholder shareholder, group, or nominee rather among other statutes, and set forth the or group under Rule 14a–11 and then than the company.774 disclosure requirements for securities reproduced by the company in its proxy We are adopting this provision as ownership reports filed by investors, statement.769 A similar provision is proposed.775 To the extent the company proxy and information statements,778 included in an instruction to new Rule does specifically incorporate the and current reports filed by companies 14a–18 with regard to information that information by reference or otherwise to provide investors with the is provided by the nominating adopt the information as its own, information they need to make informed shareholder or group in connection with however, we will consider the voting or investing decisions. The hours a nomination made pursuant to an company’s disclosure of that and costs associated with preparing, applicable state or foreign law information as the company’s own filing, and sending these schedules and provision, or the company’s governing statements for purposes of the anti-fraud forms constitute reporting and cost documents.770 and civil liability provisions of the burdens imposed by each collection of As noted above, commenters raised Securities Act, the Exchange Act, or the information. An agency may not concerns about correcting or Investment Company Act, as applicable. conduct or sponsor, and a person is not required to respond to, a collection of recirculating proxy materials and III. Paperwork Reduction Act potential liability for failing to correct or information unless it displays a recirculate proxy materials after A. Background currently valid OMB control number. Compliance with the rules is learning that material a nominating Certain provisions of the final rules mandatory. Responses to the shareholder or group provided is false contain ‘‘collection of information’’ or misleading. As discussed above, requirements within the meaning of the 777 44 U.S.C. 3507(d) and 5 CFR 1320.11. under the rules as adopted, a company Paperwork Reduction Act of 1995.776 778 The proxy rules apply only to domestic will not be responsible for any companies with securities registered under Section information that is provided by the 771 See the Instruction to proposed Item 7(e) of 12 of the Exchange Act and to investment nominating shareholder or group under Schedule 14A; Instruction to proposed Item companies registered under the Investment 22(b)(18) of Schedule 14A. Rule 14a–11 and then reproduced by the Company Act. The number of annual reports by 772 See the Instruction to proposed Item 7(f) of reporting companies may differ from the number of company in its proxy statement—the Schedule 14A; Instruction to proposed Item proxy and information statements filed with the nominating shareholder or group will 22(b)(19) of Schedule 14A. Commission in any given year. This is because have liability for that information. 773 See letters from ABA; CII; Protective. some companies are subject to reporting Accordingly, a company will not be 774 See letters from ABA; Protective. requirements by virtue of Section 15(d) of the 775 See the Instruction to Item 7(e) of Schedule Exchange Act, and therefore are not covered by the required to recirculate or correct proxy 14A and Instruction to Item 22(b)(18) of Schedule proxy rules. Also, some companies are subject to materials if it learns that the materials 14A with regard to information provided in the proxy rules only because they have a class of provided to shareholders included false connection with a Rule 14a–11 nomination. See the debt registered under Section 12. These companies Instruction to Item 7(f) of Schedule 14A and generally are not required to hold annual meetings Instruction to Item 22(b)(19) of Schedule 14A with for the election of directors. In addition, companies 768 See letter from ICI. regard to information provided in connection with that are not listed on a national securities exchange 769 See Rule 14a–11(f). a nomination made pursuant to applicable State law or national securities association may not hold 770 See Instruction to new Rule 14a–18. See also or a company’s governing documents. annual meetings and therefore would not be Note to proposed Rule 14a–19. 776 44 U.S.C. 3501 et seq. required to file a proxy or information statement.

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information collection will not be kept a company would not be required to Form 8–K, and a nominating confidential and there is no mandatory include a nominee if that nominee’s shareholder or group to provide retention period for the information candidacy, or if elected, board disclosure on new Schedule 14N. disclosed. membership, would violate applicable When filed in connection with Rule Federal law, State law, foreign law, or 14a–11, Schedule 14N requires B. Summary of the Final Rules and the rules of a national securities Amendments disclosure about the amount and exchange or a national securities percentage of securities entitled to be As discussed above in more detail, the association (other than the rules related voted on the election of directors by the final rules provide shareholders with to director independence) and such nominating shareholder or group and two ways to more fully exercise their violation could not be cured during the the length of ownership of such traditional State law rights to nominate time period provided in the rule.779 securities. Schedule 14N also requires and elect directors. First, new Exchange Second, the new amendment to disclosure similar to the disclosure Act Rule 14a–11 will, under certain Exchange Act Rule 14a–8(i)(8) 780 will currently required for a contested circumstances, require companies to preclude a company from relying on election and disclosure of whether the include in their proxy materials Rule 14a–8(i)(8) to exclude from its nominee satisfies the company’s shareholder nominees for director proxy materials shareholder proposals director qualifications.784 Schedule 14N submitted by long-term shareholders or by qualifying shareholders seeking to also requires a certification that the groups of shareholders with significant establish procedures under a company’s nominating shareholder or group is not holdings. Rule 14a–11 will apply to all governing documents for the inclusion holding any of the company’s securities reporting companies subject to the of one or more shareholder nominees in with the purpose, or with the effect, of Exchange Act proxy rules, with a few a company’s proxy materials including, changing control of the company or to exceptions. Rule 14a–11 will apply only for example, proposals to allow lower gain a number of seats on the board of when applicable state or foreign law or ownership thresholds or higher directors that exceeds the maximum a company’s governing documents do numbers of shareholder director number of nominees that the company not prohibit shareholders from nominees.781 could be required to include under Rule nominating a candidate for election as a In connection with Rule 14a–11 and 14a–11. A nominating shareholder or director. Further, Rule 14a–11 will not the amendment to Rule 14a–8(i)(8), we group also will be required to certify apply to companies subject to the proxy also are adopting new rules that will that the nominating shareholder or rules solely because they have a class of require a notice to be filed with the group and the nominee satisfy the debt securities registered under Section Commission on new Schedule 14N, and applicable requirements of Rule 14a–11. 12 of the Exchange Act. Rule 14a–11 transmitted to the company, when a When a Schedule 14N is filed in will apply to smaller reporting shareholder seeks to submit a connection with a nomination pursuant companies, but on a delayed basis. nomination to a company pursuant to to an applicable state or foreign law Consistent with the Proposal, Rule 14a–11 or pursuant to applicable provision or a company’s governing companies are not able to ‘‘opt out’’ of state or foreign law provision or the documents providing for the inclusion the rule in favor of a different 782 company’s governing documents. of one or more shareholder director framework for including shareholder The Schedule 14N will require a nominees in company proxy materials, director nominees in company proxy nominating shareholder or group to the Schedule 14N requires similar, but materials. In addition, as was proposed, provide disclosure similar to the the rule will apply regardless of whether more limited, disclosures than a disclosure currently required in a Schedule 14N filed in connection with any specified event has occurred to contested election. The company will be trigger the rule and regardless of a nomination pursuant to Rule 14a– required to include the disclosure 11.785 In addition, a nominating whether the company is subject to a provided by the nominating shareholder concurrent proxy contest. shareholder or group filing a Schedule or group in its proxy materials. Thus, 14N in connection with a nomination A nominating shareholder or group the new rules will require a company to seeking to use Rule 14a–11 to require a submitted for inclusion in a company’s provide additional disclosure on proxy materials pursuant to applicable company to include a nominee or Schedules 14A and 14C,783 as well as nominees in the company’s proxy state or foreign law or a company’s governing documents will be required to materials will be required to meet 779 For an additional discussion of the Rule 14a– certain conditions, including an 11 eligibility requirements, see Section II.B.4 above. provide a more limited certification ownership threshold and holding period 780 Exchange Act Rule 14a–8 requires a company and filing a Schedule 14N to provide to include a shareholder proposal in its Schedule under Exchange Act Section 12, or a person required disclosures and certifications. 14A unless the shareholder has not complied with soliciting shareholders of such a company, must the procedural requirements in Rule 14a–8 or the include in its proxy statement to provide Under the rule, a company will not be proposal falls within one of the 13 substantive bases shareholders with material information relating to required to include a shareholder for exclusion in Rule 14a–8, including Rule 14a– voting decisions. nominee or nominees for director in the 8(i)(8). Schedule 14C prescribes the information that a company’s proxy materials where the 781 In this regard, we note that to the extent that company with a class of securities registered under a shareholder proposal seeks to establish a Exchange Act Section 12 must include in its nominating shareholder or group holds procedure for the inclusion of shareholder information statement in advance of a shareholders’ the securities with the purpose, or with nominees for director in a company’s proxy meeting when it is not soliciting proxies from its the effect, of changing control of the materials, generally any such proposal adopted by shareholders, including when it takes corporate company or to gain a number of seats on shareholders would not affect the availability of action by written authorization or consent of Rule 14a–11. To the extent that a proposal seeks to shareholders. the board of directors that exceeds the restrict shareholder reliance on Rule 14a–11, the Investment Company Act Rule 20a1 requires maximum number of nominees that the proposal would be subject to exclusion pursuant to registered investment companies to comply with company could be required to include Rule 14a–8(i)(2) because it would cause the Exchange Act Regulation 14A or 14C, as applicable. under Rule 14a–11. A company also company to violate Federal law or pursuant to Rule The annual responses to Investment Company Act 14a–8(i)(3) because the proposal would be contrary Rule 20a–1 reflect the number of proxy and will not be required to include a to the proxy rules. information statements that are filed by registered nominee submitted pursuant to Rule 782 See Sections II.B.8 and II.C.5 above. investment companies. 14a–11 who does not meet the 783 Schedule 14A prescribes the information that 784 See Item 5 of Schedule 14N. requirements of the rule. For example, a company with a class of securities registered 785 See Item 6 of Schedule 14N.

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than is required for a nomination with these three actions because our Rule 14a–11 in 2011.795 As explained in pursuant to Rule 14a–11.786 estimate did not account for the fact that greater detail below, we believe the We also are adopting two new a company or its corporate governance actual number of shareholders or groups exemptions from the proxy rules for committee is likely to undertake a of shareholders that will seek to use solicitations by a shareholder or group lengthy process before determining Rule 14a–11 may be much smaller. in connection with a nomination whether to support the candidate.792 While we note that there are inherent pursuant to Rule 14a–11.787 The first This commenter asserted that our uncertainties involved in providing this exemption addresses written and oral estimate began only once a company has estimate, we estimate for purposes of solicitations by shareholders that are already determined to include the the PRA requirements, based on seeking to form a nominating nominee, and did not account for the available data on the number of shareholder group, provided that certain amount of time necessary for a company contested elections, that 45 companies requirements are met.788 The second to fully and completely evaluate other than registered investment new exemption will apply to written shareholder nominees. This would companies and six registered and oral solicitations by or on behalf of include, for example, determinations investment companies with a nominating shareholder or group that about the nominee’s eligibility, shareholders eligible to submit has met the requirements of Rule 14a– investigation and verification of nominees pursuant to Rule 14a–11 will 11 in favor of shareholder nominees or information provided by the nominee, receive such a nomination each year. for or against company nominees.789 research into the nominee’s background, D. Revisions to PRA Reporting and Cost Each of these new exemptions requires analysis of the relative merits of the Burden Estimates the shareholder or group soliciting in shareholder nominee as compared to connection with a nomination pursuant management’s own nominees, multiple As discussed above, the rules we are to Rule 14a–11 to file under cover of meetings of the relevant board adopting include several substantive Schedule 14N any written materials committees, and analysis of whether a modifications to the Proposal; however, published, sent or given to shareholders nomination would conflict with any the Schedule 14N disclosure no later than the date such materials are Federal law, State law or director requirements we are adopting are first published, sent or given to qualification standards. substantially similar to the proposed shareholders. In addition, persons The commenter asserted that our disclosure requirements. In addition to relying on Rule 14a–2(b)(7) to burden estimate of 65 hours for a the disclosure we proposed to be commence oral solicitations must file a company that determines not to include included in Schedule 14N, the schedule notice of such solicitation under cover a nominee in its proxy materials does also will require disclosure of whether of Schedule 14N. not account for ‘‘significant’’ costs and the shareholder nominee satisfies the the ‘‘enormous’’ amount of time that company’s director qualifications.796 As C. Summary of Comment Letters and management and the board will likely discussed more fully below, we are Revisions to Proposal spend on the proxy contest itself.793 The revising our estimates in response to We requested comment on the PRA commenter also indicated that our commenters’ suggestions and the analysis in the Proposing Release. Three estimates did not account for the modifications to the Proposal that we commenters addressed our estimate of burdens on registered investment are adopting in the final rules. The 30 burden hours for a company that is companies as a result of their unique burden estimates discussed below relate associated with including a nominee in circumstances. The commenter noted to the hours and costs associated with its proxy materials.790 According to a that subjecting registered investment preparing, filing and sending the above survey that BRT conducted, two companies to Rule 14a–11 will result in schedules and forms, and constitute commenters noted that if a company significant administrative burdens on estimates of reporting and cost burdens determines that it will include a open-end funds and fund complexes, imposed by each collection of shareholder nominee, the costs of and increased costs. This commenter, information. preparing a written notice to the however, did not provide alternative For purposes of the PRA, we estimate nominating shareholder or group, as cost estimates. Another commenter the total annual incremental paperwork well as including in the company’s questioned our assumption that the cost burden resulting from new Rule 14a–11 proxy materials the name of, and other of submitting a no-action request and the related rule changes for disclosures concerning, the nominee, pursuant to Rule 14a–11 is comparable reporting companies (other than and preparing the company’s own to that of a no-action request submitted registered investment companies) and statement regarding the shareholder pursuant to Rule 14a–8.794 This registered investment companies to be nominee would require a total of an commenter argued that due to the approximately 4,113 hours of internal average of 99 hours of company fundamental issues at stake, boards will company or management time and a personnel time and outside costs of likely expend significantly more cost of approximately $548,200 for the $1,159,073 per company for each resources to challenge shareholder services of outside professionals.797 For shareholder nominee.791 One nominees and elect their own nominees purposes of the PRA, we estimate the commenter asserted that we than they will to oppose a shareholder underestimated the burden associated proposal submitted pursuant to Rule 795 See letter from Altman. The survey had 47 14a–8. participants that were primarily issuers. The median forecast of this survey was 10%. The survey 786 One commenter submitted the results See Item 8(b) of Schedule 14N. was based on the eligibility criteria contained in the 787 For further discussion of these exemptions, of a survey it conducted in which the Proposing Release. see Section II.B.10 above. participants predicted that, on average, 796 See Item 5(e) of Schedule 14N. 788 See new Rule 14a–2(b)(7). 15% of companies listed on U.S. 797 For convenience, the estimated PRA hour 789 See new Rule 14a–2(b)(8). exchanges could expect to face a burdens have been rounded to the nearest whole 790 See letters from BRT; S&C; Society of shareholder director nomination under number. We estimate an hourly cost of $400 for the Corporate Secretaries. In response to these service of outside professionals based on our comments, we have increased some of our burden consultations with several registrants and law firms estimates. See footnotes 815 and 817 below. 792 See letter from S&C. and other persons who regularly assist registrants 791 See letters from BRT; Society of Corporate 793 Id. in preparing and filing proxy statements and related Secretaries. 794 See letter from BRT. disclosures with the Commission.

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total annual incremental paperwork candidate or candidates for election as resulting in 208 companies receiving burden to nominating shareholders and director. A nominating shareholder or nominations pursuant to Rule 14a–11 groups from Schedule 14N to be group will be required to file Schedule annually.803 In the Proposing Release, approximately 7,870 hours of 14N to disclose information about the we also estimated that 61, or 5%, of shareholder personnel time, and nominating shareholder or group and 1,225 registered investment companies $1,049,300 for services of outside the nominee or nominees, and the responding to Rule 20a–1 each year professionals. As discussed further company will be required to include would receive shareholder nominations below, these total costs include all certain information regarding the for inclusion in their proxy materials. additional disclosure burdens nominating shareholder or group and After further consideration, we believe associated with the final rules, nominee or nominees in the company’s that a better indicator of how many including burdens related to the notice proxy statement unless the company shareholders might submit a nomination and disclosure requirements. The total determines that it is not required to is the number of contested elections and costs described above also include the include the nominee or nominees in its board-related shareholder proposals that burden hours resulting from the new proxy materials.800 A nominating have been submitted to companies.804 exemptions for solicitations by shareholder or group also will be We believe starting with this number is nominating shareholders or groups in afforded the opportunity to include in better because it indicates shareholders connection with a nomination pursuant the company’s proxy statement a or groups of shareholders who have to Rule 14a–11.798 As noted above, statement of support for its nominee or shown an interest in using currently smaller reporting companies will not be nominees not to exceed 500 words per available means under our rules to subject to Rule 14a–11 until three years nominee. The nominee or nominees also influence governance matters. The after the effective date of the rule. For will be included on the company’s form number of contested elections and purposes of the PRA, we have of proxy in accordance with Exchange board-related shareholder proposals, calculated the burden estimates as if the Act Rule 14a–4. however, does not reflect the additional rule has been fully phased in for all Under the final rule, shareholders or eligibility requirements that are being companies. groups owning at least 3% of the voting adopted in new Rule 14a–11. For As amended, Rule 14a–8(i)(8) will no power of a company’s securities entitled example, Rule 14a–11 requires that a longer permit companies to exclude, to be voted on the election of directors shareholder or group of shareholders under that basis, shareholder proposals for at least three years as of the date of satisfy an ownership threshold of at that seek to establish a procedure under filing their notice on Schedule 14N with least 3% of the company’s voting power; a company’s governing documents for the Commission, and transmitting the that amount of securities must have the inclusion of one or more notice to the company, will be eligible been held continuously for at least three shareholder director nominees in the to submit a nominee for election as years as of the date the nominating company’s proxy materials. For director to be included in the company’s shareholder or group submits notice of purposes of the PRA, we estimate the proxy materials,801 provided certain its intent to use Rule 14a–11; and the total annual incremental paperwork other eligibility requirements are met 802 nominating shareholder or group must burden resulting from the amendment to and subject to certain limitations on the execute a certification that it is not Rule 14a–8(i)(8) and the related rule overall number of shareholder nominees holding the securities with the purpose, changes for reporting companies (other for director. or with the effect, of changing control of than registered investment companies), In the Proposing Release, we the company or to gain a number of registered investment companies, and estimated that 208 companies with board seats that exceeds the maximum shareholders to be approximately 17,994 eligible shareholders would receive number of nominees that the company hours of internal company or nominations pursuant to Rule 14a–11. could be required to include under Rule shareholder time and a cost of That number was based in part on data, 14a–11. As a result of the additional approximately $2,399,200 for the which we used to estimate that eligibility requirements and services of outside professionals.799 approximately 4,163 reporting certifications required by Rule 14a–11, companies (other than registered 1. Rule 14a–11 we believe it is reasonable to investment companies) would have at New Rule 14a–11 will require any least one shareholder who met the 803 If we used the same data for estimating the company subject to the rule to include eligibility criteria set forth in the number of nominees that would be submitted disclosure about a nominating Proposing Release. We then estimated pursuant to the final rules as adopted, there would be approximately 2,117 companies with at least one shareholder’s or group’s nominee or that 5% of those companies would shareholder eligible to submit a nomination. If we nominees for election as director in the receive a nomination from an eligible were to assume that 5% of those companies with company’s proxy statement, and the shareholder or group of shareholders, at least one shareholder eligible to submit a name of the nominee or nominees on nomination would receive a nomination, then we would estimate that 106 companies would receive the company’s proxy card, when the 800 The burdens associated with Schedule 14N are a nomination each year. conditions of the rule are met. The rule discussed below. 804 In this regard, we note that it is estimated that will not apply if the company is subject 801 See Section II.B.4.b. above for a discussion of there were 57 contested solicitations in 2009. See to the proxy rules solely as a result of how voting power is determined. Georgeson, 2009 Annual Corporate Governance 802 having a class of debt registered under The eligibility requirements are provided in Review Executive Summary (available at http:// Rule 14a–11(b). As discussed in more detail in www.georgeson.com/usa/acgr09.php) and footnote Section 12 of the Exchange Act or if Section II.B.4., a nominating shareholder or group 828 below. In addition, approximately 118 Rule State law, foreign law or a company’s must not be holding the securities used to meet the 14a–8 shareholder proposals related to board issues governing documents prohibit ownership threshold with the purpose, or with the were submitted to shareholders for a vote in the shareholders from nominating a effect, of changing the control of the company or 2008–2009 proxy season. Board related proposals to gain a number of seats on the board of directors include proposals to have an independent chairman that exceeds the maximum number of nominees of the board, proposals to allow for cumulative 798 See new Rules 14a–2(b)(7) and 14a–2(b)(8). that the company could be required to include voting and proposals to require a majority vote to 799 This corresponds to 6,510 hours of under Rule 14a–11. A nominating shareholder or elect directors. See RiskMetrics 2009 Proxy Season shareholder time and $868,000 for the shareholders’ group also must provide certain statements and Scorecard, May 15, 2009. We believe these actions use of outside professionals and 11,484 hours of disclosure regarding its ownership and the nominee related to contested solicitations or board issues, company time and $1,531,200 for the company’s or nominees must meet the applicable eligibility 175 in total, provide useful information about the use of outside professionals. requirements. degree of interest in using Rule 14a–11.

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significantly reduce the number of boards sampled had between nine and nominee for director will be required to contested elections and board-related 19 directors. In the case of registered include the nominee in their proxy shareholder proposals for purposes of investment companies, we estimate that materials. In the other 10% of cases, we estimating the number of shareholders the median board size is eight.809 Thus, assume that the company will be able to or groups of shareholders who may although some shareholders or groups exclude the shareholder nominee (after submit a nomination pursuant to Rule could seek to include fewer than two providing notice of its reasons to the 14a–11. For purposes of this analysis, nominees and others would be Commission). If a company determines we estimate that 45 companies other permitted to include more than two to include a shareholder nominee, it than registered investment companies nominees, depending on the size of the must provide written notice to the will receive nominees from board, we assume for purposes of the nominating shareholder or group. We shareholders 805 for inclusion in their PRA that each shareholder or group estimate the burden associated with proxy materials.806 We further estimate would submit two nominees. As a preparing this notice to be five hours. that six registered investment result, for reporting companies, we For reporting companies (other than companies will receive nominees from estimate up to 211 total company registered investment companies), this shareholders pursuant to Rule 14a–11 burden hours per company (which is will result in 205 aggregate burden annually.807 the sum of the bullets below doubled hours (41 companies × 5 hours/ We estimate for PRA purposes that where appropriate to reflect two company), which corresponds to 154 each company that receives nominees nominees) which corresponds to 158 burden hours of company time (41 pursuant to Rule 14a–11 will receive hours (211 × 0.75) of company time, and companies × 5 hours/company × 0.75) two nominees from one shareholder or a cost of approximately $21,100 (211 × and $20,500 in services of outside group. The median board size based on 0.25 × $400) for the services of outside professionals (41 companies × 5 hours/ a 2007 sample of public companies was professionals. In each case, this estimate company × 0.25 × $400). For registered nine.808 Approximately 60% of the includes: investment companies, this will result • If the company determines that it in 25 aggregate burden hours (5 805 We further estimate that 75% of the 45 will include a shareholder nominee, the companies × 5 hours/company), which submissions, or 34, will be made by groups of company’s preparation of a written corresponds to 19 burden hours of shareholders, and the remaining 11 will be made by notice to the nominating shareholder or × individuals. See the discussion below regarding the company time (5 companies 5 hours/ group (five burden hours per notice); company × 0.75), and $2,500 for estimated increase in Schedule 13G filings. • 806 For the reasons noted above, we discounted The company’s inclusion in its services of outside professionals (5 the 175 contested elections and board-related proxy statement and form of proxy of companies × 5 hours/company × 0.25 × shareholder proposals by approximately 75% to the name of, and other related $400). reflect the much more stringent eligibility disclosures concerning, a person or requirements under new Rule 14a–11 as compared We estimate the annual disclosure to Rule 14a–8. The 45 filings that we estimate for persons nominated by a shareholder or burden for companies to include purposes of the PRA are equal to 2.1% of the 2,117 shareholder group (five burden hours nominees and related disclosure in their companies we estimate to have at least one eligible per nominee); 810 proxy statements and on their form of shareholder meeting the ownership requirements of • The company’s preparation of its proxy to be 5 burden hours per the rule. own statement regarding the 807 In this regard, we estimate that there were 11 nominee, for a total of 410 aggregate contested elections in 2009, based on the number shareholder nominee or nominees (40 burden hours (41 responses × 5 hours/ of EDGAR filings on form-type PREC14A with burden hours per nominee); and response times; 2 nominees) for respect to unique investment companies in 2009. In • If a company determines that it may reporting companies (other than addition, the average number of no-action letters exclude a shareholder nominee issued by the staff regarding proposals seeking to registered investment companies), and amend a registered investment company’s bylaws to submitted pursuant to the new rule, the 50 aggregate burden hours (5 responses provide for shareholder director nominations company’s preparation of a written × 5 hours/response × 2 nominees) for received in calendar years 2007, 2008 and 2009, notice to the nominating shareholder or registered investment companies. For rounded to the nearest whole number greater than group followed by written notice of the reporting companies (other than zero, is one. We estimate that investment basis for its determination to exclude companies currently receive as many proposals registered investment companies), this regarding nomination procedures or disclosures as the nominee to the Commission staff corresponds to 308 burden hours of there are contested elections and no-action letters (116 burden hours per notice).811 company time, and $41,000 for services issued by the staff, resulting in a total of 24 For purposes of this PRA analysis, we of outside professionals.812 For contested elections and board-related shareholder assume that approximately 41 (or 90% proposals per year. For reasons similar to those registered investment companies, this articulated above for non-investment companies, of 45) reporting companies (other than corresponds to 38 hours of company we believe these actions related to contested registered investment companies) and 5 time, and $5,000 for services of outside solicitation or board issues, 24 in total, provide (or 90% of 6) registered investment professionals.813 useful information about the degree of interest in companies that receive a shareholder using Rule 14a–11. However, as discussed above, We estimate that 41 reporting Rule 14a–11 contains different eligibility companies (other than registered requirements than our current rules that will likely Approximately 40% of the boards in the sample investment companies) and 5 registered result in fewer companies receiving nominations had 8 or fewer directors, approximately 60% had between 9 and 19 directors, and less than 1% had investment companies will include a submitted pursuant to the rule. Similar to non- statement with regard to the shareholder investment companies, we believe it is reasonable 20 or more directors. 814 to discount the 24 contested elections and board- 809 See Investment Company Institute and nominees. We anticipate that the related shareholder proposals by approximately Independent Directors Council, Overview of Fund 75%, resulting in six investment companies Governance Practices 1994–2006, at 6–7 (November 812 The calculations for these numbers are: 410 receiving nominations pursuant to Rule 14a–11. We 2007), available at http://www.ici.org/pdf/ burden hours × 0.75 = 308 burden hours of further estimate that 75% of the submissions, or rpt_07_fund_gov_practices.pdf (noting that the company time and 410 burden hours × 0.25 × $400 five, will be made by groups of shareholders and median number of independent directors per fund = $41,000 for services of outside professionals. the remaining one will be made by an individual. complex in 2006 was six and that independent 813 The calculations for these numbers are: 50 See the discussion below regarding the estimated directors held 75% or more of board seats in 88% burden hours × 0.75 = 38 hours of company time increase in Schedule 13G filings. of fund complexes). and 50 burden hours × 0.25 × $400 = $5,000 for 808 According to information from RiskMetrics, 810 The requirement is in amended Rule 14a–4. services of outside professionals. based on a sample of 1,431 public companies the 811 As discussed below, for companies that 814 We assume that each company that includes median board size in 2007 was 9, with boards exclude a nominee but do not request no-action a shareholder nominee in its proxy materials would ranging in size from 4 to 23 members. relief, we estimate this burden to be 100 hours. include such a statement.

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burden to include a statement will Further, for purposes of this analysis, estimate that the burden hours include time spent to research the we assume that approximately 9 (or associated with preparing and nominee’s background, determinations 20% of 45) reporting companies (other submitting the company’s notice to the about the nominee’s eligibility, than registered investment companies) nominating shareholder or group and investigation and verification of and 1 (or 20% of 6) registered the Commission regarding its intent to information provided by the nominee, investment companies that receive a exclude a shareholder nominee and its analysis of the relative merits of the shareholder nominee for director for reasons for doing so would be 100 shareholder nominee as compared to inclusion in their proxy materials will hours.818 One commenter questioned management’s own nominees, multiple make a determination that they are not our assumption that submitting a meetings of the relevant board required to include a nominee in their request to the staff to exclude a committees, analysis of whether a proxy materials because the shareholder nominee will be nomination will conflict with any requirements of Rule 14a–11 are not met comparable to preparing a no-action Federal law, State law or director and will file a notice of intent to request to exclude a proposal under qualification standards, preparation of exclude that nominee.816 We further Rule 14a–8.819 This commenter argued the statement, and company time for estimate that 3 (or 33% of 9) of those that due to the fundamental issues at review of the statement by, among reporting companies (other than stake, boards are likely to expend others, the nominating committee and registered investment companies) will significant resources to challenge legal counsel. In the Proposing Release not seek no-action relief from the shareholder nominees and elect their we estimated that this burden will be Commission and will only provide the own nominees. We recognize the approximately 20 hours per nominee. required notice to the nominating possibility that companies might Based on comments received, however, shareholder or group and the expend greater resources in opposing a we believe it is appropriate to increase Commission. We estimate that the shareholder nominee than a shareholder this estimate to 40 hours per remaining 6 reporting companies other proposal. We believe, however, that nominee.815 For reporting companies than registered investment companies some of the resources to oppose a (other than registered investment and the one registered investment shareholder nominee will be allocated companies), this will result in 3,280 company that makes a determination to the use of other means outside of the aggregate burden hours (41 statements × that it is not required to include a required disclosure in the proxy 40 hours/statement × 2 nominees). This nominee in its proxy materials will seek statement (e.g., ‘‘fight letters’’) so we corresponds to 2,460 hours of company no-action relief in order to exclude the have not factored that into our time (41 statements × 40 hours/ nomination. We estimate that the collection of information estimate. We statement × 2 nominees × 0.75) and burden hours associated with preparing believe that a portion of the burden $328,000 for services of outside and submitting the company’s notice to associated with this will be reflected in professionals (41 statements × 40 hours/ the nominating shareholder or group the company’s preparation of its own statement × 2 nominees × 0.25 × $400) and the Commission regarding its intent statement regarding the shareholder for reporting companies (other than to exclude a shareholder nominee that nominee, rather than in the preparation registered investment companies). For includes a request for no-action relief of a no-action request, and accordingly, would be 116 hours per notice.817 We registered investment companies, this as discussed above, we have increased will result in 400 aggregate burden our estimate of the associated burden 816 With respect to companies other than hours (5 statements × 40 hours/ from 20 to 40 hours. Although we have registered investment companies, we assume that 6 increased the burden to the company statement × 2 nominees). This of these submissions ultimately would be corresponds to 300 hours of company excludable under the rule. associated with preparing its own time (5 statements × 40 hours/statement 817 This estimate is based on data provided by the statement, we are not persuaded that × × BRT in its comment letter dated August 17, 2009. also increasing the burden associated 2 nominees 0.75) and $40,000 for In its letter, the BRT provided data from a survey services of outside professionals (5 with preparing a request to exclude the of its own members indicating that the average nominee will be an accurate estimate. statements × 40 hours/statement × 2 burden associated with preparing and submitting a nominees × 0.25 × $400). single no-action request to the Commission staff in We are, however, as discussed above, connection with a shareholder proposal is increasing to 116 hours our estimate for approximately 47 hours and associated costs of preparing a notice of intent to exclude 815 In its comment letter and based on its survey $47,784. Although the letter did not specify as of its members, BRT estimated that the preparation much, assuming these costs correspond to legal of a notice to the nominating shareholder, inclusion fees, which we estimate at an hourly cost of $400, comparable to preparing a no-action request to of related disclosure in the company’s proxy we estimate that this cost is equivalent to exclude a proposal under Rule 14a–8. While it materials, and preparation of its own statement approximately 120 hours ($47,784/$400). We note appears, based on commenters’ estimates, that regarding the shareholder nominee will require an that this estimate is higher than the 65 hours we associated costs may have increased since 2003, average of 99 hours of personnel time. In the estimated in the Proposing Release, where we relied based on estimates provided by other commenters Proposing Release, we estimated the burden for on 2003 data provided by the American Society of on the costs of preparing and submitting a no-action these three actions to be 30 hours. We note that the Corporate Secretaries indicating 30 hours and request (see, e.g., letter from S&C), we believe an survey conducted by the BRT provides useful associated costs of $13,896, or 35 hours ($13,896/ average of the two estimates provides a more information regarding the amount of personnel time $400). The BRT survey also indicated that if a representative estimate of the spectrum of reporting that a company will spend responding to a Rule company opposes a shareholder nominee, it would companies, as opposed to those who participated in 14a–11 nomination; however, the survey represents incur an additional average of 302 hours of the BRT survey. Thus, we estimate that the burden a limited number of companies. While we are company time. This would be in addition to its to submit the notice and reasons for excluding a persuaded that the burden to companies of estimate of 99 hours for the actions described shareholder nominee and request no-action relief, preparing a statement with regard to the above. As noted above, the survey conducted by the would be approximately 116 hours ([167 hrs + 65 shareholder nominee may require more than the 20 BRT provides useful estimates for us to consider, hrs]/2). hours we estimated in the Proposing Release, we but the survey represents a limited number of 818 We believe that even if a company is not believe that 99 hours may represent the high end companies. In addition, it is unclear whether the seeking no-action relief the company will still of the range. In light of this information, we believe 302 hours is inclusive of the no-action process. We spend significant time preparing its notice to it is appropriate to increase our estimate and we believe this estimate is high and believe the revised exclude the nominee. Because the notice will be believe it is adequate to double our estimate of this number discussed below is a better estimate required to include the reasons that the nominee is component from 20 to 40 hours to reflect the because it attempts to reflect the burden across all being excluded, we believe that the burden will be average burden across all companies. Thus, we companies. For purposes of the PRA, we assume similar to, though not quite as extensive as, estimate that the internal burden associated with that submitting the notice and reasons for excluding preparing a request for no-action relief. these three actions would be 50 hours. a shareholder nominee to the staff will be 819 See letter from BRT.

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the nominee and request no-action relief shareholders or groups of reporting aggregate burden of 5 hours (5 based on 2009 data received from companies (other than registered solicitations × 1 hour/solicitation), commenters.820 investment companies), this will result which corresponds to 4 hours of In the case of reporting companies in 360 total burden hours (6 responses shareholder time (5 solicitations × 1 (other than registered investment × 60 hours/response). This will hour/solicitation × 0.75) and $500 for companies) that have determined they correspond to 270 hours of shareholder the services of outside professionals (5 may exclude a nominee and seek no- time (6 responses × 60 hours/response × solicitations × 1 hour/solicitation × 0.25 action relief from the staff, we estimate 0.75) and $36,000 for services of outside × $400). These burden hours would be that this will result in an aggregate professionals (6 responses x 60 hours/ added to the PRA burden of Schedule burden of 696 hours (6 notices × 116 response × 0.25 × $400). For nominating 14N. hours/notice), corresponding to 522 shareholders or groups of registered The second new exemption will apply hours of company time (6 notices × 116 investment companies, this will result to written and oral solicitations by or on hours/notice × 0.75) and $69,600 for the in 60 total burden hours (1 response × behalf of a nominating shareholder or services of outside professionals (6 60 hours/response). This will group that has met the requirements of notices × 116 hours/notice × 0.25 × correspond to 45 hours of shareholder Rule 14a–11 in favor of shareholder $400). In the case of registered time (1 response × 60 hours/response × nominees or for or against company investment companies that have 0.75) and $6,000 for services of outside nominees.825 Although nominating determined they may exclude a professionals (1 response × 60 hours/ shareholders or groups will not be nominee and seeking no-action relief response × 0.25 × $400). This burden required to engage in written from the staff, we estimate that this will would be added to the PRA burden of solicitations, if the nominating result in 116 aggregate burden hours (1 Schedule 14N. shareholder or group does so, the notice × 116 hours/notice), which will We also are adopting two new exemption will require inclusion in any correspond to 87 hours of company time exemptions from the proxy rules for written soliciting materials filed under (1 notice × 116 hours/notice × 0.75) and solicitations by shareholders or groups cover of Schedule 14N of a legend $11,600 for the services of outside in connection with a nomination advising shareholders to look at the professionals (1 notice × 116 hours/ pursuant to Rule 14a–11. The first company’s proxy statement when notice × 0.25 × $400). For companies exemption addresses written and oral available and advising shareholders (other than registered investment solicitations by shareholders that are how to find the company’s proxy companies) that have determined they seeking to form a nominating statement. For purposes of this analysis, may exclude a nomination but not to shareholder group, provided that certain we assume that 50% of nominating seek no-action relief from the staff, we requirements are met.824 Solicitations shareholders or groups ultimately estimate that this will result in an made in reliance on this exemption included in a company’s proxy aggregate burden of 300 hours (3 notices would be required to be filed under statement will solicit in favor of their × 100 hours/notice), corresponding to cover of Schedule 14N with the nominee or nominees outside the 225 hours of company time (3 notices × appropriate box marked on the cover company’s proxy statement. In the case 100 hours/notice × 0.75) and $30,000 for page. As discussed above, we estimate of reporting companies (other than the services of outside professionals (3 that 34 of the submissions made to registered investment companies), this notices × 100 hours/notice × 0.25 × companies (other than registered will result in an aggregate burden of 20 $400).821 These burdens would be investment companies) pursuant to Rule hours (20 solicitations × 1 hour/ added to the PRA burdens of Schedules 14a–11 will be by groups of solicitation), which corresponds to 15 14A and 14C or, in the case of registered shareholders formed for purposes of hours of shareholder time (20 × × investment companies, Rule 20a–1. satisfying the eligibility requirements of solicitations 1 hour/solicitation 0.75) We also estimate that the annual the rule. We estimate that 31 (90% of and $2,000 for services of outside × burden for the nominating shareholder’s 34) of these groups will avail themselves professionals (20 solicitations 1 hour/ × × or group’s participation in the no-action of Rule 14a–2(b)(7). In the case of solicitation 0.25 $400). These process822 available pursuant to Rule reporting companies (other than burden hours would be added to the 14a–11 would average 60 hours per registered investment companies), this PRA burden of Schedule 14N. In the nomination.823 For nominating will result in an aggregate burden of 31 case of registered investment hours (31 solicitations × 1 hour/ companies, this will result in an 820 Our prior estimate of 65 hours in the solicitation), which corresponds to 23 aggregate burden of 3 hours (3 × Proposing Release was based on 2003 data. hours of shareholder time (31 solicitations 1 hour/solicitation), 821 As discussed above, we estimate that only one solicitations × 1 hour/solicitation × 0.75) which corresponds to 2 hours of registered investment company will make a × determination that it is not required to include a and $3,100 for the services of outside shareholder time (3 solicitations 1 × nominee in its proxy material and that this professionals (31 solicitations × 1 hour/ hour/solicitation 0.75) and $300 for company will seek no-action relief. solicitation × 0.25 × $400). In the case services of outside professionals (3 822 × × There is no corresponding burden for of registered investment companies, we solicitations 1 hour/solicitation 0.25 shareholders or groups whose nomination is × $400). These burden hours would be excluded by the company, and the company does estimate that five of the submissions not seek no-action relief. If the shareholder objects made pursuant to Rule 14a–11 will be added to the PRA burden of Schedule to the exclusion, there is no requirement that the by groups of shareholders formed for 14N. shareholder seek redress from the staff or the Commission. As a result, we have not provided an purposes of satisfying the eligibility 2. Amendment to Rule 14a–8(i)(8) requirements of the rule. We estimate estimated burden. Under our amendment to Rule 14a– 823 As noted in footnote 817, we estimate that the that all of these groups will avail 8(i)(8), the election exclusion, a average burden to a company associated with themselves of Rule 14a–2(b)(7) (90% of company will no longer be able to rely preparing and submitting a no-action request to the 5 rounds up to 5). This will result in an staff is approximately 116 burden hours. We believe on this basis to exclude a shareholder that the average burden for a shareholder proponent proposal that seeks to establish a to respond to a company’s no-action request is for a nominating shareholder or group to respond likely to be less than a company’s burden to prepare to a company’s notice to the Commission of its procedure under a company’s governing the request; therefore, we estimate it will take intent to exclude. approximately half the time (or 60 burden hours) 824 See new Rule 14a–2(b)(7). 825 See new Rule 14a–2(b)(8).

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documents for the inclusion of one or believe that these proposals are helpful the inclusion of shareholder nominees more shareholder director nominees in in gauging the level of shareholder for director in company proxy materials the company’s proxy materials. The interest in nominating directors, as there are contested elections. We shareholder proposal will have to meet because our amendment to Rule 14a– believe that if shareholders are willing the procedural requirements of Rule 8(i)(8) narrows the scope of the under the current proxy rules to put 14a–8 and not be subject to one of the exclusion and no longer permits forth the expense and effort to wage a substantive exclusions other than the companies to exclude certain proposals contest to put forth their own nominees election exclusion (e.g., the proposal that are excludable under current Rule in 57 instances, there may be a similar could be excluded if the shareholder 14a–8(i)(8), and Rule 14a–11 as adopted number of proposals submitted to proponent did not meet the ownership includes meaningful eligibility companies pursuant to Rule 14a–8, as threshold under Rule 14a–8). standards, we believe there may be an amended, because companies will no Historically, shareholders have made increase in the number of shareholder longer be permitted to exclude some relatively few proposals relating to proposals seeking to establish proposals that currently are excludable shareholder access to a company’s procedures under a company’s under Rule 14a–8(i)(8). We also believe proxy materials. The staff received 368 governing documents for the inclusion that some shareholders that have no-action requests from companies of one or more shareholder nominees in submitted proposals in the past with seeking to exclude shareholder a company’s proxy materials to allow, regard to other board issues will submit proposals during the 2006–2007 fiscal for example, lower ownership proposals seeking to establish year. Of these requests, only three (or thresholds or higher numbers of procedures under a company’s approximately one percent) related to shareholder director nominees. governing documents for the inclusion proposals for bylaw amendments While the number of no-action of shareholder nominees for director in providing for shareholder nominees to requests the staff has received in the company proxy materials. As noted in appear in the company’s proxy past is a useful starting point for the the Proposing Release, according to materials. During the 2007–2008 fiscal PRA analysis, other data also is helpful information from RiskMetrics, year, the staff received 423 no-action to gauge shareholder interest in approximately 118 Rule 14a–8 requests to exclude shareholder nominating directors and to predict the shareholder proposals regarding board proposals pursuant to Rule 14a–8. Of anticipated impact on the number of issues were submitted to shareholders these no-action requests, six (or proposals submitted pursuant to Rule for a vote in the 2008–2009 proxy approximately two percent) related to 14a–8 that seek to establish procedures season.830 For purposes of the PRA, we proposals for bylaw amendments under a company’s governing estimate that approximately half of providing for shareholder nominees to documents for the inclusion of one or these shareholders may submit a appear in the company’s proxy more shareholder nominees in a proposal regarding procedures for the materials. During the 2008–2009 fiscal company’s proxy materials that inclusion of shareholder nominees for year, the staff received 365 no-action otherwise would be excludable under director in company proxy materials, requests to exclude shareholder current Rule 14a–8(i)(8). For example, resulting in up to 59 proposals in lieu proposals pursuant to Rule 14a–8. Of based on publicly available information, of proposals related to other board these requests, seven related to from 2001 to 2005, there were, on issues.831 shareholders’ ability to have their average, 14 contested elections per nominee included in a company’s proxy year.827 It is estimated that in 2009 there In the case of reporting companies materials. One such request sought to were at least 57 contested elections,828 (other than registered investment exclude a proposal to directly amend a and in 2008 it is estimated that there companies), we believe that the company’s governing documents to were at least 50 contested elections.829 amendment to Rule 14a–8(i)(8) may permit shareholder director For purposes of the PRA, we believe result in an increase of up to 64 (57 + nominations; the remaining six no- that as a result of the amendment to 7 2009 shareholder proposals) proposals action requests related to proposals Rule 14a–8(i)(8), shareholders may annually from 2009, and a total of 123 requesting that the company submit at least as many shareholder proposals (59 proposals + 57 + 7) to reincorporate in North Dakota where the proposals to establish procedures under companies per year regarding relevant state corporate law gives a company’s governing documents for procedures for the inclusion of qualified shareholders the right to shareholder nominees for director in 832 submit director nominees for inclusion 827 See Lucian A. Bebchuk, The Myth of the company proxy materials. We in the company’s proxy materials.826 Shareholder Franchise, 93 Va. L. Rev. 675, 683 830 Although these reincorporation (2007) (‘‘Bebchuk (2007)’’) (citing data from proxy See footnote 804 above. solicitation firm Georgeson Shareholder). See 831 We note that we used this estimate in the proposals did not seek to amend the footnote 314 in the Proposing Release. Proposing Release and did not receive comment on companies’ bylaws, by seeking 828 See Georgeson, 2009 Annual Corporate it. See Section IV.C.2. of the Proposing Release. We reincorporation into North Dakota it Governance Review (stating that as of the end of acknowledge the possibility that the number of Rule appears they sought the ability for September 2009 it had tracked 57 formal proxy 14a–8 proposals relating to director nomination contests); see also RiskMetrics Group, 2009 procedures may decrease with shareholders’ ability shareholders to have nominees included Postseason Report Summary, A New Voice in to submit a nominee for inclusion in company in a company’s proxy materials. As of Governance: Global Policymakers Shape the Road proxy materials pursuant to Rule 14a–11, but we July 23, 2010, during the 2009–2010 to Reform, October 2009, available at http:// believe that any decrease may be countered by an fiscal year, the staff has received 353 no- www.riskmetrics.com/docs/2009-postseason-report increase in shareholder proposals to establish (noting that during the 2009 proxy season there company-specific requirements that are different action requests to exclude shareholder were at least 39 proxy contests, and 36 negotiated than Rule 14a–11. proposals pursuant to Rule 14a–8, none settlements prior to a shareholder vote). 832 The increase is calculated by adding the of which related to shareholders’ ability 829 See letter from BRT (citing data from number of proxy contests in 2009 (57) plus the to have their nominee included in a Georgeson, ‘‘2008 Annual Corporate Governance number of no-action requests received in 2009 Review’’). See also RiskMetrics Group, 2008 regarding proposals seeking to amend a company’s company’s proxy materials. While we Postseason Report Summary, Weathering the Storm: bylaws to provide for shareholder director Investors Respond to the Global Credit Crisis, nominations (seven). We have not included an 826 See North Dakota Publicly Traded October 2008, available at http:// estimated 59 proposals in this increase because we Corporations Act, N.D. Cent. Code § 10–35–08 www.riskmetrics.com/docs/ believe they will be submitted in lieu of other types (2009). 2008postseason_review_summary. Continued

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estimate the annual incremental burden (110 proposals × 116 hours/proposal × companies that receive a shareholder for the shareholder to prepare the 0.25 × $400). proposal seeking to establish procedures proposal to be 10 burden hours per We also estimate that the annual under a company’s governing proposal, for a total of 640 burden hours burden for the proponent’s participation documents for the inclusion of one or (64 proposals × 10 hours/proposal). This in the Rule 14a–8 no-action process more shareholder nominees in a will correspond to 480 hours of would average 60 hours per proposal, company’s proxy materials will shareholder time (64 proposals × 10 for a total of 6,600 burden hours (110 determine that they may exclude the hours/proposal × 0.75) and $64,000 for proposals × 60 hours/proposal).834 This proposal from their proxy materials and the services of outside professionals (64 will correspond to 4,950 hours of request concurrence through the no- proposals × 10 hours/proposal × 0.25 × shareholder time (110 proposals × 60 action letter process (so registered $400).833 hours/proposal × 0.75) and $660,000 for investment companies will seek to We recognize that a company that services of outside professionals (110 exclude 22 such proposals per proxy receives a shareholder proposal has no proposals × 60 hours/proposal × 0.25 × season). Also similar to reporting obligation to submit a no-action request $400). These burdens would be added to companies other than registered to the staff under Rule 14a–8. We the PRA burden of Schedules 14A and investment companies, we assume that anticipate that because the proposals 14C. the annual burden for the company’s that would be submitted pursuant to In the case of registered investment submission of a notice of its intent to amended Rule 14a–8 could affect the companies, we anticipate that the exclude the proposal and its reasons for composition of the company’s board of amendment to Rule 14a–8(i)(8) will doing so would average 116 hours per directors, nearly all companies receiving result in an increase of 12 proposals proposal, for a total of 2,552 burden such proposals would submit a written annually, and a total of 24 proposals hours for registered investment statement of its reasons for excluding regarding procedures for the inclusion companies (22 proposals × 116 hours/ the proposal to the staff. We estimate of shareholder nominees for director in proposal). This corresponds to 1,914 × that there will be a total of 123 company proxy materials to companies hours of company time (22 proposals 835 × proposals per year regarding procedures per year. We estimate the annual 116 hours/proposal 0.75) and for the inclusion of shareholder incremental burden for the shareholder $255,200 for the services of outside × nominees in the company’s proxy proponent to prepare the proposal to be professionals (22 proposals 116 hours/ 10 hours per proposal, for a total of 120 proposal × 0.25 × $400). We also statement. This number includes the 64 × (57 + 7) new proposals plus the 59 burden hours (12 proposals 10 hours/ estimate that the annual burden for the proposals submitted in lieu of other proposal). This would correspond to 90 proponent’s participation in the Rule hours of shareholder time (12 proposals 14a–8 no-action process would average proposals. Thus, we estimate that 90% × × of the estimated 123 companies 10 hours/proposal 0.75) and $12,000 60 hours per proposal, for a total of for the services of outside professionals × receiving proposals seeking to establish 1,320 burden hours (22 proposals 60 (12 proposals × 10 hours/proposal × procedures under a company’s hours/proposal). This corresponds to 0.25 × $400). governing documents for the inclusion 990 hours of shareholder time (22 Similar to reporting companies other proposals × 60 hours/proposal × 0.75) of one or more shareholder nominees in than investment companies, we assume a company’s proxy materials will and $132,000 for the services of outside that 90% of registered investment professionals (22 proposals × 60 hours/ submit a written statement of their × × reasons for excluding the proposal to proposal 0.25 $400). These burdens 834 As noted in footnote 817 above, we estimate would be added to the PRA burden of the staff and would seek no-action that the average burden to a company associated relief. with preparing and submitting a no-action request Rule 20a–1. We estimate that companies would to the staff was approximately 116 burden hours. 3. Schedule 14N and Exchange Act Rule As noted above in footnote 823, we estimate 60 determine that they could exclude, and burden hours for a shareholder proponent to 14a–18 would seek staff concurrence through respond to a company’s notice of intent to exclude Rule 14n–1 establishes a new filing the no-action letter process for, 110 and request for no-action relief to the Commission. requirement for the nominating proposals (123 proposals × 90%) per In this regard, we also estimate that the average incremental burden for a shareholder proponent to shareholder or group, under which the proxy season. We estimate that the submit a shareholder proposal would be 10 hours. nominating shareholder or group will be annual burden for the company’s We note that one commenter estimated that the required to file notice of its intent to submission of a notice of its intent to average approximate cost to shareholders of include a shareholder nominee or exclude the proposal and its reasons for submitting a proposal is $30,000. See letter from CalPERS. We note that this commenter’s estimate nominees for director pursuant to Rule doing so would average 116 hours per corresponds to the burden to shareholders of 14a–11, applicable State law provisions, proposal, for a total of 12,760 burden submitting a proposal, whereas our estimate of 60 or a company’s governing documents, as × hours (110 proposals 116 hours/ burden hours corresponds to the burden to well as disclosure about the nominating proposal) for reporting companies (other shareholders in responding to a company’s no- action request. shareholder or group and nominee or than registered investment companies). 835 The increase is estimated based on the number nominees on new Schedule 14N. New This will correspond to 9,570 hours of of registered investment company proxy contests in Schedule 14N was modeled after × company time (110 proposals 116 calendar year 2009 (11) plus the average number of Schedule 13G, but with more extensive hours/proposal × 0.75) and $1,276,000 no-action letters issued by the staff regarding proposals seeking to amend a registered investment disclosure requirements than Schedule for the services of outside professionals company’s bylaws to provide for shareholder 13G. Schedule 14N will require, among director nominations received in calendar years other items, disclosure about the of proposals (a shareholder is limited to submitting 2007, 2008, and 2009 rounded to the nearest whole amount and percentage of securities one shareholder proposal to each company). number greater than zero (1). In addition, we 833 We note that this calculation is for estimate that investment companies currently owned by the nominating shareholder incremental, not total, costs. One commenter receive as many proposals regarding nomination or group, the length of ownership of estimated that the average approximate total cost for procedures or disclosures as there are contested such amount, and a written statement shareholders to include a Rule 14a–8 proposal was elections and no-action letters issued by the staff, that the nominating shareholder or $30,000. See letter from CalPERS. Assuming these resulting in a total of an estimated 24 proposals costs correspond to legal fees, which we estimate regarding nomination procedures or disclosures group will continue to hold the at an hourly cost of $400, we estimate that this cost related to director nominations to companies per securities through the date of the will be equivalent to approximately 75 hours. year. meeting.

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In addition, Schedule 14N will We also note that the burden associated provision, or a company’s governing contain the disclosure required to be with filing a Schedule 14N in documents will do so. As discussed included in the nominating connection with a nomination made above, we estimate that 45 reporting shareholder’s or group’s notice to the pursuant to an applicable state or companies (other than registered company of its intent to require that the foreign law provision or the company’s investment companies) and 6 registered company include the shareholder’s or governing documents may be slightly investment companies will receive group’s nominee in the company’s less than a nomination made pursuant notices of intent to submit nominees proxy materials pursuant to Rule 14a–11 to Rule 14a–11 because certain pursuant to Rule 14a–11. We anticipate or pursuant to applicable state or foreign disclosures, statements, and that some companies will receive law provisions or a company’s certifications will not be required nominees from more than one governing documents. With regard to (including a statement that the shareholder or group, though, as the latter, we are seeking to assure that nominating shareholder will continue to discussed above, for purposes of PRA nominating shareholders or groups that own the amount of securities through estimates, we assume companies with submit a shareholder nomination for the date of the meeting, disclosure about an eligible shareholder would receive inclusion in a company’s proxy the nominating shareholder’s or group’s two nominees from only one materials pursuant to applicable state or intent with respect to continued shareholder or group. foreign law provisions or the company’s ownership of the securities after the We estimate that compliance with the governing documents also provide election, the certifications that will be requirements of Schedule 14N disclosure similar to the disclosure required to use Rule 14a–11 (such as the submitted pursuant to Rule 14a–11 will required in a contested election to give certification concerning lack of intent to require 4,230 burden hours (45 notices shareholders the information needed to change control or to gain a number of × 47 hours/notice × 2 nominees/ make an informed voting decision. seats on the board that exceeds the shareholder) in aggregate each year for Schedule 14N will require disclosures maximum number of nominees that the nominating shareholders or groups of regarding the nature and extent of the company could be required to include reporting companies (other than relationships between the nominating under Rule 14a–11, or the certifications registered investment companies), shareholder or group, the nominee and that the nominating shareholder or which corresponds to 3,173 hours of the company or any affiliate of the group and the nominee satisfy the shareholder time (45 notices × 47 hours/ company. Pursuant to Items 7(e)–(f) of requirements of Rule 14a–11), and a notice × 2 nominees/shareholder × 0.75) Schedule 14A and, in the case of an supporting statement from the and costs of $423,000 (45 notices × 47 investment company, Items 22(b)(18)– nominating shareholder or group. hours/notice × 2 nominees/shareholder (19) of Schedule 14A, the company will Therefore, we estimate that compliance × 0.25 × $400) for the services of outside be required to include certain with Schedule 14N when a shareholder professionals. In the case of registered information set forth in the or group submits a nominee or investment companies, we estimate that shareholder’s notice on Schedule 14N in nominees to a company pursuant to an a nominating shareholder’s or group’s its proxy materials. A nominating applicable state or foreign law provision compliance with the requirements of shareholder or group filing a Schedule or the company’s governing documents Schedule 14N will require 564 burden 14N to provide disclosure when will result in 40 hours per response per hours (6 responses × 47 hours/response submitting a nominee for inclusion in a nominee. × 2 nominees) in aggregate each year, company’s proxy materials pursuant to For purposes of the PRA, we estimate which corresponds to 423 hours of applicable state or foreign law the total annual incremental burden for shareholder time (6 responses × 47 provisions or the company’s governing nominating shareholders or groups to hours/response × 2 nominees × 0.75) documents will not be required to prepare the disclosure that will be and costs of $56,400 for the services of provide certain statements and required under this portion of the final outside professionals (6 responses × 47 certifications required for nominating rules to be approximately 7,870 hours of hours/response × 2 nominees × 0.25 × shareholders or groups using Rule 14a– shareholder time, and $1,049,300 for the $400). Therefore, we estimate a total of 11. services of outside professionals.839 4,794 burden hours for all reporting We estimate that compliance with the This estimate includes the nominating companies, including investment Schedule 14N requirements will result shareholder’s or group’s preparation and companies, broken down into 3,596 in a burden greater than Schedule filing of the notice and required hours of shareholder time and $479,400 13G 836 but less than a Schedule 14A.837 disclosure and, as applicable, for services of outside professionals. Therefore, we estimate that compliance certifications on Schedule 14N and We assume that all nominating with Schedule 14N will result in 47 filings related to new Rules 14a–2(b)(7) shareholders or groups will prepare a hours per response per nominee and 14a–2(b)(8). statement of support for the nominee or submitted pursuant to Rule 14a–11.838 We do not expect that every nominees, and we estimate the shareholder that meets the eligibility disclosure burden for the nominating 836 We currently estimate the burden per response threshold to submit a nominee for shareholder or group to prepare a for preparing a Schedule 13G filing to be 12.4 inclusion in a company’s proxy statement of support for its nominee or hours. materials pursuant to Rule 14a–11, an nominees to be approximately 10 837 We currently estimate the burden per response for preparing a Schedule 14A filing to be 101.5 applicable state or foreign law burden hours per nominee. In the case hours and a Schedule 14C to be 102.62 hours. of companies other than registered 838 We estimate that the burden of preparing the nominating shareholder or group, and that 25% will investment companies, this results in an information in Schedule 14N for a nominating be carried by outside professionals. We believe the aggregate burden of 900 (45 statements shareholder or group would be 1⁄3 of the disclosures nominating shareholder or group will work with × × typically required by a Schedule 14A filing, which their nominee to prepare the disclosure and then 10 hours/statement 2 nominees/ results in approximately 34 burden hours. For have it reviewed by outside professionals. shareholder), which corresponds to 675 purposes of this analysis, we estimate that the 34 839 This figure represents the aggregate burden hours of shareholder time (45 burden hours will be added to the 12.4 hours hours attributed to Schedule 14N and is the sum of statements × 10 hours/statement × 2 associated with filing a Schedule 13G, resulting in the burden associated with Schedules 14N nominees/shareholder × 0.75) and a total of approximately 47 burden hours. We submitted pursuant to Rule 14a–11, applicable state estimate that 75% of the burden of preparation of or foreign law provisions, and a company’s $90,000 for services of outside Schedule 14N will be borne internally by the governing documents. professionals (45 statements × 10 hours/

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statement × 2 nominees/shareholder × requirements of Schedule 14N for approximately 10 burden hours per 0.25 × $400) for shareholders of nominating shareholders or groups nominee. This results in an aggregate reporting companies (other than submitting nominations pursuant to an burden of 600 hours (30 statements × 10 registered investment companies). For applicable state or foreign law provision hours/statement × 2 nominees/ registered investment companies, this or the company’s governing documents shareholder) for shareholders of will result in an aggregate burden of 120 would result in 2,400 aggregate burden reporting companies (other than × × × × (6 statements 10 hours/statement 2 hours (30 notices 40 hours/notice 2 registered investment companies), nominees/shareholder), which nominees/shareholder) each year for which corresponds to 450 hours of corresponds to 90 hours of shareholder nominating shareholders or groups of shareholder time (30 statements × 10 time (6 statements × 10 hours/statement reporting companies (other than hours/statement × 2 nominees/ × 2 nominees/shareholder × 0.75) and registered investment companies), shareholder × 0.75) and $60,000 for $12,000 for services of outside broken down into 1,800 hours of professionals (6 statements × 10 hours/ shareholder time (30 notices × 40 hours/ services of outside professionals (30 × × × × statements × 10 hours/statement × 2 statement 2 nominees/shareholder notice 2 nominees/shareholder 0.75) × × 0.25 × $400). Therefore, we estimate a and costs of $240,000 for the services of nominees/shareholder 0.25 $400). total of 1,020 burden hours for all outside professionals (30 notices × 40 For registered investment companies, reporting companies, including hours/notice × 2 nominees/shareholder this results in an aggregate burden of investment companies, broken down × 0.25 × $400). In the case of registered 240 hours (12 statements × 10 hours/ into 765 hours of shareholder time and investment companies, we estimate that statement × 2 nominees/shareholder), $102,000 for services of outside approximately 12 nominating which corresponds to 180 hours of professionals. shareholders or groups will submit a shareholder time (12 statements × 10 When a nominating shareholder or nomination pursuant to an applicable hours/statement × 2 nominees/ group submits a nominee or nominees state or foreign law provision or a shareholder × 0.75) and $24,000 for to a company pursuant to an applicable company’s governing documents.841 We services of outside professionals (12 state or foreign law provision or the estimate that a nominating shareholder’s statements × 10 hours/statement × 2 company’s governing documents, the or group’s compliance with the nominees/shareholder × 0.25 × $400). nominating shareholder or group will be requirements of Schedule 14N would This results in a total of 840 burden required to file a Schedule 14N to result in 960 aggregate burden hours (12 × × hours, broken down into 630 hours of provide disclosure about the nominating notices 40 hours/notice 2 nominees/ shareholder time and $84,000 for the shareholder or group and the nominee shareholder) each year, which services of outside professionals. or nominees. As discussed, a company corresponds to 720 hours of shareholder will be required to include certain time (12 notices × 40 hours/notice × 2 4. Amendments to Exchange Act Form disclosures about the nominating nominees/shareholder × 0.75) and costs 8–K shareholder or group and the nominee of $96,000 for the services of outside or nominees in its proxy statement. As professionals (12 notices × 40 hours/ Under Rule 14a–11, a nominating noted above, we estimate that the notice × 2 nominees/shareholder × 0.25 shareholder or group will be required to burden associated with filing a × $400). Therefore, we estimate that the file with the Commission, and transmit Schedule 14N in connection with a total burden hours would be 3,360 for to the company, a notice on Schedule nomination made pursuant to an all reporting companies, including 14N of its intent to require the company applicable state or foreign law provision investment companies, broken down to include the nominating shareholder’s or a company’s governing documents is into 2,520 hours of shareholder time or group’s nominee in the company’s 40 hours per nominee. We also estimate and $336,000 for services of outside proxy materials. The nominating that approximately 30 nominating professionals. shareholder or group must file and shareholders or groups of reporting We assume that all nominating transmit the notice on Schedule 14N no companies (other than registered shareholders or groups that submit a earlier than 150, and no later than 120, investment companies) will submit a nominee or nominees pursuant to an calendar days before the anniversary of nomination pursuant to an applicable applicable state or foreign law provision the date that the company mailed its state or foreign law provision or a or a company’s governing documents proxy materials for the prior year’s company’s governing documents.840 will prepare a statement of support for Thus, we estimate compliance with the the nominee or nominees,842 and we annual meeting. If the company did not estimate the disclosure burden for the hold an annual meeting during the prior 840 As discussed above, according to information nominating shareholder or group to year, or if the date of the meeting has from RiskMetrics, approximately 118 Rule 14a–8 prepare a statement of support for its changed more than 30 days from the shareholder proposals regarding board issues were prior year, then the nominating submitted to shareholders for a vote in the 2008– nominee or nominees to be 2009 proxy season. See footnote 804. We believe shareholder or group will be required to this data is a useful starting point for estimating the 841 We estimate that approximately half of the 24 provide notice a reasonable time before number of shareholders who may avail themselves shareholders submitting proposals to registered the company mails its proxy materials, of our new rules, including the use of Schedule investment companies regarding the inclusion of as specified by the company in a Form 14N. Also as discussed above, we estimate that one or more shareholder nominees for director in approximately half of these shareholders may company proxy materials will make submissions 8–K filed pursuant to new Item 5.08 of submit a proposal pursuant to Rule 14a–8 regarding pursuant to applicable state or foreign law Form 8–K. The final rules also require procedures for the inclusion of shareholder provisions or a company’s governing documents. As a registered investment company that is nominees for director in company proxy materials, a result, we estimate that approximately 12 resulting in 59 proposals. We believe the number shareholder proponents will submit to registered a series company to file a Form 8–K of shareholders submitting nominees pursuant to a investment companies nominations pursuant to disclosing the total number of the state or foreign law provision will be lower than the applicable state or foreign law provisions or a company’s shares that are entitled to number of shareholders submitting proposals company’s governing documents. pursuant to Rule 14a–8. As a result, we estimate 842 We are assuming for PRA purposes that any vote for the election of directors at the that approximately 30 shareholder proponents will applicable state or foreign law provision or annual meeting of shareholders (or, in submit nominations pursuant to applicable state or company’s governing documents will allow for lieu of such an annual meeting, a foreign law provisions or a company’s governing inclusion of such a statement by the nominating special meeting of shareholders) as of documents. shareholder or group.

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the end of the most recent calendar few, if any, registered open-end a Schedule 13G, this will result in an quarter.843 management investment companies increased number of Schedule 13G For purposes of the PRA, we estimate regularly hold annual meetings. filings. With respect to reporting that approximately 4% of reporting Therefore, we estimate that 600 companies other than registered companies (other than registered registered investment companies are not investment companies, we estimate that investment companies) will be required closed-end investment companies and 25% (11) of the nominees submitted to file a Form 8–K because the company will be required to file Form 8–K. This pursuant to Rule 14a–11 will be from did not hold an annual meeting during results in a total of 625 registered shareholders who individually meet the the prior year, or the date of the meeting investment companies required to file eligibility thresholds (25% of 45), and has changed by more than 30 days from Form 8–K (25 closed-end management 75% (34) will be from shareholder the prior year.844 Based on our estimate investment companies + 600 other groups (75% of 45). We estimate that that there are approximately 11,000 registered investment companies) and 75% of the 34 groups formed will reporting companies (other than 3,125 burden hours (625 filings × 5 exceed the 5% threshold and will file a registered investment companies), this hours/filing). This total burden Schedule 13G. As a result, we estimate corresponds to 440 companies that will corresponds to 2,344 hours of company that an additional 26 Schedule 13G be required to file a Form 8–K. In time (625 filings × 5 hours/filing × 0.75) filings will be made annually. The total accordance with our current estimate of and $312,500 for services of outside burden associated with this increase in the burden of preparing a Form 8–K, we professionals (625 filings × 5 hours/ the number of filings is 322 burden estimate 5 burden hours to prepare, filing × 0.25 × $400).847 Adding the hours (26 additional Schedule 13Gs × review and file the Form 8–K, for a total totals for reporting companies (other 12.4 hours/schedule). This burden burden of 2,200 hours (440 filings × 5 than registered investment companies) corresponds to 81 hours of shareholder hours/filing). This total burden and registered investment companies time (26 additional Schedule 13Gs × corresponds to 1,650 hours of company results in a total burden of 5,325, which 12.4 hours/Schedule × 0.25) and × × time (440 filings 5 hours/filing 0.75) corresponds to 3,994 hours of company $96,720 for services of outside and $220,000 for services of outside time and $532,500 for services of professionals (26 additional Schedule × professionals (440 filings 5 hours/ outside professionals. This includes the 13Gs × 12.4 hours/Schedule × 0.75 × × × filing 0.25 $400). requirement for a registered investment $400). In the case of registered investment company that is a series company to file With respect to registered investment companies, we estimate that, similar to a Form 8–K disclosing the total number companies, we estimate that reporting companies other than of the company’s shares that are entitled approximately 3 (50% of 6) of the registered investment companies, 4% of to vote for the election of directors at the shareholder nominees will be submitted registered closed-end management annual meeting of shareholders (or, in by shareholders of closed-end funds investment companies subject to Rule lieu of such an annual meeting, a whose shareholders are required to file 14a–11 that are traded on an exchange special meeting of shareholders) as of beneficial ownership reports under the would be required to file a Form 8–K the end of the most recent calendar Exchange Act.849 We estimate that 25% because the company did not hold an quarter. (1) of the nominees for director of annual meeting during the prior year or 5. Schedule 13G Filings closed-end funds submitted pursuant to the date of the meeting has changed by Rule 14a–11 will be from shareholders more than 30 days from the prior Shareholders will be permitted to who individually meet the eligibility 845 year. We estimate that approximately aggregate holdings for purposes of thresholds (25% of 3), and 75% (2) will 625 of the 1,225 registered investment meeting the eligibility threshold in Rule be from shareholder groups (75% of 3). companies responding to Investment 14a–11 and therefore we anticipate that We estimate that 75% of the two groups Company Act Rule 20a–1 are closed-end some groups of shareholders may formed to nominate directors of closed- funds that are traded on an exchange, beneficially own in the aggregate more end funds will exceed the 5% threshold than 5% of a voting class of an equity resulting in 25 closed-end funds that and file a Schedule 13G. As a result, we security registered pursuant to Section will be required to file Form 8–K for estimate that an additional 2 Schedule 12. In these circumstances, nominating these purposes (625 registered closed- 13G filings will be made annually (75% shareholders will need to consider end management investment companies of two groups rounds up to two). The × 846 whether they have formed a group 0.04). However, we estimate that total burden associated with this under Exchange Act Section 13(d)(3) increase in the number of filings is 843 The amendment to Rule 14a–8(i)(8) is not and Rule 13d–5(b)(1) that is required to approximately 25 burden hours (2 expected to impact Form 8–K, so the burden file beneficial ownership reports.848 To additional Schedule 13Gs × 12.4 hours/ estimates solely reflect the burden changes resulting the extent nominating shareholder from new Item 5.08, including when a nomination schedule). This burden corresponds to 6 groups exceed the 5% threshold and file is submitted pursuant to a company’s governing hours of shareholder time (2 additional documents or pursuant to applicable State law. × × 844 Based on information obtained in 2003 from end management investment companies are traded Schedule 13Gs 12.4 hours/schedule the Investor Responsibility Research Center, 3.75% on an exchange. 0.25) and $7,440 for services of outside of companies (other than registered investment 847 Consistent with the current estimates for Form companies) did not hold an annual meeting during 8–K, we estimate that that 75% of the burden of 849 Under Section 13(d) of the Exchange Act, only the prior year or the date of the meeting changed preparation of Form 8–K is carried by the company holders of equity securities of closed-end funds are by more than 30 days from the prior year. See also and that 25% of the burden of preparation of Form required to file beneficial ownership reports with footnote 195 in the 2003 Proposal. 8–K is carried by outside professionals at an average the Commission. Holders of open-end funds are not 845 We believe that the percentage for registered cost of $400 per hour. The burden includes subject to this requirement. Previously, we closed-end investment companies will be similar to disclosure of the date by which a nominating estimated that approximately 625 (or slightly over other reporting companies because such investment shareholder or group must submit the notice 50%) of the 1,225 registered investment companies companies are traded on an exchange and are required by Rule 14a–11(c) as well as disclosure of responding to Investment Company Act Rule 20a– required to hold annual meetings of shareholders. net assets, outstanding shares, and voting. 1 are closed-end funds that are traded on an 846 We estimate that 1,225 registered investment 848 We recognize that each shareholder group will exchange. We estimate that the percentage of the companies hold annual meetings each year based need to analyze its own facts and circumstances in shareholder nominees that will be submitted by on the number of responses to Rule 20a–1. Based order to determine whether it is required to file a shareholders of closed-end funds will be on data provided by Lipper, the Commission Schedule 13G; however, we expect that most groups approximately equal to the percentage of closed-end estimates that approximately 625 registered closed- will file a Schedule 13G. funds that are traded on an exchange.

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professionals (2 additional Schedule shareholders who submit a nominee or reports filed by investors, proxy and 13Gs × 12.4 hours/schedule × 0.75 × nominees for inclusion in a company’s information statements, and current $400). proxy materials will not have filed reports under the Exchange Act. The Adding the totals for reporting previously an electronic submission burden was calculated by multiplying companies (other than registered with the Commission and will be the estimated number of responses by investment companies) and registered required to file a Form ID. As noted the estimated average number of hours investment companies results in a total above, we estimate that approximately each entity spends completing the form. burden of 347 hours, which corresponds 45 reporting companies (other than We estimate that 75% of the burden of to 87 hours of shareholder time and registered investment companies) and 6 preparation of the proxy and $104,160 for services of outside registered investment companies will information statement and current professionals. receive shareholder nominations reports is carried by the company submitted pursuant to Rule 14a–11. internally, while 25% of the burden of 6. Form ID Filings This corresponds to 46 additional Form preparation is carried by outside Under Rule 14n–1 and Rule 14a–11, ID filings (90% of 51). In addition, as professionals at an average cost of $400 a shareholder who submits a nominee or noted above, we estimate that per hour. We estimate that 75% of the nominees for inclusion in the approximately 30 reporting companies burden of preparation of Schedule 14N, company’s proxy statement must (other than registered investment any soliciting materials with regard to provide notice on Schedule 14N to the companies) and 12 registered formation of a nominating shareholder company of its intent to require that the investment companies will receive group, and any soliciting materials company include the nominee or shareholder nominations submitted regarding the nomination will be carried nominees in the company’s proxy pursuant to an applicable state or by the nominating shareholder or group materials. The notice on Schedule 14N foreign law provision or a company’s internally and that 25% of the burden must be filed with the Commission on governing documents. This corresponds of preparation will be carried by outside the date the notice is transmitted to the to an additional 38 Form ID filings (90% professionals retained by the company. We anticipate that some of 42). As a result, the additional annual nominating shareholder or group. We burden would be 13 hours (84 filings × shareholders who submit a nominee or estimate that 25% of the burden of 0.15 hours/filing).850 For purposes of nominees for inclusion in a company’s preparation of Schedule 13G (for the PRA, we estimate that the additional proxy materials will not previously have nominating shareholder groups that burden cost resulting from the new rules filed an electronic submission with the beneficially own more than 5% of a will be zero because we estimate that Commission and will file a Form ID. voting class of any equity security 100% of the burden will be borne Form ID is the application form for registered pursuant to Section 12) will internally by the nominating access codes to permit filing on EDGAR. be carried by the nominating shareholder or group. The final rules are not changing the shareholder or group internally and that form itself, but we anticipate that the E. Revisions to PRA Reporting and Cost 75% of the burden of preparation will number of Form ID filings may increase Burden Estimates be carried by outside professionals retained by the nominating shareholder due to shareholders filing Schedule 14N Table 1 below illustrates the or group. The portion of the burden when submitting a nominee or incremental annual compliance burden carried by outside professionals is nominees to a company for inclusion in of the collection of information in hours reflected as a cost, while the portion of its proxy materials pursuant to Rule and in cost for securities ownership 14a–11, applicable state or foreign law the burden carried internally by the provisions, or a company’s governing 850 We currently estimate the burden associated company and nominating shareholder documents. We estimate that 90% of the with Form ID is 0.15 hours per response. or group is reflected in hours.

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TABLE 1—CALCULATION OF INCREMENTAL PRA BURDEN ESTIMATES*

Current an- Proposed Increase in Proposed Current pro- Increase in Proposed nual re- annual re- Current bur- burden burden fessional professional professional sponses sponses den hours hours hours costs costs costs

(A) (B) (C) (D) (E) (F) (G) = = F C + + G D

Sch 14A ...... 7,300 7,300 671,970 16,370 688,340 79,214,887 2,182,590 81,397,477 Sch 14C ...... 680 680 631,152 1,819 632,971 7,393,639 242,510 7,636,149 Sch 14N ...... 0 162 0 7,870 7,870 0 1,049,300 1,049,300 Form 8–K...... 115,795 116,860 493,436 3,994 497,430 65,791,500 532,500 66,324,000 Form ID ...... 65,700 65,784 9,855 13 9,868 0 0 0 Sch 13G ...... 12,500 12,528 35,577 87 35,664 42,694,200 104,160 42,798,360 Rule 20a–1 ...... 1,225 1,225 142,958 3,438 146,396 20,090,000 458,300 20,548,300

Total ...... 33,591 ...... 4,569,360 ...... * 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.

IV. Cost-Benefit Analysis nominating shareholder or group and shareholder groups and engage in the nominee in a company’s proxy solicitations in support of their nominee A. Background materials if, among other things, the or nominees without disseminating a The Commission is adopting new nominating shareholder or group held, proxy statement.851 rules that, under certain circumstances, as of the date of the shareholder notice The Commission also is adopting an will require companies to include in on Schedule 14N, either individually or amendment to Rule 14a–8 to narrow the their proxy materials shareholder in the aggregate, at least 3% of the exclusion in paragraph (i)(8) of the rule, nominees for director, as well as other voting power of the company’s which addresses director elections. disclosure regarding those nominees securities that are entitled to be voted Under the amendment, a company will and the nominating shareholder or on the election of directors at the annual not be permitted to rely on Rule 14a– group. In addition, the new rules will meeting of shareholders (or, in lieu of 8(i)(8) to omit from its proxy materials require companies, under certain such an annual meeting, a special a shareholder proposal that seeks to circumstances, to include in their proxy meeting of shareholders) or on a written establish a procedure in the company’s materials a shareholder proposal that consent in lieu of such meeting and has governing documents for the inclusion seeks to establish a procedure in the held the qualifying amount of securities of shareholder nominees for director in company’s governing documents for the used to satisfy the ownership threshold the company’s proxy materials. The inclusion of shareholder director continuously for at least three years as current procedural requirements for nominees in the company’s proxy of the date of the shareholder notice on submitting a shareholder proposal materials. As a result, a company’s Schedule 14N (in the case of a pursuant to Rule 14a–8 will remain the proxy materials may be required, under shareholder group, each member of the same. No additional disclosures will be certain circumstances, to provide required from any shareholder that group must have held the amount of shareholders with information about, submits such a proposal; however, a securities that are used to satisfy the and the ability to vote for, a shareholder nominating shareholder or group that ownership threshold for at least three nominee for director. The new rules will includes a nominee or nominees in a years as of the date of the shareholder therefore facilitate shareholders’ ability company’s proxy materials pursuant to notice on Schedule 14N). The to exercise their traditional State law an applicable state or foreign law nominating shareholder or group also rights to nominate and elect directors by provision or the company’s governing improving the disclosure provided in will be required to hold the shares documents will be required to file with connection with corporate proxy through the date of the meeting. A the Commission and transmit to the solicitations and communication nominating shareholder or group that company, in its notice on Schedule 14N, between shareholders in the proxy includes a nominee or nominees in a disclosures similar to the disclosures process. company’s proxy materials pursuant to required in a traditional contested We requested comment on all aspects Rule 14a–11 will be required to provide election. Pursuant to Item 7(f) of of the cost-benefit analysis contained in in its notice on Schedule 14N filed with Schedule 14A (and, in the case of the Proposing Release, including the Commission and transmitted to the registered investment companies and identification of any additional costs company disclosures similar to the business development companies, Item and benefits. We have considered these disclosures required in a traditional 22(b)(19) of Schedule 14A), the comments carefully and made contested election. Pursuant to Item 7(e) company will be required to include in responsive changes to the rules in order of Schedule 14A (and, in the case of its proxy materials certain disclosures to minimize the potential costs. Below registered investment companies and provided by the nominating shareholder we consider the benefits and costs of the business development companies, Item or group in its notice on Schedule 14N. economic effects of the new rules and 22(b)(18) of Schedule 14A), the discuss the comments we received, as company will be required to include in C. Factors Affecting Scope of the New applicable. its proxy materials certain disclosure Rules provided by the nominating shareholder Our discussion of the economic B. Summary of Rules or group in its notice on Schedule 14N. effects of the new rules takes into Rule 14a–11 will require companies In addition, the new rules will enable account various factors, such as the to include shareholder nominations for shareholders to engage in limited director and disclosure about the solicitations to form nominating 851 See Rules 14a–2(b)(7) and 14a–2(b)(8).

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incentives and actions of certain parties, The actions and intentions of nominees are not required to be that will affect the rules’ scope and shareholders also may affect the disclosed in the proxy materials influence. applicability of the new rules. To rely pursuant to the rule.858 Any future actions of the states and on Rule 14a–11, the nominating Shareholders seeking to establish a their legislatures could affect the shareholder (or where there is a procedure in a company’s governing applicability of the new rules. Rule 14a– nominating shareholder group, each documents and submit nominees for 11, for instance, will not apply to member of the nominating shareholder director using such a provision will companies incorporated in states or group) must not be holding any of the need to initiate a two-step process to other jurisdictions that prohibit company’s securities with the purpose, nominations of directors by have their nominees included in a or with the effect, of changing control of 859 shareholders or permit companies to the company 855 or to gain a number of company’s proxy materials. Unlike prohibit such nominations and where seats on the board of directors that the use of Rule 14a–11, this two-step the company’s governing documents do exceeds the maximum number of process depends on both the likelihood so.852 Under Rule 14a–8, shareholder nominees that the company could be that a shareholder will initiate such a proposals must be proper subjects for required to include under Rule 14a–11 process and on its success at each step action by shareholders under the laws of and must provide a certification to this of the process (e.g., the successful the jurisdiction of the company’s effect in its filed Schedule 14N.856 The inclusion of the shareholder proposal in organization. To the extent that states or effect of the rule also is affected by the the company’s proxy materials and other jurisdictions change their laws, for limitation on the number of shareholder adoption of the proposal by the example, to prohibit the nomination of director nominees that a company is appropriate shareholder vote). The directors by shareholders, Rule 14a–11 required to include in its proxy likelihood that a shareholder will and Rule 14a–8 would apply less materials. Under Rule 14a–11, a initiate the two-step process could be broadly. company will not be required to include limited by the costs arising from the Future actions of boards may affect shareholder nominations for more than time needed to complete the process the applicability of the new rules. In the a maximum of one director or 25% of (e.g., including opportunity costs of case of Rule 14a–11, we believe that the the existing board, whichever is greater. holding securities where the applicability of the rule is not likely to If one shareholder or group that is shareholder may consider the be affected by future actions of a board eligible to use Rule 14a–11 nominates company’s board composition to be sub- because companies generally may not the maximum allowable number of optimal) and the added risk of failure prohibit shareholders from nominating candidates, a company will be due to the need to complete two directors under existing State law.853 In permitted to exclude any other separate steps to include its director addition, a company will not be shareholder’s or group’s nominees from nominees in the proxy materials. The permitted to exclude pursuant to the company’s proxy materials.857 likelihood that a shareholder will amended Rule 14a–8(i)(8) a shareholder Further, if the maximum allowable initiate this process is also affected by proposal that would establish a number of existing shareholder director the existence of Rule 14a–11, which procedure under a company’s governing nominees is currently in place on the some eligible shareholders may seek to documents for the inclusion of one or board, additional shareholder director use instead. more shareholder nominees for director Lastly, the scope of the effects of Rule in the company’s proxy materials. It is nominated directors without increasing the number reasonable to expect that some of director slots for shareholder nominees for 14a–11, including the expected benefits shareholders will submit this type of director in the proxy materials because Rule 14a– and costs described below, is affected by proposal, particularly shareholders who 11 includes a provision allowing companies to the size of the eligible population of round down the number of nominees that must be shareholder groups and companies. perceive that the current board does not included when calculating the 25% maximum. represent, or possibly may come to not 855 Although Rule 14a–11 does not contain a Consequently, the scope of the direct represent, their interests and are not requirement that the shareholder nominee or effects of Rule 14a–11 will narrow to the otherwise able to use Rule 14a–11 (such nominees do not have an intent to change the extent that the rule’s eligibility criteria control of the company, a nominating shareholder’s reduce the number of shareholders as if the shareholder does not qualify to or group’s ability to meet the requirement and submit a nominee or if larger certify that it does not have such an intent will be eligible to take advantage of the rule. shareholders have exhausted the impacted by the intentions and actions of its According to the data from Form 13F nominee or nominees. For example, a nominating filings, 33% of the 6,416 public issuers nomination slots available pursuant to shareholder will not be able to certify that it does Rule 14a–11). Finally, boards seeking to not hold the company’s securities for the purpose, included in the sample would have one limit the effect of shareholder- or with the effect, of changing the control of the or more shareholders that, on its own, nominated candidates submitted company if its nominee launches its own proxy satisfies the 3% ownership threshold contest or tender offer. For further discussion, see and three-year holding period pursuant to Rule 14a–11 and elected as Section II.B.4.d. above. directors may, in some instances, 856 See certifications in Item 8 of new Schedule choose to expand the board size to 14N. 858 This could be the case when shareholder- dilute, to an extent, the influence of 857 Prior to the time a company has commenced nominated candidates for director are elected at a those directors.854 printing its proxy statement and a form of proxy, company with a classified board or when a if a nominating shareholder or group withdraws its company decides to nominate previously-elected shareholder director nominee or the nominee shareholder-nominated directors after their first 852 As noted above, we are not aware of any states becomes disqualified, the company will be required term in office. that currently prohibit shareholder nominations for to include in its proxy materials the director 859 The first step of this two-step process would director. nominee or nominees of the nominating be the submission of a shareholder proposal 853 Several commenters also stated that they were shareholder or group with the next highest voting pursuant to Rule 14a–8 seeking to establish a unaware of any law in any state or in the District power percentage that is otherwise eligible to use procedure in a company’s governing documents for of Columbia that prohibits shareholders from the rule and that filed a timely notice in accordance the inclusion of shareholder nominees for director nominating directors. See letters from ABA; BRT; with the rule, if any. This process will continue in the company’s proxy materials and shareholder CII; Eaton. until the company includes the maximum number approval of the proposal. The second step would be 854 As an example, a board of eight directors, with of nominees that it is required to include in its the submission and inclusion of shareholder two new shareholder-nominated directors, may proxy materials or the company exhausts the list of director nominees in the company’s proxy materials expand to up to 11 directors. Such an expansion eligible nominees. For further discussion, see pursuant to the nomination procedures adopted by would dilute the influence of the shareholder- Section II.B.7.b above. shareholders.

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requirement of Rule 14a–11.860 Our shareholders. The new rules do so by benefits that are not as easily extension of the holding period from a requiring the company proxy materials quantifiable (such as the possibility of one-year period, as proposed, to the to include shareholder nominees under greater shareholder participation and three-year period in the final rule, as certain conditions and, as a result, communication in the director well as the increase in the ownership providing alternative means for nomination process), as discussed threshold from that proposed for large shareholders to nominate and elect below. We believe that these benefits, accelerated filers, limit the number of director candidates other than through a collectively, justify the costs of the new shareholders eligible to use the rule and traditional proxy contest. Some eligible rules. the number of companies directly shareholders may view the new rules as We discuss below the ways in which affected by the rule. For non-accelerated more advantageous than traditional the new rules will facilitate filers, the uniform 3% ownership proxy contests and, hence, the new shareholders’ exercise of their threshold is lower than the 5% rules may influence their behavior. In traditional State law rights and the ownership threshold that we proposed addition, eligible shareholders who benefits for shareholders (particularly as for that class of filers. This may result would have considered launching a compared to a traditional proxy in an increase in the number of proxy contest for purposes other than to contest). We discuss specific monetary shareholders eligible to use Rule 14a–11 change control of the company may cost savings, both direct and indirect, as and the number of companies directly prefer to use the new rules instead. The well as other changes and the resulting affected by the rule as compared to availability of the new rules also may benefits for shareholders. those shareholders and companies encourage shareholders who would not Shareholders generally have the right affected under the proposed one year have previously considered conducting under State law to nominate and elect and 5% minimum standards; however, a proxy contest to take a greater role in their own director candidates—a right we believe that the extension of the the governance of their company by that many shareholders believe they holding period from one to three years using the new rules to have their should be able to exercise.863 Currently, may limit any increase in the number of nominees for director included in a however, a shareholder or group that shareholders eligible to use the rule at company’s proxy materials. wishes to present its director smaller reporting companies. The The precise level of the direct benefits nominations for a shareholder vote must comments we received on the Proposal to shareholders will depend on a generally conduct a proxy contest, did not substantiate the concern that the number of other factors. The benefits which is a costly endeavor. The rule would have a disproportionate may be enhanced to the extent that nominating shareholder or group would impact on small issuers, and comments companies’ governing documents are have to incur costs involved with from companies overwhelmingly modified to require inclusion of preparing proxy materials with the supported uniform ownership shareholder nominees for director in the required disclosures regarding the thresholds for all public companies. company’s proxy materials from a director nominations and mailing the broader spectrum of shareholders (for proxy materials to each shareholder D. Benefits example, by lowering the ownership solicited.864 Several commenters stated We believe that Rule 14a–11 and the threshold required to have a nominee that the costs of traditional proxy amendment to Rule 14a–8(i)(8), where included in the company’s proxy contests have made them prohibitively applicable, will (1) facilitate materials or shortening the holding expensive for shareholders wishing to 861 shareholders’ ability to exercise their period). The instances of such exercise their traditional State law rights traditional State law rights to nominate changes to provisions in governing to nominate and elect directors.865 and elect directors; (2) establish a documents may increase as a result of Further, the concern about the costs of 862 minimum uniform procedure pursuant the amendment to Rule 14a–8(i)(8). conducting a traditional proxy contest is to which shareholders will be able to We also recognize the possibility that not limited to the fact that the include their director nominees in a certain quantifiable benefits for nominating shareholder or group must company’s proxy materials and enhance shareholders, such as a nominating incur these costs directly. A collective shareholders’ ability to propose shareholder’s or group’s savings in the action problem also exists. The time and alternative procedures that further direct costs of printing and mailing effort spent by a shareholder in shareholders’ rights to nominate and proxy materials, may be less than the nominating and advocating for new elect directors; (3) potentially improve quantifiable costs for a company subject directors are not shared by other overall board and company to the new rules. We note, however, that shareholders. This unequal cost sharing performance; and (4) result in more the benefits of the new rules are not may serve to discourage any one informed voting decisions in director limited to those that are quantifiable (such as the direct savings in printing elections due to improved disclosure of 863 See letters from AFSCME; Sodali; Universities shareholder director nominations and and mailing costs) and instead include Superannuation (citing a June 2009 survey enhanced communications between conducted by ShareOwners.org showing that 82% 861 As adopted, Rule 14a–11 requires the of the respondents believed that shareholders shareholders regarding director nominating shareholder individually, or the should be able to ‘‘nominate and elect directors of nominations. nominating group in the aggregate, to hold at least their own choosing to the boards of the companies 3% of the total voting power of the company’s they own,’’ while 16% of the respondents stated 1. Facilitating Shareholders’ Ability to securities that are entitled to be voted on the that ‘‘shareholders should not be able to propose Exercise Their State Law Rights to election of directors at the annual (or a special directors to sit on the boards of the companies they Nominate and Elect Directors meeting in lieu of the annual) meeting of own.’’). shareholders, or on a written consent in lieu of such 864 Proxy contests waged in connection with Facilitating shareholders’ ability to meeting, on the date the nominating shareholder or efforts to obtain control may involve costs related exercise their traditional State law rights nominating group provides notice to the company to not only preparing proxy materials and engaging to nominate and elect directors is a on Schedule 14N. in solicitation efforts, but to the purchase or lock- 862 As amended, companies will no longer be able up of a significant amount of the voting securities direct benefit of the new rules for to rely on Rule 14a–8(i)(8) to exclude a shareholder of the target company. Such costs could be high. proposal that seeks to establish a procedure in the 865 See letters from Americans for Financial 860 November 2009 Memorandum. See Section company’s governing documents for the inclusion Reform; CalPERS; CII; Florida State Board of II.B.4.b. above for a discussion of the data, of shareholder nominees for director in the Administration; M. Katz; J. McRitchie; S. Ranzini; including its limitations. company’s proxy materials. Teamsters.

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shareholder from assuming the costs of rules also will mitigate collective action shareholders and one that is not running a traditional proxy contest on and free-rider concerns that may have justified by the costs and disruption that its own, even though a successful otherwise deterred many shareholders would result from the rules.870 The contest could result in a greater from exercising their rights under State commenter observed that the average of aggregate benefit for all shareholders.866 law to nominate directors. $18,000 in estimated savings identified As a result, there is the added economic Direct cost savings, particularly as in the Proposing Release represented cost of foregone opportunities where a compared to the cost of a traditional less than 5% of the cost of a traditional qualified director candidate fails to be proxy contest, come from two sources. proxy contest and did not include costs nominated because no one shareholder First, a nominating shareholder or group that would be incurred by a shareholder or group wishes to bear alone the costs may see direct cost savings due to actively seeking the election of its of an election contest for the benefit of reduced printing and postage costs. nominee, such as costs related to legal all shareholders. Based on the information available,868 counsel, proxy solicitors, public We believe Rule 14a–11 will further we calculate that a shareholder using relations advisers and advertising. our stated goal of facilitating Rule 14a–11 to submit a director We recognize that the adoption of the shareholders’ ability to nominate and nominee or nominees to be included in new rules may not relieve a nominating elect their own director candidates by a company’s proxy materials will save at shareholder or group of all expenditures allowing shareholders to avoid certain least $18,000 on average in printing and that could be incurred for an active direct costs of conducting a traditional postage costs. campaign that may be more successful proxy contest and reducing the overall Second, and significantly, a to support the election of its candidate costs to shareholders for nominating nominating shareholder or group may to the company’s board of directors. The and electing directors—a belief shared see direct cost savings related to new rules, however, are not intended to by several commenters.867 The new reduced expenditures for advertising serve that purpose. Instead, the new and promotion of its candidates as a rules’ goal is to facilitate shareholders’ 866 See, e.g., letters from Bebchuk, et al. (‘‘In result of its ability to use the company’s ability to present their own director evaluating eligibility and procedural requirements, proxy materials to directly solicit other nominees for a vote at a shareholder the SEC should also keep in mind that many institutional investors lack incentives to invest shareholders. To the extent that the meeting by eliminating or reducing actively in seeking governance benefits that would nominating shareholder or group barriers in the proxy solicitation be shared by their fellow shareholders.’’); Lucian A. decides to reduce its public relations process—one of which is the direct cost Bebchuk and Scott Hirst (‘‘Bebchuk/Hirst’’) and advertising expenditures to promote of printing and mailing proxy (submitting the article by Lucian A. Bebchuk and Scott Hirst, Private Ordering and the Proxy Access its candidates, or to engage proxy materials—that have contributed to Debate, 65 Bus. Law. 329 (2010) (‘‘Bebchuk and solicitors, the cost savings will be frustrating shareholder director Hirst (2010)’’), in which the authors state: ‘‘Thus, greater. These reductions in costs may nominations.871 challengers who might be able to improve the remove a disincentive for shareholders We also recognize that the direct management of the company may be discouraged from running because they will bear all of the costs to submit their own director printing and mailing cost savings of but capture only a fraction of the benefits from any nominations, mitigate the collective $18,000, on their own, may not be improvement in governance.’’ See also Lynn A. action concern, and serve the goal of viewed by some to be significant enough Stout, The Mythical Benefit of Shareholder Control, to drive the behavior of large 93 Va. L. Rev. 789, 789 (2007) (‘‘Stout (2007)’’) (‘‘In facilitating shareholders’ ability to a public company with widely dispersed share exercise their traditional State law rights shareholders of public companies. The ownership, it is difficult and expensive for to nominate and elect directors. comments that we received regarding shareholders to overcome obstacles to collective We received significant comment the likely increase in the number of action and wage a proxy battle to oust an incumbent board.’’) (cited in the Proposing Release, Section questioning the need for the new rules election contests resulting from the new V.B.1.). to reduce the costs described above or rules, however, seem to undercut this 867 See letters from CII; Key Equity Investors; the degree to which the reduction in view and suggest instead that Pershing Square. The benefit of a reduction in the costs will actually facilitate shareholder shareholders’ behavior may indeed be cost of a proxy solicitation exists only to the extent director nominations.869 One influenced by the rules.872 The extent to that the nominating shareholder or group views Rule 14a–11 as a substitute for a traditional proxy commenter characterized the direct which election contests are predicted to contest. Even with the adoption of Rule 14a–11, printing and mailing cost savings as the increase as a result of shareholders some shareholders may prefer to conduct a sole benefit of the new rules for nominating their own director traditional proxy contest due to the various restrictions on the use of the rule. For example, the candidates for inclusion in the rule restricts the number of shareholder director a traditional contest. For such shareholders, the company’s proxy materials strongly nominees that a company will be required to expected reduction in a shareholder’s proxy indicates that the benefits of the new include in its proxy materials. The rule also will be solicitation costs will not materialize. rules cannot be fairly characterized as a available only to shareholders that do not hold the 868 According to a study of proxy contests securities in the company with the purpose, or with conducted during 2003, 2004, and 2005, the average the effect, of changing control of the company. cost of a proxy contest to a soliciting shareholder 870 See letter from BRT. These elements of Rule 14a–11 impose restrictions was $368,000. See letter from Automatic Data 871 We recognize that other factors may have that are not present in a traditional proxy contest. Processing, Inc. (April 20, 2006) regarding Internet similarly frustrated the effective exercise of this Some shareholders also may prefer a traditional Availability of Proxy Materials, Exchange Act State law right. We discuss below these factors and proxy contest over Rule 14a–11 for reasons related Release No. 34–52926 (December 8, 2005) (File No. how the new rules will reduce or eliminate these to their strategy for the conduct of the election S7–10–05). The costs included those associated factors. contest, such as having greater control over the with proxy advisors and solicitors, processing fees, 872 See, e.g., letters from Altman (stating that mailing schedule and contents of their proxy legal fees, public relations, advertising, and printing participants in its survey predicted that, on average, materials. See, e.g., letter from Carl T. Hagberg (‘‘C. and mailing of proxy materials. Approximately 95% 15% of companies listed on U.S. exchanges could Hagberg’’) (stating that ‘‘most truly serious of the costs were unrelated to printing and postage. expect to face a shareholder director nomination nominators of director candidates will surely The cost of printing and postage averaged submitted under Rule 14a–11 in 2011, based on the produce their own proxy materials, and take control approximately $18,000. eligibility criteria of the Proposal); BRT (stating that of their own ‘electioneering’ with materials and 869 See letters from 26 Corporate Secretaries; 3M; the new rules ‘‘will increase the frequency of proxy cards of their own, if they want to stand a Ameriprise; Association of Corporate Counsel; BRT; contested elections * * *’’); Chamber of Commerce/ reasonable chance to win.’’). Therefore, while Rule Cummins; DuPont; ExxonMobil; FMC Corp.; CCMC (noting that if the new rules are adopted, ‘‘it 14a–11 may encourage some shareholders seeking Frontier; GE; General Mills; Honeywell; IBM; is likely that proxy contests (in which the company to nominate and elect their candidates to use the Keating Muething; Motorola; Schneider; Sidley is required to solicit proxies on behalf of rule instead of conducting a traditional proxy Austin; Simpson Thacher; Time Warner Cable; shareholders) will increase greatly and may become contest, other shareholders may continue to prefer Wachtell; Wells Fargo; Xerox. customary.’’).

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‘‘mere $18,000 in estimated savings’’ 873 of proxy materials 876 or stated that the contest conducted through the notice —a characterization that we believe notice and access model has already and access model for reasons related to obfuscates the significance of this reduced the costs for shareholders to its strategy for the conduct of the benefit of our new rules. effect changes in the membership of a election contest, such as avoiding the We received comment that while board.877 We note that this observation need and cost to use Exchange Act Rule certain shareholders may be relieved of applies only to the direct printing and 14a–7 to obtain a shareholder list from certain costs to run a traditional proxy mailing costs, rather than all of the other the company (or have the company send contest as a result of the new rules, the monetary cost savings discussed proxy materials on its behalf) 880 as well rules may simply shift those costs onto throughout this section. We agree that as the requirement to file preliminary the company and, indirectly, all the notice and access model may proxy materials at least ten calendar shareholders.874 Therefore, while the decrease significantly the printing and days before definitive materials are first rules may reduce the direct costs of mailing costs associated with a proxy sent to shareholders.881 solicitation by a particular shareholder solicitation. To the extent that a The new rules will do more than for its director nominees, it may result shareholder chooses to nominate and reduce the direct monetary costs in an increase in the overall cost of a elect its director candidates through a described above. We recognize that company’s proxy solicitation for a traditional proxy contest using the shareholders today are widely dispersed director election (e.g., additional notice and access model, the expected and the corporate proxy is the principal printing and mailing costs arising from benefit of a reduction in printing and means through which State law voting the disclosure of the shareholder mailing costs will be somewhat lower. rights are exercised. The dispersed director nominations) and indirectly the The notice and access model, however, nature of ownership creates certain cost to all shareholders, particularly if may not necessarily provide a soliciting intangible disincentives to the effective the new rules lead to an increase in the shareholder with the same cost savings exercise of shareholders’ ability to number of shareholder director possible under Rule 14a–11. Under the nominate and elect their own director nominations. We have some reason to model, a soliciting shareholder will still candidates, as discussed below. As we believe, however, that the increased incur the costs of printing and mailing stated in the Proposing Release, the costs for the company may not be as notices of availability of proxy materials proxy process provides the only to shareholders from whom the person practical means for shareholders to much as would otherwise result if that 878 shareholder engaged in a traditional is soliciting proxy authority. Further, solicit votes from other shareholders in proxy contest.875 We also note that, to as we recognized at the time we created favor of the election of their nominees. the extent that the new rules help to the notice and access model, additional The current inability of many address the collective action concern, it printing and mailing costs will be shareholders to utilize the proxy process incurred to the extent that a solicited could remove disincentives that for this purpose means that shareholder shareholder requests paper copies of the previously deterred shareholders from director nominees do not have a proxy materials.879 A soliciting submitting director nominations that realistic prospect of being elected shareholder also may prefer using the may have ultimately benefited all because most, if not all, shareholders new rules over a traditional proxy shareholders. would have cast their votes well in advance of the shareholder meeting. Other commenters observed that 876 See, e.g., letters from 26 Corporate Secretaries; Shareholders are deprived of not only savings in printing and mailing costs Ameriprise; BRT. the ability to exercise a traditional State 877 could be obtained through our notice See letters from 26 Corporate Secretaries; 3M; law right, but the opportunity to assess and access model for electronic delivery Ameriprise; Association of Corporate Counsel; BRT; Cummins; DuPont; ExxonMobil; FMC Corp.; Frontier; GE; General Mills; Honeywell; IBM; 880 Exchange Act Rule 14a–7 sets forth the 873 See letter from BRT. Keating Muething; Motorola; Schneider; Sidley obligation of companies either to provide a 874 See letter from ABA. We recognized this Austin; Simpson Thacher; Time Warner Cable; shareholder list to a requesting shareholder or to possibility in the Proposing Release as well, noting Wachtell; Wells Fargo; Xerox. send the shareholder’s proxy materials on the that the rule ‘‘may result in a decrease in costs to 878 Exchange Act Rule 14a–16(l)(2). A soliciting shareholder’s behalf. The rule provides that the shareholders that would have to conduct proxy person other than the company could limit the cost company has the option to provide the list or send contests in the absence of [proposed] Rule 14a–11, of a solicitation by soliciting proxies only from a the shareholder’s materials, except when the but may increase the costs for companies.’’ See select group of shareholders, such as those with company is soliciting proxies in connection with a Proposing Release, Section V.C.3. large holdings, without furnishing other going-private transaction or a roll-up transaction. 875 One commenter on the 2003 Proposal shareholders with any information. This flexibility Under Rule 14a–7(e), the shareholder must estimated that a Rule 14a–11 contest would cost a would allow a soliciting person other than the reimburse the company for ‘‘reasonable expenses’’ company approximately one-third what a full proxy company to reduce even further its printing and incurred by the company in providing the contest costs. See letter from Stephen M. Bainbridge mailing costs by soliciting only those persons who shareholder list or sending the shareholder’s proxy submitted in connection with the 2003 Proposal have not previously requested paper copies of the materials. (File No. S7–19–03)(‘‘Bainbridge 2003 Letter’’). proxy materials. Certain practical reasons, however, 881 Exchange Act Rule 14a–6 requires that Based on this assumption and relying on data from may deter a soliciting person other than the preliminary copies of the proxy statement and form a late 1980s survey, this commenter estimated that company from taking full advantage of this of proxy be filed with the Commission at least ten the costs of such a contest to a public company flexibility, such as the fact that institutional calendar days prior to the date that definitive copies would be $500,000. This commenter also cited data investors may prefer receiving paper copies of of such materials are first sent or given to security estimating companies’ annual expenditures on Rule proxy materials. See Jeffrey N. Gordon, Proxy holders, except if the solicitation relates to certain 14a–8 shareholder proposals to be $90 million. Contests in an Era of Increasing Shareholder Power: matters to be acted upon at the meeting of security While this commenter noted the belief that it is Forget Issuer Proxy Access and Focus on E-Proxy, holders. Accordingly, the proxy statement and form unlikely that there will be as many Rule 14a–11 61 Vand. L. Rev. 476, 488 (2008) (noting that of proxy for a traditional proxy contest must be election contests as Rule 14a–8 shareholder institutional investors ‘‘generally may request paper filed in preliminary form. By contrast, under the proposals, the commenter asserted that incumbent delivery to minimize their own printing costs.’’) amendments to Rule 14a–6 that we are adopting boards are likely to spend considerably more on (cited in the letters from BRT and Simpson today, the inclusion of a shareholder director opposing each Rule 14a–11 contest than on Thacher). nominee in the company’s proxy materials will not opposing a Rule 14a–8 shareholder proposal. This 879 See Internet Availability of Proxy Materials, require the company to file preliminary proxy commenter estimated that $100 million may be an Release No. 34–55146 (January 22, 2007) (‘‘Internet materials, provided that the company is otherwise appropriate estimate for the lower boundary of the Proxy Availability Release’’) (noting that ‘‘to the qualified to file directly in definitive form. In this range within which Rule 14a–11’s direct costs will extent that some shareholders request paper copies regard, the inclusion of a shareholder director fall. Commenters did not provide any data during of the proxy materials, the benefits of the nominee will not be deemed a solicitation in the comment period for the Proposal that compared amendments in terms of savings in printing and opposition for purposes of the exclusion from filing these costs for a company. mailing costs will be reduced.’’). preliminary proxy materials.

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and vote on qualified candidates who appearance of this set of materials, we making process and reduce the potential could have been presented for a vote if believe that our new rules will help for any confusion on the part of the proxy process functioned as address that concern. With the new shareholders.885 The result may be a intended. As with the direct monetary rules, a shareholder will have the ability greater degree of participation by costs, reducing the costs arising from to include its director nominees in the shareholders through the proxy process the dispersed nature of ownership company’s proxy materials, provided in the governance of their companies. discussed below will help address any that the rules’ requirements are met. The 2. Minimum Uniform Procedure for related collective action concerns. fact that a nominating shareholder or Inclusion of Shareholder Director Some commenters observed that a group could have its director nominees Nominations and Enhanced Ability for shareholder seeking to nominate and included in a company’s proxy Shareholders To Adopt Director elect its own director candidates materials—as opposed to being included Nomination Procedures through a traditional proxy contest is in its own proxy materials—pursuant to disadvantaged by the fact that its the new rules may be viewed by the Rule 14a–11, as adopted, will provide candidates are presented to shareholder or group as a significant shareholders of companies subject to the shareholders through a separate set of improvement in its ability to have its Federal proxy rules the ability to proxy materials.882 A nominating nominees evaluated by shareholders in include their director nominees in the shareholder or group may encounter the same manner as they evaluate company’s proxy materials, provided difficulties in having its nominees management’s nominees. Shareholders that the rule’s requirements are met.886 evaluated in the same manner as those who are interested in effecting a change Further, with our adoption of the of management by shareholders who are in the company’s leadership or direction amendment to Rule 14a–8(i)(8), used to receiving only the company’s may be less likely to be deterred by the shareholders will be able to present in proxy materials and who may react prospect that their director nominees the company’s proxy materials a differently, and perhaps negatively, to will not be assessed on their merit. proposal that would seek to establish a the shareholder’s nominees simply Nominating shareholders also may see procedure in the company’s governing because the nominees are presented in less need for additional soliciting documents for the inclusion of a separate, unfamiliar set of proxy efforts, such as the hiring of proxy shareholder nominees for director in the materials. solicitors, public relations advisors, or company’s proxy materials.887 As we stated throughout this release, advertising, if their director nominees Shareholders will have a greater ability the Federal proxy rules should not are presented alongside those of to present for a shareholder vote a frustrate the exercise of a shareholder’s management in a set of company proxy director nomination procedure with traditional State law right to present its materials with which the company’s requirements, such as the requisite own director candidates for a shareholders are familiar.883 ownership threshold or holding period, shareholder vote. To the extent that the Shareholders also may be hindered in that differ from those of Rule 14a–11.888 exercise of this right is hindered simply making their voting decisions in a We received significant comment because of a nominating shareholder’s traditional proxy contest due to the fact regarding the uniform applicability of or group’s need to deliver a separate set that they have to evaluate more than one Rule 14a–11 and the amendment to Rule of proxy materials and potentially set of proxy materials—one sent by a 14a–8(i)(8).889 While there was negative reaction by shareholders to the company and another sent by an widespread support for the amendment insurgent shareholder—when evaluating to Rule 14a–8(i)(8), commenters were 882 See letters from Bebchuk/Hirst (submitting the whether and how to grant authority to Bebchuk and Hirst (2010) study, which noted the vote their shares by proxy.884 Presenting 885 As discussed in Section IV.D.4. below, the ability of shareholders to include their nominees in new disclosure requirements that we are adopting the company’s proxy materials would ‘‘avoid the competing director nominees on one for shareholder director nominations submitted intangible disadvantages that may result from being proxy card, with the related disclosure pursuant to Rule 14a–11, a state or foreign law on a separate card.’’); Pershing Square (stating that contained in one proxy statement, may provision, or a provision in the company’s ‘‘the absence of universal ballots, on which simplify the shareholder’s decision- governing documents also will facilitate more shareholders can vote from among all nominees informed voting decisions by providing regardless of who proposed them, is glaring and shareholders with important disclosures and clearly anti-choice’’ and that ‘‘[o]ur hope is that, 883 As discussed in Section II.B.9.d.ii. above, we outside the control context, selection of the best have adopted the proposed amendments to enhancing their ability to communicate with each nominees in a contest will be based more on Exchange Act Rule 14a–4 out of a similar desire to other regarding director nominations. character, competency, and relevancy of their avoid giving management’s director nominees an 886 For a discussion of the companies that are experience rather than the identity of the person advantage over those of a nominating shareholder subject to Rule 14a–11, see Section II.B.3. above. As nominating the candidate.’’). or group and to create an impartial presentation of discussed in that section, foreign private issuers At the October 7, 2009 ‘‘Proxy Access the nominees for whom a shareholder may vote. and companies that are subject to the Federal proxy Roundtable’’ held by the Harvard Law School 884 One commenter stated that if enabling rules solely because they have a class of debt Program on Corporate Governance (the transcript of shareholders to evaluate a board more efficiently securities registered under Exchange Act Section 12 which was submitted as part of a comment letter and make more informed voting decisions is the will not be subject to Rule 14a–11. For smaller from S. Hirst), Roy Katzovicz, the Chief Legal goal of the Proposal, then enhancing proxy reporting companies, Rule 14a–11 will become Officer of Pershing Square Capital Management, disclosure, rather than facilitating proxy contests, effective three years after the date that the rule L.P. explained: will better achieve that goal. See letter from Davis becomes effective for all other companies. As a cultural matter, there are two sub-points. Polk. We recognize the importance of enhancing the 887 As previously discussed, a shareholder First and foremost, having the decision of choosing disclosure provided in connection with proxy proposal seeking to establish such a procedure will two people, one next to the other, invites, we think, solicitations and recently adopted new rules to continue to be subject to exclusion under other a more intelligent analysis on the part of better enable shareholders to evaluate the provisions of Rule 14a–8. shareholders generally. In particular, we think that leadership of public companies. See Proxy 888 As discussed in Section II.C. above, a if the basis for election for a nominee is their merit Disclosure Enhancements Adopting Release. These provision in a company’s governing documents as an individual, a fund or an investor of any type rules, however, do not dispense with the need for establishing a procedure for the inclusion of that can identify the deadweight on the board, and Rule 14a–11 and the amendment to Rule 14a– shareholder director nominees in a company’s in place of that deadweight find ideal candidates 8(i)(8). The new rules we are adopting will proxy materials will not affect the operation of Rule from a skills perspective to round out the board, complement the recently-adopted proxy disclosure 14a–11, regardless of whether the company’s they’re going to have an easier time getting enhancement rules by enabling shareholders to shareholders have approved the provision. shareholder support for their nominee. Their ability submit their own director nominees if, after 889 For further discussion of the comments to vote among all the nominees and from all evaluating a company’s public disclosures and regarding the uniform applicability of Rule 14a–11 proponents, I think, facilitates that kind of person- performance, they are displeased with that and the amendment to Rule 14a–8(i)(8), see by-person analysis, versus slate-by-slate analysis. company’s current leadership or direction. Sections II.B.2. and II.C. above.

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divided on the extent to which As such, we believe that a uniform also expressed a general concern that companies and shareholders should be application of Rule 14a–11 to under private ordering, the provisions permitted to use Rule 14a–8 to propose companies subject to the Federal proxy in a company’s governing documents alternative requirements for shareholder rules is the best way to enable regarding shareholder director director nominations and on the related shareholders of these companies to do nominations may be so restrictive that it issue of whether shareholders and so without having to incur the types of would be impossible for shareholders to companies should be able to opt out of costs and other disadvantages that have candidates included in company Rule 14a–11 entirely. Some commenters shareholders traditionally have proxy materials.900 Other commenters, believed that the amendment to Rule encountered. A single, uniform rule will however, disagreed that these 14a–8(i)(8) should facilitate private provide shareholders of any company difficulties would actually interfere ordering under State law by enabling subject to the rule with the ability to with the establishment of a procedure shareholders to include in the meaningfully exercise their traditional under a private ordering approach.901 company’s proxy materials a Rule 14a– State law rights to present their own As previously discussed, we believe 8 proposal that would impose more director candidates for a vote at a that our rules should provide restrictive eligibility criteria than those shareholder meeting may be invoked shareholders with the ability to include of Rule 14a–11.890 A number of through the proxy process. With the director nominees in a company’s proxy commenters also believed that adoption of the amendment to Rule materials without the need for shareholders should be able to elect to 14a–8(i)(8), shareholders will be able to shareholders to bear the burdens of have their companies opt out of Rule establish procedures that can further overcoming substantial obstacles to 14a–11, including through the facilitate this ability, if they wish. creating that ability on a company-by- submission of a Rule 14a–8 proposal.891 By contrast, we believe that exclusive company basis.902 Private ordering To facilitate private ordering, a reliance on private ordering under State based on an opt-in approach would significant number of commenters law would not be as effective and require shareholders to incur significant supported the adoption of the efficient in facilitating the exercise of costs, regardless of the presence of the amendment to Rule 14a–8(i)(8) while these rights. Commenters identified difficulties described above. opposing adoption of Rule 14a–11.892 procedural and legal difficulties that Shareholders would need to expend By contrast, other commenters they believe would hinder the both time and funds to draft and submit supported an amendment enabling establishment of a shareholder director a proposal, such as a Rule 14a–8 shareholders to include in a company’s nomination procedure under private proposal, establishing a shareholder proxy materials a Rule 14a–8 proposal ordering, including: A supermajority director nomination procedure on a that establishes a shareholder director voting standard for approval of the company-by-company basis.903 These nomination procedure but only if the proposal; 896 the constraints imposed by costs may be higher if the company procedure would provide shareholders the 500-word limit for a Rule 14a–8 opposes and solicits against adoption of with a greater ability to include their proposal; 897 the significant percentage the proposal—a possibility that is very director nominees in the company’s of companies that restrict shareholders’ likely at companies where proxy materials.893 A number of ability to amend or propose bylaws; 898 disagreements between incumbent commenters also opposed any provision and the potential ability of a board to directors and a nominating shareholder that would permit companies to opt out repeal or amend a shareholder-adopted or group already exist.904 Further, of Rule 14a–11 894 and preferred the bylaw procedure.899 Some commenters shareholders may be disinclined to uniform applicability of Rule 14a–11 to undergo a two-step process to submit all companies.895 896 See B. Young, footnote 52, above (‘‘Data on their own nominees—first, to establish a We considered these comments bylaw amendment limitations show that at between nomination procedure through a Rule carefully. As discussed above, and 38 and 43% of companies, depending on the index, 14a–8 shareholder proposal and, shareholders are either unable to amend the bylaws noted in the Proposal, the purpose of or face significant challenges in the form of second, to submit their director the rules is to facilitate shareholders’ supermajority vote requirements.’’); see also letters candidates for inclusion in the traditional State law rights to nominate from AFSCME; Bebchuk/Hirst; Florida State Board company’s proxy materials—given the and elect their own director candidates. of Administration; J. Liu. 897 See letters from Bebchuk/Hirst; CII; Florida 900 See letters from Florida State Board of State Board of Administration. 890 See letters from American Express; Administration; P. Neuhauser; Shamrock. 898 See letters from AFSCME; Florida State Board 901 BorgWarner; Brink’s; BRT; CIGNA; P. Clapman; Con See letters from AT&T; ABA; BRT; J. of Administration; Nathan Cummings Foundation; Edison; CSX; Davis Polk; DTE Energy; DuPont; GE; Grundfest; Keller Group; Lemonjuice.biz SWIB. General Mills; C. Holliday; JPMorgan Chase; (‘‘Lemonjuice’’); Seven Law Firms. 899 Metlife; P&G; Pfizer; Safeway; Seven Law Firms; See letters from AFSCME; Corporate Library; 902 See Section II.B.2. above, for additional Society of Corporate Secretaries; Southern Sodali. See also Michael E. Murphy, The discussion of our consideration of a private Company; Tenet; U.S. Bancorp; Verizon. Nominating Process for Corporate Boards of ordering approach. Directors: A Decision-Making Analysis, 5 Berkeley 903 891 See letters from DTE Energy; JPMorgan Chase; See letters from CalPERS; Florida State Board Bus. L.J. 131, 144 (2008) (discussing how a P&G; Seven Law Firms; Society of Corporate of Administration; D. Nappier; P. Neuhauser. One company’s management defeated a shareholder Secretaries; U.S. Bancorp. of these commenters estimated that the approximate proposal regarding shareholder director cost for shareholders of ‘‘running a proposal’’ is 892 See, e.g., letters from ABA; BRT; Society of nominations through the use of a bylaw requiring $30,000. See letter from CalPERS. The commenter Corporate Secretaries. a super-majority shareholder vote in favor of such estimated that it would cost $351,000,000 to 893 See letters from CII; Governance for Owners; a shareholder proposal and noting that ‘‘[t]he super- attempt to establish the right of shareholders of D. Nappier. majority requirement was one of several potential Russell 3000 companies to include their director 894 See letters from AFL–CIO; Amalgamated Bank; defenses that management might have employed; it nominees in a company’s proxy materials. W. Baker; Florida State Board of Administration; might also have imposed inconvenient notice 904 The reluctance of companies to support the IAM; Marco Consulting; P. Neuhauser; Nine Law requirements, stringent shareholder qualification establishment of a shareholder director nomination Firms; Norges Bank; Relational; Shamrock; TIAA– rules, or restrictions mirroring the conditions of procedure was noted in an article submitted by a CREF; USPE; ValueAct Capital. SEC rule 14a–8. If these barriers proved insufficient, commenter. See letter from Bebchuk/Hirst (referring 895 See letters from AFSCME; CalPERS; CalSTRS; management might have considered counter- to Bebchuk and Hirst (2010)). In their article, the CII; COPERA; Florida State Board of initiatives; it is an open question in Delaware and authors observed that while the establishment of Administration; John C. Liu (‘‘J. Liu’’); D. Nappier; certain other states whether the board of directors such a procedure is permissible under the existing Nathan Cummings Foundation; Phil Nicholas (‘‘P. has the power to repeal a shareholder-initiated laws of some states, including Delaware, only three Nicholas’’); OPERS; State Universities Retirement bylaw by adopting a superseding bylaw companies have in fact established a shareholder System of Illinois (‘‘SURSI’’); SWIB; WSIB. amendment.’’) director nomination procedure.

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length of time that they will have to 3. Potential Improved Board disputed the conclusions of a study hold the requisite amount of securities Performance and Company Performance regarding the benefits enjoyed by and, perhaps more importantly, the risk As discussed throughout this release, companies with ‘‘hybrid boards’’ that 911 of failure at each step of the process. we are adopting the new rules with the was cited in the Proposing Release. Different but equally significant issues goal of facilitating shareholders’ ability Commenters also challenged the basis would arise under an opt-out approach. under State law to nominate and elect for any suggestions in the Proposing Shareholders who wish to retain their directors for election to the board. Release that the recent economic crisis ability to include their director Because State law provides shareholders was somehow linked to the inability of shareholders to include their director nominees in the company’s proxy with the right to nominate and elect nominees in the company’s proxy materials pursuant to Rule 14a–11 may directors to ensure that boards remain materials, pointing out that we have find it difficult to successfully oppose accountable to shareholders and to contemplated similar regulatory efforts an opt-out proposal due to mitigate the agency problems associated several times before the recent crisis management’s ability to draw on the with the separation of ownership from occurred.912 company’s resources to promote the control, facilitating shareholders’ 905 exercise of these rights may have the adoption of the proposal. We also 911 See, e.g., letters from IBM; Simpson Thacher. believe that if we were to allow an opt- potential of improviing board These commenters questioned the conclusions of out approach, even one in which only accountability and efficiency and the study by Chris Cernich, et al., ‘‘Effectiveness of shareholders could approve an opt out, increasing shareholder value. In the Hybrid Boards,’’ IRRC Institute for Corporate Responsibility (May 2009) (‘‘Cernich (2009)’’), there is a high likelihood that the effort Proposing Release, we requested available at http://www.irrcinstitute.org/pdf/ to procure such approval could be comment on the assertion that the IRRC_05_09_EffectiveHybridBoards.pdf (cited in supported by management and funded Proposal could improve board the Proposing Release, Section V.B.3.). For example, performance and, hence, company one of these commenters stated that the study by company assets, while opposing ‘‘demonstrates that the objectives of successful views could not be advanced effectively. performance—both for boards that dissidents were often short-term in nature’’ and Shareholders of these companies would include shareholder-nominated ‘‘suggests that companies with dissidents on their find themselves, once again, left without directors elected pursuant to the new board perform better than their peers over a one- rules and for boards that may be more year period, but that they perform worse over a an effective or efficient ability to three-year period.’’ See letter from Simpson nominate and elect their own director attentive and responsive to shareholder Thacher. The other commenter stated that ‘‘the only candidates. Further, as some concerns to avoid the submission of conclusion that could fairly be drawn from the data commenters observed, both the opt-in shareholder director nominations is that some companies perform better, and many 907 perform worse, under such circumstances’’ and ‘‘of and opt-out approaches may impose pursuant to the new rules. the companies with dissident directors studied for unnecessary complexity and We received significant comment three years after the contest period, share administrative burdens for shareholders regarding this assertion. Many performance averaged just 0.7%, which is 6.6% less commenters agreed that the new rules than peer companies.’’ with diversified holdings in numerous We recognize the limitations of the Cernich companies and may hinder their may result in the benefit of more (2009) study as well. While it provides useful exercise of a traditional State law accountable, more responsive, and documentation of patterns of behavior of activist right.906 generally better-performing boards.908 investors, its long-term findings on shareholder Other commenters, however, questioned value creation are difficult to interpret. Return estimates are presented without standard errors. For 905 In this regard, we note that a survey that one whether the new rules would in fact long-term returns in particular, this shortcoming commenter conducted showed that, if available, a promote board accountability,909 makes it difficult to infer whether results arise large majority of its member companies— warned of the costs of distracting and because returns are different than peers in approximately two-thirds—would seek to expensive election contests,910 and expectation, or because of random chance. Other implement an opt-out from Rule 14a–11. See letter studies cited in this release do use standard from Society of Corporate Secretaries. This survey statistical inference techniques to approach similar suggests that shareholders of many companies may, 907 See Proposing Release, Section V.B.3. questions. See, e.g., J. Harold Mulherin and Annette once again, be limited in their ability to have their 908 See letters from AFSCME; Bebchuk, et al.; B. Poulsen, Proxy Contests and Corporate Change: director candidates included in the companies’ Brigham; CalPERS; CII; L. Dallas; T. DiNapoli; A. Implications For Shareholder Wealth, J. Fin. Econ. proxy materials. Dral; GovernanceMetrics; Governance for Owners; (March 1998) (‘‘Mulherin and Poulsen (1998)’’) 906 See letters from CFA Institute; CII; COPERA; Hermes; M. Katz; LUCRF; J. McRitchie; R. Moulton- (cited in the NERA Report submitted as part of the letter from BRT). D. Nappier; OPERS. One commenter countered that Ely; D. Nappier; P. Neuhauser; NJSIC; OPERS; Pax 912 most long-term institutional shareholders are World; Pershing Square; Relational; RiskMetrics; D. See letters from 3M; ACE; Ameriprise; unlikely to submit director candidates at a large Romine; Shareowners.org; Social Investment American Bankers Association; BRT; Devon; number of companies simultaneously and predicted Forum; Teamsters; TIAA–CREF; Universities Dewey; GE; A. Goolsby; C. Holliday; Honeywell; that private ordering will lead to ‘‘some degree of Superannuation; USPE; Walden. One commenter IBM; Jones Day; Norfolk Southern; Pfizer; Sidley Austin; Simpson Thacher; TI; tw telecom; Unitrin; standardization’’ in the types of shareholder director added that the benefits of the right to include Wachtell. See also letters from BRT (submitting the nomination procedures. See letter from Society of shareholder director nominees in the company’s study by Andrea Beltratti and Rene´ M. Stulz, Why Corporate Secretaries. While we appreciate these proxy materials, including enhanced shareholder Did Some Banks Perform Better During the Credit points, we believe that adoption of Rule 14a–11, in value from hybrid boards and directors becoming Crisis? A Cross-Country Study of the Impact of fact, provides such ‘‘standardization.’’ The ‘‘more alert to their duties,’’ are ‘‘less easy to quantify.’’ See letter from P. Neuhauser. Governance and Regulation (July 2009) (‘‘Beltratti amendment to Rule 14a–8(i)(8) complements Rule and Stulz (2009)’’), in which the authors found ‘‘no 909 See, e.g., letters from Alaska Air; Ameriprise; 14a–11 by enabling shareholders to consider and consistent evidence that better governance led to Brink’s; Comcast; CSX; General Mills; Piedmont; vote on proposals that provide shareholders with an better performance during the crisis’’ but found Praxair; William H. Steinbrink (‘‘W. Steinbrink’’); even greater ability to present their own director ‘‘strong evidence that banks with more shareholder- candidates for a shareholder vote. Lastly, we Time Warner Cable; United Brotherhood of friendly boards performed worse.’’); Chamber of recognize that the amendment to Rule 14a–8(i)(8) Carpenters. Commerce/CCMC (submitting an article by Brian R. could result in some complexity as well, in that 910 See letters from ABA; Atlas; AT&T; Book Cheffins, Did Corporate Governance ‘‘Fail’’ During shareholders could establish director nomination Celler; Carlson; Carolina Mills; Chamber of the 2008 Stock Market Meltdown? The Case of the procedures that require, for example, a different Commerce/CCMC; Chevron; Crespin; M. Eng; S&P 500 (‘‘Cheffins (2010)’’), which stated that ownership threshold or holding period than those Erickson; ExxonMobil; Fenwick; GE; General Mills; because ‘‘corporate governance functioned tolerably contained in Rule 14a–11. We believe, however, Glass Lewis; Glaspell; Intelect; R. Clark King; well in companies removed from the S&P 500 and that such complexity is justified because it furthers Koppers; MCO; MeadWestvaco; MedFaxx; Medical that a combination of regulation and market forces our goal of facilitating, as much as possible, the Insurance; Merchants Terminal; D. Merilatt; NAM; will likely prompt financial firms to scale back the effective exercise of shareholders’ traditional State NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; free-wheeling business activities that arguably law right of shareholders to nominate their own Sara Lee; Schneider; Southland; Style Crest; Tenet; helped to precipitate the stock market meltdown, director candidates for a vote at a shareholder TI; tw telecom; R. VanEngelenhoven; Wachtell; the case is not yet made for fundamental reform of meeting. Wells Fargo; Weyerhaeuser; Yahoo. current corporate governance arrangements.’’).

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The comments reflect the sharp against incumbent directors.913 In one commenter also submitted studies divide on the question of whether response to the Proposal, commenters that showed that anti-takeover facilitating shareholders’ ability to submitted studies regarding the effects provisions protecting incumbent exercise their rights to nominate and of reducing incumbent directors’ management are associated with elect directors would lead to the benefit insulation from removal, which showed economically significant reductions in of improved board and company measures that make incumbent directors firm valuation, returns and performance. We have considered these more vulnerable to replacement by performance, and share prices increase comments carefully and appreciate both shareholder action have salutary when activists prompt elimination of the fact that the empirical evidence may deterrent effects against board provisions such as staggered boards.916 appear mixed and the potential for complacency and improve corporate Conversely, the creation of a staggered 914 negative effects due to management governance and shareholder value. board structure was found to be distraction and discord on the board Further, by creating a new threat of associated with a reduction in firm removal, the new rules could lead to 917 that some commenters identified. After value. Because our new rules may greater accountability on the part of assessing the costs and benefits make director elections more incumbent directors to the extent they identified by commenters, and for competitive by facilitating shareholders’ see a close link between their reasons discussed below, we believe ability to nominate and elect their own performance and the prospect of director candidates and, hence, also that the totality of the evidence and removal.915 In response to the Proposal, economic theory supports the view that make some incumbent directors less secure in their positions, we believe that facilitating shareholders’ ability to 913 The Supreme Court’s recent opinion in the rules may have analogous salutary include their director nominees in a Citizens United v. FEC, 130 S.Ct. 876 (2010) effects. company’s proxy materials has the underscores the importance of board As we noted in the Proposing Release, potential of creating the benefit of responsiveness to shareholder concerns. In Citizens United, the government asserted an interest in the presence of directors nominated by improved board performance and limiting independent expenditures by corporations shareholders may have an effect on in political campaigns in order to prevent enhanced shareholder value—both in company performance and shareholder companies with the actual election of dissenting shareholders from being compelled to fund corporate political speech with which they value.918 We also noted in the Proposing shareholder-nominated directors and in disagreed. Citizens United, 130 S.Ct. at 911. The companies that react to shareholders’ Court, however, stated that any such coercion could the link between incentives that are associated with concerns because of the possibility of be addressed ‘‘through the procedures of corporate accountability and performance. See, e.g., Benjamin ’’ such directors being elected. Thus, as democracy. Id., quotation omitted. E. Hermalin and Michael S. Weisbach, 914 See letter from L. Bebchuk (noting the article discussed below, it is our conclusion Endogenously Chosen Board of Directors and Their by Lucian A. Bebchuk and Alma Cohen, The Costs Monitoring of the Board, 88 Am. Econ. Rev. 96 that the potential benefits of improved of Entrenched Boards, J. Fin. Econ. (November (1998) (cited in the Proposing Release, Section board and company performance and 2005) (‘‘Bebchuk and Cohen (2005)’’), in which the V.B.3); Milton Harris and Artur Raviv, Control of ‘‘ shareholder value justify the potential authors stated: Staggered boards are associated Corporate Decisions: Shareholders vs. Management with an economically meaningful reduction in firm (May 29, 2008), available at http://papers.ssrn.com/ costs. value * * * [w]e also provide suggestive evidence sol3/papers.cfm?abstract_id=965559 (cited in the that staggered boards bring about, and not merely Proposing Release, Section V.B.3.). By facilitating shareholders’ exercise reflect, an economically significant reduction in 916 See Bebchuk and Hirst (2010) (noting the of their traditional State law rights to firm value * * * [f]inally, the correlation with ‘‘substantial empirical evidence indicating that reduced firm value is stronger for staggered boards nominate and elect directors, we believe director insulation from removal is associated with that are established in the corporate charter (which that eligible shareholders may prefer to lower firm value and worse performance.’’). See also shareholders cannot amend) than for staggered letter from L. Bebchuk (noting the following use the new rules over a costly boards established in the company’s bylaws (which traditional proxy contest, making shareholders can amend).’’). articles: Lucian A. Bebchuk, Alma Cohen and Allen Ferrell, What Matters in Corporate Governance?, 22 Commenters also submitted empirical studies election contests a more plausible Rev. Fin. Studs. 783 (2009) (‘‘Bebchuk, Cohen, and indicating that facilitating shareholders’ rights and Ferrell (2009)’’) (‘‘We put forward an entrenchment avenue for shareholders to participate in voice may result in better company performance. index based on six provisions: staggered boards, the governance of their company. This See letters from L. Bebchuk; CalSTRS; Nathan limits to shareholder bylaw amendments, poison Cummings Foundation (noting the study by Paul may have two beneficial effects on the pills, golden parachutes, and supermajority Gompers, Joy Ishii and Andrew Metrick, Corporate governance of a company. First, the requirements for mergers and charter amendments Governance and Equity Prices, 118 Q.J. Econ. 107 * * * [w]e find that increases in the index level are board and management of a company (2003), in which the authors found that ‘‘firms with monotonically associated with economically may be increasingly responsive to stronger shareholder rights had higher firm value, significant reductions in firm valuation as well as shareholders’ concerns, even when higher profits, higher sales growth, lower capital expenditures, and made fewer corporate large negative abnormal returns during the 1990– ’’ contested elections do not occur, acquisitions.’’); letters from CalSTRS; Nathan 2003 period. ); Re-Jin Guo, Timothy A. Kruse and because of shareholders’ ability to Cummings Foundation (noting the study by B. Tom Nohel, Undoing the Powerful Anti-Takeover present their director nominees more Lawrence Brown and Marcus Caylor, The Force of Staggered Boards, J. Corp. Fin. (June 2008) (‘‘Guo, Kruse and Nohel (2008)’’) (‘‘We find that de- easily. Second, new shareholder- Correlation Between Corporate Governance and Company Performance, Research Commissioned staggering the board creates wealth and that nominated directors may be more Institutional Shareholder Services (2004), in which shareholder activism is an important catalyst for inclined to exercise judgment the authors found that ‘‘firms with weaker pushing through this change.’’); Olubunmi Faleye, independent of the company’s governance perform more poorly, are less profitable, Classified Boards, Firm Value, and Managerial more risky, and have lower dividends than firms Entrenchment, J. Fin. Econ. (February 2007) incumbent directors and management. with better governance.’’). See also letter from T. (‘‘Faleye (2007)’’) (noting that ‘‘classified boards The new rules will remove or reduce Yang (noting the study by Bonnie Buchanan, Jeffry significantly insulate management from market M. Netter, and Tina Yang, Proxy Rules and Proxy discipline, thus suggesting that the observed some of the current disincentives to Practice: An Empirical Study of US and UK reduction in value is due to managerial shareholders’ exercise of their Shareholder Proposals (September 2009) entrenchment and diminished board traditional State law rights to nominate (‘‘Buchanan, Netter, and Yang (2009)’’), in which the accountability.’’)). 917 director candidates. Once the rules authors found that ‘‘after receiving a shareholder See Bebchuk and Hirst (2010); Bebchuk and proposal, [U.S.] firms exhibit higher stock returns Cohen (2005). become effective, boards’ and the improvement is greater [ ] when the 918 See Proposing Release, Section V.B.3. (citing responsiveness to concerns expressed proposal is likely to be wealth maximizing or Cernich (2009)). Moreover, as we noted in the same by shareholders may increase because sponsored by a shareholder owning a relatively section of the Proposing Release, empirical shareholders could more easily large equity stake in the target firm.’’). evidence has indicated that the ability of significant 915 As we noted in the Proposing Release, shareholders to hold corporate managers nominate their own directors to run economists have put forth theory and evidence on Continued

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Release that academic literature Such boards are a close, but not perfect, commenters warn that the new rules indicates the benefit to shareholders of analog to the results from an election in will lead to election contests that will be having an independent, active and which shareholder nominees submitted distracting, time-consuming, and committed board of directors.919 pursuant to the new rules are elected inefficient for companies, boards, and Directors are charged under State law to and typically result when the management.925 act as disinterested fiduciaries on behalf shareholder’s nominees join the board We have reviewed these studies and of all shareholders, but it has been through an actual or threatened proxy have reason to question some of their recognized that the difficult agency contest, but without a change of control. conclusions either because of questions problem created by the separation in In the study cited in the Proposing raised by subsequent studies,926 public companies of ownership from Release, ongoing businesses with a control creates conflicts not completely minority of dissident directors posted thirty-seven companies removed from the S&P 500 addressed by State law. We received index during 2008 and concluding that corporate increases in shareholder value of 9.1%, governance functioned ‘‘tolerably well’’ in these comment expressing concern regarding relative to peers, during the contest companies to negate the need for fundamental the close relationships between period, indicating that the market reform of the current corporate governance directors and a company’s management viewed the contest as having a positive arrangements) (submitted as part of the letter from and the degree to which the nomination 922 Chamber of Commerce/CCMC); Ali C. Akyol, Wei effect on shareholder value. Other Fen Lim and Patrick Verwijmeren, Shareholders in process is dominated by commenters adduce evidence that the Boardroom: Wealth Effects of the SEC’s Rule to management.920 Directors nominated by boards with a minority of dissident Facilitate Director Nominations (December 14, shareholders pursuant to the new rules directors produce positive changes in 2009) (‘‘Akyol, Lim, and Verwijmeren (2009)’’) will owe their presence on the board to (documenting negative stock price reactions to the corporate governance structures and announcements of regulatory activities related to their nomination by one or more strategy and result in increased shareholders’ right to include director nominees in significant shareholders and therefore shareholder value measured in both the company’s proxy materials, including the may be independent in a way that is absolute returns and relative to peers.923 Proposal) (submitted as part of the letter from J. fundamentally different from directors Grundfest); David F. Larcker, Gaizka Ormazabal and Amending our proxy rules to facilitate Daniel J. Taylor, The Regulation of Corporate nominated by the incumbent directors. the operation of State laws permitting Governance (January 16, 2010)) (‘‘Larcker, We found to be relevant the empirical shareholder nominations of directors Ormazabal, and Taylor (2010)’’) (submitted as part evidence cited in our Proposing Release may allow shareholders to elect of the letter from David F. Larcker (‘‘D. Larcker’’)). and by commenters regarding the effect 925 See letters from ABA; Atlas; AT&T; Book directors who, without obtaining Celler; Carlson; Carolina Mills; Chamber of on shareholder value of so-called control, can exercise similar influence Commerce/CCMC; Chevron; Crespin; M. Eng; ‘‘hybrid boards’’ (i.e., boards composed over decisions critical to shareholder Erickson; ExxonMobil; Fenwick; GE; General Mills; of a majority of incumbent directors and value. Glass Lewis; Glaspell; Intelect; R. Clark King; a minority of dissident directors).921 Koppers; MCO; MeadWestvaco; MedFaxx; Medical We recognize the existence of studies Insurance; Merchants Terminal; D. Merilatt; NAM; that reached conclusions contrary to NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; accountable for activity that does not benefit those discussed above.924 Other Sara Lee; Schneider; Southland; Style Crest; Tenet; investors may reduce agency costs and increase TI; tw telecom; R. VanEngelenhoven; Wachtell; shareholder value. See, e.g., Brad M. Barber, Wells Fargo; Weyerhaeuser; Yahoo. expected returns following contests are different ‘‘Monitoring the Monitor: Evaluating CalPERS’ 926 For example, we note that a study highlighted from peers, or whether the realized long-term Activism’’ (November 2006), available at http:// a methodological flaw in the Ikenberry and returns during the sample period are merely the papers.ssrn.com/sol3/ Lakonishok (1993) study. Mulherin and Poulsen _ result of random chance. Other research, such as papers.cfm?abstract id=890321 (cited in the (1998) noted that this study had required that Proposing Release, Section V.B.3.). See also Mulherin and Poulsen (1998), is consistent with companies exist as the same entity in the Deutsche Bank, Global Equity Research, ‘‘Beyond these findings, but investigates the impact of proxy COMPUSTAT database subsequent to the contest, the Numbers: Corporate Governance in Europe,’’ contests generally, rather than hybrid boards. eliminating some of the most favorable outcomes of (March 5, 2005) (cited in the Proposing Release, 922 Cernich (2009). proxy contests from consideration and biasing the Section V.B.3). 923 See letters from D. Romine; estimate of long-term returns downward. After 919 See Proposing Release, Section V.B.3. (citing GovernanceMetrics; P. Neuhauser; Social making corrections for this statistical bias and Fitch Ratings, ‘‘Evaluating Corporate Governance’’ Investment Forum; TIAA–CREF; Universities examining a sample of 270 proxy contests for board (December 12, 2007), available at http:// Superannuation. See also Mulherin and Poulsen seats conducted from 1979 to 1994, the authors www.fitchratings.com/corporate/reports/ (1998); James F. Cotter, Anil Shivdasani, and Marc found that the market had a favorable response to _ _ report frame.cfm?rpt id=363502). Zenner, Do Independent Directors Enhance Target the initiation of the proxy contest with an average 920 See, e.g., letters from CII (noting that ‘‘some Shareholder Wealth During Tender Offers?, J. Fin. abnormal return of 8.04% in the initiation period, boards are dominated by the chief executive officer, Econ. (February 1997) (finding, after examining a followed by long-run returns statistically who often plays the key role in selecting and sample of 169 tender offers conducted from 1989 indistinguishable from those of comparable stocks. nominating directors’’ and quoting a view expressed through 1992, that target shareholder gains from Their analysis showed that the wealth gains during by a prominent investor that ‘‘[t]hese people [chief tender offers were approximately 20% greater when proxy contests stemmed mainly from firms that executive officers] aren’t looking for Dobermans. the board was independent). were acquired. Overall, the authors concluded that * * * They’re looking for cocker spaniels.’’); J. 924 See letter from BRT (referring to the ‘‘Report proxy contests generally create value, and for McRitchie (‘‘It is well known that until recently the on Effects of Proposed SEC Rule 14a–11 on companies that were not acquired, ‘‘the occurrence vast majority of board vacancies were filled via Efficiency, Competitiveness and Capital Formation, of management turnover [had] a significant, positive recommendations from CEOs who also are typically in Support of Comments by Business Roundtable’’ effect on shareholder wealth relative to the firms chairmen of the boards * * * Recent requirements by NERA Economic Consulting (‘‘NERA Report’’)); that do not replace senior management.’’ In the for an ‘independent’ nominating committee provide David Ikenberry and Joself Lakonishok, Corporate Borstadt and Zwirlein (1992) study, the finding of little assurance against continued management Governance Through the Proxy Contest: Evidence a negative risk-adjusted return, conditional on domination. These ‘independent’ board members and Implications, 66 J. Bus. 420 (1993) (‘‘Ikenberry dissidents winning, was based on a sample of 32 serve at the pleasure of the CEOs and the other and Lakonishok (1993)) (claiming that ‘‘companies firms. Borstadt and Zwirlein note that, overall, board members; they have no independent base of with dissident board members substantially ‘‘dissident activity leads to gains for shareholders power.’’). underperform compared to their peers.’’) (cited in and is often followed by corporate reforms * * * 921 Cernich (2009). See also letters from D. the NERA Report); Lisa Borstadt and Thomas such that the realized gains over the contest period Romine; GovernanceMetrics; P. Neuhauser; Social Zwirlein, The Efficient Monitoring Role of Proxy appear to be permanent.’’ A survey article on Investment Forum; TIAA–CREF; Universities Contests: An Empirical Analysis of Post-Contest corporate governance confirmed that this is the Superannuation. Control Changes and Firm Performance, Fin. Mgm’t current academic consensus, stating that ‘‘[t]he As we previously noted, the Cernich (2009) study (1992) (‘‘Borstadt and Zwirlein (1992)’’) (asserting latest evidence suggests that proxy fights provide a cites long-term return results, relative to peers, that, in the long run, proxy contests destroy degree of managerial disciplining and enhance which are positive over the subsequent year but shareholder value) (cited in NERA Report); Beltratti shareholder value.’’ See Marco Becht, Patrick Bolton negative over the subsequent three years. However, and Stulz (2009) (submitted as part of the letter and Ailsa Roell, Corporate Governance and Control, these results are not reported with standard errors, from BRT and cited in letters from AT&T, BRT, and Handbook of the Economics of Finance (2003) making it difficult to determine whether the Seven Law Firms); Cheffins (2010) (examining (‘‘Becht, Bolton and Roell (2003)’’).

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limitations acknowledged by the existing means of ‘‘disciplining’’ a a shareholder director nominee may, in studies’ authors,927 or our own concerns company’s board and management. some circumstances, increase costs and about the studies’ methodology or Moreover, the ability of shareholders to potentially decrease the effectiveness scope.928 While we recognize that there ‘‘vote with their feet’’ or submit to a and efficiency of a unitary or cluster are strongly-held views on every side of takeover bid may be unattractive from a board utilized by a fund complex.933 this debate, we believe that, as shareholder’s perspective if those Some of these commenters noted their discussed throughout this release and transactions occur after a period of weak belief that investment company supported by commenters’ views and management that has depressed the governance presents a special case, empirical data, we have a reasonable company’s share price. Further, arguing that the rules should not be basis for expecting the benefits shareholders who invest in indices may extended to them absent empirical described above. not be readily able to sell securities of evidence specifically related to boards We are aware, of course, that the new a particular company that is part of the in this industry.934 Commenters also rules are additive to many existing index, making it difficult for them to means of monitoring and ‘‘disciplining’’ ‘‘vote with their feet.’’ The high costs argued that investment companies are a company’s board and management,929 involved with other existing subject to a unique regulatory regime which include: Hostile takeovers; mechanisms for ‘‘management under the Investment Company Act that stockholders ‘‘voting with their feet’’ by discipline,’’ such as a traditional proxy provides additional protection to selling their shares; board members contest, often mean that the prospect of investors, such as the requirement to being replaced by other means when the replacing incumbent directors is remote obtain shareholder approval to engage company’s stock performance is poor; unless the company’s performance falls in certain transactions or activities, and and management turnover following below a very low threshold. By that that investment companies and their poor performance or wrongdoing.930 time, a significant amount of boards have very different functions We acknowledge these alternatives, shareholder value will have, by from non-investment companies and but believe that, for the reasons noted hypothesis, already been lost and will their boards.935 We understand these above, directors nominated pursuant to require additional time to recoup. We concerns, but we also note that some the new rules will have a degree of believe that the new rules will help commenters have raised governance independence that is not present in the shareholders exert ‘‘management concerns regarding the relationship discipline’’ by reducing the cost of, and between boards and investment 927 For example, we believe that attempts to draw otherwise making more plausible, 936 sharp inferences from the Beltratti and Stulz (2009) advisers. Moreover, although study may not be warranted because, as the authors shareholder nominations. investment companies and their boards themselves noted, the evidence leaves much to We also acknowledge concerns may have different functions from non- interpretation. The authors concluded that negative expressed by commenters that the investment companies and their boards, conclusions about board effectiveness may be Proposal would encourage boards to unwarranted because it is unfair to evaluate ex-ante investment company boards, like the make decisions to improve results in the decisions using hind-sight. In particular, they boards of other companies, have short-term at the expense of long-term explained that: significant responsibilities in protecting Such a result does not mean that good governance shareholder value creation.931 For the shareholder interests, such as the is bad. Rather it is consistent with the view that reasons described above, we believe the banks that were pushed by their boards to maximize new rules have the potential to lead to approval of advisory contracts and shareholder wealth before the crisis took risks that fees.937 We also do not believe that the were understood to create shareholder wealth, but improved company performance and were costly ex post because of outcomes that were enhanced shareholder value for both regulatory protections offered by the not expected when the risks were taken. short-term and long-term shareholders. Investment Company Act (including Beltratti and Stulz (2009) at 3. Evidence suggests that, historically, requirements to obtain shareholder 928 For example, the relatively short timeframe approval to engage in certain and small number of companies examined in proxy contests have created value in Cheffins (2010) study alone justify some caution in both the short-run and long-run for transactions and activities) serve to attempting to draw any sharp inferences from the shareholders.932 The possible inclusion decrease the importance of the rights study. As for the Akyol, Lim, and Verwijmeren and potential election of shareholder that are granted to shareholders under (2009) and Larcker, Ormazabal, and Taylor (2010) State law. In fact, the separate regulatory studies, we note that, even if facilitating director nominees in company proxy shareholders’ ability to include their nominees in materials would not negate the board’s regime to which investment companies a company’s proxy materials enhances shareholder fiduciary obligations, which are to all are subject emphasizes the importance value, it may be possible to observe negative stock shareholders. Finally, shareholder of investment company directors in price reactions for a particular set of public announcement dates. The problem lies in director nominees are subject to election dealing with the conflicts of interest ascertaining the first time investors learned about by both long-term and short-term created by the external management the regulatory efforts to facilitate this shareholder shareholders, who will express their right. On that initial date, investors may have interest through their vote. In sum, we 933 adjusted share prices for both the capitalized value See, e.g., letters from ABA; ICI; ICI/IDC; IDC; of the benefits (or costs) associated with the do not expect that the prospect that MFDF; S&C; T. Rowe Price; Vanguard. regulatory effort and the probability of the effort’s such holders would nominate directors 934 See letters from ICI; ICI/IDC; S&C; T. Rowe success. Subsequent public announcements may should lead boards to take short-term Price. simply cause investors to update these initial actions that would detract from long- 935 See letters from ABA; Barclays; ICI; ICI/IDC; assessments of the valuation impact and the IDC; T. Rowe Price; S&C; Vanguard. probability of success. Consequently, it is difficult term value in order to avoid 936 See letters from J. Reid; J. Taub. to infer whether the price reactions are independent nominations. 937 See Jones v. Harris Assocs., 130 S.Ct. 1418, of past announcements or simply a revision of the A number of commenters expressed 1423, 176 L. Ed. 2d 265, 273–274 (2010). See also investors’ prior expectations. It is important, special concerns with respect to the S. Rep. No. 91–184; 91st Congress 1st Session; S. therefore, to disentangle investor expectations about Proposal’s effect on investment 2224 (1969) (‘‘This section is not intended to the probability of the success of the regulatory effort companies, asserting that the election of authorize a court to substitute its business judgment from the associated valuation implications. It for that of the mutual fund’s board of directors in appears that the Akyol, Lim, and Verwijmeren the area of management fees. * * * The directors (2009) and Larcker, Ormazabal, and Taylor (2010) 931 See, e.g., letters from BRT; GE; General Mills; of a mutual fund, like directors of any other studies did not focus on this distinction. IBM; Metlife; Office Depot; Safeway; Wachtell. corporation will continue to have * * * overall 929 See NERA Report. 932 See Mulherin and Poulsen (1998) and fiduciary duties as directors for the supervision of 930 Id. discussion in footnote 926 above. all of the affairs of the fund.’’).

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structure of most investment shareholder and nominee 942 as well as with each other regarding director companies.938 certain certifications required for use of nominations and elections through the Lastly, improved board performance Rule 14a–11.943 Rule 14a–18, Rule 14n– proxy process. Shareholders eligible to may result from the possible increase in 1 and Schedule 14N will require similar use Rule 14a–11 will be able to utilize the pool of qualified director disclosures when a shareholder or group the company’s proxy materials to candidates. When a company does not uses an applicable state or foreign law present their own director nominees for include shareholder nominees for provision or company’s governing a vote by other shareholders. They will director in its proxy materials, it loses documents to include shareholder be able to include in the company’s the opportunity to increase the pool of nominees for director in the company’s proxy materials a statement supporting qualified nominees. Further, it deprives proxy materials. The information their director nominees.946 Shareholders shareholders of the opportunity to provided by the disclosures and who are dissatisfied with the company’s consider and assess all qualified certifications will help provide existing board or the company’s director candidates if asked to make an informed transparency to shareholders when nominees will be able to communicate voting decision in director elections. As voting on shareholder nominees for this view and their preference for we stated in the Proposing Release, director and therefore may lead to better alternative candidates through the votes facilitating shareholders’ ability to informed voting decisions. they cast under the proxy process. include director nominations in a With respect to Rule 14a–8(i)(8), The new solicitation exemptions also company’s proxy materials may result companies previously have been will facilitate communications between in a larger pool of qualified director permitted to exclude shareholder shareholders.947 Shareholders interested nominees from which to choose.939 By proposals to establish procedures for in forming a nominating group to use allowing shareholders to submit their including shareholder director Rule 14a–11 can contact other own director nominees for inclusion in nominees in the company’s proxy shareholders—through both oral and the company’s proxy materials, the materials. This exclusion arose out of written communications—for that demand for qualified individuals who the concern that allowing such purpose without fear that their may be willing to serve as shareholder- proposals would result in the communications would be viewed as nominated directors also may increase. occurrence of contested elections solicitations under the proxy rules, as This increased demand may, in turn, without the disclosure that otherwise long as the exemption’s conditions are encourage more individuals to present would be required in a traditional proxy satisfied.948 If its director nominees are themselves as potential shareholder contest.944 The new disclosure included in the company’s proxy director nominees, resulting in a large requirements applicable to nominations materials pursuant to Rule 14a–11, the pool of potential candidates. We made pursuant to state or foreign law or nominating shareholder or group can recognize, however, this benefit may be a company’s governing documents solicit other shareholders to vote in offset by the possibility that some address that concern by mandating favor of its nominees, or against the qualified individuals may be less disclosure that is similar to that company’s own nominees, as long as the willing to be nominated to serve on a required in a traditional proxy exemption’s conditions are satisfied.949 board if faced with a contested contest.945 With the new amendment to Rule 940 election. In addition to improved disclosure, 14a–8(i)(8), shareholders will benefit 4. More Informed Voting Decisions in our new rules will enhance from a greater ability to present a Director Elections Due to Improved shareholders’ ability to communicate proposal to establish an alternative Disclosure of Shareholder Director procedure under a company’s governing Nominations and Enhanced Shareholder 942 Among the information included in Schedule documents for the inclusion of one or 14N is the disclosure required by Items 4(b), 5(b), Communications 7 and, for investment companies, Item 22(b) of more shareholder director nominees in There was widespread support among Schedule 14A. This disclosure is the same the company’s proxy materials. Thus, commenters for the principle that the disclosure required for a solicitation subject to shareholders will be able to present for Exchange Act Rule 14a–12(c). consideration by other shareholders a Commission should require disclosures 943 Item 8 of Schedule 14N. These certifications director nomination procedure that they regarding nominating shareholders and include: A certification that the nominating their nominees.941 The new shareholder (or where there is a nominating believe is appropriate for their requirements in Rule 14a–11, Rule 14n– shareholder group, each member of the nominating company. Through their votes on the 1, and Schedule 14N will require certain shareholder group) is not holding any of the proposal, shareholders will then have company’s securities with the purpose, or with the an opportunity to communicate their disclosures and certifications to be effect, of changing control of the company or to gain provided on Schedule 14N by a number of seats on the board that exceeds the views on this proposal to other shareholders who submit a nominee maximum number of nominees that the company shareholders and the company’s could be required to include under Rule 14a–11; a management. under Rule 14a–11. A nominating certification that the nominating shareholder or shareholder or group will be required to group satisfies the applicable eligibility E. Costs provide disclosure of the information requirements of Rule 14a–11; a certification that the We anticipate that the new rules, similar to that currently required in a shareholder director nominee satisfies the proxy contest regarding the nominating applicable eligibility requirements of Rule 14a–11; where applicable, may result in costs and a certification that the information set forth in related to (1) potential adverse effects on the notice on Schedule 14N is true, complete, and company and board performance; (2) 938 See footnote 142 above. correct. 939 See Proposing Release, Section V.B.3. 944 See Shareholder Proposal Proposing Release additional complexity in the proxy 940 For a more detailed discussion, see Section (proposing amendments to Rule 14a–8 to ‘‘make process; and (3) preparing the required IV.E.1. below. clear that director nominations made pursuant to disclosures, printing and mailing, and 941 See letters from ABA; Alston & Bird; [bylaw amendments concerning shareholder costs of additional solicitations. Americans for Financial Reform; CalSTRS; CFA nominations of directors] would be subject to the Institute; CII; Corporate Library; Dominican Sisters disclosure requirements currently applicable to 946 of Hope; Florida State Board of Administration; proxy contests’’ and noting that such disclosure is See Item 7(e) of Schedule 14A and Item 5(i) GovernanceMetrics; ICI; Mercy Investment Program; of ‘‘great importance’’ to an informed voting of Schedule 14N. Protective; RiskMetrics; Sisters of Mercy; Tri-State decision by shareholders). 947 See Rules 14a–2(b)(7) and 14a–2(b)(8). Coalition; Ursuline Sisters of Tildonk; USPE; 945 See Rule 14a–18, Rule 14n–1, and Schedule 948 See Rule 14a–2(b)(7). Walden. 14N. 949 See Rule 14a–2(b)(8).

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1. Costs Related to Potential Adverse shareholder nominees for director in the Third, the new rules could, in some Effects on Company and Board company’s proxy materials. Further, the cases, result in lower quality boards.954 Performance ownership threshold and holding period The quality of a company’s board may Rule 14a–11 and the amendment to that we adopted in response to decrease if, as some commenters Rule 14a–8(i)(8) may result in potential commenters’ concerns should limit the predicted, unqualified individuals are 955 adverse effects on the performance of a use of Rule 14a–11 to only holders who elected to the board. Commenters company and its board of directors. demonstrate a long-term, significant worried, in particular, that a First, we received significant commitment to the company. To shareholder director nominee will be comment stating that election contests encourage constructive dialogue elected without undergoing the same are distracting and time-consuming for between a company and a nominating extensive vetting process or having to companies, boards, and management.950 shareholder or group regarding the comply with the same independence or Further, to the extent that a more director nominees to be presented to director qualification standards competitive nomination and election shareholders for a vote, we revised the applicable to other director process motivates incumbent directors rule so that if a company negotiates with nominees.956 The presence of directors to be more responsive to shareholders’ the nominating shareholder or group who lack the proper qualifications may concerns, the board may incur costs in that otherwise would be eligible to have result in a lower quality board and attempting to institute policies and its nominees included in the company’s represent a cost to companies and procedures it believes will address proxy materials after the nominating shareholders. It is important to shareholder concerns. It is possible that shareholder or group has submitted its recognize that Rule 14a–11 provides for the time a board spends on shareholder nomination on Schedule 14N, and the only the inclusion of a shareholder relations could reduce the time that it company agrees to include the director nominee in the company’s otherwise would spend on strategic and nominating shareholder’s or group’s proxy materials, not the election of that long-term thinking and overseeing nominees on the company’s proxy card nominee. Further, the new disclosure management, which, in turn, may as company nominees, those nominees requirements contained in the Proposal negatively affect shareholder value.951 will count toward the 25% maximum will provide shareholders with We considered these comments and set forth in the rule.952 We believe that information for them to assess whether appreciate commenters’ concerns the cost described above may be offset a shareholder nominee possesses the regarding these costs. We believe it is by other factors as well. The additional necessary qualifications and experience 957 important to note that these costs are communication between a board and to serve as a director. Accordingly, as associated with the traditional State law the company’s shareholders may lead to other commenters have noted, an right to nominate and elect directors, enhanced transparency into the board’s unqualified individual, even if and are not costs incurred for including decision-making process, more effective nominated, will still need to receive the monitoring of this process by support of a significant number of 950 See letters from ABA; Atlas; AT&T; Book shareholders, and, ultimately, a better shareholders in order to be elected to Celler; BRT; Carlson; Carolina Mills; Chamber of the board.958 Therefore, the cost arising Commerce/CCMC; Chevron; Crespin; M. Eng; decision-making process by the board. Erickson; ExxonMobil; Fenwick; GE; General Mills; The cost also may be offset to the extent 954 See letters from 3M; ABA; American Electric Glass Lewis; Glaspell; Intelect; R. Clark King; that shareholders understand that the Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; Koppers; MCO; MeadWestvaco; MedFaxx; Medical board’s time and other resources are in Boeing; BRT; Burlington Northern; Callaway; Insurance; Merchants Terminal; D. Merilatt; NAM; scarce supply and will take these Carlson; Chamber of Commerce/CCMC; CIGNA; NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; Columbine; Cummins; CSX; J. Dillon; Emerson Sara Lee; Schneider; Southland; Style Crest; Tenet; considerations into account in deciding Electric; Erickson; ExxonMobil; FedEx; Headwaters; TI; tw telecom; R. VanEngelenhoven; Wachtell; to nominate directors, recognizing that C. Holliday; IBM; Intelect; R. Clark King; Lange; Wells Fargo; Weyerhaeuser; Yahoo. the cost of a distracted board may not Louisiana Agencies; Metlife; NIRI; O3 Strategies; V. 951 See, e.g., Akyol, Lim, and Verwijmeren (2009) justify pursuing their own specific Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara (finding that, based on the market response of a Lee; Sidley Austin; tw telecom; Wachtell; Wells sample of 1,315 firms, ‘‘the proposed rule is concerns. Fargo; Weyerhaeuser; Yahoo. See also Stephen M. perceived as costly by shareholders,’’ ‘‘that Second, the new rules may lead some Bainbridge, A Comment on the SEC Shareholder increasing shareholder rights, specifically by Access Proposal (November 14, 2003) at 17, facilitating director nominations by shareholders, companies to re-examine their current available at http://ssrn.com/abstract=470121 (‘‘The may actually be detrimental to shareholder wealth,’’ procedures for shareholders to submit likely effects of electing a shareholder and that ‘‘empowering shareholders is not their own director nominees for representative therefore will not be better necessarily perceived as a good thing by most consideration by either the company’s governance. It will be an increase in affectional shareholders.’’); Stout (2007) (‘‘Perhaps the most conflict . * * * It will be a reduction in the trust- obvious [economic function of board governance] is board or nominating committee, based relationships that causes horizontal promoting more efficient and informed business especially if the company is subject to, monitoring within the board to provide effective decisionmaking. It is difficult and expensive to or thinks it likely will be subject to, constraints on agency costs.’’) (cited in the arrange for thousands of dispersed shareholders to shareholder-nominated director Proposing Release, Section V.C.1.). express their often-differing views on the best way 955 See letters from AGL; Air Tite, Inc. (‘‘Air to run the firm.’’); see generally Stephen M. candidates submitted pursuant to Rule Tite’’); All Cast; John C. Astle (‘‘J. Astle’’); Astrum Bainbridge, Response to Increasing Shareholder 14a–11. These companies may incur Solar (‘‘Astrum’’); Atlantic Bingo; Burlington Power: Director Primacy and Shareholder costs associated with such a re- Northern; Glen Burton (‘‘G. Burton’’); R. Chicko; Disempowerment, 119 Harv. L. Rev. 1735 (2006) Columbine; Darden Restaurants; Erickson; Fluharty; (discussing how concern for accountability may examination and any resulting Horizon; Lange; Mama’s; Massey Services; NIRI; O3 953 undermine decision-making discretion and adjustments to their procedures. Strategies; P&G; PepsiCo; W. Steinbrink; Stringer; authority) (cited in the Proposing Release, Section These costs may be limited, however, to Theragenics; VCG; Wachtell; and Wells Fargo. V.C.1.). But see Lucian Arye Bebchuk, The Case for the extent that the new rules improve 956 See letters from AGL; Astrum; Boeing; R. Burt; Increasing Shareholder Power, 118 Harv. L. Rev. G. Burton; S. Campbell; Carolina Mills; Columbine; 833, 883 (2005) (‘‘[M]ere recognition that back-seat the overall efficiency of the director W. Cornwell; Erickson; Fenwick; FPL Group; driving might sometimes be counter-productive is nomination process and lead to Intelect; Little; McDonald’s; MedFaxx; Norfolk hardly sufficient to mandate general deference to improvements in the existing Southern; P&G, Rosen; UnitedHealth; VCG; Wells management. Such mandated deference would procedures for director nominations. Fargo; Xerox; Yahoo. follow only if one assumes that shareholders are so 957 See Rules 14a–11, 14a–18 and 14n–1, and irrational or undisciplined that they cannot be Schedule 14N. trusted to decide for themselves whether deference 952 See new Rule 14a–11(d) (5). For a discussion 958 See letters from BCI; Bebchuk, et al.; CII; T. would best serve their interests.’’) (cited in the of this modification, see Section II.B.6.c. above. DiNapoli; Florida State Board of Administration; Proposing Release, Section V.C.1.). 953 See, e.g., letters from Biogen; GE. Continued

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from unqualified directors may be to be nominated and presented for a companies whose boards are already limited to the extent that shareholders shareholder vote pursuant to Rule 14a– well-functioning, such disruption could understand that experience and 11 or a procedure in the company’s be counterproductive and could delay competence are important director governing documents established the board’s decision-making process and qualifications and cast their votes for through Rule 14a–8. The cost may be a delay or impairment in the decision- the most-qualified candidates. further mitigated to the extent that the making process could constitute an Moreover, as adopted, the rule will new rules lead to the election of indirect economic cost to shareholder require a company to include in its individuals who will present a greater value. For the reasons discussed above, proxy materials no more than one diversity of views for the board’s however, we believe that boards with shareholder director nominee or a consideration, thereby leading to a directors who were not nominated by number of nominees that represent 25% better decision-making process, and, the incumbent directors would, on of the company’s board, whichever is ultimately, greater shareholder value.964 balance, improve company performance greater.959 We believe that this Lastly, as we stated in the Proposing and increase shareholder value.967 provision will limit the effect of any Release,965 the possibility of qualified In addition, it may be possible for an potential decrease in the overall quality candidates being discouraged from investor to submit director nominees of a board. Lastly, to the extent that running for a board seat may be limited through the new rules with the there is a risk of unqualified individuals by shareholders’ understanding that intention of having the nominees, if being elected as directors, it is a risk board dynamics can be important, and elected, advocate for board decisions that arises because shareholders are that changing them may not always be that maximize the investor’s private given the right under state or foreign beneficial. gains but at the expense of other law to determine who sits on the board Fourth, potential disruptions in shareholders.968 In the case of Rule 14a– of directors. boardroom deliberations represent 11, the cost may be limited to the extent The quality of a board also may another possible cost to shareholders that the ownership threshold and decrease if, as some commenters and companies. If a shareholder director holding requirement allow the use of warned, the increased likelihood of a nominee is elected and disruptions or the rule by only holders who contested election discourages polarization in boardroom dynamics demonstrated a significant, long-term experienced and capable individuals occur as a result, the disruptions may commitment to the company. This cost from serving on boards, making it more delay or impair the board’s decision- may be limited to the extent that a difficult for companies to recruit making process. Such boardroom director nominee with narrow interests qualified directors or create a board disruption may occur when one or more must still gain the support of a with the proper mix of experience, directors seek to promote an agenda that significant number of shareholders to be skills, and characteristics.960 Some conflicts with that of the rest of the elected.969 The disclosure requirements commenters noted that it is already board. We received significant comment that we are adopting also may alert difficult to recruit qualified that the presence of shareholder- shareholders to the narrow interests of independent directors.961 Other nominated directors could disrupt the the nominating shareholder or group in commenters, however, did not believe collegiality and efficiency of boards.966 advance of the election so that they can that Rule 14a–11 will discourage We recognize the view that for cast their votes in favor of the candidate experienced, capable directors from who will best serve the interests of all serving,962 with one commenter stating 964 See letters from L. Dallas (citing Jerry shareholders.970 The cost may be further that it encountered no difficulty in Goodstein et al., The Effects of Board Size and limited to the extent that a shareholder Diversity on Strategic Change, 15 Strategic Mgmt. J. finding executives willing to serve on a 241 (1994) and Lynne L. Dallas, The New director nominee, once elected to the shareholder-nominated slate.963 To the Managerialism and Diversity on Corporate Boards board, will be subject to the same extent that the prospect of a contested of Directors, 76 Tulane L. Rev. 1363 (2002)); fiduciary duties applicable to all other election deters an otherwise qualified LIUNA; RiskMetrics (noting that it tracked over a directors.971 The possibility of a director four-year period the returns of a portfolio of individual from considering a board companies where activists gained board seats in seeking to promote private gain at the seat, this will represent a cost to both 2005, found that the portfolio outperformed the S&P expense of shareholders generally—and the company and its shareholders. This 500 index even during the recent market turmoil, the related costs to the board’s overall cost may be mitigated, however, by the and saw no indication that the presence of dissident performance and dynamics—should be directors on boards had a detrimental impact on ability of other individuals—those who shareholder value); Teamsters. limited to the extent that such a director would not have been considered or 965 See Proposing Release, Section V.C.1. recognizes these duties and strives to nominated by the incumbent directors— 966 See, e.g., letters from Association of Corporate fulfill these legal obligations. The cost Counsel; BRT; Chamber of Commerce/CCMC; GE; also may be limited to the extent that Governance for Owners; A. Krakovsky; P. IBM; McDonald’s; O’Melveny & Myers; P&G; shareholders recognize the potential Neuhauser; NJSIC; Relational; Shamrock; Social PepsiCo; Seven Law Firms; Society of Corporate Secretaries (also presenting data that the average Investment Forum. 967 hedge fund ownership is 7.15%, the number of S&P See Section IV.D.3. above. 959 See Rule 14a–11(d)(1). 500 companies with hedge fund ownership at or 968 See, e.g., letters from BRT; Eaton; IBM; 960 See letters from 3M; ABA; American Electric above 5% is 273, and the number of S&P 500 McDonald’s; Seven Law Firms; Society of Corporate Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; companies with hedge fund ownership at or above Secretaries; UnitedHealth. See also Stout (2007) at Boeing; BRT; Burlington Northern; Callaway; 10% is 104); Vinson & Elkins; Wachtell; Xerox; 794 (‘‘[B]y making it easier for large shareholders in Carlson; Chamber of Commerce/CCMC; CIGNA; Yahoo. See also Larcker, Ormazabal, and Taylor public firms to threaten directors, a more effective Columbine; Cummins; CSX; J. Dillon; Emerson (2010)(stating that ‘‘the evidence suggests shareholder franchise might increase the risk of Electric; Erickson; ExxonMobil; FedEx; Headwaters; shareholders react negatively to regulation of proxy intershareholder ‘rent-seeking’ in public C. Holliday; IBM; Intelect; R. Clark King; Lange; access, and that the reaction is decreasing in the companies.’’). Louisiana Agencies; Metlife; NIRI; O3 Strategies; V. number of large blockholders and increasing in the 969 See letters from BCIA; Bebchuk, et al.; CII; T. Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara number of small institutional investors,’’ and that DiNapoli; Florida State Board of Administration; Lee; Sidley Austin; tw telecom; Wachtell; Wells ‘‘the market perceives that shareholders of firms Governance for Owners; A. Krakovsky; P. Fargo; Weyerhaeuser; Yahoo. with many large blockholders are harmed by proxy Neuhauser; NJSIC; Relational; Shamrock; Social 961 See, e.g., letters from Ameriprise; BRT; access and is consistent with critics’ claims that Investment Forum. Chamber of Commerce/CCMC. large blockholders will use the privileges afforded 970 See Rule 14a–11, Rule 14a–18, Rule 14n–1, 962 See letters from Florida State Board of them by proxy access regulation to manipulate the and Schedule 14N. Administration; Pershing Square. governance process to make themselves better off at 971 See letter from CII. See also Veasey & 963 See letter from Pershing Square. the expense of other shareholders.’’). DiGuglielmo, above.

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harm from misuse of the board’s increase costs and potentially decrease Although commenters argued that the decision-making process and therefore the efficiency of the boards.976 We note, election of a shareholder-nominated do not vote for the nominee if they view however, that these costs are associated director to a unitary or cluster board the cost as sufficiently high. with the traditional State law right to will necessarily result in decreased Fifth, to the extent that the need to nominate and elect directors, and are effectiveness of the board, we disagree. comply with the new rules makes the not costs incurred for including In this regard, one commenter argued U.S. public equity markets less shareholder nominees in the company’s that competition in the board attractive,972 discourages private proxy materials. We also note that any nomination process may improve companies from conducting public increased costs and decreased efficiency efficiency by providing additional offerings in the U.S.,973 or encourages of an investment company’s board as a leverage for boards in negotiations with U.S. reporting companies to become result of the fund complex no longer the investment adviser.978 In any event, non-reporting companies, this would be having a unitary or cluster board would we believe that investment company a cost of the new rules because occur, if at all, only in the event that the shareholders should have the investors’ investment opportunities investment company shareholders elect opportunity to exercise their traditional could be limited. This cost may be the shareholder nominee. Investment State law rights to elect a non-unitary or mitigated to the extent that the new companies may include information in non-cluster board if they so choose. rules help improve board accountability the proxy materials making investors and corporate governance, generate 2. Costs Related to Additional aware of the company’s views on the Complexity of Proxy Process stronger company performance, and perceived benefits of a unitary or cluster increase shareholder value. Investors board and the potential for increased The new rules that we are adopting may be more willing to invest or costs and decreased efficiency if the will, for the first time, require that continue to invest in companies in shareholder nominees are elected. company proxy materials include which they have the ability to present Moreover, we note that a fund complex information about, and the ability to their own shareholder director can take steps to minimize the cost and vote for, director nominees submitted by nominees in the company’s proxy shareholders. The rules will facilitate materials if they are displeased with the burden of a shareholder-nominated director who is elected by, for example, shareholders’ ability to exercise their company’s performance. We also note traditional State law rights to nominate that shareholders in many foreign entering into a confidentiality agreement in order to preserve the status and elect their own director candidates. countries already have the ability to One of the costs of this newly-enhanced of confidential information regarding include their director nominees in the ability, however, is the additional the fund complex. company’s proxy materials.974 We complexity in the proxy process as both therefore believe that the new rules may Two commenters in a joint comment companies and shareholders may have bring the U.S. capital markets closer in letter argued that there are a number of to consider and address the issue of line with international practice by practical and legal issues that prevent shareholder director nominations more giving shareholders of U.S. companies confidentiality agreements from being frequently than in the past. an ability that may already be enjoyed sufficient to protect the interests of fund Several commenters expressed by shareholders of many non-U.S. shareholders, and included a concern that the inability of companies companies. memorandum from a law firm and shareholders to opt out of Rule 14a– Lastly, with respect to investment discussing concerns about Regulation 11, or establish a shareholder director companies, a number of commenters FD, enforceability of confidentiality nomination procedure with criteria expressed concern that the election of a agreements, whether shareholder- different than those of Rule 14a–11, may shareholder director nominee may, in nominated directors would sign create workability and implementation some circumstances, increase costs and confidentiality agreements, compliance, issues for companies, as they struggle to burdens (e.g., the shareholder- and loss of attorney-client privilege.977 comply with a rule that does not fit their nominated director would have to leave We considered the issues raised by the specific capital and governance during discussions that pertain to the joint comment letter. To the extent that structures.979 One commenter, for other investment companies in the material non-public information is example, identified several of these complex, board materials would have to discussed by boards in a fund complex, issues, such as: the operation of the rule be customized for the director, and the we emphasize that entering into a in a company with multiple classes of fund complex would face challenges in confidentiality agreement is only one stock, a cumulative voting standard, or preserving the status of privileged method of preserving the confidentiality a majority voting standard; the information) and potentially decrease of information revealed in board treatment of derivatives and other the efficiency of a unitary or cluster meetings attended by the shareholder- 975 synthetic ownership under the rule; the board utilized by a fund complex. We nominated director. The fund complex need for adequate protection against use recognize that for fund complexes that can have separate meetings and board of the rule for change of control utilize unitary or cluster boards, the materials for the board with the attempts; and the consequences of false election of a shareholder director shareholder-nominated director, nominee may, in some circumstances, especially if particularly sensitive legal 978 See letter from J. Taub. or other matters will be discussed or to 979 See, e.g., letters from ABA (‘‘Workability 972 See letter from BRT. protect attorney-client privilege. Finally, requires that the rule or bylaw be easily 973 See letters from Altman (stating that its survey understandable, be able to be readily administered, of 36 public companies showed that 80.85% of we believe the concerns expressed in address all relevant issues, operate in a time frame respondents believe the new rules ‘‘will deter some the memorandum about confidentiality that permits proper conduct of shareholder U.S. private companies from going public and some agreements were either not compelling meetings and action by a fully informed foreign companies from listing on U.S. exchanges.’’); or speculative in nature. shareholder body, recognize the role and fiduciary BRT; Richard Tullo (‘‘R. Tullo’’). responsibility of the board of directors, comply with 974 See letters from ACSI; CalPERS; ICGN; the requirements of the Commission’s rules and LUCRF; Pax World; RiskMetrics; Social Investment 976 See, e.g., letters from ICI; ICI/IDC; IDC; MFDF; other applicable law and allow the company and its Forum; SWIB. Vanguard. shareholders sufficient flexibility to respond to 975 See, e.g., letters from ABA; ICI; ICI/IDC; IDC; 977 See letter from ICI/IDC (including attached changed circumstances in a timely manner.’’); Keller MFDF; S&C; T. Rowe Price; Vanguard. legal memorandum). Group; Wachtell.

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certifications by a nominating proposals submitted pursuant to Rule our new rules.988 Presenting the shareholder or group.980 We recognize 14a–8 and the process for submission of competing director nominees on one the possibility that attempting to a no-action request to exclude the proxy card, with the related disclosure comply with a highly-complex rule proposal. To the extent disputes on contained in one proxy statement, may without the necessary flexibility to whether to include particular nominees simplify the shareholder’s decision- adapt the rule to a company’s specific or proposals are not resolved between making process, reduce the potential for situation may create certain costs for the company and shareholders, any confusion on the part of companies, such as the cost of legal companies and/or shareholders may shareholders, and address any advice and possible litigation if seek recourse in courts, which will reluctance on the part of shareholders to uncertainties must be resolved in courts. increase costs. consider an insurgent shareholder’s We also recognize the possibility that As discussed throughout the release, nominee solely because the nominee shareholders may have to incur similar the rules we are adopting include was not presented in the company’s costs if they attempt to use a highly- modifications to the proposed rules. We proxy materials. complex and unclear rule. believe that the modifications will help The requirements of Rule 14a–11, minimize the complexity of the new 3. Costs Related To Preparing such as the eligibility criteria, may add rules and clarify uncertainties as much Disclosure, Printing and Mailing and a certain degree of complexity in the as possible. For example, our decision Costs of Additional Solicitations and proxy process. For example, the process to adopt a uniform ownership threshold Shareholder Proposals of determining which shareholder instead of the proposed tiered approach The new rules will impose additional director nominee will be in the simplifies this particular eligibility direct costs on companies and company’s proxy materials and the requirement and should reduce some of shareholders related to the preparation limitations on the number of the uncertainties identified by a of required disclosure, printing and shareholder nominees for director that a commenter.981 We also clarified the mailing costs, and costs of additional company is required to include in its availability of Rule 14a–11 when there solicitations that may be undertaken as proxy materials may add complexity. If is a concurrent proxy contest,982 a result of including one or more several shareholders or groups desire provided standards for the order of shareholder nominees for director in the (and qualify) to nominate the maximum priority of shareholder director company’s proxy materials pursuant to number of directors they are allowed to nominees upon the withdrawal or Rule 14a–11, a company’s governing place in the company’s proxy materials, disqualification of another shareholder documents, or an applicable state or only the shareholder or group holding director nominee,983 addressed issues foreign law provision.989 the largest qualifying ownership interest regarding the application of Rule 14a–11 First, the new rules will impose direct will succeed. Another potential source to certain corporate structures (such as costs onto companies and shareholders of complexity under Rule 14a–11 is the staggered boards and different classes of due to the rules’ disclosure and number of shareholder director voting securities),984 and adopted a procedural requirements. For example, nominees that a nominating shareholder uniform deadline for the submission of companies that determine that they may or group may submit to a company shareholder director nominations exclude a shareholder director nominee during a particular proxy season. For pursuant to Rule 14a–11 that is pursuant to Rule 14a–11 will be example, if the maximum allowable generally applicable to companies required to provide a notice to the number of shareholder director subject to the rule.985 The costs arising nominating shareholder or group nominees currently serves on the board, from any complexity or uncertainty regarding any eligibility or procedural a company will not be required to arising from the new rules may be deficiencies in the nomination and include additional shareholder director mitigated to the extent that companies provide to the Commission notice of the nominees in the company’s proxy and shareholders gain greater familiarity basis for its determination.990 materials. These sources of complexity with the new rules over time,986 Companies also may incur costs in and any uncertainty that may arise in additional guidance is provided by the preparing any statements regarding the implementing the new rules could Commission or its staff,987 and, if shareholder director nominees that they result in costs to companies, necessary, uncertain legal issues are wish to include in their proxy materials. shareholders seeking to have their resolved by courts. Nominating shareholders or groups and nominees included in the companies’ Lastly, as discussed above, we believe the nominees also will be required to proxy materials, and shareholder the overall proxy solicitation process for disclose information about themselves, director nominees. For example, both contested director elections may be less which may be costly.991 Most of this companies and shareholders could confusing for shareholders as a result of disclosure will be provided by the incur costs to seek legal advice in nominating shareholder or group in the connection with shareholder 981 See letter from Shearman & Sterling (opposing notice to the company, which would be nominations submitted pursuant to Rule the tiered ownership thresholds because a number of companies regularly move from one category of filed on new Schedule 14N. The 14a–11, the inclusion of shareholder filer to another as the aggregate worldwide market Schedule 14N also will include director nominees in a company’s proxy value of their voting and non-voting common equity materials, submission of a notice of changes from fiscal year to fiscal year, which it 988 See Section IV.D.1. above. believed would lead to uncertainty). intent to exclude a nominee or 989 We note that these increased costs may be less 982 nominees, and the process set forth in See Section II.B.2.e. above. for companies using the notice and access model. 983 See Section II.B.7.b. above. the rule for seeking an informal See Internet Proxy Availability Release. 984 See Sections II.B.4.b. and II.B.6.a. above. 990 For purposes of the PRA analysis, we estimate statement of the staff’s views with 985 See Section II.B.8.c.ii. above. these disclosure requirements would result in 225 respect to the company’s determination 986 See letter from CII. burden hours of company time, and $30,000 for the to exclude a shareholder director 987 For example, we are adopting, as proposed, a services of outside professionals. nominee. Companies and shareholders procedure by which companies could send a notice 991 For purposes of the PRA analysis, we estimate also could incur costs to seek legal to the Commission where the company intends not the total burden for Schedule 14N for shareholders to include a shareholder director nominee in its submitting nominees pursuant to Rule 14a–11 advice in connection with shareholder proxy materials and could seek informal staff would result in a total of 7,870 hours of shareholder views—through a no-action request—with respect time and $1,049,300 for the services of outside 980 See letter from Wachtell. to that determination. professionals.

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information regarding the length of an estimated 47 hours and associated exclude the proposal from its proxy ownership, certifications, and other costs of $47,784 to prepare and submit materials, these costs also may decrease information. Companies could incur a notice of intent to exclude a to the extent that the company does not additional costs to investigate or verify shareholder proposal.995 An investment seek to exclude the proposal. Lastly, the the information regarding shareholder company estimated that its costs for costs may be limited to the extent that director nominees provided by including a shareholder proposal in its shareholders do not submit proposals nominating shareholders or groups, complex-wide proxy materials exceeded related to director nomination determine whether nominations will $3 million in ‘‘tabulation expenses.’’ 996 procedures due to the uniform conflict with any laws, and analyze the One commenter, however, described the applicability of Rule 14a–11 to all relative merits of the shareholder costs to companies resulting from the companies subject to the rule and director nominees and the companies’ amendment to Rule 14a–8(i)(8) as availability of the rule for eligible own director nominees.992 For purposes ‘‘negligible’’ (with such costs confined to shareholders.999 of the PRA analysis, we estimate that any additional costs of printing and Second, the new rules may increase the disclosure burden of Rule 14a–11 on distributing the proposal in the the incremental costs of printing and reporting companies (other than company’s proxy materials).997 For mailing a company’s proxy materials registered investment companies) and purposes of the PRA analysis, we due to the need to include additional registered investment companies is estimate that shareholders will submit a names and background information of 4,113 hours of personnel time and total of 147 proposals regarding shareholder director nominees in the $548,200 for the services of outside procedures for the inclusion of proxy materials and the increased professionals. We also estimate for shareholder nominees in company weight of these materials. These costs purposes of the PRA analysis that the proxy materials per year to reporting may increase as the number of disclosure burden to shareholders of companies, including registered shareholder director nominees to be Schedule 14N will be 7,870 hours of investment companies. Assuming that included in the company’s proxy shareholder time and $1,049,300 for the 90% of reporting companies (including materials increases. Thus, this may services of outside professionals. We registered investment companies), or result in a decrease in the costs to also received estimates from 132 companies, prepare and submit a shareholders that would have had to commenters regarding the costs notice of intent to exclude these conduct traditional proxy contests in described above.993 These estimates are proposals, the resulting costs to the absence of Rule 14a–11, but may described in the PRA analysis above.994 companies will result in approximately increase the costs for companies.1000 Companies also could incur costs due 11,484 hours and $1,531,200 for the Companies also will incur additional to the potential increase in the number services of outside professionals.998 printing and mailing costs with respect of shareholder proposals submitted to These costs could decrease to the extent to the inclusion of a shareholder companies as a result of the expansion that the Rule 14a–8 no-action process proposal related to changes to a in the types of proposals permitted provides guidance from the staff on company’s governing documents under Rule 14a–8. Under the which types of proposals are regarding inclusion of shareholder amendment to Rule 14a–8(i)(8), excludable. Further, because a company director nominees in the company’s companies will no longer be able to rely that receives a shareholder proposal has proxy materials. We have two sources of on this basis to exclude from their proxy no obligation to make a submission information estimating such costs. materials shareholder proposals that under Rule 14a–8 unless it intends to Based on its July 2009 survey of its seek to establish a procedure in the member companies, one commenter company’s governing documents for the 995 See letter from BRT. stated that companies spend an 996 See letter from Vanguard. The commenter did inclusion of shareholder nominees for not elaborate on the nature of these ‘‘tabulation estimated 20 hours and associated costs director in the company’s proxy expenses.’’ It also noted that this figure does not of $18,982 to print and mail one materials. This will likely result in include ‘‘incremental printing and mailing costs shareholder proposal.1001 The responses increased costs to companies related to because the proposal was included in the proxy to a questionnaire that the Commission reviewing and processing such statement and did not require a separate mailing.’’ made available in 1997 relating to 1998 997 See letter from CII. proposals to determine matters such as 998 This estimate is based on the assumption that amendments to Rule 14a–8 suggest such shareholder eligibility and whether shareholders of reporting companies (other than costs to the responding companies there is another basis for excluding registered investment companies) will submit averaged $50,000.1002 As noted above, these proposals under Rule 14a–8. If a approximately 123 proposals per year regarding procedures for inclusion of shareholder nominees 999 company decides to exclude the for director in company’s proxy materials, and that As discussed in Section II.B.3. above, Rule shareholder proposal, it will have to 90% of companies that receive such a shareholder 14a–11 will not apply to certain types of incur the costs, such as legal fees, proposal will seek to exclude the proposal from companies. 1000 needed to prepare and submit a notice their proxy materials. Thus, we estimate that However, as explained in footnote 875 above, companies will seek to exclude 110 such proposals the increased costs for the company may not be as to the Commission regarding its basis (123 proposals × 90%) per proxy season. We much as would otherwise result if the shareholders for excluding the proposal. In this estimate that the annual burden for the company’s engaged in a traditional proxy contest. regard, we received several estimates submission of a notice of its intent to exclude the 1001 See letter from BRT. This cost is in addition from commenters regarding the costs proposal and its reasons for doing so would average to the estimated 47 hours and associated costs of 116 hours per proposal, for a total of 12,760 burden $47,784 that companies spend to prepare and related to a Rule 14a–8 shareholder hours (110 proposals × 116 hours/proposal) for submit a notice of intent to exclude a shareholder proposal. Based on its July 2009 survey reporting companies (other than registered proposal. of its member companies, one investment companies). This will correspond to 1002 In the adopting release for the amendments commenter stated that companies spend 9,570 hours of company time (110 proposals × 116 to Rule 14a–8 in 1998, we noted that responses to hours/proposal × 0.75) and $1,276,000 for the a questionnaire we made available in February 1997 services of outside professionals (110 proposals × suggested the average cost spent on printing costs 992 See, e.g., letter from S&C. 116 hours/proposal × 0.25 × $400). For registered (plus any directly related costs, such as additional 993 See letters from BRT; Society of Corporate investment companies, we estimate for purposes of postage and tabulation expenses) to include Secretaries. the PRA that the total burden hours will be 2,552 shareholder proposals in company proxy materials 994 See Section III.C. above, for discussion of the hours, which corresponds to 1,914 hours of was approximately $50,000. The responses received estimates included in the letters from BRT and company time and $255,200 for the services of may have accounted for the printing of more than Society of Corporate Secretaries. outside professionals. See Section III.D.2. above. one proposal.

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for purposes of the PRA, we estimate of management’s time.1005 Another 11.1010 However, the costs for that the amendment to Rule 14a–8(i)(8) commenter noted that it had direct costs companies may be less to the extent that could result in the annual submission of of approximately $11 million in 2008 directors determine not to expend such 147 shareholder proposals regarding and more than $9 million in 2009—in resources to oppose the election of the procedures for the inclusion of addition to the substantial indirect costs shareholder director nominees and shareholder director nominees in in management time and attention—as a simply include the shareholder director company proxy materials. Based on this result of the proxy contests that it nominees and the related disclosure in information, for purposes of our faced.1006 the company’s proxy materials.1011 The analysis, we assume printing and We understand that company boards requisite ownership threshold and mailing costs of one shareholder may be motivated by the issues at stake holding period of Rule 14a–11 may also proposal in a company’s proxy materials to expend significant resources to limit the number of shareholder director could be in the range of approximately challenge shareholder director nominations that a board may receive, $18,000 to $50,000. Assuming each of nominees, elect their own nominees, or consider, and possibly contest. these proposals were included in solicit votes against a shareholder 4. Other Costs company proxy materials, it could result proposal. We therefore recognize that, as The new rules may result in in a total cost of approximately a practical matter, it can reasonably be $2,646,000 to $7,350,000 for the affected additional costs, as described below. expected that the boards of some With respect to investment companies. companies likely would oppose the Finally, the new rules may lead to an companies, one commenter stated that if election of shareholder director increase in soliciting activities by both a shareholder nomination causes an nominees. If the incumbent board companies and shareholders. election to be ‘‘contested’’ under rules of members incur large expenditures to Companies may increase solicitations to the New York Stock Exchange, brokers defeat shareholder director nominees, vote for their slate of directors, to vote would not be able to vote client shares those expenditures will represent a cost against shareholder director nominees, on a discretionary basis, making it or to vote against shareholder proposals. to the company and, indirectly, all difficult and more expensive for Shareholders may increase solicitations shareholders. It is also possible that investment companies to achieve a to vote for shareholder proposals, to some shareholders may perceive the use quorum for a meeting.1012 We recognize withhold votes for a company’s of corporate funds to oppose the that it may be more costly for nominees for director, or to vote for the election of nominees submitted by investment companies to achieve a shareholder director nominees. This shareholders as having a negative effect quorum at shareholder meetings if a increase in soliciting activities by both on the value of their investments. shareholder director nomination causes companies and shareholders will result These costs, however, may be limited an election to be ‘‘contested’’ under the in an increase in costs as well. These by two factors. They may be limited to rules of the New York Stock Exchange solicitation costs are not, however, the extent that the directors’ fiduciary and brokers cannot vote shares on a required under our rules. duties prevent them from using discretionary basis. We believe, We received a significant amount of corporate funds to resist shareholder however, that the costs imposed on comment regarding the extent to which director nominations for no good-faith investment companies will be limited companies will solicit against the corporate purpose.1007 Some for three reasons. First, to the extent election of a shareholder director commenters, in fact, characterized the investment companies do not hold nominee. One commenter predicted that costs incurred by incumbent directors to annual meetings as permitted by State boards will take ‘‘extraordinary efforts’’ defeat shareholder director nominees as law, investment company shareholders to campaign against the shareholder discretionary because Rule 14a–11 itself will have less opportunity to take director nominees, including significant does not require such efforts.1008 Other advantage of the new rules.1013 Second, media and public relations efforts, commenters disagreed with this even when investment company advertising in a number of forums, mass characterization, asserting that the shareholders do have the opportunity to mailings, and other communication directors’ fiduciary duties may compel take advantage of the new rules, the efforts, as well as the hiring of outside them to expend company resources to disproportionately large and generally advisors and the expenditure of oppose a shareholder director passive retail shareholder base of significant time and effort by the nominee.1009 We recognize that, under investment companies suggests that the company’s employees.1003 As examples certain circumstances, company new rules will be used less frequently of these costs, the commenter pointed to directors likely would oppose a than will be the case with non- the costs of recent proxy contests, which particular shareholder director nominee ranged from $14 million to $4 million, and expend company resources in that 1010 The Commission is not expressing a view as as well as the costs of contests at smaller to the scope of directors’ State law fiduciary duties effort, which would increase the costs to in responding to shareholder director nominations companies, which ranged from $3 the company resulting from Rule 14a– or expressing a view as to what conduct would be million to $800,000. Another consistent with these duties. 1011 For example, the costs that are incurred only commenter conducted a survey of its 1005 See letter from Ryder. if the incumbent directors choose to challenge or member companies and indicated that 1006 See letter from Biogen. solicit against a shareholder director nominee (e.g., an average total of 302 hours of 1007 See Hall v. Trans-Lux Daylight Picture Screen the legal fees arising from the company’s efforts to company personnel and director time Corp., 171 A. 226, 228 (Del. Ch. 1934) (‘‘where exclude the nominee from its proxy materials) are will be needed if a company opposes a reasonable expenditures are in the interest of an distinguishable from the costs that must be incurred intelligent exercise of judgment on the part of the 1004 irrespective of whether the directors oppose the shareholder director nominee. One stockholders upon policies to be pursued, the shareholder director nomination (e.g., the increased commenter estimated its own annual expenditures are proper; but where the printing costs caused by the inclusion of the costs for defending against a expenditures are solely in the personal interest of shareholder director nominees and related shareholder director nominee to be the directors to maintain themselves in office, disclosures in the company’s proxy materials). expenditures made in their campaign for proxies 1012 See letter from S&C. NYSE Rule 452 provides approximately $330,000 and 275 hours are not proper.’’). that, with respect to registered investment 1008 See letters from CalSTRS; CII; Florida State companies, brokers may not vote uninstructed 1003 See letter from Chamber of Commerce/CCMC. Board of Administration. shares in contested elections. 1004 See letter from BRT. 1009 See letters from ABA; BRT. 1013 See letters from ABA; MFDF.

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investment companies.1014 Third, rules under the Exchange Act, to comments that addressed this section. because we have sought to limit the cost consider the impact that any new rule The comments we received, and our and burden on all companies, including would have on competition. In addition, consideration of those comments, are investment companies, by limiting Rule Section 23(a)(2) prohibits us from discussed below. 14a–11 to nominations by shareholders adopting any rule that would impose a The analysis below is based on our who have maintained significant burden on competition not necessary or understanding that while no state continuous holdings in the company for appropriate in furtherance of the currently prohibits shareholders from at least three years, and because, as purposes of the Exchange Act. Section nominating candidates for the board of suggested by one commenter, many 3(f) of the Exchange Act 1019 and Section directors,1021 shareholders generally do funds, such as money market funds, are 2(c) of the Investment Company Act 1020 not have a right under existing State law held by shareholders on a short-term require us, when engaging in to require a company to include their basis,1015 we believe that the situations rulemaking that requires us to consider director nominees in the company’s where shareholders will meet the or determine whether an action is proxy materials.1022 eligibility requirements will be limited. necessary or appropriate in the public We expect that the new rules will Our decision to adopt, as proposed, interest, to consider, in addition to the promote efficiency in the capital the revisions to Rule 14a–6(a)(4) and protection of investors, whether the markets in a number of ways. First, we Note 3 to the rule 1016 means that the action will promote efficiency, have already considered extensively the inclusion of a shareholder director competition and capital formation. expected costs and benefits of the new nominee in the company’s proxy We are adopting new rules that will, rules in the Cost-Benefit Analysis and materials will not require the company under certain circumstances, require throughout the release. As we believe to file preliminary proxy materials, that company proxy materials include the benefits (including the possible provided that the company was information about, and the ability to benefit of improved board otherwise qualified to file directly in vote for, director nominees submitted by accountability and company definitive form. Because the proxy shareholders. The rules will facilitate performance) justify the costs, we materials will not be filed in the exercise of shareholders’ rights to expect the new rules to promote preliminary form, the Commission staff nominate and elect directors and efficiency of the economy on the whole. may not have the opportunity to review provide shareholders with information We believe the new rules will these proxy materials before companies about a nominating shareholder or promote efficiency by reducing several make definitive copies available to group and its nominees for director. different types of costs that previously shareholders. Staff review of Rule 14a–11 will provide for the discouraged potentially beneficial preliminary materials can benefit inclusion of shareholder nominees for actions. The new rules will reduce the shareholders by helping to assure that director in the company’s proxy cost of shareholders’ exercise of their companies comply with the Federal materials under certain circumstances rights to nominate and elect proxy rules and provide appropriate and disclosure regarding the nominating directors.1023 To the extent that disclosure to shareholders. We believe, shareholder or group and nominees facilitating shareholders’ ability to however, that any cost related to the submitted pursuant to the rule. The nominate and elect directors of their staff’s inability to review preliminary amendment to Rule 14a–8(i)(8) will own choosing is expected to produce proxy materials is mitigated by the provide an avenue for shareholders to the economic benefits for investors staff’s ability to review the disclosure submit proposals that would seek to described elsewhere in this release, the contained in the Schedule 14N as well establish a procedure under a as in any additional soliciting materials company’s governing documents for the 1021 We are not aware of any law in any state or in the District of Columbia that prohibits filed by either the company or the inclusion of one or more shareholder shareholders from nominating directors. For further nominating shareholder or group. director nominees in the company’s discussion, see Section II.B.2.a. above. Further, as we recently stated, the staff proxy materials. No longer permitting 1022 One notable exception exists under the North retains the right to comment on proxy companies to exclude these types of Dakota Publicly Traded Corporations Act, which materials filed in definitive form if the proposals pursuant to Rule 14a–8(i)(8) permits holders of at least five percent of the outstanding shares of a company subject to the staff deems that to be appropriate under should enable shareholders to better statute to submit a notice of intent to nominate the circumstances.1017 reflect their preferences for director directors and requires the company to include each nomination procedures that would such shareholder nominee in its proxy statement V. Consideration of Burden on further facilitate their ability to and form of proxy. See North Dakota Publicly Competition and Promotion of Traded Corporations Act, N.D. Cent. Code § 10–35– nominate and elect their own director Efficiency, Competition and Capital 08 (2009). candidates. In addition, the new rules 1023 Formation Many commenters noted the general require disclosure of information ineffectiveness or prohibitive cost of the existing Section 23(a)(2) of the Exchange regarding nominating shareholders or means to effect a change in the membership of a Act 1018 requires us, when adopting board, such as a traditional proxy contest, Rule groups and any nominees submitted 14a–8 shareholder proposals, and communications pursuant to an applicable state or with a company’s nominating committee or board. 1014 See letter from J. Taub. foreign law provision or a company’s See letters from Americans for Financial Reform; 1015 See letter from ABA. governing documents, which provides Brigham; CalPERS; CII; Florida State Board of 1016 The revisions make clear that inclusion of a Administration; Ironfire; M. Katz; J. McRitchie; shareholder director nominee would not be deemed shareholders a more informed basis for Nathan Cummings Foundation; P. Neuhauser; Pax a solicitation in opposition for purposes of the deciding how to vote for nominees for World; S. Ranzini; Teamsters; TIAA–CREF; USPE. exclusion from filing preliminary proxy materials. election to the board of directors. Moreover, only a traditional proxy contest was 1017 See Shareholder Approval of Executive We requested comment on whether viewed by some commenters to be a realistic Compensation of TARP Recipients, Exchange Act method of effecting change in the board’s Release No. 34–61335 (Jan. 12, 2010) (adopting an the new rules will promote efficiency, membership. See letters from Americans for amendment to Exchange Act Rule 14a–6(a) to add competition and capital formation or Financial Reform; CalPERS; CII; Florida State Board the shareholder advisory vote on executive have an impact or burden on of Administration; M. Katz; J. McRitchie; S. compensation required for participants in the competition. We received a number of Ranzini; Teamsters. Yet, according to these Troubled Asset Relief Program (‘‘TARP’’) to the list commenters, the high costs of such a proxy contest of items that do not trigger a preliminary filing hinder shareholders’ ability to nominate and elect requirement). 1019 15 U.S.C. 78c(f). directors. For further discussion of these costs, see 1018 15 U.S.C. 78w(a)(2). 1020 15 U.S.C. 80a–2(c). Section IV.C.1. above.

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new rules will bring about these benefits described elsewhere in the release.1030 The efficiency of U.S. public at a reduced cost and thereby promote Such communications may, in some companies could be negatively affected efficiency. Some commenters asserted cases, address the concerns that if shareholders use the new rules to that although the new rules may relieve prompted the shareholders to submit promote their narrow interests at the certain shareholders of costs that they their own director nominations and expense of other shareholders.1034 If the are unwilling to incur to run a help avert any distracting election new rules facilitate the ability of traditional short-slate election contest, contests.1031 Enhanced communication shareholders with narrow interests to those costs will simply be shifted onto with shareholders also may result in place directors on the board, the new the company and indirectly borne by all better decision-making by the board as rules may impair efficiency by shareholders.1024 This burden may be shareholders may provide the board increasing the cost of board justified, however, because these costs with new ideas or information that the deliberations and resulting in may not be as much as would otherwise board has not considered. companies taking actions that benefit result if that shareholder engaged in a We considered potential negative only a few shareholders. This negative traditional proxy contest,1025 resulting effects of the new rules on the efficiency effect, however, could be limited to the in a reduction in the overall cost of of U.S. public companies, as discussed extent that the disclosure requirements changing a limited percentage of a below. related to Rule 14a–11 alert board’s membership. The burden may As discussed elsewhere in the release, shareholders to the narrow interests of be further justified because the new if the number of election contests the nominating shareholder or group in rules may mitigate any collective action increases as a result of the new rules, advance of the election so that they can concerns.1026 boards may end up devoting less time cast their votes in favor of the candidate The new rules also will promote to overseeing their companies’ business who will best serve the interests of all efficiency by reducing the cost of operations. Election contests have been shareholders.1035 Directors with administering informed shareholder described by many commenters as potentially narrow interests also will be voting—to the extent that a shareholder distracting, time-consuming, and subject to the same fiduciary duties as director nominee is submitted for inefficient for companies, boards, and directors nominated by the inclusion in a company’s proxy management.1032 To the extent that a company.1036 materials pursuant to Rule 14a–11, a board’s attention is drawn away by the company’s governing documents, or a demands of election contests or 1034 See, e.g., letters from 3M; ACE; AGL; Alaska state or foreign law provision—by shareholders, the new rules may impair Air; Alcoa; Allstate; American Bankers Association; providing for director nominees to be American Business Conference; American Express; companies’ ability to compete Ameriprise; Artistic Land Designs; Association of included on one proxy card with clear efficiently. To limit the use of Rule 14a– Corporate Counsel; J. Astle; Astrum; Atlantic Bingo; disclosure 1027 for shareholders to 11 to only holders who demonstrate a Avis Budget; J. Blanchard, Board Institute; Boeing; evaluate when deciding whether and significant, long-term commitment to Boston Scientific; Brink’s; BRT; Burlington how to grant authority to vote their Northern; Callaway; S. Campbell; Cargill; Carpet the company, we adopted a uniform 3% and Tile (‘‘Carpet and Tile’’); Caterpillar; Chamber shares by proxy, as opposed to having ownership threshold and 3-year holding of Commerce/CCMC; Kevin F. Clune (‘‘K. Clune’’); to evaluate more than one set of proxy period. We also continue to believe that P. Clapman; Chevron; J. Chico; CIGNA; CNH Global; materials sent by a company and an this concern may be mitigated to the Columbine; Competitive Enterprise Institute; A. insurgent shareholder.1028 Presenting Conte; W. Cornwell; Crown Battery; Cummins; extent that shareholders, while voicing Darden Restaurants; Data Forms, Inc. (‘‘Data the competing director nominees on one their concerns and seeking the board’s Forms’’); Deere; T. Dermody; Dewey; A. Dickerson; proxy card, with the related disclosure attention, understand the board’s time W. B. Dickerson; J. Dillon; Eaton; Emerson Electric; contained in one proxy statement, may A. England; Engledow; Mike Emis (‘‘M. Emis’’); may be in scarce supply and take this FedEx; FMC Corp.; FPL Group; Frontier; GE; simplify the shareholder’s decision- factor into consideration when deciding General Mills; Healthcare Practice; Home Depot; making process, reduce the potential for to nominate director candidates.1033 Honeywell; Horizon; Karen L. Hubbard (‘‘K. any confusion on the part of Hubbard’’); IBM; ICI; Instrument Piping Tech; Theodore S. Jablonski (‘‘T. Jablonski’’); Keating shareholders, and address any 1030 See letters from AFSCME; Bebchuk, et al.; Muething; Koppers; C. Leadbetter; Leggett; Little; Brigham; CalPERS; CII; L. Dallas; T. DiNapoli; A. reluctance on the part of shareholders to Louisiana Agencies; ITT; Leggett; Brittany D. Dral; GovernanceMetrics; Governance for Owners; consider an insurgent shareholder’s Lunceford (‘‘B. Lunceford’’); Melvin Maltz (‘‘M. Hermes; M. Katz; LUCRF; J. McRitchie; R. Moulton- nominee solely because the nominee Maltz’’); Massey Services; J. McCoy; McDonald’s; D. Ely; D. Nappier; P. Neuhauser; NJSIC; OPERS; Pax McDonald; MCO; McTague; MeadWestvaco; was not presented in the company’s World; Pershing Square; Relational; RiskMetrics; D. 1029 MedFaxx; D. Merilatt; Metlife; M. Metz; J. Miller; proxy materials. Romine; Shareowners.org; Social Investment E. Mitchell; Moore Brothers; Motorola; MT Glass; The new rules could promote Forum; Teamsters; TIAA–CREF; Universities NAM; NIRI; Norfolk Southern; O’Melveny & Myers; efficiency by reducing the cost of Superannuation; USPE; Walden. According to these Office Depot; Omaha Door; P&G; V. Pelson; commenters, the prospect of an election contest PepsiCo; Pinch a Penny (‘‘Pinch a Penny’’); effective communication between may create greater incentives for incumbent shareholders and directors, potentially Protective; Realogy; J. Rosen; RTW; Ryder; S&C; directors to communicate with shareholders, Safeway; Sara Lee; R. Saul; Schneider; Seven Law resulting in enhanced board address their concerns, and consider shareholders’ Firms; Sidley Austin; Southern Company; Southern responsiveness and accountability as preferences regarding nominations for director. Services; M. Sposato; Ralph Strangis (‘‘R. Strangis’’); 1031 We have changed certain provisions of Rule Tenet; Tesoro; E. Tremaine; tw telecom; L. Tyson; 14a–11 from their proposed form to further 1024 UnitedHealth; U.S. Bancorp; VCG; Vinson & Elkins; See letter from ABA. encourage communication between boards and 1025 Wachtell; Wagner Industries; Wells Fargo; See Bainbridge 2003 Letter. shareholders. See, e.g., Rule 14a–11(d)(5). Weyerhaeuser; Xerox; Yahoo. One commenter 1026 See Section IV.D.1. above. 1032 See, e.g., letters from ABA; Atlas; AT&T; added that many recent election contests were 1027 It is assumed here that the private cost of Book Celler; Carlson; Carolina Mills; Chamber of directed towards achieving short-term financial making the required disclosure and the cost to the Commerce/CCMC; Chevron; Crespin; M. Eng; objectives, including proposals to sell the company company for including the disclosure in the Erickson; ExxonMobil; Fenwick; GE; General Mills; or effect a buyback or special dividend. See letter company’s proxy materials is lower than the total Glass Lewis; Glaspell; Intelect; R. Clark King; from Simpson Thacher. information cost for voting shareholders. Koppers; MCO; MeadWestvaco; MedFaxx; Medical 1035 See Rule 14a–11, Rule 14a–18, Rule 14n–1, 1028 As discussed in footnote 884 above, we do Insurance; Merchants Terminal; D. Merilatt; NAM; and Schedule 14N. not believe that our recent adoption of rules NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; 1036 Veasey & DiGuglielmo, at 774 (‘‘Directors will enhancing proxy solicitation disclosure dispenses Sara Lee; Schneider; Southland; Style Crest; Tenet; generally be responsible for protecting the best with the need for Rule 14a–11 and the amendment TI; tw telecom; R. VanEngelenhoven; Wachtell; interests of the corporation and all its stockholders, to Rule 14a–8(i)(8). Wells Fargo; Weyerhaeuser; Yahoo. despite the directors’ designation by some 1029 See Section IV.D.1. above. 1033 See Proposing Release, Section V.C.1. particular constituency, because fiduciary duties

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The increased likelihood of a described above, we have made company’s views on the perceived contested election may discourage some modifications to clarify that a company benefits of a unitary or cluster board and qualified candidates from running for a will not be liable for materially false or the potential for increased costs and board seat, making it more difficult for misleading information provided by the decreased efficiency if the shareholder companies to recruit qualified directors nominating shareholder or group.1042 nominees are elected. Furthermore, we and negatively affecting the efficiency of Finally, additional guidance from the believe that exempting small investment U.S. public companies.1037 Commission, its staff, or courts should companies from the new rules would Nevertheless, as discussed elsewhere in further resolve any uncertainties not be appropriate because doing so the release, a countervailing effect that regarding the new rules’ would interfere with achieving the goal the new rules may have is the impact on implementation and may reduce the of facilitating shareholders’ ability to the labor market for director candidates need for parties to resort to litigation. participate more meaningfully in the and potential increase in the demand for With respect to investment nomination and election of directors individuals who can serve as companies, a number of commenters and to promote the exercise of shareholder director nominees.1038 expressed concern that the election of a shareholders’ traditional State law rights shareholder director nominee may, in to nominate and elect directors.1046 Finally, compliance with the new some circumstances, decrease the Although commenters argued that the rules may impose additional financial effectiveness and efficiency of a unitary election of a shareholder-nominated costs on companies, such as for legal or cluster board utilized by a fund director to a unitary or cluster board services, printing and mailing of proxy complex.1043 In addition, one will necessarily result in decreased materials, and additional proxy commenter noted that small investment effectiveness of the board, we disagree. solicitation efforts.1039 The workability companies are likely to be particularly In this regard, one commenter argued and implementation issues identified by affected by the Proposal and its that competition in the board commenters, in particular, may force attendant costs, including the loss of the nomination process may improve companies to incur significant time and benefits of a cluster or unitary board.1044 efficiency by providing additional funds to resolve.1040 Increased litigation According to the commenter, ‘‘the leverage for boards in negotiations with costs also represent a possible negative expected smaller rate of return on the investment adviser.1047 In any event, effect of the new rules, as companies capital may dissuade some we believe that investment company and nominating shareholders or groups entrepreneurs from entering the shareholders should have the expend resources to resolve legal investment company industry, and force opportunity to exercise their traditional disputes in Federal and state courts. the exit of some fund advisers with thin State law rights to elect a non-unitary or Incurring such costs could negatively profit margins,’’ negatively affecting non-cluster board if they so choose. affect the efficiency of the capital both efficiency and competition. We considered the possible effects markets. As discussed throughout the We recognize that for fund complexes that the new rules may have on release, we have modified several that utilize unitary or cluster boards, the competition, as discussed below. aspects of the rules we proposed to election of a shareholder director With the possible effect of improved clarify any uncertainties identified by nominee may, in some circumstances, board accountability and corporate commenters and to address workability increase costs and potentially decrease governance, the new rules may issues. We also have taken steps to the efficiency of the boards.1045 We ultimately increase shareholder value, address commenters’ concerns regarding note, however, that any decrease in generate stronger company performance, a company’s liability for efficiency and competition is associated and increase competition. Investors also misrepresentations or omissions in the with the State law right to nominate and may be more willing to invest in nominating shareholder’s or group’s elect directors, and not from including companies in which they have the information that is repeated in the shareholder nominees in the company’s ability to present their own shareholder company’s proxy materials.1041 As proxy materials. We also note that any director nominees in the company’s decreased efficiency of an investment proxy materials if they become generally will trump contractual expectations in the company’s board, or any decrease in displeased with the company’s corporate context.’’). See also letters from ACSI; performance. Nevertheless, it is possible LUCRF (indicating that they are unaware of any competition, as a result of the fund that some companies may be more breaches of fiduciary or statutory duties, including complex no longer having a unitary or reluctant to conduct public offerings in Regulation FD, by shareholder-nominated directors cluster board would occur, if at all, only in jurisdictions that allow shareholder director the U.S. or may wish to avoid being a in the event that investment company nominations in the company’s proxy materials). reporting company due to the need to 1037 shareholders elect the shareholder See letters from 3M; ABA; American Electric comply with new rules, making the U.S. Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; nominee. Investment companies may public equity markets less attractive.1048 Boeing; BRT; Burlington Northern; Callaway; include information in the proxy Companies may instead attempt to raise Carlson; Chamber of Commerce/CCMC; CIGNA; materials making investors aware of the Columbine; Cummins; CSX; J. Dillon; Emerson capital through private placements or in Electric; Erickson; ExxonMobil; FedEx; Headwaters; foreign equity markets instead of C. Holliday; IBM; Intelect; R. Clark King; Lange; As originally proposed, under Rule 14a–11(e) and Louisiana Agencies; Metlife; NIRI; O3 Strategies; V. Note to Rule 14a–19, a company would not be through public offerings in the U.S. Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara responsible for information that is provided by the equity markets. We note that Lee; Sidley Austin; tw telecom; Wachtell; Wells nominating shareholder or group under Rule 14a– shareholders in many foreign countries Fargo; Weyerhaeuser; Yahoo. 11, an applicable State law provision, or the 1038 company’s governing documents and then repeated See Section IV.D.3. above. 1046 For a specific discussion of the impact of the 1039 by the company in its proxy statement, except For a discussion of these costs, see Section rule on small companies and the alternatives we where the company ‘‘knows or has reason to know IV.E.3. above. considered in lieu of applying the rule to such ’’ 1040 See, e.g., letters from ABA; Wachtell. that the information is false or misleading. entities, see Section VI. below. 1042 1041 See letters from ABA; Alaska Air; American For further discussion, see Section II.E. 1047 See letter from J. Taub. above. Bankers Association; Ameriprise; BorgWarner; BRT; 1048 See letters from Altman (stating that its 1043 Caterpillar; Cleary; DTE Energy; ExxonMobil; See, e.g., letters from ABA; ICI; ICI/IDC; IDC; survey of 36 public companies showed that 80.85% Honeywell; ICI; Protective; S. Quinlivan; Seven Law MFDF; S&C; T. Rowe Price; Vanguard. of respondents believe the new rules ‘‘will deter Firms; Sidley Austin; Society of Corporate 1044 See letter from ICI. some U.S. private companies from going public and Secretaries; Southern Company; UnitedHealth; 1045 See, e.g., letters from ICI; ICI/IDC; IDC; some foreign companies from listing on U.S. Verizon. MFDF; Vanguard. exchanges.’’); BRT; R. Tullo.

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already have the ability to include their broker or bank that is not a clearing and address any reluctance to invest in director nominees in the company’s agency participant (e.g., when a broker U.S. companies.1053 Companies proxy materials.1049 We therefore or bank of the nominating shareholder attempting to raise capital in the U.S. believe that the new rules may bring the or member of the nominating markets may therefore encounter greater U.S. capital markets closer in line with shareholder group holds shares of the willingness on the part of potential international practice by giving shareholder or member in an omnibus investors to participate in their shareholders of U.S. companies an account at another broker or bank), it is securities offerings.1054 ability that may already be enjoyed by possible that some shareholders may As part of our rulemaking process, we shareholders of many non-U.S. prefer to hold their securities directly considered possible alternatives to the companies. Lastly, we note that the new through a clearing agency participant to new rules that may serve the same rules will not apply to foreign private avoid having to obtain more than one function—and to the same degree—of issuers because they are exempt from written statement to prove their promoting efficiency, competition, and the Commission’s proxy rules.1050 ownership of the requisite amount of capital formation. In this regard, we Therefore, we do not believe that the securities. If so, the competitive received significant comment that the new rules will affect the willingness of positions of clearing agency participants rules are unnecessary in light of recent such issuers to raise capital in the U.S. and clearing agencies themselves in the corporate governance reforms that capital markets. marketplace may be enhanced. Their already increased the accountability of We also believe that directors competitive position also may be boards to shareholders.1055 While each nominated by shareholders pursuant to enhanced if a nominating shareholder is of these reforms may enhance to some the new rules and elected to the board reluctant to change its broker or bank degree the boards’ accountability and may be more inclined to exercise because it would need to obtain a responsiveness to shareholders or independent judgment in the boardroom written statement from each broker or shareholders’ ability to effect change in due to the fact that they were nominated bank with respect to the shares that it the board’s membership, we believe by shareholders, not the incumbent is using to meet the ownership they may not be as efficient, effective, or directors. The impact of these threshold and specify the time period optimal as the new rules. Our shareholder-nominated directors may during which the shares were held. consideration of recent corporate lead to greater competition when the We considered the possible effects governance reforms and suggested board considers strategic alternatives, that the new rules may have on capital alternatives are discussed throughout including in the market for corporate formation, as discussed below. the release. control. Board members play a key role We expect that potential investors We recognize the passage of recent in evaluating corporate control may be more willing to invest in a amendments to state corporation laws to transactions and, while the new rules company if they have greater confidence enable companies to provide in their are not intended to facilitate a change in in the abilities of the company’s board governing documents an ability for control, shareholder-nominated members. The new rules allow for a shareholders to include their director directors may not share the same bias as more competitive election process—one incumbent directors regarding a in which shareholders will have the 1053 See, e.g., letters from AFSCME and Sodali transaction that may be contrary to their opportunity to evaluate qualified (noting a June 2009 survey of investors conducted by ShareOwners.org that indicated 57% of the interests but beneficial for shareholders. alternatives to the board’s own respondents feel strong Federal action would The presence of these directors, nominees and select the person that ‘‘restore their lost confidence in the fairness of the therefore, may lead to increased they feel is most qualified. To the extent markets’’ and 81% of the respondents identified competition in the market for corporate that the overall quality of a company’s ‘‘overpaid CEOs and/or unresponsive management and boards’’ as the top reason for the loss of investor control. We recognize that since the board increases as a result of a more confidence in the markets); letter from Universities number of shareholder director competitive election, the company’s Superannuation (noting that ‘‘Governance Metrics nominees that a company is required to ability to attract the necessary capital in International now ranks the United States behind include in its proxy materials pursuant the marketplace may be enhanced as Britain, Australia, Canada, and Ireland in corporate governance quality’’ and that ‘‘the CFA Institute to Rule 14a–11 is limited, the potential well. 2009 Financial Market Integrity Index survey of effect on competition for corporate Further, potential investors may be investment professionals found a marked decline control may also be limited. more willing to invest in a company if over the past year in global sentiment of investment Lastly, the requirement that a they know that they have a meaningful professionals toward the United States, with only 43 percent of non-U.S. respondents reporting they nominating shareholder or member of way to nominate directors for election. would recommend investing in the United States the nominating shareholder group using The new rules will facilitate investors’ (based solely on ethical behavior and regulation of Rule 14a–11 provide proof of ownership ability to nominate and elect director capital market systems), down from 67 percent a in the form of written statements with candidates, and may thereby have the year earlier.’’). 1054 respect to securities held on deposit effect of holding boards more See letter from Universities Superannuation. 1055 See letters from 26 Corporate Secretaries; 3M; with a clearing agency acting as a accountable. Investors may also be Advance Auto Parts; Allstate; Avis Budget; securities depository may affect the attracted to the potential increase in American Express; Anadarko; Association of competitive position of brokers or banks shareholder value that may result from Corporate Counsel; AT&T; L. Behr; Best Buy; that are not securities depository an increased ability to replace directors Boeing; BRT; R. Burt; California Bar; S. Campbell; 1051 Carlson; Caterpillar; Chamber of Commerce/CCMC; participants. Due to the need for a and enhancement of shareholders’ Chevron; CIGNA; W. Cornwell; CSX; Cummins; nominating shareholder or member of a rights.1052 Lastly, potential investors Davis Polk; Dewey; DuPont; Eaton; M. Eng; FedEx; nominating shareholder group to obtain could prefer to invest in companies with FMC Corp.; FPL Group; Frontier; GE; General Mills; a separate written statement from a boards that they feel are more open and C. Holliday; Honeywell; C. Horner; IBM; Jones Day; Keating Muething; J. Kilts; R. Clark King; N. responsive to their views. Lautenbach; MeadWestvaco; Metlife; Motorola; 1049 See letters from ACSI; CalPERS; ICGN; By enabling greater board O’Melveny & Myers; Office Depot; Pfizer; LUCRF; Pax World; RiskMetrics; Social Investment accountability to shareholders, the new Protective; S&C; Safeway; Sara Lee; Shearman & Forum; SWIB. rules also may contribute to restoring Sterling; Sherwin-Williams; Sidley Austin; 1050 Exchange Act Rule 3a12–3 exempts securities Simpson Thacher; Tesoro; Textron; TI; G. Tooker; of certain foreign issuers from Section 14(a) of the investor confidence in the U.S. markets UnitedHealth; Unitrin; U.S. Bancorp; Wachtell; Exchange Act. Wells Fargo; West Chicago Chamber; Weyerhaeuser; 1051 See Instruction 4 to new Schedule 14N. 1052 See Section IV.D.3. above. Xerox; Yahoo.

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nominees in the company’s proxy requirements (such as the 500-word voting standard, some boards have materials, and that private ordering is an limit on shareholder proposals) 1062 or disregarded the outcome of the elections alternative to our new rules.1056 procedural requirements for by, for example, refusing to accept the However, as discussed throughout the shareholder-proposed bylaw resignations of directors who failed to release, we have reason to believe that amendments, such as a super-majority receive a majority vote.1067 Further, reliance on private ordering under State voting requirement for adoption of while a majority voting standard law would be insufficient to meet our amendments.1063 facilitates shareholders’ ability to elect goal of facilitating the exercise of We considered the recent candidates put forth by a company’s shareholders’ traditional State law rights amendments to state corporation laws to management, it does not facilitate to nominate and elect directors.1057 For enable a company to include in its shareholders’ ability to exercise their example, companies, particularly those governing documents a provision for right to nominate candidates for that have performed poorly or have reimbursement of a shareholder’s proxy director. activist shareholders, may be reluctant solicitation costs.1064 We note, however, We considered the growing to amend their governing documents to that poorly performing companies may effectiveness of ‘‘withhold’’ or ‘‘vote no’’ provide for an ability of shareholders to be reluctant to include such a provision, campaigns in director elections, include director nominees in the forcing shareholders to undergo the particularly at companies with a company’s proxy materials, even if potentially costly and time-consuming majority voting standard for director permitted by state corporation law.1058 process of establishing such a provision elections. ‘‘Withhold’’ or ‘‘vote no’’ In that regard, one commenter observed themselves (for example, through a Rule campaigns have long been available but that most of the companies currently 14a–8 shareholder proposal). Even if appear only occasionally to have able to provide such an ability in their reimbursement arrangements were to resulted in a change in composition of governing documents under State law exist at all public companies, we believe the board or senior management.1068 By have, in fact, not done so.1059 Further, that the ability of shareholders to be definition, however, such campaigns as previously discussed, establishing reimbursed for their proxy solicitation lack what Rule 14a–11 facilitates, such an ability on a company-by- costs may be less efficient in facilitating namely a direct means to include company basis may be more costly and changes in the board or increasing board shareholder-nominated candidates for inefficient than under our new rules.1060 accountability or responsiveness election as directors, rather than merely For shareholders with a diverse because shareholders would still need express disapproval of incumbent portfolio of securities, the funds to maintain an election directors.1069 administrative burden of tracking each contest.1065 This may create a disparity We considered the effect of adoption company’s requirements for including a among shareholders as shareholders of our notice and access model for director nominee in the company’s with greater resources are able to take electronic delivery of proxy materials, proxy materials may add another degree advantage of the right and conduct a which reduces the printing and mailing of inefficiency.1061 Some commenters proxy contest (with the knowledge they costs for shareholders’ proxy also expressed concerns about the will be reimbursed) while those who solicitations. As discussed above, the ability of shareholders to adopt a lack such resources are unable to do so. notice and access model, while reducing provision in a company’s governing We also considered the trend towards the printing and mailing costs, does not documents for the inclusion of adopting a majority voting standard in necessarily provide the same cost shareholder director nominees through director elections, which gives savings as Rule 14a–11.1070 Further, a the Rule 14a–8 process due to the rule’s shareholders a greater voice in director shareholder may find the use of the elections and the company’s corporate model to be unattractive for the reasons 1056 For example, Delaware recently amended the governance. It is important to note, related to its strategy for the conduct of Delaware General Corporation Law to add new however, that a majority voting standard the election contest.1071 Section 112 clarifying that the bylaws of a Delaware Lastly, one commenter pointed out corporation may provide that, if the corporation in director elections, while increasingly solicits proxies with respect to an election of common, is not yet used by all that the market already provides directors, the corporation may be required to companies.1066 Further, commenters multiple means of ‘‘management 1072 include in its solicitation materials one or more pointed out that even with a majority discipline.’’ Shareholders could individuals nominated by a shareholder in addition express their displeasure with current to the individuals nominated by the board of directors. The obligation of the corporation to 1062 Id. management by selling their securities include such shareholder nominees will be subject 1063 See letter from CII (stating that, based on a to the procedures and conditions set forth in the November 2009 white paper commissioned by the 1067 See letters from CalPERS; RiskMetrics; TIAA– bylaw adopted under Section 112. In addition, the CII and ShareOwners.org, many companies have CREF (noting that ‘‘[t]here are currently over 40 American Bar Association’s Committee on supermajority voting requirements to amend the directors at U.S. companies who continue to serve Corporate Laws has adopted similar changes to the bylaws, thereby ‘‘making shareholder-proposed without having received majority support.’’). See Model Business Corporation Act. See American Bar bylaw amendments nearly impossible to also City of Westland Police & Fire Ret. Sys. v. Association, Section of Business Law, Committee implement’’). Axcelis Technologies, Inc., 2009 Del. Ch. LEXIS 173 on Corporate Laws Amendments to The Model 1064 Delaware also added new Section 113 of the (September 28, 2009), aff’d, 2010 Del. LEXIS 382 Business Corporation Act Approved on Third Delaware General Corporation Law, which allows a (Del., August 11, 2010) (finding ‘‘no credible basis’’ Reading at the Committee’s Meeting on December Delaware corporation’s bylaws to include a to infer wrongdoing by directors who refused to 12, 2009 (available at http://www.abanet.org/ provision that the corporation, under certain accept resignations by other directors who failed to _ _ _ media/docs/Amendments to MCBA 121709.pdf). circumstances, will reimburse a shareholder for the achieve the majority vote required by board policy). 1057 See Sections II.B.2. and IV.D.2. above. expenses incurred in soliciting proxies in 1068 See J.W. Verret, Pandora’s Ballot Box, Or a 1058 See letters from CalPERS; D. Nappier; P. connection with an election of directors. Proxy with Moxie? Majority Voting, Corporate Ballot Neuhauser; Pershing Square; Schulte Roth & Zabel. 1065 See letter from Florida State Board of Access, and the Legend of Martin Lipton Re- 1059 See letter from TIAA–CREF. Further, based Administration. Examined, 62 Bus. Law. 1007, 1014 (2007) (reporting on one replacement of a board chairman on its survey of its member companies, one 1066 See letters from CalPERS (noting that the following a withhold campaign resulting in a 43% commenter stated that a large majority— standard has ‘‘only been adopted by 294 companies withhold vote). approximately two-thirds—would seek to opt out of in the S&P 500 and just 734 companies out of the 1069 Rule 14a–11, if possible. See letter from Society of 3,369 companies according to the Corporate Library See letter from AFSCME. Corporate Secretaries. Board Analyst database.’’); TIAA–CREF (noting that 1070 See Section IV.D.1. above. 1060 See letters from CalPERS; D. Nappier; P. ‘‘[o]nly about half of S&P 500 companies and a 1071 Id. Neuhauser. small minority of Russell 3000 companies have 1072 See letter from BRT (referring to the NERA 1061 See letter from CII. adopted this reform.’’). Report).

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in the company, board members could under the Exchange Act and the companies by limiting Rule 14a–11 to be replaced, and managers could be Investment Company Act that would, nominations by shareholders who have removed for wrongdoing. In addition, under certain limited circumstances, maintained a significant continuous the commenter stated that the threat of require companies to include in their ownership interest in the company for takeover attempts that management proxy materials shareholder nominees at least three years at the time the notice faces and higher levels of board for election as director. It also relates to of nomination is submitted, and by independence suggest the success of the amendments to the rules that will limiting the number of nominees a existing means of ‘‘management prohibit companies from excluding company is required to include in its discipline.’’ shareholder proposals pursuant to Rule proxy materials under Rule 14a–11. While we are aware of these means of 14a–8(i)(8) that seek to establish a These aspects of the final rules will ‘‘management discipline,’’ we believe procedure under a company’s governing limit the number of nominees a the relevant issue is whether investors documents for the inclusion of one or company will be required to consider will benefit from our new rules. more shareholder director nominees in for inclusion in its proxy materials and Shareholders’ ability to express their the company’s proxy materials. The thus will lower the cost to companies displeasure with current management amendments will require, under certain while facilitating the exercise of through the sale of securities may be circumstances, a company’s proxy shareholders’ traditional State law rights limited if the market for the securities materials to provide shareholders with to nominate and elect directors to is illiquid or the shareholder is information about, and the ability to boards of directors, thereby enabling constrained by its policies to invest in vote for, a shareholder’s, or group of shareholders to participate more all companies within a given index. shareholders’, nominees for director. meaningfully in the nomination and Replacing board members or removing The amendments will facilitate the election of directors at the companies in managers under the current regulatory exercise of shareholders’ traditional which they invest. We believe the new scheme is expensive and often requires State law rights to nominate and elect rules will benefit shareholders by considerable time during which directors to boards of directors and improving corporate suffrage, the significant shareholder value may be thereby enable shareholders to disclosure provided in connection with lost. By providing a more efficient participate more meaningfully in the proxy solicitations, and communication means for shareholders with a nomination and election of directors at between shareholders through the proxy significant, long-term stake to nominate the companies in which they invest. process. directors, the new rules will promote A. Need for the Amendments The final rules include a phase-in competition and enable shareholders to period that delays the compliance date nominate and elect directors. As described in this release and the Commenters also argued that it was Proposing Release, the final rules for Rule 14a–11 for smaller reporting not necessary to make investment include features from the proposals on companies, which include most small companies subject to the new rules this topic in 2003 and 2007, and reflect entities, for three years from the much of what we learned through the effective date of the rule for other because they are subject to a unique 1076 regulatory regime under the Investment public comment that the Commission companies. We believe the delayed Company Act that provides additional has received concerning this topic over compliance date will allow those protection to investors, such as the the past seven years. The final rules are companies to observe how the rule requirement to obtain shareholder intended to facilitate shareholders’ operates for other companies and may approval to engage in certain ability to participate more meaningfully allow them to better prepare for the transactions or activities.1073 However, in the nomination and election of implementation of the rules. We also we do not believe that the regulatory directors, to promote the exercise of believe that delayed implementation for protections offered by the Investment shareholders’ traditional State law rights these companies will provide us with Company Act (including requirements to nominate and elect directors, to open the opportunity to evaluate the to obtain shareholder approval to engage up communication between a company implementation of Rule 14a–11 by and its shareholders, and to provide in certain transactions and activities) larger companies and to consider shareholders with more information to serve to decrease the importance of the whether adjustments to the rule would make an informed voting decision by rights that are granted to shareholders be appropriate for smaller reporting requiring disclosure about a nominating under State law. In fact, the separate companies before the rule becomes shareholder or group and its nominee or 1077 regulatory regime to which investment applicable to them. In addition, in nominees. In particular, the final rules companies are subject emphasizes the will enable long-term shareholders, or 1076 For purposes of this FRFA, we are required importance of investment company groups of long-term shareholders, with to consider the impact of our rules on small entities, directors in dealing with the conflicts of ‘‘ ’’ significant holdings to have their including small business. See footnote 1088 and interest created by the external the related discussion. The new rules will have a nominees for director included in management structure of most delayed effective date for smaller reporting 1074 company proxy materials. In addition, companies as defined in Exchange Act Rule 12b– investment companies. the amendment to Rule 14a–8(i)(8) will 2. Whether a company is a small business is narrow the exclusion and will not determined based on a company’s assets while the VI. Final Regulatory Flexibility determination of whether a company is a smaller Analysis permit companies to exclude, under reporting company is generally based on a This Final Regulatory Flexibility Rule 14a–8(i)(8), shareholder proposals company’s public float. We expect that most small businesses that would be subject to the new rules Analysis (‘‘FRFA’’) has been prepared in that seek to establish a procedure under a company’s governing documents for also would qualify as smaller reporting companies. accordance with the Regulatory 1077 As discussed in Section II.B.3. above, the Flexibility Act.1075 It relates to the inclusion of one or more recent Dodd-Frank Wall Street Reform and amendments to the rules and forms shareholder director nominees in the Consumer Protection Act provided the Commission company’s proxy materials. with exemptive authority with respect to rules The final rules are intended to permitting the inclusion of shareholder director 1073 ABA; Barclays; ICI; IDC; T. Rowe Price; S&C; nominations in company proxy materials. In doing Vanguard. achieve the stated objectives without so, Congress noted that the Commission shall take 1074 See footnote 142 above. unduly burdening companies. We into account whether any such requirement to 1075 5 U.S.C. 601. sought to limit the cost and burden on permit inclusion of shareholder nominees for

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an effort to limit the cost and burden on recommended that Rule 14a–11 exclude information from which to make an all companies subject to the rule, companies that are not at least informed voting decision. Some including smaller reporting companies, accelerated filers and be limited, at least commenters noted that small companies we have limited use of Rule 14a–11 to initially, to large accelerated filers.1080 are ‘‘just as likely’’ to have dysfunctional nominations by shareholders who have These commenters expressed concern boards as their larger counterparts.1086 maintained significant continuous about the burden Rule 14a–11 would Also, one commenter agreed that holdings in the company, and we have place on smaller companies, including exempting small entities would be extended the required holding period to difficulty in recruiting qualified inconsistent with the stated goals of the at least three years at the time the notice directors and costs of conducting due Proposal and the costs and burdens to of nomination is filed with the diligence on shareholder nominees.1081 these entities would be minimal.1087 Commission and transmitted to the One commenter noted that small However, we are cognizant of the fact company. We expect that these investment companies, which may that the new rules will increase the eligibility requirements will help operate with thin profit margins, would burden on all companies and therefore achieve the stated objective without be particularly affected by the Proposal the potential burden on smaller unduly burdening any particular group and its attendant costs, including the reporting companies as defined in Rule of companies. loss of the benefits of a cluster or 12b–2 under the Exchange Act. To unitary board.1082 By contrast, some address concerns about the potential B. Significant Issues Raised by Public commenters stated that Rule 14a–11 impact on smaller reporting companies, Comments should apply to small businesses.1083 At the final rule delays the compliance In the Proposing Release, we least one commenter argued that Rule date for Rule 14a–11 for smaller requested comment on any aspect of the 14a–11 would not impose a material reporting companies for a period of Initial Regulatory Flexibility Act burden on any company subject to the three years from the effective date of the Analysis (‘‘IRFA’’), including the proxy rules because companies already rule for other companies so that smaller number of small entities that would be have to distribute proxy cards and it reporting companies can observe how affected by the proposed rules, the would not be an imposition if they were the rule operates and allow them to nature of the impact, how to quantify required to add additional nominees to better prepare for the implementation of the number of small entities that would those cards.1084 Another commenter the rules. We also believe that delayed be affected, and how to quantify the argued that exempting small entities implementation for these companies impact of the proposed rules. We also would be inconsistent with the stated will allow us to evaluate the considered, and sought comment on, goals of the Proposal and the costs and implementation of Rule 14a–11 by excluding from operation of the rule burden to such entities would be larger companies and provide us with smaller reporting companies either minimal.1085 the additional opportunity to consider permanently or on a temporary basis We believe that exempting small whether adjustments to the rule would through staggered compliance dates companies, including small investment be appropriate for smaller reporting based on company size. We did not companies, from the new rules would companies before the rule becomes receive comments specifically not be appropriate because doing so applicable to them. In addition, in an addressing the IRFA. Several would interfere with achieving the goal effort to limit the cost and burden on all commenters, however, addressed of facilitating shareholders’ ability to companies subject to the rule, including aspects of the proposed rules that could participate more meaningfully in the smaller reporting companies, we have potentially affect small entities. nomination and election of directors, to limited use of Rule 14a–11 to In particular, many commenters promote the exercise of shareholders’ nominations by shareholders who have stated generally that Rule 14a–11 should rights to nominate and elect directors, to maintained significant continuous not apply to small businesses.1078 Some open up communication between a holdings in the company, and we have commenters argued that the Proposal, if company and its shareholders and to extended the required holding period to adopted, would hurt their larger provide shareholders with better at least three years at the time the notice corporate suppliers which would, in of nomination is filed with the turn, increase their own costs of doing Darrell’s Automotive; Data Forms; Fluharty; E. Commission and transmitted to the business.1079 Two commenters Garcia; S. Henning; T. Luna; Magnolia; American company. We expect that these Mailing; H. Olson; T. Roper; Solar Systems; E. eligibility requirements will help Sprenkle; Steele Group; R. Trummel; T. Trummel; director in company proxy materials would V. Trummel; Wagner; T. White. achieve the stated objective without disproportionately burden small issuers. 1080 See letters from ABA; Theragenics. unduly burdening any particular group 1078 See letters from ABA; American Mailing; All 1081 of companies. Cast; Always N Bloom; American Carpets; J. In this regard, one commenter suggested that our estimate of the burden to companies of Arquilla; B. Armburst; Artistic Land Designs; C. C. Small Entities Subject to the Rules Atkins; Book Celler; K. Bostwick; Brighter Day evaluating a shareholder nominee’s background to Painting; Colletti; Commercial Concepts; Complete determine eligibility, investigation and verification The final rules will affect some Home Inspection; D. Courtney; S. Crawford; of information provided by the nominee, research into the nominee’s background, analysis of the companies that are small entities. The Crespin; Don’s; T. Ebreo; M. Eng; eWareness; Evans; Regulatory Flexibility Act defines ‘‘small Fluharty; Flutterby; Fortuna Italian Restaurant; relative merits of the shareholder nominee as Future Form; Glaspell; C. Gregory; Healthcare compared to management’s own nominee, meetings entity’’ to mean ‘‘small business,’’ ‘‘small Practice; B. Henderson; S. Henning; J. Herren; A. of the relevant board committees, and analysis of organization,’’ or ‘‘small governmental Iriarte; J. Jones; Juz Kidz; Kernan; LMS Wine; T. whether a nomination would conflict with any 1088 Federal or State law, or director qualification jurisdiction.’’ The Commission’s Luna; Mansfield Children’s Center; D. McDonald; rules define ‘‘small business’’ and ‘‘small Meister; Merchants Terminal; Middendorf; Mingo; standards was too low. This commenter estimated Moore Brothers; Mouton; D. Mozack; Ms. Dee; G. that the burden hours associated with the above organization’’ for purposes of the Napolitano; NK; H. Olson; PESC; Pioneer Heating actions would be 99 hours of company personnel Regulatory Flexibility Act for each of & Air Conditioning; RC; RTW; D. Sapp; SBB; SGIA; time. See letter from S&C (citing results of a survey conducted by BRT). For a discussion of burden the types of entities regulated by the P. Sicilia; Slycers Sandwich Shop; Southern Commission. Securities Act Rule Services; Steele Group; Sylvron; Theragenics; E. estimates, see Section III. above. Tremaine; Wagner; Wagner Industries; Wellness; 1082 See letter from ICI. West End; Y.M.; J. Young. 1083 See letters from AFSCME; CII; D. Nappier. 1086 See letters from AFSCME; D. Nappier. 1079 See letters from Always N Bloom; Brighter 1084 See letter from USPE. 1087 See letter from CII. Day Painting; Caswells; Complete Home Inspection; 1085 See letter from CII. 1088 5 U.S.C. 601(6).

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157 1089 and Exchange Act Rule 0– in the company’s governing documents E. Agency Action To Minimize Effect on 10(a) 1090 define a company, other than to submit a nomination for director to be Small Entities an investment company, to be a ‘‘small included in a company’s proxy The Regulatory Flexibility Act directs business’’ or ‘‘small organization’’ if it materials will be required to provide us to consider significant alternatives had total assets of $5 million or less on disclosure in new Schedule 14N about that would accomplish the stated the last day of its most recent fiscal year. the nominating shareholder or group objective, while minimizing any We estimate that there are and the nominee. Companies also will significant adverse impact on small approximately 1,209 issuers that may be be required to include disclosure about entities. In connection with the new 1091 considered small entities. the nominating shareholder or group rules, we considered the following For purposes of the Regulatory and the nominee in the company’s alternatives: Flexibility Act, an investment company • The establishment of differing is a small entity if it, together with other proxy materials when a shareholder submits a nomination for director for compliance or reporting requirements or investment companies in the same timetables that take into account the group of related investment companies, inclusion in the company’s proxy materials pursuant to an applicable state resources available to small entities; has net assets of $50 million or less as • The clarification, consolidation or or foreign law provision or a company’s of the end of its most recent fiscal simplification of the rule’s compliance 1092 governing documents. year. We estimate that and reporting requirements for small approximately 168 registered We have no reason to expect that the entities; investment companies and 33 business amendment to Rule 14a–8(i)(8) will • The use of performance rather than development companies meet this substantially increase the number of design standards; and definition. The new rules may affect shareholder proposals to smaller • An exemption for small entities each of the approximately 201 issuers companies and likely will have little from coverage under the proposals. that may be considered small entities, to impact on small entities. With respect to As noted in the Proposing Release, the the extent companies and shareholders Rule 14a–11, there is some data Commission has considered a variety of take advantage of the rules. indicating that smaller companies are reforms to achieve its regulatory D. Reporting, Recordkeeping and Other subject to more proxy contests as a objectives while minimizing the impact on small entities. As one possible Compliance Requirements group than larger companies,1093 but the approach, we considered in 2003 data do not demonstrate that the The final rules are designed to requiring companies to include frequency is disproportionately larger at require, under certain circumstances, shareholder nominees for director in a Exchange Act reporting companies smaller companies relative to other company’s proxy materials only upon (other than debt-only companies and companies. In addition, we did not the occurrence of certain events so that companies whose applicable state or receive data substantiating a the rule would apply only in situations foreign law provisions or governing disproportionate impact on smaller where there was a demonstrated failure documents prohibit shareholder companies. in the proxy process related to director nominations) subject to the Federal With respect to investment nominations and elections. We sought proxy rules, including small entities, to companies, we assume that small comment in the Proposing Release on include shareholder nominees for this approach, with commenters arguing director in the company’s proxy investment companies, which may both for 1095 and against 1096 the materials. Nominating shareholders or operate with thin profit margins, would approach. We have not taken this groups, including nominating be particularly affected by the rules and approach in the final rules because we shareholders that are small entities, will the attendant costs, including the loss of do not believe it is appropriate to limit be required to meet certain eligibility the benefits of a cluster or unitary the rule to companies where specified requirements and to provide disclosure board.1094 However, the costs resulting events have occurred. Moreover, we are in Schedule 14N about the nominating from the loss of the benefits of a cluster not aware of data suggesting that such shareholders and the nominee, and or unitary board are costs associated specified events are less likely to occur companies will be required to include with the traditional State law rights to at smaller companies than at larger the disclosure provided by the nominate and elect directors, and are companies. nominating shareholder or group in the not costs incurred for including We considered changes to Rule 14a– company’s proxy materials. shareholder nominees in the company’s 8(i)(8) in 2007 that would enable The final rules also will enable proxy materials. We also note that any shareholders to include proposals in the shareholders to have their proposals for increased costs and decreased efficiency bylaw amendments regarding the company’s proxy materials that seek to of an investment company’s board as a establish a procedure under a result of the fund complex no longer 1095 company’s governing documents for the See letters from ADP; Alaska Air; Allstate; having a unitary or cluster board would American Electric Power; Anadarko; AT&T; Avis inclusion of one or more shareholder occur, if at all, only in the event that Budget; Barclays; Biogen; Boeing; BRT; Burlington director nominees in the company’s Northern; R. Burt; Callaway; Chevron; CIGNA; CNH investment company shareholders elect proxy materials. A nominating Global; Comcast; Cummins; Deere; Eaton; shareholder or group, including a the shareholder nominee. Investment ExxonMobil; FedEx; FMC Corp.; FPL Group; companies may include information in Frontier; General Mills; C. Holliday; IBM; ITT; J. nominating shareholder or group that is Kilts; E.J. Kullman; N. Lautenbach; McDonald’s; J. a small entity, using an applicable state the proxy materials making investors Miller; Motorola; Office Depot; O’Melveny & Myers; or foreign law provision or a provision aware of the company’s views on the P&G; PepsiCo; Pfizer; Protective; Ryder; Sara Lee; perceived benefits of a unitary or cluster Sherwin Williams; Theragenics; TI; TW Telecom; G. Tooker; UnitedHealth; Xerox. 1089 board and the potential for increased 17 CFR 230.157. 1096 See letters from ABA; AFSCME; CalSTRS; 1090 17 CFR 240.0–10(a). costs and decreased efficiency if the CFA Institute; CII; COPERA; T. DiNapoli; Florida 1091 The estimated number of reporting small shareholder nominees are elected. State Board of Administration; ICGN; N. entities is based on 2009 data, including the Lautenbach; LIUNA; D. Nappier; Nathan Cummings Commission’s EDGAR database and Standard & Foundation; OPERS; Pax World; Relational; Sodali; Poor’s. 1093 See, e.g., Bebchuk (2007). SWIB; TIAA–CREF; G. Tooker; USPE; ValueAct 1092 17 CFR 270.0–10(a). 1094 See letter from ICI. Capital.

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procedures for nominating directors opportunity to consider adjustments for proxy materials. Amended Rule 14a– included in the company’s proxy smaller reporting companies. In 8(i)(8) facilitates this process. In that materials provided the shareholder addition, in an effort to limit the cost respect, the rules provide both design submitting the proposal made certain and burden on all companies subject to and performance standards, as disclosures and beneficially owned the rule, including smaller reporting appropriate. more than 5% of the company’s shares. companies, we have limited use of Rule Lastly, as discussed above, we believe Although this approach could 14a–11 to nominations by shareholders potentially reduce the number of who have maintained significant that the final rules should apply shareholder proposals submitted to continuous holdings in the company, regardless of company size, as was 1098 smaller entities by establishing a and we have extended the required proposed. The purpose of the rules minimum threshold for having such holding period to at least three years at is to facilitate the exercise of proposals included in the company’s the time the notice of nomination is shareholders’ traditional State law rights proxy statement, we have not taken this filed with the Commission and to nominate and elect directors to approach because, as noted above, we transmitted to the company. We expect company boards of directors and do not expect the final rule to that these eligibility requirements will thereby enable shareholders to substantially increase the number of help achieve the stated objective participate more meaningfully in the shareholder proposals to smaller without unduly burdening any nomination and election of directors at companies. In addition, we have not particular group of companies. the companies in which they invest. We relied exclusively on an amendment to We are not adopting different believe that shareholders of smaller Rule 14a–8(i)(8) to achieve our disclosure standards based on the size reporting companies should be able to regulatory goals because we seek to of the issuer. We believe uniform exercise these rights to the same extent provide shareholders with a more disclosure will be helpful to voting as shareholders of larger reporting immediate and direct means of effecting decisions on shareholder-nominated companies. Therefore, we are not directors at companies of all sizes. change in the boards of directors of the persuaded that exempting smaller Because we are delaying the compliance companies in which they invest. For reporting companies from the final rules these reasons, as well as the reasons date of Rule 14a–11 for smaller would be consistent with this goal. discussed throughout the release, we reporting companies, we believe this believe that these final rules may better will allow them additional time to Nonetheless, as discussed above, we achieve the Commission’s objectives. prepare to comply with the new rule recognize that smaller reporting We also sought comment on whether and observe the rule’s impact on larger companies may have had less the proposed tiered approach—under companies, which should allow smaller experience with existing forms of which shareholders or shareholder reporting companies to be able to shareholder involvement in the proxy groups at larger companies would have comply with the same disclosure process and may have less-developed to satisfy a lower ownership threshold standards when the rule becomes infrastructures for managing these than shareholders or shareholder groups applicable to them. matters. The final rules therefore at smaller companies in order to rely on We considered the use of performance include a phase-in period that delays Rule 14a–11—is appropriate and standards rather than design standards the compliance date of Rule 14a–11 for in the final rules. The final rule contains workable. We considered whether the smaller reporting companies for three effect of the tiered approach may make both performance standards and design years from the effective date of the rule. it less likely that shareholders at smaller standards. We proposed design companies will nominate directors standards to the extent that we believe VII. Statutory Authority and Text of the under Rule 14a–11, but determined not compliance with particular Amendments to adopt this approach because the data requirements are necessary. However, to available to us did not indicate a the extent possible, our rules impose The amendments are made pursuant meaningful difference between small performance standards. For example, to Sections 3(b), 13, 14, 15, 23(a) and 36 entities and entities generally in regard under Rule 14a–11, a nominating of the Securities Exchange Act of 1934, to concentration of long-term share shareholder or group can provide a 500- as amended, Sections 10, 20(a) and 38 ownership.1097 word statement of support concerning of the Investment Company Act of 1940, We considered whether a delayed each of its nominee or nominees for as amended, and Sections 971(a) and (b) compliance date for Rule 14a–11 for director, but we do not specify the of the Dodd-Frank Act. smaller reporting companies, which content. Similarly, shareholders can would include most small entities, submit a proposal that seeks to establish List of Subjects would reduce the burden on these a procedure under a company’s 17 CFR Parts 200 entities. After considering the comments governing documents for the inclusion discussed above, we have determined to of one or more shareholder director Freedom of information, Reporting delay the compliance date of Rule 14a– nominees in the company’s proxy and recordkeeping requirements, 11 for smaller reporting companies for materials. By allowing shareholders to Securities. a period of three years from the effective submit such proposals, we seek to date for other companies. We believe provide shareholders and companies 17 CFR Parts 232, 240, and 249 that a delayed compliance date for with a measure of flexibility to tailor the means through which they can comply Reporting and recordkeeping smaller reporting companies will allow requirements, Securities. those companies to observe how Rule with the standards. Even though Rule 14a–11 operates for other companies 14a–11 provides a procedure from ■ In accordance with the foregoing, the and may allow them to better prepare which companies may not opt out, Securities and Exchange Commission is companies and shareholders are not for the implementation of the rules and, amending Title 17, chapter II of the prohibited from adopting nominating as noted, will give us a further Code of Federal Regulations as follows: procedures that could further facilitate 1097 For further discussion, see Section II.B.4. shareholders’ ability to include their above. own director nominees in company 1098 See Section II.B.3.f. above.

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PART 200—ORGANIZATION; 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, (1) Has not acquired the securities CONDUCT AND ETHICS; AND 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, with any purpose, or with the effect, of INFORMATION AND REQUESTS 78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a– changing or influencing the control of 20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, the issuer, or in connection with or as Subpart D—Information and Requests 80b–11, and 7201, et seq.; and 18 U.S.C. 1350 a participant in any transaction having and 12 U.S.C. 5221(e)(3), unless otherwise that purpose or effect, including any ■ 1. The authority citation for Part 200, noted. transaction subject to § 240.13d–3(b), Subpart D, continues to read, in part, as * * * * * other than activities solely in follows: ■ 6. Amend § 240.13a–11 by revising connection with a nomination under Authority: 5 U.S.C. 552, as amended, 15 paragraph (b) to read as follows: § 240.14a–11; U.S.C. 77f(d), 77s, 77ggg(a), 77sss, 78m(F)(3), § 240.13a–11 Current reports on Form 8–K * * * * * 78w, 80a–37, 80a–44(a), 80a–44(b), 80b– Instruction 1 to paragraph (c)(1). For 10(a), and 80b–11. (§ 249.308 of this chapter). purposes of paragraph (c)(1) of this * * * * * * * * * * section, the exception for activities ■ 2. Add § 200.82a to read as follows: (b) This section shall not apply to solely in connection with a nomination foreign governments, foreign private under § 240.14a–11 will not be available § 200.82a Public availability of materials issuers required to make reports on filed pursuant to § 240.14a–11(g) and related after the election of directors. Form 6–K (17 CFR 249.306) pursuant to materials. * * * * * § 240.13a–16, issuers of American ■ 8. Amend § 240.13d–102 by revising Materials filed with the Commission Depositary Receipts for securities of any pursuant to Rule 14a–11(g) under the the sentences following the introductory foreign issuer, or investment companies text in Items 10(a) and (c) as follows: Securities Exchange Act of 1934 (17 required to file reports pursuant to CFR 240.14a–11(g)), written § 270.30b1–1 of this chapter under the § 240.13d–102 Schedule 13G—Information communications related thereto Investment Company Act of 1940, to be included in statements filed pursuant received from interested persons, and except where such an investment to § 240.13d–1(b), (c), and (d) and each related no-action letter or other company is required to file: amendments thereto filed pursuant to § 240.13d–2. written communication issued by the (1) Notice of a blackout period staff of the Commission, shall be made pursuant to § 245.104 of this chapter; * * * * * available to any person upon request for (2) Disclosure pursuant to Instruction Item 10. Certifications inspection or copying. 2 to § 240.14a–11(b)(1) of information (a) * * * PART 232—REGULATION S–T— concerning outstanding shares and By signing below I certify that, to the best GENERAL RULES AND REGULATIONS voting; or of my knowledge and belief, the securities FOR ELECTRONIC FILINGS (3) Disclosure pursuant to Instruction referred to above were acquired and are held 2 to § 240.14a–11(b)(10) of the date by in the ordinary course of business and were ■ 3. The authority citation for Part 232 which a nominating shareholder or not acquired and are not held for the purpose continues to read, in part, as follows: of or with the effect of changing or nominating shareholder group must influencing the control of the issuer of the Authority: 15 U.S.C. 77f, 77g, 77h, 77j, submit the notice required pursuant to securities and were not acquired and are not 77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 78n, § 240.14a–11(b)(10). held in connection with or as a participant 78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, * * * * * in any transaction having that purpose or 80a–30, 80a–37, and 7201 et seq.; and 18 ■ 7. Amend § 240.13d–1 by revising effect, other than activities solely in U.S.C. 1350. connection with a nomination under paragraphs (b)(1)(i) and (c)(1) and § 240.14a–11. * * * * * adding Instruction 1 to paragraph (b)(1) ■ 4. Amend § 232.13 by revising to read as follows: * * * * * paragraph (a)(4) (the note remains (c) * * * unchanged) to read as follows: § 240.13d–1 Filing of Schedules 13D and By signing below I certify that, to the 13G. best of my knowledge and belief, the § 232.13 Date of filing; adjustment of filing * * * * * securities referred to above were not date. (b)(1) * * * acquired and are not held for the (a) * * * (i) Such person has acquired such purpose of or with the effect of changing (4) Notwithstanding paragraph (a)(2) securities in the ordinary course of his or influencing the control of the issuer of this section, a Form 3, 4 or 5 business and not with the purpose nor of the securities and were not acquired (§§ 249.103, 249.104, and 249.105 of with the effect of changing or and are not held in connection with or this chapter) or a Schedule 14N influencing the control of the issuer, nor as a participant in any transaction (§ 240.14n–101 of this chapter) in connection with or as a participant in having that purpose or effect, other than submitted by direct transmission on or any transaction having such purpose or activities solely in connection with a before 10 p.m. Eastern Standard Time or effect, including any transaction subject nomination under § 240.14a–11. Eastern Daylight Saving Time, to § 240.13d–3(b), other than activities * * * * * whichever is currently in effect, shall be solely in connection with a nomination ■ 9. Amend § 240.14a–2 by: deemed filed on the same business day. under § 240.14a–11; and ■ a. Revising paragraph (b) introductory * * * * * * * * * * text; and ■ b. Adding paragraphs (b)(7) and (b)(8). PART 240—GENERAL RULES AND Instruction 1 to paragraph (b)(1). For purposes of paragraph (b)(1)(i) of this The revision and additions read as REGULATIONS, SECURITIES follows: EXCHANGE ACT OF 1934 section, the exception for activities solely in connection with a nomination § 240.14a–2 Solicitations to which ■ 5. The authority citation for Part 240 under § 240.14a–11 will not be available § 240.14a–3 to § 240.14a–15 apply. continues to read, in part, as follows: after the election of directors. * * * * * Authority: 15 U.S.C. 77c, 77d, 77g, 77j, * * * * * (b) Sections 240.14a–3 to 240.14a–6 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, (c) * * * (other than paragraphs 14a–6(g) and

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14a–6(p)), § 240.14a–8, § 240.14a–10, must file a cover page in the form set (iii) Any written soliciting material and §§ 240.14a–12 to 240.14a–15 do not forth in Schedule 14N (§ 240.14n–101), published, sent or given to shareholders apply to the following: with the appropriate box on the cover in accordance with this paragraph must * * * * * page marked, under the registrant’s be filed by the nominating shareholder (7) Any solicitation by or on behalf of Exchange Act file number (or in the case or nominating shareholder group with any shareholder in connection with the of an investment company registered the Commission, under the registrant’s formation of a nominating shareholder under the Investment Company Act of Exchange Act file number, or, in the group pursuant to § 240.14a–11, 1940 (15 U.S.C. 80a–1 et seq.), under the case of a registrant that is an investment provided that: registrant’s Investment Company Act company registered under the (i) The soliciting shareholder is not file number), no later than the date of Investment Company Act of 1940 (15 holding the registrant’s securities with the first such communication. U.S.C. 80a–1 et seq.), under the the purpose, or with the effect, of Instruction to paragraph (b)(7). The registrant’s Investment Company Act changing control of the registrant or to exemption provided in paragraph (b)(7) file number, no later than the date the gain a number of seats on the board of of this section shall not apply to a material is first published, sent or given directors that exceeds the maximum shareholder that subsequently engages to shareholders. Three copies of the number of nominees that the registrant in soliciting or other nominating material must at the same time be filed could be required to include under activities outside the scope of with, or mailed for filing to, each § 240.14a–11(d); § 240.14a–2(b)(8) and § 240.14a–11 in national securities exchange upon connection with the subject election of (ii) Each written communication which any class of securities of the directors or is or becomes a member of includes no more than: registrant is listed and registered. The any other group, as determined under (A) A statement of each soliciting soliciting material must include a cover section 13(d)(3) of the Act (15 U.S.C. shareholder’s intent to form a page in the form set forth in Schedule 78m(d)(3) and § 240.13d–5(b)), or nominating shareholder group in order 14N (§ 240.14n–101) and the otherwise, with persons engaged in to nominate one or more directors under appropriate box on the cover page must soliciting or other nominating activities § 240.14a–11; be marked. in connection with the subject election (B) Identification of, and a brief Instruction 1 to paragraph (b)(8). A of directors. statement regarding, the potential nominating shareholder or nominating (8) Any solicitation by or on behalf of shareholder group may rely on the nominee or nominees or, where no a nominating shareholder or nominating nominee or nominees have been exemption provided in paragraph (b)(8) shareholder group in support of its of this section only after receiving identified, the characteristics of the nominee that is included or that will be nominee or nominees that the notice from the registrant in accordance included on the registrant’s form of with § 240.14a–11(g)(1) or § 240.14a– shareholder intends to nominate, if any; proxy in accordance with § 240.14a–11 11(g)(3)(iv) that the registrant will (C) The percentage of voting power of or for or against the registrant’s nominee include the nominating shareholder’s or the registrant’s securities that are or nominees, provided that: entitled to be voted on the election of (i) The soliciting party does not, at nominating shareholder group’s directors that each soliciting any time during such solicitation, seek nominee or nominees in its form of shareholder holds or the aggregate directly or indirectly, either on its own proxy. percentage held by any group to which or another’s behalf, the power to act as Instruction 2 to paragraph (b)(8). Any the shareholder belongs; and proxy for a shareholder and does not solicitation by or on behalf of a (D) The means by which shareholders furnish or otherwise request, or act on nominating shareholder or nominating may contact the soliciting party. behalf of a person who furnishes or shareholder group in support of its (iii) Any written soliciting material requests, a form of revocation, nominee included or to be included on published, sent or given to shareholders abstention, consent or authorization; the registrant’s form of proxy in in accordance with this paragraph must (ii) Any written communication accordance with § 240.14a–11 or for or be filed by the shareholder with the includes: against the registrant’s nominee or Commission, under the registrant’s (A) The identity of each nominating nominees must be made in reliance on Exchange Act file number, or, in the shareholder and a description of his or the exemption provided in paragraph case of a registrant that is an investment her direct or indirect interests, by (b)(8) of this section and not on any company registered under the security holdings or otherwise; other exemption. Investment Company Act of 1940 (15 (B) A prominent legend in clear, plain Instruction 3 to paragraph (b)(8). The U.S.C. 80a–1 et seq.), under the language advising shareholders that a exemption provided in paragraph (b)(8) registrant’s Investment Company Act shareholder nominee is or will be of this section shall not apply to a file number, no later than the date the included in the registrant’s proxy person that subsequently engages in material is first published, sent or given statement and that they should read the soliciting or other nominating activities to shareholders. Three copies of the registrant’s proxy statement when outside the scope of § 240.14a–11 in material must at the same time be filed available because it includes important connection with the subject election of with, or mailed for filing to, each information (or, if the registrant’s proxy directors or is or becomes a member of national securities exchange upon statement is publicly available, advising any other group, as determined under which any class of securities of the shareholders of that fact and section 13(d)(3) of the Act (15 U.S.C. registrant is listed and registered. The encouraging shareholders to read the 78m(d)(3) and § 240.13d–5(b)), or soliciting material must include a cover registrant’s proxy statement because it otherwise, with persons engaged in page in the form set forth in Schedule includes important information). The soliciting or other nominating activities 14N (§ 240.14n–101) and the legend also must explain to in connection with the subject election appropriate box on the cover page must shareholders that they can find the of directors. be marked. registrant’s proxy statement, other * * * * * (iv) In the case of an oral solicitation soliciting material, and any other ■ 10. Amend § 240.14a–4 by: made in accordance with the terms of relevant documents at no charge on the ■ a. Revising the first sentence of this section, the nominating shareholder Commission’s Web site; and paragraph (b)(2) introductory text; and

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■ b. Adding a sentence to the end The revisions and additions read as cause to be included in a registrant’s paragraph (b)(2) concluding text. follows: proxy materials, either pursuant to the The revision and addition read as Federal proxy rules, an applicable state follows: § 240.14a–6 Filing requirements. or foreign law provision, or a registrant’s (a) * * * governing documents as they relate to § 240.14a–4 Requirements as to proxy. (4) A shareholder nominee for including shareholder nominees for * * * * * director included pursuant to § 240.14a– director in a registrant’s proxy materials, (b) * * * 11, an applicable state or foreign law include in a notice on Schedule 14N (2) A form of proxy that provides for provision, or a registrant’s governing (§ 240.14n–101), or include in any other the election of directors shall set forth documents as they relate to the related communication, any statement the names of persons nominated for inclusion of shareholder director which, at the time and in the light of the election as directors, including any nominees in the registrant’s proxy circumstances under which it is made, person whose nomination by a materials. is false or misleading with respect to shareholder or shareholder group * * * * * any material fact, or which omits to satisfies the requirements of § 240.14a– Note 3. * * * The inclusion of a state any material fact necessary in 11, an applicable state or foreign law shareholder nominee in the registrant’s proxy order to make the statements therein not provision, or a registrant’s governing materials pursuant to § 240.14a–11, an false or misleading or necessary to documents as they relate to the applicable state or foreign law provision, or correct any statement in any earlier inclusion of shareholder director a registrant’s governing documents as they communication with respect to a nominees in the registrant’s proxy relate to the inclusion of shareholder director solicitation for the same meeting or materials. * * * nominees in the registrant’s proxy materials subject matter which has become false * * * Means to grant authority to does not constitute a ‘‘solicitation in or misleading. vote for any nominees as a group or to opposition’’ for purposes of Rule 14a–6(a) (§ 240.14a–6(a)), even if the registrant * * * * * withhold authority for any nominees as ■ opposes the shareholder nominee and solicits 15. Add § 240.14a–11 to read as a group may not be provided if the form against the shareholder nominee and in favor follows: of proxy includes one or more of a registrant nominee. shareholder nominees in accordance § 240.14a–11 Shareholder nominations. with § 240.14a–11, an applicable state or * * * * * (a) Applicability. In connection with foreign law provision, or a registrant’s (p) Solicitations subject to § 240.14a– an annual (or a special meeting in lieu governing documents as they relate to 11. Any soliciting material that is of an annual) meeting of shareholders, the inclusion of shareholder director published, sent or given to shareholders or a written consent in lieu of such nominees in the registrant’s proxy in connection with § 240.14a–2(b)(7) or meeting, at which directors are elected, materials. (b)(8) must be filed with the a registrant will be required to include * * * * * Commission as specified in that section. in its proxy statement and form of proxy ■ 13. Amend § 240.14a–8 by revising the name of a person or persons ■ 11. Amend § 240.14a–5 by: paragraph (i)(8) as follows: nominated by a shareholder or group of ■ a. Revising paragraph (e)(1) to remove shareholders for election to the board of ‘‘and’’ at the end of the paragraph; § 240.14a–8 Shareholder proposals. directors and include in its proxy ■ b. Revising paragraph (e)(2) to remove * * * * * statement the disclosure about such the period at the end of the paragraph (i) * * * nominee or nominees and the and add in its place ‘‘; and’’; and (8) Director elections: If the proposal: nominating shareholder or members of ■ c. Adding paragraph (e)(3) to read as (i) Would disqualify a nominee who the nominating shareholder group as follows: is standing for election; specified in Item 5 of Schedule 14N § 240.14a–5 Presentation of information in (ii) Would remove a director from (§ 240.14n–101), provided that the proxy statement. office before his or her term expired; conditions set forth in paragraph (b) of (iii) Questions the competence, this section are satisfied. This rule will * * * * * business judgment, or character of one not apply to a registrant if: (e) * * * or more nominees or directors; (1) The registrant is subject to the (3) The deadline for submitting (iv) Seeks to include a specific proxy rules solely because it has a class nominees for inclusion in the individual in the company’s proxy of debt securities registered under registrant’s proxy statement and form of materials for election to the board of section 12 of the Exchange Act (15 proxy pursuant to § 240.14a–11, an directors; or U.S.C. 78l); or applicable state or foreign law (v) Otherwise could affect the (2) Applicable state or foreign law or provision, or a registrant’s governing outcome of the upcoming election of a registrant’s governing documents documents as they relate to the directors. prohibit the registrant’s shareholders inclusion of shareholder director from nominating a candidate or nominees in the registrant’s proxy * * * * * ■ 14. Amend § 240.14a–9 by adding a candidates for election as director. materials for the registrant’s next annual (b) Eligibility. A shareholder nominee meeting of shareholders. paragraph (c), removing the authority citation following the section, and or nominees shall be included in a * * * * * redesignating notes (a), (b), (c), and (d) registrant’s proxy statement and form of ■ 12. Amend § 240.14a–6 by: as a., b., c., and d. proxy if the following requirements are a. Redesignating paragraphs (a)(4), The addition reads as follows: satisfied: (a)(5), (a)(6), and (a)(7) as paragraphs (1) The nominating shareholder (a)(5), (a)(6), (a)(7), and (a)(8) § 240.14a–9 False or misleading individually, or the nominating respectively; statements. shareholder group in the aggregate, ■ b. Adding new paragraph (a)(4); * * * * * holds at least 3% of the total voting ■ c. Adding a sentence at the end of (c) No nominee, nominating power of the registrant’s securities that Note 3 to paragraph (a); and shareholder or nominating shareholder are entitled to be voted on the election ■ d. Adding paragraph (p). group, or any member thereof, shall of directors at the annual (or a special

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meeting in lieu of the annual) meeting solicitation of a proxy with respect to those Instruction 4 to paragraph (b)(1). If a of shareholders or on a written consent securities would require compliance with registrant has more than one class of in lieu of such meeting, on the date the Exchange Act Regulation 14A (§ 240.14a–1 et outstanding securities entitled to vote on the seq.). election of directors and those classes do not nominating shareholder or nominating b. When determining the total voting vote together in the election of all directors, shareholder group files the notice on power of the registrant’s securities held by then the voting power of the registrant’s Schedule 14N (§ 240.14n–101) with the the nominating shareholder or any member securities for purposes of the calculation of Commission and transmits the notice to of the nominating shareholder group, which both the numerator and denominator the registrant; is the numerator in the calculation of the specified in Instruction 3 to paragraph (b)(1) percentage: should be determined only on the basis of the Instruction 1 to paragraph (b)(1). In the 1. Calculate the number of votes derived voting power of the class or classes of case of a registrant other than an investment only from securities with respect to which securities that would be voting together on company registered under the Investment solicitation of a proxy would require the election of the person or persons sought Company Act of 1940 (15 U.S.C. 80a–1 et compliance with Exchange Act Regulation to be nominated by the nominating seq.), for purposes of (b)(1) of this section, in 14A (§ 240.14a–1 et seq.) and over which the shareholder or the nominating shareholder determining the total voting power of the nominating shareholder or any member of group. registrant’s securities that are entitled to be the nominating shareholder group, as the voted on the election of directors, the case may be, has voting power and (2) The nominating shareholder or nominating shareholder or nominating investment power, either directly or through each member of the nominating shareholder group may rely on information any person acting on their behalf; shareholder group has held the amount set forth in the registrant’s most recent 2. Notwithstanding the voting power of securities that are used for purposes quarterly or annual report, and any current calculation specified in paragraph b.1. of this of satisfying the minimum ownership report subsequent thereto, filed with the instruction, add to the result of the Commission pursuant to this Act, unless the requirement of paragraph (b)(1) of this calculation specified in paragraph b.1. of this section continuously for at least three nominating shareholder or nominating instruction any votes attributable to shareholder group knows or has reason to securities with respect to which solicitation years as of the date the notice on know that the information contained therein of a proxy would require compliance with Schedule 14N (§ 240.14n–101) is filed is inaccurate. In the case of a registrant that Exchange Act Regulation 14A (§ 240.14a–1 et with the Commission and transmitted to is an investment company registered under seq.) that have been loaned by or on behalf the registrant and must continue to hold the Investment Company Act of 1940, for of the nominating shareholder or any that amount of securities through the purposes of (b)(1) of this section, in member of the nominating shareholder group date of the subject election of directors; determining the total voting power of the to another person, if the nominating registrant’s securities that are entitled to be shareholder or member of the nominating Instruction to paragraph (b)(2). To voted on the election of directors, the shareholder group, as the case may be, or any determine whether the amount of securities nominating shareholder or nominating person acting on their behalf, has the right to that are used for purposes of satisfying the shareholder group may rely on information recall the loaned securities, and will recall minimum ownership requirement of set forth in the following documents, unless the loaned securities upon being notified that paragraph (b)(1) has been held continuously the nominating shareholder or nominating any of the nominating shareholder’s or during the three year period prior to the date shareholder group knows or has reason to group’s nominees will be included in the the Schedule 14N (§ 240.14n–101) is filed know that the information contained therein registrant’s proxy statement and proxy card; and during the period after the Schedule 14N is inaccurate: and is filed through the date of the subject a. In the case of a registrant that is a series 3. Subtract from the result of the election of directors, and with respect to all company as defined in Rule 18f–2(a) under calculation specified in paragraphs b.1. and points in time during those periods: the Investment Company Act of 1940 b.2. of this instruction the number of votes a. Include only the amount of securities (§ 270.18f–2(a) of this chapter), the Form 8– attributable to securities of the registrant with respect to which a solicitation of a K (§ 249.308 of this chapter) described in entitled to vote on the election of directors, proxy would require compliance with Instruction 2 to paragraph (b)(1) of this regardless of whether solicitation of a proxy Exchange Act Regulation 14A (§ 240.14a–1 et section; or with respect to those securities would require seq.) and over which the nominating b. In the case of other investment compliance Exchange Act Regulation 14A shareholder or the member of the nominating companies, the registrant’s most recent (§ 240.14a–1 et seq.), that the nominating shareholder group, as the case may be, has annual or semi-annual report filed with the shareholder or any member of the voting power and investment power, either Commission on Form N–CSR (§ 249.331 and nominating shareholder group, as the case directly or through any person acting on their § 274.128 of this chapter). may be, or any person acting on their behalf, behalf; Instruction 2 to paragraph (b)(1). If the has sold in a short sale, as defined in 17 CFR b. Notwithstanding the voting power registrant is an investment company that is 242.200(a), that is not closed out, or has determination specified in paragraph a. of a series company (as defined in § 270.18f– borrowed for purposes other than a short this instruction, include the amount of 2(a) of this chapter), the registrant must sale. securities that have been loaned by or on disclose pursuant to Item 5.08 of Form 8–K c. For purposes of the voting power behalf of the nominating shareholder or any (§ 249.308 of this chapter) the total number calculation in paragraph b.1. of this member of the nominating shareholder group of shares of the registrant outstanding and instruction: to another person, if the nominating entitled to be voted (or if the votes are to be 1. A shareholder has voting power directly shareholder or member of the nominating cast on a basis other than one vote per share, only when the shareholder has the power to shareholder group, as the case may be, or any then the total number of votes entitled to be vote or direct the voting, and investment person acting on their behalf: voted and the basis for allocating such votes) power directly only when the shareholder 1. Has the right to recall the loaned on the election of directors as of the end of has the power to dispose or direct the securities; and the most recent calendar quarter. disposition, of the securities; and 2. With respect to the period from the date Instruction 3 to paragraph (b)(1). 2. A securities intermediary (as defined in the Schedule 14N (§ 240.14n–01) is filed a. When determining the total voting § 240.17Ad–20(b)) shall not have voting through the date of the subject election of power of the registrant’s securities, which is power or investment power over securities directors, will recall the loaned securities the denominator in the calculation of the for purposes of paragraph b.1. of this upon being notified that any of the person’s percentage of voting power held by the instruction solely because such intermediary nominees will be included in the registrant’s nominating shareholder individually or the holds such securities by or on behalf of proxy statement and proxy card; nominating shareholder group in the another person, notwithstanding that c. Reduce the amount of securities held by aggregate, calculate the aggregate number of pursuant to the rules of a national securities the amount of securities, on a class basis, that votes derived from all classes of securities of exchange such intermediary may vote or the nominating shareholder or any member the registrant that are entitled to vote on the direct the voting of such securities without of the nominating shareholder group, as the election of directors regardless of whether instruction. case may be, or any person acting on their

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behalf, sold in a short sale, as defined in 17 clearing agency acting as a securities proxy in accordance with this section, will CFR 242.200(a), during the periods, or depository, then a statement from such not represent a direct or indirect agreement borrowed for purposes other than a short broker or bank will satisfy the requirements with the registrant. sale; and of paragraph (b)(3) of this section. If the (8) The nominee’s candidacy or, if d. Adjust the amount of securities held to securities are held through a broker or bank give effect to any changes in the amount of (e.g., in an omnibus account) that is not a elected, board membership would not securities during the periods resulting from participant in a clearing agency acting as a violate controlling Federal law, State stock splits, reclassifications or other similar securities depository, the nominating law, foreign law, or rules of a national adjustments by the registrant. shareholder or member of the nominating securities exchange or national shareholder group must also obtain and securities association (other than rules (3) The nominating shareholder or submit a separate written statement specified regarding director independence) or, in each member of the nominating in the Instruction to Item 4 of Schedule 14N the case that the nominee’s candidacy shareholder group provides proof of (§ 240.14n–101). or, if elected, board membership would ownership of the amount of securities violate such laws or rules, such that are used for purposes of satisfying (4) The nominating shareholder or violation could not be cured by the time the ownership and holding period each member of the nominating provided in paragraph (g)(2) of this requirements of paragraphs (b)(1) and shareholder group provides a statement, as specified in Item 4(b) of Schedule section; (b)(2) of this section. If the nominating (9) In the case of a registrant other shareholder or each member of the 14N (§ 240.14n–101), on the date the notice on Schedule 14N is filed with the than an investment company, the nominating shareholder group is not the nominee meets the objective criteria for registered holder of the securities, the Commission and transmitted to the registrant, that the nominating ‘‘independence’’ of the national nominating shareholder or each member securities exchange or national of the nominating shareholder group shareholder or each member of the nominating shareholder group intends securities association rules applicable to must provide proof of ownership in the the registrant, if any, or, in the case of form of one or more written statements to continue to hold the amount of securities that are used for purposes of a registrant that is an investment from the registered holder of the company, the nominee is not an nominating shareholder’s securities (or satisfying the minimum ownership requirement of paragraph (b)(1) of this ‘‘interested person’’ of the registrant as the brokers or banks through which defined in section 2(a)(19) of the those securities are held) verifying that, section through the date of the meeting; (5) The nominating shareholder or Investment Company Act of 1940 (15 as of a date within seven calendar days each member of the nominating U.S.C. 80a–2(a)(19)); prior to filing the notice on Schedule shareholder group provides a statement, 14N (§ 240.14n–101) with the Instruction to paragraph (b)(9). For as specified in Item 4(b) of Schedule Commission and transmitting the notice purposes of this provision, the nominee 14N (§ 240.14n–101), on the date the would be required to meet the definition of to the registrant, the nominating notice on Schedule 14N is filed with the ‘‘independence’’ that is generally applicable shareholder or each member of the Commission and transmitted to the to directors of the registrant and not any nominating shareholder group, registrant, regarding the nominating particular definition of independence continuously held the amount of applicable to members of the audit shareholder’s or group’s intent with securities being used to satisfy the committee of the registrant’s board of respect to continued ownership of the ownership threshold for a period of at directors. To the extent a national securities registrant’s securities after the election; least three years. The written statement exchange or national securities association (6) The nominating shareholder (or or statements proving ownership must rule imposes a standard regarding where there is a nominating shareholder independence that requires a subjective be attached as an appendix to Schedule group, each member of the nominating determination by the board or a group or 14N on the date the notice is filed with shareholder group) is not holding any of committee of the board (for example, the Commission and transmitted to the the registrant’s securities with the requiring that the board of directors or any registrant, and provide the information group or committee of the board of directors purpose, or with the effect, of changing specified in Item 4 of Schedule 14N. In make a determination regarding the existence control of the registrant or to gain a the alternative, if the nominating of factors material to a determination of a number of seats on the board of shareholder or member of the nominee’s independence), the nominee directors that exceeds the maximum nominating shareholder group has filed would not be required to meet the subjective number of nominees that the registrant determination of independence as part of the a Schedule 13D (§ 240.13d–101), could be required to include under shareholder nomination process. Schedule 13G (§ 240.13d–102), Form 3 paragraph (d) of this section; (§ 249.103 of this chapter), Form 4 (10) The nominating shareholder or (7) Neither the nominee nor the (§ 249.104 of this chapter), and/or Form nominating shareholder group provides nominating shareholder (or where there 5 (§ 249.105 of this chapter), or notice to the registrant on Schedule 14N is a nominating shareholder group, any amendments to those documents, (§ 240.14n–101), as specified by member of the nominating shareholder reflecting ownership of the securities as § 240.14n–1, of its intent to require that group) has an agreement with the of or before the date on which the three- the registrant include that shareholder’s registrant regarding the nomination of year eligibility period begins, the or group’s nominee in the registrant’s the nominee; nominating shareholder or member of proxy statement and form of proxy. This the nominating shareholder group may Instruction to paragraph (b)(7). notice must be transmitted to the attach the filing as an appendix to the Negotiations between the nominee, the registrant on the date it is filed with the Schedule 14N or incorporate the filing nominating shareholder or nominating Commission. The notice must be filed shareholder group and the nominating by reference into the Schedule 14N; with the Commission and transmitted to committee or board of the registrant to have the registrant no earlier than 150 Instruction to paragraph (b)(3). If the the nominee included in the registrant’s calendar days, and no later than 120 nominating shareholder or member of the proxy statement and form of proxy as a nominating shareholder group must provide registrant nominee, where those negotiations calendar days, before the anniversary of proof of ownership in the form of a written are unsuccessful, or negotiations that are the date that the registrant mailed its statement with respect to securities held limited to whether the registrant is required proxy materials for the prior year’s through a broker or bank that is a participant to include the shareholder nominee in the annual meeting, except that, if the in the Depository Trust Company or other registrant’s proxy statement and form of registrant did not hold an annual

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meeting during the prior year, or if the of the Act (15 U.S.C. 78m(d)(3) and required to include in the proxy date of the meeting has changed by § 240.13d–5(b)), or otherwise, with persons statement and form of proxy more more than 30 calendar days from the engaged in soliciting or other nominating shareholder nominees than could result activities in connection with the subject in the total number of directors who prior year, or if the registrant is holding election of directors; a special meeting or conducting an b. Is separately conducting a solicitation in were elected as shareholder nominees election of directors by written consent, connection with the subject election of pursuant to this section and serving on then the nominating shareholder or directors other than a solicitation subject to the board being more than one nominating shareholder group must § 240.14a–2(b)(8) in relation to those shareholder nominee or 25% of the total transmit the notice to the registrant and nominees it has nominated pursuant to this number of the registrant’s board of file its notice with the Commission a section or for or against the registrant’s directors, whichever is greater. reasonable time before the registrant nominees; or (3) Where the registrant has multiple c. Is acting as a participant in another classes of securities and each class is mails its proxy materials, as specified by person’s solicitation in connection with the the registrant in a Form 8–K (§ 249.308 subject election of directors. entitled to elect a specified number of of this chapter) filed pursuant to Item directors, the registrant will be required 5.08 of Form 8–K; and (c) Statement of support. A registrant to include the lesser of the number of will be required to include a statement nominees that the nominating Instruction 1 to paragraph (b)(10). If the of support submitted by a nominating shareholder’s or group’s class is entitled registrant held a meeting the previous year shareholder or nominating shareholder and the date of the current year’s annual to elect or 25% of the registrant’s board meeting has not changed by more than 30 group in Item 5(i) of the notice on of directors, but in no case less than one calendar days from the date of the previous Schedule 14N (§ 240.14n-101), provided nominee. year’s annual meeting, the window period for that the statement of support does not (4) Where the registrant agrees to filing a notice on Schedule 14N (§ 240.14n– exceed 500 words per nominee. If a include in its proxy statement and form 101) with the Commission and transmitting statement of support submitted by a of proxy, as an unopposed registrant that notice to the registrant should be nominating shareholder or nominating nominee, the nominee or nominees of calculated by determining the release date shareholder group exceeds 500 words disclosed in the registrant’s previous year’s the nominating shareholder or proxy statement, increasing the year by one, per nominee, the registrant will be nominating shareholder group that and counting back 150 calendar days and 120 required to include the nominee or otherwise would be eligible under this calendar days for the beginning and end of nominees, provided that the eligibility section to have its nominees included in the window period, respectively. Where the requirements and other conditions of the registrant’s proxy materials, the 120 calendar day deadline falls on a the rule are satisfied, but the registrant nominee will be considered a Saturday, Sunday or holiday, the deadline may exclude the supporting shareholder nominee for purposes of will be treated as the first business day statement(s). calculating the maximum number of following the Saturday, Sunday or holiday. (d) Maximum number of shareholder Instruction 2 to paragraph (b)(10). If the shareholder nominees that must be registrant did not hold an annual meeting the nominees. (1) A registrant will be included in the registrant’s proxy previous year, or if the date of the current required to include in its proxy statement and form of proxy, provided year’s annual meeting has been changed by statement and form of proxy one that the nominating shareholder or more than 30 calendar days from the date of shareholder nominee or the number of nominating shareholder group filed its the previous year’s annual meeting, or if the nominees that represents 25% of the notice on Schedule 14N (§ 240.14n–101) registrant is holding a special meeting or total number of the registrant’s board of before beginning communications with conducting the election of directors by directors, whichever is greater, the registrant about the nomination. written consent, the registrant must disclose submitted by a nominating shareholder pursuant to Item 5.08 of Form 8–K (§ 249.308 (5) A nominee included in a of this chapter) the date by which a or nominating shareholder group registrant’s proxy statement and form of shareholder or group must submit the notice pursuant to this section, subject to the proxy as a result of an agreement required pursuant to paragraph (b)(10) of this limitations in paragraphs (d)(2), (d)(3), between the nominee or nominating section, which date shall be a reasonable (d)(4), and (d)(5) of this section. A shareholder (or where there is a time prior to the date the registrant mails its registrant may exclude a nominee or nominating shareholder group, any proxy materials for the meeting. nominees if including the nominee or member of the nominating shareholder (11) The nominating shareholder or nominees would result in the registrant group) and the registrant, other than as nominating shareholder group provides exceeding the maximum number of specified in paragraph (d)(4) of this the certifications required by Schedule nominees it is required to include in its section, will not be counted as a 14N (§ 240.14n–101) on the date the proxy statement and form of proxy shareholder nominee for purposes of notice on Schedule 14N is filed with the pursuant to this provision. calculating the maximum number of Commission and transmitted to the Instruction to paragraph (d)(1). Depending shareholder nominees that the registrant registrant. on board size, 25% of the board may not is required to include in its proxy Instruction to paragraph (b). A registrant result in a whole number. In those instances, statement and form of proxy. the registrant will round down to the closest will not be required to include a nominee or Instruction to paragraph (d)(5). whole number below 25% to determine the nominees submitted by a nominating Negotiations between the nominee, the maximum number of shareholder nominees shareholder or nominating shareholder group nominating shareholder or nominating for director that the registrant is required to pursuant to this section if the nominating shareholder group and the nominating include in its proxy statement and form of shareholder or any member of the committee or board of the registrant to have proxy. nominating shareholder group also submits the nominee included in the registrant’s any other nomination to that registrant and/ (2) Where the registrant has one or proxy statement and form of proxy as a or is participating in more than one more directors currently serving on its registrant nominee, where those negotiations nominating shareholder group for that board of directors who were elected as are unsuccessful, or negotiations that are registrant. In addition, a registrant will not be a shareholder nominee pursuant to this limited to whether the registrant is required required to include a nominee or nominees to include the shareholder nominee in the if a nominating shareholder or member of a section, and the term of that director or registrant’s proxy statement and form of nominating shareholder group: directors extends past the election of proxy in accordance with this section, will a. Is or becomes a member of any other directors for which it is soliciting not represent a direct or indirect agreement group, as determined under section 13(d)(3) proxies, the registrant will not be with the registrant.

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(e) Order of priority for shareholder filed and transmitted as specified in elect a specified number of directors, nominees. (1) In the event that more paragraph (b)(10) of this section, if any, and nominating shareholders or groups than one eligible shareholder or group up to and including the total number of nominating shareholders of more of shareholders submits a nominee or required to be included by the than one of those classes submit a nominees for inclusion in the registrant. This process would continue number of eligible nominees for registrant’s proxy materials pursuant to until the registrant included the inclusion in the registrant’s proxy this section, the registrant shall include maximum number of nominees it is materials pursuant to this section that is in the proxy statement and form of required to include in its proxy greater than 25% of the total number of proxy the nominee or nominees of the statement and form of proxy pursuant to the registrant’s board of directors, the nominating shareholder or nominating paragraph (d) of this section or the registrant shall include in the proxy shareholder group with the highest registrant exhausts the list of eligible statement and form of proxy the qualifying voting power percentage nominees. If the registrant has nominee or nominees of the nominating disclosed as of the date of filing the commenced printing its proxy statement shareholders or groups on the basis of Schedule 14N (§ 240.14n–101) (as and form of proxy, the registrant will the proportion of total voting power in determined in calculating ownership to not be required to include a nominee or the election of directors attributable to satisfy the requirement as specified in nominees in its proxy statement and each class, rounding to the closest paragraph (b)(1) of this section) from form of proxy in place of a nominee or whole number, if necessary, and which the registrant received a notice nominees that has withdrawn or has otherwise in accordance with paragraph filed and transmitted as specified in been disqualified. (e) of this section. paragraph (b)(10) of this section, up to (3) If a nominee or nominees withdraws or is disqualified after the Instruction 1 to paragraph (e). In and including the total number of determining the priority of the nominee or nominees required to be included by the registrant provides notice to the nominees to be included in the registrant’s registrant pursuant to this section. nominating shareholder or nominating proxy materials, the registrant will be Where the nominating shareholder or shareholder group of the registrant’s required to consider only the nominee or nominating shareholder group with the intent to include the nominee or nominees that would otherwise be required highest qualifying voting power nominees in its proxy statement and to be included under the provisions of this percentage that is otherwise eligible to form of proxy, the registrant will be section. required to include in its proxy Instruction 2 to paragraph (e). If the rely on this section and that filed and registrant is including shareholder director transmitted the notice as specified in statement and form of proxy any other eligible nominee submitted by that nominees from more than one nominating paragraph (b)(10) of this section does shareholder or nominating shareholder not nominate the maximum number of nominating shareholder or nominating group, as described in this paragraph, and individuals required to be included by shareholder group. If that nominating including all of the shareholder director the registrant, the nominee or nominees shareholder or nominating shareholder nominees of the nominating shareholder or of the nominating shareholder or group did not include any other eligible nominating shareholder group that is last in nominating shareholder group with the nominees in its notice filed on Schedule priority would result in exceeding the next highest qualifying voting power 14N (§ 240.14n–101), then the registrant maximum number required under paragraph will be required to include the nominee (d) of this section, the nominating percentage from which the registrant shareholder or nominating shareholder group received the notice filed and transmitted or nominees of the nominating shareholder or nominating shareholder that is last in priority may specify which of as specified in paragraph (b)(10) of this group with the next highest voting its nominees are to be included in the section would be included in the registrant’s proxy materials. power percentage, disclosed as of the registrant’s proxy statement and form of date of filing the Schedule 14N (f) False or misleading statements. proxy, if any, up to and including the (§ 240.14n–101) (as determined in The registrant is not responsible for any total number required to be included by calculating ownership to satisfy the information in the notice from the the registrant. This process would requirement as specified in paragraph nominating shareholder or nominating continue until the registrant has (b)(1) of this section), from which the shareholder group submitted as required included the maximum number of registrant received a notice filed and by paragraph (b)(10) of this section or nominees it is required to include in its transmitted as specified in paragraph otherwise provided by the nominating proxy statement and form of proxy (b)(10) of this section, if any, up to and shareholder or nominating shareholder pursuant to paragraph (d) of this section including the total number required to group that is included in the registrant’s or the registrant exhausts the list of be included by the registrant. This proxy materials. eligible nominees. process would continue until the (g) Determinations regarding (2) Prior to the time a registrant has registrant included the maximum eligibility. (1) If the registrant commenced printing its proxy statement number of nominees it is required to determines that it will include a and form of proxy, if a nominating include in its proxy statement and form shareholder nominee, it must notify the shareholder or nominating shareholder of proxy pursuant to paragraph (d) of nominating shareholder or nominating group withdraws or is disqualified, a this section or the registrant exhausts shareholder group (or their authorized registrant will be required to include in the list of eligible nominees. If the representative) upon making this its proxy statement and form of proxy registrant has commenced printing its determination. In no event should the the nominee or nominees of the proxy statement and form of proxy, the notification be postmarked or nominating shareholder or nominating registrant will not be required to include transmitted electronically later than 30 shareholder group with the next highest a nominee or nominees in its proxy calendar days before it files its qualifying voting power percentage, statement and form of proxy in place of definitive proxy statement and form of disclosed as of the date of filing the a nominee or nominees that has proxy with the Commission. Schedule 14N (§ 240.14n–101) (as withdrawn or has been disqualified. (2) If the registrant determines that it determined in calculating ownership to (4) Notwithstanding the other may exclude a shareholder nominee satisfy the requirement as specified in provisions of this paragraph, if a pursuant to a provision in paragraph (a), paragraph (b)(1) of this section), from registrant has multiple classes of (b), (d), or (e) of this section, or exclude which the registrant received a notice securities and each class is entitled to a statement of support pursuant to

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paragraph (c) of this section, the (D) A supporting opinion of counsel representative of a nominating shareholder registrant must notify in writing the when the registrant’s basis for excluding group is responsible for providing the nominating shareholder or nominating a nominee or nominees relies on a response in a manner that evidences timely shareholder group (or their authorized matter of state or foreign law. transmission. (ii) The registrant must file its notice Instruction 2 to paragraph (g). Neither the representative) of this determination. composition of the nominating shareholder This notice must be postmarked or to the Commission and simultaneously group nor the shareholder nominee may be transmitted electronically to the provide a copy to the nominating changed as a means to correct a deficiency nominating shareholder or nominating shareholder or each member of the identified in the registrant’s notice to the shareholder group (or their authorized nominating shareholder group (or their nominating shareholder or nominating representative) no later than 14 calendar authorized representative). At the time shareholder group under paragraph (g)(2) of days after the close of the period for the registrant files its notice, the this section; however, where a nominating submission specified in paragraph registrant also may seek an informal shareholder or nominating shareholder group (b)(10) of this section. statement of the Commission staff’s submits a number of nominees that exceeds (i) The registrant’s notice to the views with regard to its determination the maximum number required to be included by the registrant under the nominating shareholder or nominating to exclude from its proxy materials a circumstances set forth in paragraph (d) of shareholder group (or their authorized nominee or nominees or a statement of this section, the nominating shareholder or representative) that it has determined support. The Commission staff may nominating shareholder group may specify that it may exclude a shareholder provide an informal statement of its which nominee or nominees are not to be nominee or statement of support must views to the registrant along with a copy included in the registrant’s proxy materials. include an explanation of the to the nominating shareholder or Instruction 3 to paragraph (g). Unless registrant’s basis for determining that it nominating shareholder group (or their otherwise indicated in this section, the may exclude the nominee or statement authorized representative); burden is on the registrant to demonstrate of support. (iii) The nominating shareholder or that it may exclude a nominee or statement of support. (ii) The nominating shareholder or nominating shareholder group may nominating shareholder group shall submit a response to the registrant’s ■ 16. Amend § 240.14a–12 by removing have 14 calendar days after receipt of notice to the Commission. This response the heading following paragraph the registrant’s notice pursuant to must be postmarked or transmitted (c)(2)(iii) ‘‘Instructions to § 240.14a–12’’; paragraph (g)(2)(i) of this section to electronically to the Commission no by removing the numbers 1. and 2. of respond to the registrant’s notice and later than 14 calendar days after the instructions 1 and 2 to § 240.14a–12 and correct any eligibility or procedural nominating shareholder’s or nominating adding in their places the phrases deficiencies identified in that notice. shareholder group’s receipt of the ‘‘Instruction 1 to § 240.14a–12.’’ and The nominating shareholder’s or registrant’s notice to the Commission. ‘‘Instruction 2 to § 240.14a–12.’’, nominating shareholder group’s The nominating shareholder or respectively; and adding Instruction 3 to response must be postmarked or nominating shareholder group must § 240.14a–12 to read as follows: transmitted electronically to the simultaneously provide to the registrant § 240.14a–12 Solicitation before furnishing registrant no later than 14 calendar days a copy of its response to the a proxy statement. after receipt of the registrant’s notice. Commission. (3) If the registrant intends to exclude (iv) If the registrant seeks an informal * * * * * Instruction 3 to § 240.14a–12. a shareholder nominee or statement of statement of the Commission staff’s Inclusion of a nominee pursuant to support, after providing the requisite views with regard to its determination § 240.14a–11, an applicable state or notice of and time for the nominating to exclude a shareholder nominee or foreign law provision, or a registrant’s shareholder or nominating shareholder nominees, the registrant shall provide governing documents as they relate to group to remedy any eligibility or the nominating shareholder or the inclusion of shareholder director procedural deficiencies in the nominating shareholder group (or their nominees in the registrant’s proxy nomination or statement, the registrant authorized representative) with notice, materials, or solicitations by a must provide notice of the basis for its either postmarked or transmitted nominating shareholder or nominating determination to the Commission no electronically, promptly following shareholder group that are made in later than 80 calendar days before it files receipt of the staff’s response, of connection with that nomination its definitive proxy statement and form whether it will include or exclude the constitute solicitations in opposition of proxy with the Commission. The shareholder nominee; and Commission staff may permit the (v) The exclusion of a shareholder subject to § 240.14a–12(c), except for registrant to make its submission later nominee or a statement of support by a purposes of § 240.14a–6(a). ■ 17. Add § 240.14a–18 to read as than 80 calendar days before the registrant where that exclusion is not follows: registrant files its definitive proxy permissible under paragraph (a), (b), (c), statement and form of proxy if the (d), or (e) of this section shall be a § 240.14a–18 Disclosure regarding registrant demonstrates good cause for violation of this section. nominating shareholders and nominees submitted for inclusion in a registrant’s missing the deadline. Instruction 1 to paragraph (g). When a (i) The registrant’s notice to the registrant must provide a notice to a proxy materials pursuant to applicable state Commission shall include: nominating shareholder, member of a or foreign law, or a registrant’s governing (A) Identification of the nominating nominating shareholder group, or authorized documents. shareholder or each member of the representative of a nominating shareholder To have a nominee included in a nominating shareholder group, as group, the registrant is responsible for registrant’s proxy materials pursuant to applicable; providing the notice in a manner that a procedure set forth under applicable (B) The name of the nominee or evidences timely transmission. Where a state or foreign law, or the registrant’s nominating shareholder, member of a governing documents addressing the nominees; nominating shareholder group, or authorized (C) An explanation of the registrant’s representative of a nominating shareholder inclusion of shareholder director basis for determining that the registrant group responds to a notice, the nominating nominees in the registrant’s proxy may exclude the nominee or nominees shareholder, member of a nominating materials, the nominating shareholder or a statement of support; and shareholder group, or authorized or nominating shareholder group must

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provide notice to the registrant of its nominating shareholder or nominating 1933 (15 U.S.C. 77a et seq.), the intent to do so on a Schedule 14N shareholder group. Securities Exchange Act of 1934 (15 (§ 240.14n–101) and file that notice, Instruction to Item 7(e). The U.S.C. 78a et seq.), or the Investment including the required disclosure, with information disclosed pursuant to Company Act of 1940 (15 U.S.C. 80a–1 the Commission on the date first paragraph (e) of this Item will not be et seq.), except to the extent that the transmitted to the registrant. This notice deemed incorporated by reference into Fund specifically incorporates that shall be postmarked or transmitted any filing under the Securities Act of information by reference. electronically to the registrant by the 1933 (15 U.S.C. 77a et seq.), the (19) If a Fund is required to include date specified by the registrant’s Securities Exchange Act of 1934 (15 a shareholder nominee or nominees advance notice provision or, where no U.S.C. 78a et seq.), or the Investment submitted to the Fund for inclusion in such provision is in place, no later than Company Act of 1940 (15 U.S.C. 80a–1 the Fund’s proxy materials pursuant to 120 calendar days before the et seq.), except to the extent that the a procedure set forth under applicable anniversary of the date that the registrant specifically incorporates that state or foreign law or the Fund’s registrant mailed its proxy materials for information by reference. governing documents providing for the the prior year’s annual meeting, except (f) If a registrant is required to include inclusion of shareholder director that, if the registrant did not hold an a shareholder nominee or nominees nominees in the Fund’s proxy materials, annual meeting during the prior year, or submitted to the registrant for inclusion the Fund must include in its proxy if the date of the meeting has changed in the registrant’s proxy materials statement the disclosure required from by more than 30 calendar days from the pursuant to a procedure set forth under the nominating shareholder or prior year, then the nominating applicable state or foreign law, or the nominating shareholder group under shareholder or nominating shareholder registrant’s governing documents Item 6 of § 240.14n–101 with regard to group must provide notice a reasonable providing for the inclusion of the nominee or nominees and the time before the registrant mails its proxy shareholder director nominees in the nominating shareholder or nominating materials, as specified by the registrant registrant’s proxy materials, the shareholder group. in a Form 8–K (§ 249.308 of this registrant must include in its proxy Instruction to paragraph (b)(19). The chapter) filed pursuant to Item 5.08 of statement the disclosure required from information disclosed pursuant to Form 8–K. the nominating shareholder or paragraph (b)(19) of this Item will not be Instruction to § 240.14a–18. The nominating shareholder group under deemed incorporated by reference into registrant is not responsible for any Item 6 of § 240.14n–101 with regard to any filing under the Securities Act of information provided in the Schedule the nominee or nominees and the 1933 (15 U.S.C. 77a et seq.), the 14N (§ 240.14n–101) by the nominating nominating shareholder or nominating Securities Exchange Act of 1934 (15 shareholder or nominating shareholder shareholder group. U.S.C. 78a et seq.), or the Investment group, which is submitted as required Instruction to Item 7(f). The Company Act of 1940 (15 U.S.C. 80a–1 by this section or otherwise provided by information disclosed pursuant to et seq.), except to the extent that the the nominating shareholder or paragraph (f) of this Item will not be Fund specifically incorporates that nominating shareholder group that is deemed incorporated by reference into information by reference. included in the registrant’s proxy any filing under the Securities Act of * * * * * materials. 1933 (15 U.S.C. 77a et seq.), the ■ 19. Amend part 240 by adding an ■ 18. Amend § 240.14a–101 by: Securities Exchange Act of 1934 (15 undesignated center heading and ■ a. Revising Item 7 as follows: U.S.C. 78a et seq.), or the Investment §§ 240.14n–1 through 240.14n–3 and ■ i. Redesignating paragraph (e) as Company Act of 1940 (15 U.S.C. 80a–1 § 240.14n–101 to read as follows: paragraph (g); and et seq.), except to the extent that the registrant specifically incorporates that Regulation 14N: Filings Required by ■ ii. Adding new paragraph (e) and Certain Nominating Shareholders paragraph (f); and information by reference. ■ b. Adding paragraphs (18) and (19) to * * * * * § 240.14n–1 Filing of Schedule 14N. Item 22(b). Item 22. Information required in (a) A shareholder or group of The additions read as follows: investment company proxy statement. shareholders that submits a nominee or * * * * * nominees in accordance with § 240.14a– § 240.14a–101 Schedule 14A. Information (b) * * * 11 or a procedure set forth under required in proxy statement. (18) If a shareholder nominee or applicable state or foreign law, or a SCHEDULE 14A INFORMATION nominees are submitted to the Fund for registrant’s governing documents inclusion in the Fund’s proxy materials providing for the inclusion of * * * * * pursuant to § 240.14a–11 and the Fund shareholder director nominees in the Item 7. *** is not permitted to exclude the nominee registrant’s proxy materials shall file * * * * * or nominees pursuant to the provisions with the Commission a statement (e) If a shareholder nominee or of § 240.14a–11, the Fund must include containing the information required by nominees are submitted to the registrant in its proxy statement the disclosure Schedule 14N (§ 240.14n–101) and for inclusion in the registrant’s proxy required from the nominating simultaneously provide the notice on materials pursuant to § 240.14a–11 and shareholder or nominating shareholder Schedule 14N to the registrant. the registrant is not permitted to group under Item 5 of § 240.14n–101 (b)(1) Whenever two or more persons exclude the nominee or nominees with regard to the nominee or nominees are required to file a statement pursuant to the provisions of § 240.14a– and the nominating shareholder or containing the information required by 11, the registrant must include in its nominating shareholder group. Schedule 14N (§ 240.14n–101), only one proxy statement the disclosure required Instruction to paragraph (b)(18). The statement need be filed. The statement from the nominating shareholder or information disclosed pursuant to must identify all such persons, contain nominating shareholder group under paragraph (b)(18) of this Item will not be the required information with regard to Item 5 of § 240.14n–101 with regard to deemed incorporated by reference into each such person, indicate that the the nominee or nominees and the any filing under the Securities Act of statement is filed on behalf of all such

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persons, and include, as an appendix, lllllllllllllllllllll Notes: Attach as many copies of parts one their agreement in writing that the (CUSIP Number) through three of the cover page as are statement is filed on behalf of each of lllllllllllllllllllll needed, one reporting person per copy. them. Each person on whose behalf the [ ] Solicitation pursuant to § 240.14a– statement is filed is responsible for the Filing persons may, in order to avoid 2(b)(7) unnecessary duplication, answer items timely filing of that statement and any [ ] Solicitation pursuant to § 240.14a– on Schedule 14N by appropriate cross amendments thereto, and for the 2(b)(8) completeness and accuracy of the [ ] Notice of Submission of a Nominee references to an item or items on the information concerning such person or Nominees in Accordance with cover page(s). This approach may only contained therein; such person is not § 240.14a–11 be used where the cover page item or responsible for the completeness or [ ] Notice of Submission of a Nominee items provide all the disclosure required accuracy of the information concerning or Nominees in Accordance with by the schedule item. Moreover, such a the other persons making the filing. Procedures Set Forth Under use of a cover page item will result in (2) If the group’s members elect to Applicable State or Foreign Law, or the item becoming a part of the schedule make their own filings, each filing the Registrant’s Governing Documents and accordingly being considered as should identify all members of the * The remainder of this cover page ‘‘filed’’ for purposes of Section 18 of the group but the information provided shall be filled out for a reporting Act or otherwise subject to the liabilities concerning the other persons making person’s initial filing on this form, and of that section of the Act. the filing need only reflect information for any subsequent amendment which the filing person knows or has containing information which would Special Instructions for Complying reason to know. alter the disclosures provided in a prior With Schedule 14N cover page. § 240.14n–2 Filing of amendments to The information required in the Under Sections 14 and 23 of the Schedule 14N. remainder of this cover page shall not be Securities Exchange Act of 1934 and the (a) If any material change occurs with deemed to be ‘‘filed’’ for the purpose of rules and regulations thereunder, the respect to the nomination, or in the Section 18 of the Securities Exchange Commission is authorized to solicit the disclosure or certifications set forth in Act of 1934 (‘‘Act’’) or otherwise subject information required to be supplied by the Schedule 14N (§ 240.14n–101) to the liabilities of that section of the this Schedule. The information will be required by § 240.14n–1(a), the person Act but shall be subject to all other used for the primary purpose of or persons who were required to file the provisions of the Act. determining and disclosing the holdings statement shall promptly file or cause to (1) Names of reporting persons: and interests of a nominating be filed with the Commission an llllllllllll shareholder or nominating shareholder amendment disclosing that change. (2) Mailing address and phone group. This statement will be made a (b) An amendment shall be filed number of each reporting person (or, matter of public record. Therefore, any within 10 calendar days of the final where applicable, the authorized information given will be available for results of the election being announced representative): inspection by any member of the public. by the registrant stating the nominating llllllllllll shareholder’s or the nominating (3) Amount of securities held that are Because of the public nature of the shareholder group’s intention with entitled to be voted on the election of information, the Commission can use it regard to continued ownership of their directors held by each reporting person for a variety of purposes, including shares. (and, where applicable, amount of referral to other governmental securities held in the aggregate by the authorities or securities self-regulatory § 240.14n–3 Dissemination. nominating shareholder group), but organizations for investigatory purposes One copy of Schedule 14N including loaned securities and net of or in connection with litigation (§ 240.14n–101) filed pursuant to securities sold short or borrowed for involving the Federal securities laws or §§ 240.14n–1 and 240.14n–2 shall be purposes other than a short sale: other civil, criminal or regulatory mailed by registered or certified mail or llllllllllll statutes or provisions. Failure to electronically transmitted to the (4) Number of votes attributable to the disclose the information requested by registrant at its principal executive securities entitled to be voted on the this schedule may result in civil or office. Three copies of the material must election of directors represented by criminal action against the persons at the same time be filed with, or mailed amount in Row (3) (and, where involved for violation of the Federal for filing to, each national securities applicable, aggregate number of votes securities laws and rules promulgated exchange upon which any class of attributable to the securities entitled to thereunder, or in some cases, exclusion securities of the registrant is listed and be voted on the election of directors of the nominee from the registrant’s registered. held by group): llllllllllll proxy materials. § 240.14n–101 Schedule 14N—Information to be included in statements filed pursuant Instructions for Cover Page: General Instructions to Item to § 240.14n–1 and amendments thereto (1) Names of Reporting Persons— Requirements filed pursuant to § 240.14n–2. Furnish the full legal name of each person for whom the report is filed— Securities and Exchange Commission, The item numbers and captions of the i.e., each person required to sign the Washington, DC 20549 items shall be included but the text of Schedule 14N schedule itself—including each member the items is to be omitted. The answers Under the Securities Exchange Act of of a group. Do not include the name of to the items shall be prepared so as to 1934 a person required to be identified in the indicate clearly the coverage of the (Amendment No. _)* report but who is not a reporting person. items without referring to the text of the (3) and (4) Amount Held by Each items. Answer every item. If an item is (Name of Issuer) Reporting Person—Rows (3) and (4) are lllllllllllllllllllll inapplicable or the answer is in the to be completed in accordance with the negative, so state. (Title of Class of Securities) provisions of Item 3 of Schedule 14N.

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Item 1(a). Name of Registrant alternative, if the nominating clearing agency acting as a securities Item 1(b). Address of Registrant’s shareholder has filed a Schedule 13D depository, the nominating shareholder Principal Executive Offices (§ 240.13d–101), Schedule 13G or member of the nominating (§ 240.13d–102), Form 3 (§ 249.103 of shareholder group must (a) obtain and Item 2(a). Name of Person Filing this chapter), Form 4 (§ 249.104 of this submit a written statement or statements Item 2(b). Address or Principal chapter), and/or Form 5 (§ 249.105 of (the ‘‘initial broker statement’’) from the Business Office or, if None, Residence this chapter), or amendments to those broker or bank with which the documents, reflecting ownership of the nominating shareholder or member of Item 2(c). Title of Class of Securities securities as of or before the date on the nominating shareholder group Item 2(d). CUSIP No. which the three-year eligibility period maintains an account that provides the information about securities ownership Item 3. Ownership begins, so state and incorporate that filing or amendment by reference. set forth above and (b) obtain and Provide the following information, in (b) Provide a written statement that submit a separate written statement accordance with Instruction 3 to the nominating shareholder, or each from the clearing agency participant § 240.14a–11(b)(1): member of the nominating shareholder through which the securities of the (a) Amount of securities held and group, intends to continue to hold the nominating shareholder or member of entitled to be voted on the election of amount of securities that are used for the nominating shareholder group are directors (and, where applicable, purposes of satisfying the minimum held, that (i) identifies the broker or amount of securities held in the ownership requirement of § 240.14a– bank for whom the clearing agency aggregate by the nominating shareholder 11(b)(1) through the date of the meeting participant holds the securities, and (ii) ______group): . of shareholders, as required by states that the account of such broker or (b) The number of votes attributable to § 240.14a–11(b)(4). Additionally, bank has held, as of the date of the the securities referred to in paragraph provide a written statement from the separate written statement, at least the ______(a) of this Item: . nominating shareholder or each member number of securities specified in the (c) The number of votes attributable to of the nominating shareholder group initial broker statement, and (iii) states securities that have been loaned but regarding the nominating shareholder’s that this account has held at least that which the reporting person: or nominating shareholder group amount of securities continuously for at (i) has the right to recall; and member’s intent with respect to least three years. (ii) will recall upon being notified that continued ownership after the election If the securities have been held for any of the nominees will be included in of directors, as required by § 240.14a– less than three years at the relevant the registrant’s proxy statement and entity, provide written statements ______11(b)(5). proxy card: . Instruction to Item 4. If the covering a continuous period of three (d) The number of votes attributable nominating shareholder or any member years and modify the language set forth to securities that have been sold in a of the nominating shareholder group is above as appropriate. short sale that is not closed out, or that not the registered holder of the For purposes of complying with have been borrowed for purposes other securities and is not proving ownership § 240.14a–11(b)(3), loaned securities than a short sale: ______. for purposes of § 240.14a–11(b)(3) by may be included in the amount of (e) The sum of paragraphs (b) and (c), providing previously filed Schedules securities set forth in the written minus paragraph (d) of this Item, 13D or 13G or Forms 3, 4, or 5, and the statements. divided by the aggregate number of securities are held in an account with a votes derived from all classes of Item 5. Disclosure Required for broker or bank that is a participant in securities of the registrant that are Shareholder Nominations Submitted the Depository Trust Company (‘‘DTC’’) entitled to vote on the election of Pursuant to § 240.14a–11 or other clearing agency acting as a directors, and expressed as a percentage: securities depository, a written If a nominating shareholder or ______. statement or statements from that nominating shareholder group is Item 4. Statement of Ownership From a participant or participants in the submitting this notice in connection Nominating Shareholder or Each following form will satisfy § 240.14a– with the inclusion of a shareholder Member of a Nominating Shareholder 11(b)(3): nominee or nominees for director in the Group Submitting this Notice Pursuant As of [date of this statement], [name registrant’s proxy materials pursuant to to § 240.14a–11 of nominating shareholder or member of § 240.14a–11, provide the following the nominating shareholder group] held information: (a) If the nominating shareholder, or (a) A statement that the nominee at least [number of securities owned each member of the nominating consents to be named in the registrant’s continuously for at least three years] of shareholder group, is the registered proxy statement and form of proxy and, the [registrant’s] [class of securities], holder of the shares, please so state. if elected, to serve on the registrant’s and has held at least this amount of Otherwise, attach to the Schedule 14N board of directors; such securities continuously for [at least one or more written statements from the (b) Disclosure about the nominee as three years]. [Name of clearing agency persons (usually brokers or banks) would be provided in response to the participant] is a participant in [name of through which the nominating disclosure requirements of Items 4(b), clearing agency] whose nominee name shareholder’s securities are held, 5(b), 7(a), (b) and (c) and, for investment is [nominee name]. verifying that, within seven calendar companies, Item 22(b) of Schedule 14A days prior to filing the shareholder [name of clearing agency (§ 240.14a–101), as applicable; notice on Schedule 14N with the participant] (c) Disclosure about the nominating Commission and transmitting the notice By: [name and title of shareholder or each member of a to the registrant, the nominating representative] nominating shareholder group as would shareholder continuously held the Date: be required of a participant in response amount of securities being used to If the securities are held through a to the disclosure requirements of Items satisfy the ownership threshold for a broker or bank (e.g. in an omnibus 4(b) and 5(b) of Schedule 14A period of at least three years. In the account) that is not a participant in a (§ 240.14a–101), as applicable;

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(d) Disclosure about whether the the audit committee of the registrant’s each nominee, if the nominating nominating shareholder or any member board of directors. To the extent a shareholder or nominating shareholder of a nominating shareholder group has national securities exchange or national group elects to have such statement been involved in any legal proceeding securities association rule imposes a included in the registrant’s proxy during the past ten years, as specified in standard regarding independence that materials. Item 401(f) of Regulation S–K (§ 229.10 requires a subjective determination by Item 6. Disclosure Required by of this chapter). Disclosure pursuant to the board or a group or committee of the § 240.14a–18 this paragraph need not be provided if board (for example, requiring that the provided in response to Item 5(c) of this board of directors or any group or If a nominating shareholder or section; committee of the board of directors nominating shareholder group is Instruction 1 to Item 5(c) and (d). make a determination regarding the submitting this notice in connection Where the nominating shareholder is a existence of factors material to a with the inclusion of a shareholder general or limited partnership, determination of a nominee’s nominee or nominees for director in the syndicate or other group, the independence), the nominee would not registrant’s proxy materials pursuant to information called for in paragraphs (c) be required to meet the subjective a procedure set forth under applicable and (d) of this Item must be given with determination of independence as part state or foreign law, or the registrant’s respect to: of the shareholder nomination process. governing documents provide the a. Each partner of the general (g) The following information following disclosure: partnership; regarding the nature and extent of the (a) A statement that the nominee b. Each partner who is, or functions relationships between the nominating consents to be named in the registrant’s as, a general partner of the limited shareholder or nominating shareholder proxy statement and form of proxy and, partnership; group, the nominee, and/or the if elected, to serve on the registrant’s c. Each member of the syndicate or registrant or any affiliate of the board of directors; group; and registrant: (b) Disclosure about the nominee as d. Each person controlling the partner (1) Any direct or indirect material would be provided in response to the or member. interest in any contract or agreement disclosure requirements of Items 4(b), Instruction 2 to Item 5(c) and (d). If between the nominating shareholder or 5(b), 7(a), (b) and (c) and, for investment the nominating shareholder is a any member of the nominating companies, Item 22(b) of Schedule 14A corporation or if a person referred to in shareholder group, the nominee, and/or (§ 240.14a–101), as applicable; a., b., c. or d. of Instruction 1 to the registrant or any affiliate of the (c) Disclosure about the nominating paragraphs (c) and (d) of this Item is a registrant (including any employment shareholder or each member of a corporation, the information called for agreement, collective bargaining nominating shareholder group as would in paragraphs (c) and (d) of this Item agreement, or consulting agreement); be required in response to the disclosure (2) Any material pending or must be given with respect to: requirements of Items 4(b) and 5(b) of a. Each executive officer and director threatened legal proceeding in which Schedule 14A (§ 240.14a–101), as of the corporation; the nominating shareholder or any applicable; b. Each person controlling the member of the nominating shareholder (d) Disclosure about whether the corporation; and group and/or the nominee is a party or nominating shareholder or any member c. Each executive officer and director a material participant, and that involves of a nominating shareholder group has of any corporation or other person the registrant, any of its executive been involved in any legal proceeding ultimately in control of the corporation. officers or directors, or any affiliate of during the past ten years, as specified in (e) Disclosure about whether, to the the registrant; and best of the nominating shareholder’s or (3) Any other material relationship Item 401(f) of Regulation S–K (§ 229.10 group’s knowledge, the nominee meets between the nominating shareholder or of this chapter). Disclosure pursuant to the director qualifications, if any, set any member of the nominating this paragraph need not be provided if forth in the registrant’s governing shareholder group, the nominee, and/or provided in response to Item 6(c) of this documents; the registrant or any affiliate of the section; (f) A statement that, to the best of the registrant not otherwise disclosed; Instruction 1 to Item 6(c) and (d). nominating shareholder’s or group’s Note to Item 5(g)(3). Any other Where the nominating shareholder is a knowledge, in the case of a registrant material relationship of the nominating general or limited partnership, other than an investment company, the shareholder or any member of the syndicate or other group, the nominee meets the objective criteria for nominating shareholder group or information called for in paragraphs (c) ‘‘independence’’ of the national nominee with the registrant or any and (d) of this Item must be given with securities exchange or national affiliate of the registrant may include, respect to: securities association rules applicable to but is not limited to, whether the a. Each partner of the general the registrant, if any, or, in the case of nominating shareholder or any member partnership; a registrant that is an investment of the nominating shareholder group b. Each partner who is, or functions company, the nominee is not an currently has, or has had in the past, an as, a general partner of the limited ‘‘interested person’’ of the registrant as employment relationship with the partnership; defined in section 2(a)(19) of the registrant or any affiliate of the c. Each member of the syndicate or Investment Company Act of 1940 (15 registrant (including consulting group; and U.S.C. 80a–2(a)(19)). arrangements). d. Each person controlling the partner Instruction to Item 5(f). For this (h) The Web site address on which the or member. purpose, the nominee would be nominating shareholder or nominating Instruction 2 to Item 6(c) and (d). If required to meet the definition of shareholder group may publish the nominating shareholder is a ‘‘independence’’ that is generally soliciting materials, if any; and corporation or if a person referred to in applicable to directors of the registrant (i) Any statement in support of the a., b., c. or d. of Instruction 1 to and not any particular definition of shareholder nominee or nominees, paragraphs (c) and (d) of this Item is a independence applicable to members of which may not exceed 500 words for corporation, the information called for

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in paragraphs (c) and (d) of this Item Item 8. Signatures already on file with the Commission must be given with respect to: (a) The following certifications shall may be incorporated by reference. The a. Each executive officer and director be provided by the filing person name and any title of each person who of the corporation; submitting this notice pursuant to signs the statement shall be typed or printed beneath his signature. b. Each person controlling the § 240.14a–11, or in the case of a group, corporation; and each filing person whose securities are Attention: Intentional misstatements being aggregated for purposes of or omissions of fact constitute Federal c. Each executive officer and director criminal violations (see 18 U.S.C. 1001). of any corporation or other person meeting the ownership threshold set out ■ 20. Amend § 240.15d–11 by revising ultimately in control of the corporation. in § 240.14a–11(b)(1) exactly as set forth below: paragraph (b) to read as follows: (e) The following information I, [identify the certifying individual], regarding the nature and extent of the § 240.15d–11 Current reports on Form 8–K after reasonable inquiry and to the best (§ 249.308 of this chapter). relationships between the nominating of my knowledge and belief, certify that: shareholder or nominating shareholder (1) I [or if signed by an authorized * * * * * group, the nominee, and/or the representative, the name of the (b) This section shall not apply to registrant or any affiliate of the nominating shareholder or each member foreign governments, foreign private registrant: of the nominating shareholder group, as issuers required to make reports on (1) Any direct or indirect material appropriate] am [is] not holding any of Form 6–K (17 CFR 249.306) pursuant to interest in any contract or agreement the registrant’s securities with the § 240.15d–16, issuers of American between the nominating shareholder or purpose, or with the effect, of changing Depositary Receipts for securities of any any member of the nominating control of the registrant or to gain a foreign issuer, or investment companies shareholder group, the nominee, and/or number of seats on the board of required to file reports pursuant to the registrant or any affiliate of the directors that exceeds the maximum § 270.30b1–1 of this chapter under the registrant (including any employment number of nominees that the registrant Investment Company Act of 1940, agreement, collective bargaining could be required to include under except where such an investment agreement, or consulting agreement); § 240.14a–11(d); company is required to file: (2) Any material pending or (2) I [or if signed by an authorized (1) Notice of a blackout period threatened legal proceeding in which representative, the name of the pursuant to § 245.104 of this chapter; the nominating shareholder or any nominating shareholder or each member (2) Disclosure pursuant to Instruction member of the nominating shareholder of the nominating shareholder group, as 2 to § 240.14a–11(b)(1) of information group and/or nominee is a party or a appropriate] otherwise satisfy [satisfies] concerning outstanding shares and material participant, involving the the requirements of § 240.14a–11(b), as voting; or registrant, any of its executive officers or applicable; (3) Disclosure pursuant to Instruction directors, or any affiliate of the (3) The nominee or nominees satisfies 2 to § 240.14a–11(b)(10) of the date by registrant; and the requirements of § 240.14a–11(b), as which a nominating shareholder or (3) Any other material relationship applicable; and nominating shareholder group must between the nominating shareholder or (4) The information set forth in this submit the notice required pursuant to any member of the nominating notice on Schedule 14N is true, § 240.14a–11(b)(10). shareholder group, the nominee, and/or complete and correct. * * * * * (b) The following certification shall be the registrant or any affiliate of the provided by the filing person or persons registrant not otherwise disclosed; and PART 249—FORMS, SECURITIES submitting this notice in connection EXCHANGE ACT OF 1934 Instruction to Item 6(e)(3). Any other with the submission of a nominee or material relationship of the nominating nominees in accordance with ■ 21. The authority citation for Part 249 shareholder or any member of the procedures set forth under applicable continues to read, in part, as follows: nominating shareholder group with the state or foreign law or the registrant’s registrant or any affiliate of the Authority: 15 U.S.C. 78a et seq. and 7201 governing documents: et seq.; and 18 U.S.C. 1350, unless otherwise registrant may include, but is not I, [identify the certifying individual], noted. limited to, whether the nominating after reasonable inquiry and to the best * * * * * shareholder or any member of the of my knowledge and belief, certify that ■ nominating shareholder group currently 22. Amend Form 8–K (referenced in the information set forth in this notice § 249.308) by: has, or has had in the past, an on Schedule 14N is true, complete and ■ a. Adding a sentence at the end of employment relationship with the correct. General Instruction B.1; registrant or any affiliate of the lllllllllllllllll Dated: ■ b. Removing the phrase ‘‘Section 5.06’’ registrant (including consulting Signature: llllllllllllllll arrangements). Name/Title: lllllllllllllll in the heading and adding in its place ‘‘Item 5.06’’; and (f) The Web site address on which the The original statement shall be signed ■ nominating shareholder or nominating by each person on whose behalf the c. Adding Item 5.08. shareholder group may publish statement is filed or his authorized The additions read as follows: soliciting materials, if any. representative. If the statement is signed Note: The text of Form 8–K does not, and Item 7. Notice of Dissolution of Group on behalf of a person by his authorized this amendment will not, appear in the Code of Federal Regulations. or Termination of Shareholder representative other than an executive Nomination officer or general partner of the filing person, evidence of the representative’s Form 8–K Notice of dissolution of a nominating authority to sign on behalf of such * * * * * shareholder group or the termination of person shall be filed with the statement, a shareholder nomination shall state the provided, however, that a power of GENERAL INSTRUCTIONS date of the dissolution or termination. attorney for this purpose which is * * * * *

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B. Events To Be Reported and Time for (§ 240.14n–101) required pursuant to connection with the election of directors Filing Reports § 240.14a–11(b)(10), which date shall be at an annual meeting of shareholders a reasonable time before the registrant (or, in lieu of such an annual meeting, 1. * * * A report pursuant to Item mails its proxy materials for the a special meeting of shareholders) the 5.08 is to be filed within four business meeting. Where a registrant is required total number of shares of the registrant days after the registrant determines the to include shareholder director outstanding and entitled to be voted (or anticipated meeting date. nominees in the registrant’s proxy if the votes are to be cast on a basis * * * * * materials pursuant to either an other than one vote per share, then the Item 5.08 Shareholder Director applicable state or foreign law total number of votes entitled to be Nominations provision, or a provision in the voted and the basis for allocating such registrant’s governing documents, then votes) on the election of directors at (a) If the registrant did not hold an the registrant is required to disclose the such meeting of shareholders as of the annual meeting the previous year, or if date by which a nominating shareholder end of the most recent calendar quarter. the date of this year’s annual meeting or nominating shareholder group must * * * * * has been changed by more than 30 submit the notice on Schedule 14N By the Commission. calendar days from the date of the required pursuant to § 240.14a–18. previous year’s meeting, then the (b) If the registrant is a series Dated: August 25, 2010. registrant is required to disclose the date company as defined in Rule 18f–2(a) Elizabeth M. Murphy, by which a nominating shareholder or under the Investment Company Act of Secretary. nominating shareholder group must 1940 (§ 270.18f–2 of this chapter), then [FR Doc. 2010–22218 Filed 9–15–10; 8:45 am] submit the notice on Schedule 14N the registrant is required to disclose in BILLING CODE 8010–01–P

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