Company Name: Wells Fargo & Co. (Community Reinvestment)
Public Availability Date: February 16, 2006
Document Sections:
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
VIA FEDERAL EXPRESS
December 22, 2005
Securities and Exchange Commission
Office of Chief Counsel
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
RE: Wells Fargo & CompanyStockholder Proposal Submitted by The Community
Reinvestment Association of North Carolina, Thomas McK. Thomas and Joyce Sirlin-Rand
Ladies and Gentlemen:
Pursuant to Rule 14a-8(j) of the Securities Exchange Act of 1934, as amended
(the "Act"), Wells Fargo & Company ("Wells Fargo") hereby gives notice of its
intention to omit from its proxy statement and form of proxy for the Wells Fargo
2006 annual meeting of stockholders (collectively, the "2006 Proxy Materials"),
in reliance on Rule 14a-8(i)(7), (i)(2), (i)(6), and (i)(3), a proposal (the
"Proposal") submitted by The Community Reinvestment Association of North
Carolina, Thomas McK. Thomas and Joyce Sirlin-Rand (the "Proponents").
On November 2, 2005, the Company received the Proposal and a related supporting
statement (the "Supporting Statement"). In summary, the Proposal requests that
the Board of Directors of Wells Fargo implement a policy mandating that Wells
Fargo will not provide credit or other banking services to lenders that are
engaged in payday lending. The text of the Proposal and the Supporting Statement
are attached to this letter as Exhibit A. As used in this letter, the term
"Proposal" means collectively, the Proposal and the Supporting Statement.
Wells Fargo hereby notifies the Securities and Exchange Commission (the
"Commission") that it intends to omit the Proposal from its 2006 Proxy Materials
pursuant to Rule 14a-8(j) on the alternative grounds (1) that the Proposal deals
with a matter relating to the conduct of Wells Fargo's ordinary business
operations; (2) that the Proposal, if implemented, would cause Wells Fargo to
violate the law and, accordingly, Wells Fargo lacks the authority to implement
the Proposal; and (3) that the Proposal is vague and indefinite in violation of
Rule 14a-9 and 14a-5. We respectfully request confirmation that the staff of the
Division of Corporation Finance (the "Staff") of the Commission will not
recommend enforcement action if Wells Fargo omits the Proposal from the 2006
Proxy Materials in reliance on Rule 14a-8(i)(7), (i)(2), (i)(6) and (i)(3) for
the reasons stated herein.
Wells Fargo expects to file its definitive 2006 Proxy Materials pursuant to Rule
14a-6(b) of the Act on or about March 17, 2006. Accordingly, pursuant to Rule
14a-8(j), Wells Fargo is submitting its reasons for omitting the Proposal more
than 80 calendar days before filing its definitive 2006 Proxy Materials with the
Commission.
The Proposal
The Proposal requests that "the Board of Directors implement a policy mandating
that Wells Fargo will not provide credit or other banking services to lenders
that are engaged in payday lending."
Discussion
1. Wells Fargo may omit the Proposal pursuant to Rule 14a-8(i)(7) because it
deals with a matter relating to Wells Fargo's ordinary business operations.
Rule 14a-8(i)(7) permits the exclusion of a stockholder proposal from a
company's proxy statement if it deals with a matter relating to the company's
ordinary business operations. In SEC Release No. 34-40018, the Commission stated
that the policy underlying this exclusion is "to confine the resolution of
ordinary business problems to management and the board of directors, since it is
impracticable for shareholders to decide how to solve such problems at an annual
shareholders meeting." SEC Release No. 34-40018 (May 21, 1998). The Commission
stated that this policy rests on two central considerations. The first is the
subject matter of the proposal. In this regard, the Commission said that "[c]ertain
tasks are so fundamental to management's ability to run a company on a
day-to-day basis that they could not, as a practical matter, be subject to
direct shareholder oversight." Id. The second consideration relates to the
degree to which the proposal seeks to "micro-manage" the company by probing too
deeply into matters of a complex nature upon which shareholders, as a group,
would not be in a position to make an informed judgment. Id.
A. The Proposal Relates to Wells Fargo's Ordinary Business Operations
Wells Fargo is a diversified financial services company, providing banking,
insurance, investment, mortgage, and other commercial and consumer financial
services, including credit and deposit services, to its customers. Wells Fargo
serves approximately 23 million customers though more than 6,200 stores, the
internet and other distribution channels across North America and elsewhere
internationally. The Proposal attempts to allow stockholders, rather than
management, to decide when and to whom Wells Fargo can or cannot provide credit
and offer other banking services. The subject matter of the Proposal relates
directly to Wells Fargo's ordinary business operations, as it addresses
decisions that are part of management's day-to-day activities. Indeed, as
discussed in more detail below, the Staff found in Bank of America Corporation
(March 7, 2005) that there was a basis for excluding a proposal that was
identical to the Proposal on the grounds that the proposal received by Bank of
America related to its ordinary business operations.
The Staff has agreed that the decision to extend credit to particular types of
customers involves day-to-day business operations, and that the credit and other
policies a company applies in making lending decisions are particularly complex,
such that shareholders are generally not in a position to make an informed
judgment. For example, in Bank of America, the Staff found that a proposal
requesting that the board of directors implement a policy mandating that Bank of
America not provide credit or other banking services to lenders that are engaged
in payday lending was excludable because it related to Bank of America's
ordinary business operations (i.e., credit policies, loan underwriting and
customer relations). Similarly, in Bancorp Hawaii, Inc. (February 27, 1992), the
Staff found that a proposal that would have prohibited the company from
participating in a number of specified business activities related to the
proposed Honolulu rapid transit system, including purchasing bonds, making
loans, and acting as a financial consultant, was excludable because it related
to the company's day-to-day business operations. In Centura Banks, Inc. (March
12, 1992) ("Centura Banks") a proposal requiring the company to refrain from
knowingly having business dealings with anyone involved in the manufacture or
sale of illegal drugs, and to refrain from giving aid or comfort to anyone
involved in the manufacture or sale of illegal drugs, was excludable from proxy
materials as dealing with ordinary business operations. In Citicorp (January 19,
1989) a proposal prohibiting loans to corporations that have changed their
annual meeting dates was excludable because it related to ordinary business
operations. As with these proposals, the Proposal seeks to determine the
customers to which Wells Fargo may provide services and products (i.e., credit
and other banking services) and addresses Wells Fargo's credit policies, loan
underwriting and customer relationships. The Proposal, therefore, is excludable
as dealing with ordinary business operations.
The Staff has also found that decisions regarding other banking services are
ordinary business. In Citicorp (January 26, 1990), the Staff found that a
proposal to write down, discount or liquidate loans to less developing countries
was excludable because it related to the forgiveness of a particular category of
loans and the specific strategy and procedures for effectuating such
forgiveness. In Citicorp (January 2, 1997), a proposal seeking to establish a
compliance program directed at the Foreign Corrupt Practices Act was excludable
because it dealt with the initiation of a general compliance program, an
ordinary business matter. In Salomon, Inc. (January 25, 1990), a proposal to an
investment bank that related to the specific services to be offered to customers
and the types of trading activity to be undertaken by the company was excludable
because it dealt with ordinary business operations. In The Bank of New York
Company, Inc. (March 11, 1993) a proposal that related to the establishment of
procedures for dealing with the bank's account holders was excludable because it
dealt with ordinary business operations. As with the foregoing proposals, the
Proposal addresses Wells Fargo's provision of banking services and customer
relationships. See also Bank of America, supra.
In sum, Wells Fargo's core business is providing credit and other banking
services. The Proposal would prohibit the extension of credit and the provision
of other banking services to certain customers and, thus, seeks to give
stockholders power over Wells Fargo's ordinary business operations.
B. The Proposal's Excludability is Not Overridden by a Significant Policy
Concern
The fact that a proposal relates to ordinary business matters does not
conclusively establish that a company may exclude the proposal from its proxy
materials. Proposals that relate to ordinary business matters but that focus on
"sufficiently significant social policy issues ... would not be considered to be
excludable, because the proposals would transcend the day-to-day business
matters...." Release No. 34-40018.
Although Wells Fargo is aware of and agrees with the Staff's position that
predatory lending may raise significant policy issues, we do not believe that
the Proposal raises a significant social policy issue as contemplated by Rule
14a-8(i)(7). In American International Group (February 17, 2004) and Household
International, Inc. (February 26, 2001), proposals linking executive
compensation to successfully addressing predatory lending concerns and practices
were not excludable under Rule 14a-8(i)(7). In Conseco, Inc. (April 5, 2001) and
Associates First Capital Corporation (March 13, 2000), proposals to form a
committee to develop policies to ensure that the company did not engage in
predatory lending practices were not excludable under Rule 14a-8(i)(7). In each
of these no-action letters, the proponents' concerns were focused directly on
the predatory lending practices of the subject companies. The proponents did not
want these specific companies to make predatory or sub-prime loans and/or they
sought to use executive compensation as leverage to that end. Unlike the
proposals in American International Group, Household International, Conseco, and
Associates First Capital, the Proposal is not focused on the predatory lending
practices of Wells Fargo, and the Proposal is not requesting Wells Fargo to stop
making predatory or non-prime loans. Instead the Proposal focuses on Wells
Fargo's relationships with payday lenders. The Proposal attempts to paint all
payday lenders as engaging in predatory lending activities.
Wells Fargo does not engage in or condone so-called predatory lending or support
companies that it knows are participating in such unethical activity. On a
selective, case-by-case basis, Wells Fargo provides loans to non-prime lenders
that are creditworthy and engaged in legal business activities. Wells Fargo also
is a direct lender or participant with others in providing credit facilities to
other financial institutions and companies engaged in consumer finance whose
business may include acting as a payday lender. Loans and credit facilities
extended by Wells Fargo to non-prime lenders involve a thorough credit analysis,
extensive due diligence, sound underwriting, diligent account management, and
intensive monitoring. Accordingly, decisions regarding the extension of credit
and provision of banking services to these lenders relate to the daily
operations of Wells Fargo and do not raise significant policy concerns.
C. Conclusion
The extension of credit and the provision of banking services are core
components of Wells Fargo's ordinary business operations. See Bank of America.
Accordingly, the Proposal may be omitted from proxy materials for the 2006
Annual Meeting pursuant to Rule 14a-8(i)(7).
2. Wells Fargo may omit the Proposal pursuant to Rules 14a-8(i)(2) and
14a-8(i)(6) because the Proposal, if implemented, would cause Wells Fargo to
violate state law, and, accordingly, Wells Fargo lacks the authority to
implement the Proposal.
Rule 14a-8(i)(2) permits a company to exclude a proposal if the proposal would
cause the company to violate state law. Rule 14a-8(i)(6) permits a registrant to
omit a proposal from its proxy materials if, upon passage, "the company would
lack the power or authority to implement the proposal." Wells Fargo has numerous
agreements with customers under which it is contractually committed to extend
credit and provide other related banking services for predetermined periods of
time as long as the customer is not in default. Some of these relationships may
be with companies that the Proponents would deem to be engaged in payday
lending.
The Proposal would require Wells Fargo to unilaterally terminate its legal
obligations to extend credit and provide other banking services as required by
its customer agreements, resulting in Wells Fargo breaching its contractual
obligations and subjecting the company to potential liability for damages to its
customers as a result of such breaches. The Staff has consistently permitted the
exclusion of stockholder proposals pursuant to Rules 14a-8(i)(2) and
14a-8(i)(6), and the predecessor to such rules, Rules 14a-8(c)(2) and
14a-8(c)(6), if the proposals would require the company to breach existing
contractual obligations. See NetCurrents, Inc. (June 1, 2001); The Goldfield
Corporation (March 28, 2001).
Accordingly, Wells Fargo believes that the implementation of the Proposal would
require it to breach unilaterally its obligations under its customer agreements,
in violation of the applicable governing state law, and is, therefore,
excludable under Rules 14a-8(i)(2) and 14a-8(i)(6).
3. Wells Fargo may omit the Proposal pursuant to Rule 14a-8(i)(3) because it is
vague and indefinite, in violation of Rule 14a-9 and Rule 14a-5.
The Staff has recognized that a proposal may be excluded under Rule 14a-8(i)(3)
if it is so vague and indefinite that shareholders voting on the proposal would
not be able to determine with reasonable certainty exactly what action or
measures would be required in the event the proposal was adopted. See Bank of
America (March 10, 2004); Philadelphia Electric Co. (July 30, 1992); IDACORP, Inc. (January 9, 2001); and Northeast Utility Service Company (April 9, 2001).
Rule 14a-8(i)(3) permits the exclusion of a proposal if it or its supporting
statement is contrary to any of the Commission's proxy rules and regulations,
including Rule 14a-9, which prohibits the making of false or misleading
statements in proxy soliciting materials or the omission of any material fact
necessary to make statements contained therein not false or misleading, and Rule
14a-5, which requires that information in a proxy statement be "clearly
presented."
The Proposal is vague and indefinite. It does not include enough clear
information for Wells Fargo's stockholders to make an informed decision on the
matter being presented. Furthermore, it does not include enough clear
information for Wells Fargo to be able to implement it without making
assumptions regarding what the Proponents actually had in mind. Wells Fargo is
unable to determine what the Proposal actually is requesting and believes that
its stockholders will face a similar dilemma if presented with the Proposal. In
addition, the supporting statement offers little specific guidance to help
clarify the Proposal.
The Proposal requests "that the Board of Directors implement a policy mandating
that Wells Fargo will not provide credit or other banking services to lenders
that are engaged in payday lending." The Proposal does not define what
constitutes being "engaged in payday lending" or indicate what products are
included in "other banking services." Not only do the Proponents not define what
is meant by "payday lending," there is no federal law or regulation that defines
this term. While many states have adopted laws or regulations purporting to
regulate this type of business, many states have not. Those states that have
adopted laws do not use a consistent definition. In fact, most state laws do not
even use the term "payday lending" in legally defining and regulating the
activities in question. While many groups colloquially refer to "payday
lending," there is no commonly-accepted definition or parameters around these
activities either in the industry or among community activists. The Proposal's
use of the generic term "payday lending" provides insufficient guidance as to
how shareholders should interpret the term or as to how Wells Fargo would
implement the Proposal if adopted.
The supporting statement refers to payday loans as having unreasonable interest
rates and/or high fees for extremely short terms, but provides no quantification
of such matters. This raises a number of unanswered questions: How much is
unreasonable? What fees are too high? How short is extremely short? Who decides
any of these factors? If the interest rates or fees charged are legal under
state usury laws, are they still unreasonable or too high? Would Wells Fargo be
prohibited from dealing with large companies that have a subsidiary deemed to be
in the payday lending business? Are short-term lenders covered under the
Proposal? For example, many colleges and universities offer students short-term
loans. Can Wells Fargo extend credit to those entities? Today, some grocery
stores lease space to lenders, some of which may be deemed to be payday lenders.
Can Wells Fargo maintain a banking relationship with such grocery stores?
The term "other banking services" raises a number of additional questions: Would
the Proposal prohibit Wells Fargo from offering any service to an alleged payday
lender? Even ATM usage? What about accepting banking deposits? What about
investment banking, M&A advisory services, securities underwriting, or
derivatives and foreign exchange transactions?
The supporting statement indicates that "[c]ertain payday lenders provide loans
that are predatory." However, the Proposal appears to prohibit loans to all
payday lenders, even those that do not provide "predatory" (also undefined)
payday loans. It is unclear from the Proposal as to whether Wells Fargo would be
prohibited from establishing or maintaining a business relationship with a
client that has not acted in a predatory manner. Similarly, it is unclear from
the Proposal who would determine whether a particular lender is a payday lender
or offers payday loans or on what basis those determinations would be made.
The Staff, in numerous no-action letters, has permitted the exclusion of
shareholder proposals "involving vague and indefinite determinations ... that
neither the shareholders voting on the proposal nor the Company would be able to
determine with reasonable certainty what measures the Company would take if the
proposal was approved." See A.H. Belo Corp. (January 29, 1998.) Such proposals
were "inherently so vague and indefinite that neither the shareholders voting on
the proposal, nor the Company in implementing the proposal (if adopted), would
be able to determine with any reasonable certainty exactly what actions or
measures the proposal requires" or "misleading because any action ultimately
taken by the Company upon implementation of the proposal could be significantly
different from the actions envisioned by shareholders voting on the proposal."
See Philadelphia Electric Company (July 30, 1992); NYNEX Corporation (January
12, 1990); and the Staff's Legal Bulletin 14B (September 15, 2004).
The Proposal is not clearly presented. Wells Fargo's stockholders cannot be
asked to guess exactly on what they are voting, and Wells Fargo and its
stockholders could have significantly different interpretations of the Proposal.
Based on the foregoing, Wells Fargo believes that the Proposal and its
supporting statement are so vague, ambiguous, indefinite and misleading, that
the Proposal may be omitted under Rule 14a-8(i)(3), in violation of both Rule
14a-9 and Rule 14a-5.
Conclusion
Based upon the foregoing, we hereby respectfully request a response from the
Staff that it will not recommend enforcement action to the Commission if Wells
Fargo omits the Proposal from the 2006 Proxy Materials.
In accordance with Rule 14a-8(j), six copies of this letter, including Exhibit
A, are enclosed. Please acknowledge receipt of this letter and its enclosures by
stamping the enclosed additional copy of this letter and returning it to the
undersigned in the return envelope provided. By copy of this letter, Wells Fargo
is also notifying the Proponents of its intention to omit the Proposal from the
2006 Proxy Materials. Should the Staff desire any additional information in
support of Wells Fargo's position, we would appreciate an opportunity to confer
with the Staff concerning these matters. If the Staff has any questions about,
or wishes to discuss any aspect of this request, please contact the undersigned
at 612/667-8573.
Very truly yours,
/s/
Jeannine E. Zahn
Senior Counsel
cc: Peter Skillern, Community Reinvestment Association of North Carolina
Thomas McK. Thomas
Joyce Sirlin-Rand
[APPENDIX]
WHEREAS:
Wells Fargo & Company, through its subsidiary, Wells Fargo Bank, National
Association (collectively, "Wells"), provides lenders with credit, which
supplies the capital that these lenders need to engage in predatory payday
lending, a practice that, we believe, has a negative impact on elderly, minority
and low-to-moderate income consumers (collectively, "vulnerable consumers").
Payday loans, as generally defined by bank regulators, are small-dollar,
short-term loans that borrowers promise to repay out of their next paycheck or
deposit of funds.
Certain payday lenders provide loans that are predatory. These lenders charge
unreasonable interest rates and/or high fees for extremely short terms and
encourage multiple loan renewals (a practice commonly known as "Loan Flipping").
Such lenders target vulnerable consumers who are least able to afford the cost
of such predatory practices.
In our opinion, predatory lending, generally, and the practice of Loan Flipping,
specifically, puts vulnerable consumers in a "debt trap," in which they have
difficulty paying the principal owed due to the accumulation of exorbitant fees
and interest.
For these reasons, predatory payday loans hurt vulnerable consumers and the
neighborhoods in which they live.
Wells provides loans to payday lenders that, we believe, engage in predatory
payday lending. We believe that by providing such credit to predatory payday
lenders, Wells' practices increase the economic obstacles facing vulnerable
consumers.
Such lending is contrary to the spirit and provisions of the Community
Reinvestment Act of 1977, and the regulations promulgated thereunder, ("CRA"),
which obligates Wells to affirmatively meet the credit needs of the communities
it serves. Moreover, regulators have warned banks of the significant compliance,
legal, and reputational risks of payday lending.
Other major financial institutions such as SunTrust Banks, Inc. ("SunTrust")
have recognized that financing predatory payday lenders is a negative practice
and have voluntarily ceased to finance payday lenders. In a July 12, 2004 letter
to the Federal Reserve Bank of Atlanta, SunTrust's CRA compliance manager stated
that after considering the potential reputational risks and consumer ham that
could result from lending to such companies, SunTrust is revising its credit
policies to prohibit all future loans to businesses that engage in payday
lending.
Wells continues to finance payday lenders that, we believe, engage in predatory
lending despite the negative socio-economic impact on vulnerable consumers,
negative statements on predatory payday lending from regulators and the
voluntary withdrawal from the payday lender financing market by other major
financial institutions, such as SunTrust
RESOLVED:
Shareholders request that the Board of Directors implement a policy mandating
that Wells Fargo will not provide credit or other banking services to lenders
that are engaged in payday lending.
[INQUIRY LETTER]
VIA FEDERAL EXPRESS
January 13, 2006
Securities and Exchange Commission
Office of Chief Counsel
Division of Corporate Finance
1000 F. Street, N.E.
Washington, D.C. 20549
RE: Wells Fargo & CompanyStockholder Proposal Submitted by The Community
Reinvestment Association of North Carolina, Thomas McK. Thomas and Joyce Sirlin-Rand
Ladies and Gentlemen:
I am the Executive Director of The Community Reinvestment Association of North
Carolina ("CRA-NC") and I am writing to notify you of our intention to file a
response to Wells Fargo & Company's (the "Company") request that the Staff not
recommend enforcement action to the Commission if Wells Fargo omits a proposal
(the "Proposal") submitted by The Community Reinvestment Association of North
Carolina, Thomas McK. Thomas and Joyce Sirlin-Rand from the 2006 Proxy Materials
(the "Proponents").
CRA-NC is a non-profit corporation that promotes and protects community wealth
and is a shareholder of the Company. We have concerns about the Company's
financing of payday lenders that we believe engage in predatory lending
activities. Financing predatory payday lenders is harmful to consumers to whom
predatory payday loans are marketed and such loans violate public policy. As you
likely know, recent responses by the Securities and Exchange Commission (the
"SEC") to requests for No-Action Letters have indicated "that predatory lending
is within the purview of shareholders as a matter of significant social policy."
See American International Group, SEC No-Action Letter, 2004 WL 334471 (February
17, 2004).
I hereby request that the Staff not make a recommendation on enforcement action
before the CRA-NC is able to issue a substantive response to the Company's
request. Please acknowledge receipt of this letter by stamping the enclosed
additional copy of this letter and returning it to the undersigned in the return
envelope provided. If the Staff has any questions, please contact the
undersigned at 919-667-1557 ext 22.
Very truly yours,
/s/
Peter Skillern
Executive Director
[INQUIRY LETTER]
VIA FEDERAL EXPRESS
January 24, 2006
Securities and Exchange Commission
Office of Chief Counsel
Division of Corporate Finance
1000 F. Street, N.E.
Washington, D.C. 20549
RE: Wells Fargo & CompanyStockholder Proposal Submitted by The Community
Reinvestment Association of North Carolina, Thomas McK. Thomas and Joyce
Sirlin-Rand
Ladies and Gentlemen:
We are responding in opposition to the request (the "No Action Request") for
confirmation submitted by Wells Fargo & Company ("Company") that the staff of
the Division of Corporate Finance of the Securities and Exchange Commission (the
"Commission") will not recommend enforcement action if the Company omits from
its 2006 proxy statement the stockholder proposal (the "Proposal") submitted by
the Community Reinvestment Association of North Carolina ("CRA-NC"). If
approved, the Proposal would ask the Company's board of directors to implement a
policy that will ensure the Company does not provide credit or other banking
services to lenders that are engaged in predatory payday lending. For the
reasons set forth in detail below, we ask that the Company's No Action Request
to the Commission be denied.
Background Statement
CRA-NC is a non-profit corporation that promotes and protects community wealth
and raises awareness on important issues of consumer welfare. Over the past
several years, CRA-NC has increasingly focused on the issue of predatory
lending, both in North Carolina and throughout the country. In particular,
CRA-NC has been particularly active in its efforts to eliminate predatory
lending in the context of payday lending.
As part of its work to limit the negative impacts of predatory lending,
generally, and payday lending, specifically, CRA-NC seeks to limit the access
that such lenders have to credit from regulated banks, as well as from other
sources. To this end, last year CRA-NC sought to have proposals, the content of
which were substantially similar to that of the Proposal, included in the 2005
proxy materials for the Company and Bank of America Corporation ("Bank of
America"). In each case, CRA-NC met all the stock ownership requirements
established by the Commission with respect to shareholder proposals and the
proposals were submitted in a timely fashion with each company.
Bank of America sought to omit the CRA-NC proposal from its 2005 proxy
materials, and requested confirmation from the Commission that the staff would
not recommend enforcement action in case of such an omission (the "Bank of
America No Action Request"). The Commission has granted the Bank of America No
Action Request (the "Bank of America No Action Letter"). Bank of America
Corporation (March 7, 2005).
Conversely, the Company included CRA-NC's proposal in its 2005 proxy material
(the "2005 Proposal"). The Board of Directors, however, issued an accompanying
statement in opposition to the proposal. Notwithstanding the Board's opposition,
the proposal was well received by the shareholders, receiving approximately
3.74% of the vote. Ownership of the Company is highly diversified. Approximately
68% of the Company's common stock is held by institutional and mutual owners,
with its largest shareholder holding only 4.98% of the shares. Even its top
institutional owners hold less than 1% of shares, and the mean institutional
ownership is well under 0.10%. Therefore, a 3.74% vote in favor of the proposal
represents a very significant level of shareholder interest in this matter.
Despite the evidence showing that the subject matter of the Proposal is of
significant shareholder interest, the Company now seeks to exclude the Proposal
from inclusion in its 2006 proxy materials. Its No Action Request is in all
material respects identical to the Bank of America No Action Request. However,
as described in more detail below, the current circumstances are far different
than those that were operative when the Commission considered the Bank of
America No Action Request. In light of these changed circumstances, CRA-NC
respectfully requests that the No Action Request be denied. The bases for this
request are set forth below.
1. Significant social policy issues override the ordinary business basis for
exclusion under Rule 14a-8(i)(7).
Pursuant to Rule 14a-8(i)(7), a company may generally exclude a shareholder
proposal if the proposal pertains to the ordinary business operations of the
company. Despite this general rule, it has been established that "proposals
relating to [certain tasks so fundamental to management's ability to run a
company on a day-to-day basis] but focusing on sufficiently significant social
policy issues ... generally would not be considered to be excludable, because
the proposals would transcend the day-to-day business matters and raise policy
issues so significant that it would be appropriate for a shareholder vote."
Amendments to Rules on Shareholder Proposals, Exchange Act Release No. 34-40018
(May 21, 1998). The Commission has determined that proposals pertaining to the
issue of predatory lending raise issues of social policy and are, therefore,
generally not excludable under Rule 14a-8(i)(7). Conseco, Inc. (April 5, 2001);
Associates First Capital Corporation (March 13, 2000) (shareholder proposals
requesting the creation of a committee to ensure that neither company engages in
predatory lending practices were not excludable under Rule 14a-8(i)(7)). CRA-NC
contends that the Proposal raises significant social policy issues for at least
three reasons.
A. Financing Provided by the Company Facilitates Predatory Lending by Certain of
Its Customers.
While lending decisions by financial institutions are generally a matter of
ordinary business, that is not the case in this situation. In the instant case,
the Company acknowledges that it may provide credit to payday lenders (see
discussion in Section II.B, below). The extension of such credit to payday
lenders is critical to their operations and is the most important "raw material"
in the product that such lenders market to consumers. As a result, the Company's
role with respect to the product (i.e. payday lending) is not that of mere
credit provider, but is essentially equivalent to that of component supplier.
Thus, the fact that the product ultimately marketed by any customer of the
Company who is engaged in payday lending relates to a matter of important social
policy, means that the Company's activities with respect to this limited area of
its business also raise important social policy concerns and are a proper matter
for shareholder attention.
Given the supplier-like nature of the relationship between the Company and any
of its customers engaged in payday lending, the situation here is analogous to
the business relationship found in Kimberly-Clark Corporation (February 22,
1990). In Kimberly-Clark, the company was as a supplier of paper products used
by tobacco companies to manufacture cigarettes. The Commission disallowed the
exclusion of a shareholder proposal that prohibited the company from transacting
any business related to tobacco products. As discussed above, the Company's
relationships with any payday lenders that it finances is analogous to those in
question in Kimberly-Clark and, as in that matter, the Company's request to
exclude CRA-NC's narrowly tailored proposal should be denied.
B. The Company May Be Providing Credit to Certain Customers that Are Engaged in
Illegal Payday Lending Activities.
In support of its contention that the Proposal may be excluded under Rule
14a-8(i)(7), The Company asserts in its No Action Request that it makes loans to
only non-prime lenders and consumer finance company's, including payday lenders,
that "engage in legal business activities." The content of the Company's
argument on this point appears to be that if the activities of its customers who
are payday lenders are legal, then the extension of credit by the Company to
finance such activities cannot raise significant social policy issues.
Bank of America made the same argument in the Bank of America No Action Letter
Request. Regardless of whether Bank of America's contention was true at the time
it was made, it appears that the Company's assertion on this point may not be
accurate. For example, payday lending is now illegal in at least four states:
Georgia, New York, North Carolina and Texas. Thus, to the extent the Company is
providing credit to any payday lenders operating in any of these states,
contrary to its position in the No Action Request, it would be making loans to
customers engaged not only in predatory lending, but, by doing so, in an illegal
activity.
For example, since North Carolina determined that payday lending within the
state is illegal, the North Carolina Attorney General has aggressively
prosecuted payday lenders. During this time, the State has brought at least six
enforcement actions against payday lenders and it has prevailed in the action
brought against Advance America. See State of North Carolina v. NCCS Loans,
Inc., 2005 N.C. App. LEXIS 2588 (N.C. App. 2005); See also Statement from
Attorney General Roy Cooper on Advance America Case (December 22, 2005) at
http://www.ncdoj.com/DocumentStreamerClient?directory=PressReleases/&file=advance
americarulingdecember05.pdf.
Thus, unlike the circumstances surrounding the Commission's consideration of the
Bank of America No Action Request, it is clear that several states have
determined that payday lending is an illegal activity. As a result, when the
Company provides credit to a payday lender, the transaction not only implicates
a matter of important social policy, but it may be to a customer that will use
the credit to finance illegal activities. This is further evidence that, while
it may have been proper to permit Bank of America to exclude CRA-NC's prior
proposal under Rule 14a-8(i)(7), the factual situation surrounding the Company's
request to exclude the Proposal is substantially different and does not support
the Company's position with respect to the exclusion of the Proposal. As a
result, unlike the proposal at issue in the Bank of America situation, the
Proposal clearly raises an issue of significant social policy and the Company
should not be permitted to exclude it under Rule 14a-8(i)(7).
C. Financing Provided by the Company to Payday Lenders is a Matter of
Significant Interest to Shareholders and is Within Their Competence.
Unlike, the 2005 proposal CRA-NC submitted to Bank of America, the subject
matter of the Proposal has already been considered by the Company's shareholders
and been determined to be an important issue by a substantial number of
shareholders. As noted above, the 2005 Proposal received 3.74% of the vote of
the Company's shareholders. This is roughly equivalent to the level of support
received by proposals related to other proposals addressing issues of
significant social policy, such as predatory lending, executive compensation and
the environment.
The substantial vote in favor of the 2005 Proposal, which was in all material
respects identical to the Proposal, suggests that not only is the subject matter
of the Proposal of importance to the Company's shareholders, but it is within
their competence. Unlike the typical decisions about lending activities by the
Company, which are highly technical and require significant expertise and
familiarity with its credit policies, the Proposal addresses a basic matter of
social policy to which any shareholder is able to respond in an informed way.
If permitted to exclude the Proposal, the Company would be allowed to deprive
shareholders of the fundamental right to express their views on a matter that is
related to an issue the Commission has recognized as a matter of important
social policy, and which is not so specialized that it should properly be solely
within the provenance of the board of directors. Further, the fact that the 2005
Proposal received nearly 4% of the eligible votes in connection with the
Company's 2005 proxy suggests that, unlike most of the Company's general
operational matters, the Proposal raises issues of significant interest to
shareholders and should not be excluded under Rule 14a-8(i)(7).
2. The Proposal does not affect pre-existing legal obligations, therefore,
Company should not be able to omit the Proposal pursuant to Rules 14a-8(i)(2)
and 14a-8(i)(6).
The Proposal does not require the Company to terminate or modify, in any way,
any of its pre-existing legal obligations with its current clients. The language
of the Proposal itself makes it clear that the requested policy change is
intended to apply only to future obligations of the Company. The use of the term
"will not provide" in the Proposal clearly indicates that the Proposal is
directed only at future actions by the Company.
It is not the proponent's intention to require any action on the part of the
Company that would cause it to violate its current legal obligations, including
those under its outstanding credit agreements. See The Goldfield Corporation
(March 28, 2001) (allowing a proponent to avoid a violation of rules 14a-8(i)(2)
and 14a-8(i)(6) "if the proposal were revised to apply to approval of only
future contractual obligations."); and CoBancorp Inc. (February 22, 1996)
(allowing a proponent to avoid a violation "if the proposal were revised to
indicate that it applies only to... future grants."). Accordingly, while the
proposal does not affect any pre-existing legal obligations, and the Company
should not be able to omit it, the proponent requests that it be allowed to
revise its proposal if recommended by the Commission staff.
3. The Proposal is not vague and indefinite, therefore, the Company should not
be able to omit the Proposal pursuant to Rule 14a-8(i)(3).
A. The term "payday lending" is sufficiently clear and definite.
The Company seems to make much of the fact that there is, as yet, no universally
accepted definition of the term "payday lending" in use by legislators or those
in the banking industry. This, however, is not sufficient reason to reject the
Proposal as being vague and indefinite. While there may be some continuing
debate over what constitutes the outer margins of the definition, the
fundamental core of what constitutes a "payday lender" is well established. This
fact is confirmed by the Company's own admission in its letter to the Commission
of December 22, 2005 in which it states that "...many states have adopted laws
or regulations purporting to regulate this type of business...." If the term is
sufficiently clear for these "many states" to establish a regulatory system, it
is difficult to conclude that the term is so "false and misleading" as to be
excludable from the Company's proxy materials. Further confirmation of the
ability of the Company to ascertain the meaning of the term can be seen in its
claim that this Proposal would cause it to violate its legal obligation to
current clients Advance America and Cash Advance Centers, Inc. The Company's
ability to clearly identify these clients as falling within the definition of a
"payday lender" belies its claim that the term is so vague and indefinite as to
be false and misleading. Moreover, the fact that North Carolina has specifically
identified Advance America as an illegal payday lender, and in fact, the North
Carolina Attorney General has prevailed on an enforcement action against Advance
America, clearly takes away any ambiguity or vagueness about the term.
It also should be noted that a definition of the term "payday loans" was
provided in the recitations accompanying the Proposal. This definition is taken
from the current, generally accepted definition of the term as used by bank
regulators. Again, if the term is able to be defined sufficiently for bank
regulators and for state legislators, it should be sufficiently clear for use in
the Proposal.
Further, the term "payday loan" as defined in the Proposal and as generally
defined by bank regulators requires more than merely that the loan be
short-term. Additional requirements include that the loans be for a small amount
and that borrowers promise to repay them out of their next paycheck or deposit
of funds. Therefore, the Company's stated concern that the Proposal would extend
to such entities as colleges, universities and grocery stores that may provide
some short-term loans in limited circumstances is irrelevant.
Notwithstanding our belief that the term as it is given can be sufficiently
understood both by the Company, and its shareholders, we are willing to provide
further clarification of the term if the Commission so desires. See First
Mariner Bancorp (January 10, 2005) (proposal is not excludable under Rule
14a-8(i)(3) despite alleged lack of an explicit definition for "independent");
Hormel Foods Corporation (October 22, 2004) (proposal is not excludable under
Rule 14a-8(i)(3) despite alleged lack of an explicit definition for
"sustainability report"); Massey Energy Company (March 1, 2004) (proposal is not
excludable under Rule 14a-8(i)(3) despite lack of an explicit definition for
"senior executive officers," "base salary," "bonus" and "fringe benefits."); and
Exxon Mobil Corporation (March 1, 2004) (proposal is not excludable under Rule
14a-8(i)(3) despite alleged lack of an explicit definition for "employees of
color" and "glass ceiling").
B. The term "other banking services" is sufficiently clear and definite.
It is apparent from the context of the Proposal that the term "other banking
services" refers to other lending-related services provided by the Company to
payday lenders. The inclusion of this term was intended to ensure that the
Company would not circumvent the Proposal by engaging in a game of semantics, by
providing essentially lending services to payday lenders without calling those
services a "loan."
It is not the proponent's intention that the Proposal require the Company to cut
off all access to their ATM machines, deposit accounts and the like since these
services are unrelated to the lending activity that is the subject of the
Proposal.
Again, notwithstanding our belief that the term "other banking services" is
sufficiently understood within its context, we remain willing to implement any
changes that the Commission requests in order to resolve any alleged ambiguities
to its satisfaction.
Conclusion
Companies that finance payday lenders play a critical role in financing the
predatory lending of these companies. Additionally, they expose themselves to
reputational, regulatory and litigation risks. As a result, many lenders, such
as SunTrust, have unilaterally decided not to continue to provide credit in this
narrow segment of the market. Further, through their vote in support of the 2005
proposal, a significant percentage of the Company's shareholders have already
indicated that they think the Proposal is important and should be adopted.
CRA-NC respectfully requests that, for these reasons, as well as those noted
throughout this letter, the Commission find that the arguments presented in the
letter of December 22, 2005 by the Company are without merit and deny the
Company's request for no-action relief.
Very truly yours,
The Community Reinvestment Association of North Carolina
By: /s/
Peter Skillern, Executive Director
[STAFF REPLY LETTER]
February 16, 2006
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Wells Fargo & Company Incoming letter dated December 22, 2005
The proposal requests that the board implement a policy mandating that Wells
Fargo will not provide "credit or other banking services to lenders that are
engaged in payday lending."
There appears to be some basis for your view that Wells Fargo may exclude the
proposal under rule 14a-8(i)(7), as relating to Wells Fargo's ordinary business
operations (i.e., credit policies, loan underwriting and customer relations).
Accordingly, we will not recommend enforcement action to the Commission if Wells
Fargo omits the proposal from its proxy materials in reliance on rule
14a-8(i)(7). In reaching this position, we have not found it necessary to
address the alternative bases for omission upon which Wells Fargo relies.
Sincerely,
/s/
Amanda McManus
Attorney-Adviser
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