ICI Comments on Director Nominee Rule Proposal, December 2003

Washington, DC, December 30, 2003 - The Institute recently commented on rules proposed by the SEC that would conditionally require companies to include in their proxy statements security holder nominees for election as director.

Background
The rules proposed by the SEC are intended to improve disclosure to security holders to enhance their ability to participate meaningfully in the proxy process for the nomination and election of directors. The proposed rules would not provide security holders with the right to nominate directors where it is prohibited by state law, but are intended to enable long-term security holders, or groups of long-term security holders, to include in company proxy materials their director nominees.

ICI Position
In its comment letter, the Institute supports many provisions of the proposed rules, including:

requiring each person that is a security holder nominee not to be an "interested person" of the investment company under Section 2(a)(19) of the Investment Company Act;
requiring companies to examine the required information regarding the nominating security holder and any nominees and determine whether they have complied with proposed Rule 14a-11 and whether the nominee satisfies each of the requirements of the proposed procedure;
requiring investment companies to provide disclosure on Form N-CSR regarding the occurrence of any nominating procedure triggering events;
providing limited exemptions from the proxy rules for nominating security holders to enable them to communicate with other security holders for the purpose of: forming a nominating security holder group; and soliciting support for a security holder nominee placed on the company's proxy statement;
the SEC's decision not to view a security holder as having acquired securities for the purpose of influencing the control of the company by virtue of nominating a director under proposed Rule 14a-11, soliciting on behalf of that candidate, or having that candidate elected;
excluding from Rule 16a-1(a)(1)'s definition of 10 percent owner a nominating security holder group; and
including both a provision in Rule 14a-11 and a statement in any adopting release making clear that the nominating security holder or group, not the company, would be liable for any false or misleading statements included in the notice to the company and any disclosure based thereon in the proxy statement.

a revision to the proposal to require that a company be subject to the proposed security holder nomination procedure if, in an election of directors, 35 percent of the votes cast are withheld from half of the company's nominees on any given proxy statement, as opposed to a single nominee;
a new requirement that a direct access proposal receive more than two-thirds of the votes cast by shareholders on the proposal, provided that at least 50 percent of shares outstanding have been voted on the proposal; and
a recommendation that all security holder(s), including mutual fund security holders, be required to file on Schedule 13G upon reaching the more than 5 percent beneficial ownership threshold.

In the past, the Institute has expressed support for SEC proposals that would increase the transparency of the board nominating process and enhance the process that allows security holders to communicate directly with board members.

Related Links
Sections of this website are devoted to the Institute's support for the critical role of mutual fund directors in safeguarding the interests of fund shareholders and for initiatives that maintain the high industry standard in the many types of disclosure provided by funds.