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SEC reviewing director election process, Schapiro says

Commission will also consider rules to give shareholders greater access to the corporate proxy

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By Sara Hansard

November 8, 2009 6:01 am ET

The Securities and Exchange Commission is conducting a “comprehensive review” of the way proxy ballots are voted in the election of corporate directors and how proxy information is communicated to shareholders.

Speaking last Wednesday at the Practising Law Institute's 41st annual Institute on Securities-Regulation, SEC Chairman Mary Schapiro said that the commission is “looking at the entire process through which proxies are distributed and votes are tabulated.”

The commission will seek public input on the matter in the months ahead, she said.

“We want to ensure that the U.S. proxy-voting system as a whole operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect,” Ms. Schapiro added.

The review of the proxy system, which she said is “well under way,” will ask market participants how companies could ensure accuracy in vote tabulation since voting results are becoming increasingly close and many companies have adopted majority-voting policies for director elections. Under such policies, directors must receive more “yea” than “nay” votes to keep their seats.

The SEC is also examining whether it needs to adopt rules to make sure that investors aren't voting more shares than they are entitled to. In some cases, Ms. Schapiro said, “a broker's customers may cast more votes than the broker is actually entitled to vote on their behalf,” a practice known as “over-voting.”

In other cases, in what is known as “empty voting,” individuals are able to vote shares even though they lack the full economic interest that goes along with share ownership, she said.

The SEC will look at ways of addressing the drop in voting rates by retail investors. Its 2007 decision to allow companies to distribute proxy ballots online may have contributed to a reduction in participation rates, Ms. Schapiro said.

“This poses a special challenge for companies with broad retail-investor bases. That is why some have proposed client-directed voting — where brokers would be allowed to solicit voting instructions from their shareholder clients in advance of the company proxy materials,” Ms. Schapiro said.

The SEC in July approved a New York Stock Exchange LLC rule banning broker voting of proxy ballots for uncontested elections of directors. The implementation of the rule, Ms. Schapiro said, “heightens concerns about shareholder participation and education which need to be addressed.”

She also said that she is “committed” to considering rules next year that would allow shareholders access to the corporate proxy to nominate corporate directors.

E-mail Sara Hansard at shansard@investmentnews.com.

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