On October 22, 2013, Institutional Shareholder Services (“ISS”) announced two proposed changes to its 2014 U.S. proxy voting policy. ISS requested comments on the proposed changes, which can be submitted via e-mail to [email protected] by November 4, 2013. ISS will take the comments into account when issuing its 2014 proxy voting policies. It is important to note that ISS’s final U.S. policy updates for 2014, which are expected to be released in November, may reflect additional changes beyond the two on which ISS has solicited comments.
Topic: Corporate Governance
Vanguard Proactively Reaching Out to Companies to Address Governance Concerns
In anticipation of the 2014 proxy season, Vanguard is sending letters to approximately 350 companies to proactively engage with them on governance issues. The letters are tailored to the individual companies and identify governance practices at the companies that Vanguard believes are not in line with what Vanguard views as best practices.
SEC Staff Grants Request to Exclude Rule 14a-8 Shareholder Proposal Regarding Repayment of Student Loans
Gibson Dunn successfully represented DeVry Inc. in obtaining no-action relief from the SEC staff (the “Staff”) for the exclusion of a shareholder proposal requesting that DeVry “annually report to shareholders on the expected ability of students at Company-owned institutions to repay their student loans.” The shareholder proposal, which was submitted by the New York City Comptroller’s Office on behalf of several New York City pension funds, specified particular quantitative and other information to be included in the requested report. DeVry’s no-action request argued that DeVry could exclude the shareholder proposal under Rule 14a-8(i)(7) as relating to DeVry’s ordinary business operations because the proposal implicated decisions concerning product quality. The no-action request identified shareholder proposal precedents relating to the quality of products or services in other industries (such as beverages and banking) and pointed out that, similar to those precedents, the proposal at issue was focused on the quality of DeVry’s educational services. In a response letter dated September 6, 2013, the Staff concurred that the shareholder proposal could be excluded, noting that “the proposal focuses primarily on information the company should provide regarding the quality of its educational services” and that “[p]roposals that concern product quality are generally excludable under rule 14a-8(i)(7).” The Staff’s decision to grant DeVry’s no-action request is notable because the Staff had denied a no-action request earlier this year regarding an identical shareholder proposal submitted to another company. The earlier no-action request had also asserted that the proposal was excludable under Rule 14a-8(i)(7), but its reasoning focused on the proposal’s infringement of the company’s risk assessment practices and compliance with laws rather than on how the proposal implicated the quality of the company’s products or services. The Staff’s concurrence with DeVry’s no-action request highlights the importance of identifying the appropriate issue that may support exclusion of a shareholder proposal, exploring and addressing any precedents and clearly articulating the reasons for which the proposal implicates a particular basis for exclusion.
Reminder to Respond This Week to the ISS Policy Survey
Companies wishing to participate in Institutional Shareholder Services’ (“ISS”) annual global policy survey should do so this week. The ISS policy survey closes on September 13. Public companies and others are urged to submit their views by completing the survey, as ISS considers the responses to its survey when developing its proxy voting policies for the coming proxy season. When responding to the survey, it is not necessary to enter a response to every question that is asked.
Reminder for Companies Planning to Rely on the “End-User Exception” for Swaps Activities
On Monday, September 9, new CFTC rules will take effect for non-financial companies that use swaps to hedge or mitigate commercial risk. These rules will require the clearing of interest rate swaps and credit default index swaps unless an exception is available. One such exception is the “end-user exception,” and public companies planning to rely on this exception must take certain governance steps. These include obtaining approval from the board of directors or an appropriate committee to enter into swaps exempt from clearing. For more information on these governance steps, please see our June 17, 2013 client alert entitled “Public Companies and the ‘End-User Exception’ for Swaps: Governance Action Items,” which is available here.
Are Changes to the Audit Report on the Horizon? PCAOB Issues Two Significant Proposals
Today, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment two audit standards that, if adopted, would significantly change the audit report model, and dramatically expand the auditor’s responsibilities in reporting on management’s disclosures outside the financial statements. PCAOB Chairman Doty remarked that the proposed standards – running to almost 300 pages – mark a “watershed moment” for auditing in the United States.
ISS Releases Survey for 2014 Policy Updates
Institutional Shareholder Services (“ISS”), the most influential proxy advisory firm, today launched its annual global policy survey. Each year, ISS solicits comments in connection with its review of its proxy voting policies. At the end of this process, in November 2013, ISS will announce its updated proxy voting policies applicable to 2014 shareholders’ meetings.
U.S. District Court Upholds SEC’s Conflict Minerals Rules
Yesterday, Judge Robert Wilkins of the U.S. District Court for the District of Columbia issued a decision granting the SEC’s motion for summary judgment in a suit challenging the SEC’s conflict minerals rules, which were mandated under the Dodd-Frank Act and issued by the SEC on August 22, 2012. As a result, the conflict minerals rules remain in effect as adopted by the SEC. The parties have not yet indicated whether they will appeal the decision. The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable had challenged the rules in October 2012, arguing that the rules are arbitrary and capricious and impose undue costs on companies in violation of the Administrative Procedure Act of 1946 and the Securities Exchange Act of 1934, and compel speech in violation of the First Amendment by requiring companies to make misleading disclosures suggesting that their products promote violence and human rights abuses. Rejecting the petitioners’ arguments, the court found that various aspects of the conflict minerals provision in the Dodd-Frank Act were ambiguous, and it gave deference to the SEC’s judgments, including its determination not to adopt a de minimis exception and to include within the scope of the rules issuers that “contract to manufacture” products containing conflict minerals. In regard to the First Amendment argument, the court gave deference to Congress in light of the foreign affairs aspect of the Dodd-Frank conflict minerals provision. The district court’s opinion is available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2013cv0635-37.
Guidance on Compensation Committees’ Assessment of Adviser Independence
As discussed in our April 26, 2013 posting on the Gibson Dunn Securities Regulation and Corporate Governance Monitor, under recently amended NYSE Rule 303A.05 and NASDAQ Rule 5605(d), board compensation committees cannot select or receive advice from a compensation consultant, legal counsel or other adviser without first taking into consideration that adviser’s independence, including consideration of the factors enumerated in the rules. As compensation committees and their advisers are preparing for the July 1 effective date of these new listing standards, three observations are important:
July 1, 2013 Deadline Approaches for Updates to Compensation Committee Charters
By July 1, 2013, companies listed on the New York Stock Exchange (“NYSE”) and NASDAQ Stock Market (“NASDAQ”) must comply with new listing standards relating to compensation committees and their responsibilities and authority with respect to outside advisers. In view of the upcoming deadline, listed companies should review and update their compensation committee charters to provide the committee with these responsibilities and authority. In addition, compensation committees will need to assess the independence of their advisers in the coming months so they can receive advice from them after July 1.