Company Name: Bank of America Corp.
Public Availability Date: February 20, 2008
Document Sections:
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
[INQUIRY LETTER]
December 21, 2007
BY OVERNIGHT DELIVERY
Securities and Exchange Commission
Office of Chief Counsel
Division of Corporation Finance
101 F. Street, N.E.
Washington, DC 20549
Re: Stockholder Proposal Submitted by the Missionary Oblates of Mary Immaculate
and Multiple Co-filers
Ladies and Gentlemen:
Pursuant to Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and as counsel to Bank of America Corporation, a
Delaware corporation (the "Corporation"), we request confirmation that the staff
of the Division of Corporation Finance (the "Division") will not recommend
enforcement action if the Corporation omits from its proxy materials for the
Corporation's 2008 Annual Meeting of Stockholders (the "2008 Annual Meeting")
for the reasons set forth herein, the proposal described below. The statements
of fact included herein represent our understanding of such facts.
GENERAL
The Corporation received a proposal and supporting statement dated November 13,
2007 (the "Proposal") from the Missionary Oblates of Mary Immaculate and,
subsequent thereto, from multiple co-filers identified at the end of this letter
(collectively, the "Proponent"), for inclusion in the proxy materials for the
2008 Annual Meeting. The Proposal is attached hereto as Exhibit A. The 2008
Annual Meeting is scheduled to be held on or about April 23, 2008. The
Corporation intends to file its definitive proxy materials with the Securities
and Exchange Commission (the "Commission") on or about March 19, 2008.
Pursuant to Rule 14a-8(j) promulgated under the Exchange Act, enclosed are:
1. Six copies of this letter, which includes an explanation of why the
Corporation believes that it may exclude the Proposal; and
2. Six copies of the Proposal.
A copy of this letter is also being sent to each Proponent as notice of the
Corporation's intent to omit the Proposal from the Corporation's proxy materials
for the 2008 Annual Meeting.
SUMMARY OF PROPOSAL
The Proposal requests the Corporation to disclose "quarterly collateral and
other credit risk management policy for off balance sheet liabilities and
exposure in the following areas:
Structured Investment Vehicles;
Structured securities
Conduits"
REASONS FOR EXCLUSION OF PROPOSAL
The Corporation believes that the Proposal may be properly omitted from the
proxy materials for the 2008 Annual Meeting pursuant to Rules 14a-8(i)(7) and
14a-8(i)(10). The Proposal may be excluded pursuant to Rule 14a-8(i)(7) because
it deals with a matter relating to the ordinary business of the Corporation. The
Proposal may be excluded pursuant to Rule 14a-8(i)(10) because the Corporation
has substantially implemented.
1. The Corporation may omit the Proposal pursuant to Rule 14a-8(i)(7) because it
deals with a matter relating to the Corporation's ordinary business operations.
Rule 14a-8(i)(7) permits the omission of a stockholder proposal that deals with
a matter relating to the ordinary business of a company. Under Commission and
Division precedent, a stockholder proposal is considered "ordinary business"
when it relates to matters that are so fundamental to management's ability to
run a company on a day-to-day basis that, as a practical matter, they are not
appropriate for stockholder oversight. See Exchange Act Release No. 34-40018
(May 21, 1998) (the "1998 Release"). One must also consider the degree to which
the proposal calls for additional disclosure or seeks to probe into matters of a
complex nature upon which the stockholders, as a group, would not be in a
position to make an informed judgment. See id. The Division has also considered
whether the proposal involves matters of risk assessment. See McDonald's
Corporation (February 14, 2006); Dow Chemical Co. (February 23, 2005); and
Potomac Electric Power Company (March 1, 1991). Further, in order to constitute
"ordinary business," the proposal must not involve a significant policy issue
that would override its "ordinary business" subject matter. See 1998 Release.
Finally, a proposal that is styled as a request for a report does not change its
ordinary business nature. The Division has long evaluated proposals requesting a
report by considering the underlying subject matter of a proposal when applying
Rule 14a-8(i)(7). See Exchange Act Release No. 34-20091 (August 16, 1983). The
Corporation believes that the underlying subject matter of the Proposal falls
squarely within the scope of the above considerations.
The Proposal Infringes on Management's Ability to Run the Corporation on a
Day-to-Day Basis.
The Corporation is one of the world's largest financial institutions, serving
individual consumers, small and middle market businesses and large corporations
with a full range of banking, investing, asset management and other financial
and risk-management products and services. The Corporation serves approximately
57 million consumer and small business relationships with more than 5,700 retail
banking offices, more than 17,000 ATMs and online banking with more than 23
million active users. The Corporation is the leading overall Small Business
Administration ("SBA") lender in the United States and the leading SBA lender to
minority-owned small businesses. The Corporation serves clients in 175 countries
and has relationships with 99 percent of the U.S. Fortune 500 companies and 80
percent of the Fortune Global 500. At September 30, 2007, the Corporation had
total assets of over $1.5 trillion.
In the normal course of business, to serve its clients as well as on its own
behalf, the Corporation enters into many financial arrangements. The
arrangements are recorded based on Generally Accepted Accounting Principles ("GAAP").
Consistent with GAAP, certain arrangements are not required to be reflected on
the Corporation's consolidated balance sheet. While not reflected on the
consolidated balance sheet, the arrangements may otherwise potentially expose
the Corporation to varying degrees of credit and market risk and, therefore, are
subject to substantially similar credit and market risk limitation reviews as
those instruments recorded on the Corporation's consolidated balance sheet. The
Corporation has a rigorous risk management program, which is disclosed in the
Corporation's periodic reports filed with the Commission and publicly available
to all investors and potential investors, including the Proponent.
As a full service financial services company with a broad spectrum of clients,
each with unique, complex and divergent financial needs, the Corporation
constantly refines and develops its product mix as well as adjusts and evaluates
its risk metrics and levels of acceptable risk. The Corporation is in the
business of taking prudent risks using confidential and proprietary risk
management policies, tools and procedures. In connection with its clients needs,
and given the Corporation's financial size and structure, it must also, on a
day-to-day basis, prudently manage its own assets and liabilities. To meet these
challenges, the Corporation participates in transactions that generate potential
liabilities that may not be reflected on its consolidated balance sheet as
provided for in GAAP. Among the numerous financial products the Corporation
offers, manages and/or invests in, through certain of its subsidiaries, on its
behalf or for the benefit of certain of its clients are structured securities,
conduits and other financial products that may create off-balance sheet
liabilities.1 Managing these transactions and the related off-balance sheet
exposures is an integral part of management's responsibility in directing the
Corporation's day-to-day operations. The Corporation utilizes a variety of
established policies, tools and procedures, under the leadership of management,
including a Chief Risk Officer, who is appointed by the Chief Executive Officer
and who is one of the most senior executive officers of the Corporation, as well
as financial, mathematical and statistical experts, on an on-going basis to
analyze the sufficiency of any applicable collateral associated with and the
risks related to the Corporation's off-balance sheet liabilities. In addition,
the Board of Directors has created an Asset Quality Committee to oversee credit
risks to the Company's assets and related earnings.
Notwithstanding the foregoing, the Proponent believes that the stockholders at
large are in a better position than management and the Board of Directors to
evaluate the Corporation's policies regarding and exposures to off-balance sheet
liabilities. The Corporation's internal policies regarding management of its
liabilities and obligations, whether reflected in the consolidated balance sheet
or otherwise, are integral, confidential and proprietary to the Corporation's
business operations. The Corporation's financial transactions are detailed and
complex and require a very high degree of financial knowledge and understanding
to be properly managed, particularly in today's rapidly changing and
unprecedented market environment. Clearly, the Corporation's management and
Board of Directors are better positioned to manage these risks than its
stockholders. As such, the Proposal usurps management and the Board's authority
by allowing stockholders to govern the day-to-day business of managing the
oversight of off-balance sheet arrangements and financial risk generally.
The Proposal Calls for Additional Disclosure Regarding Day-to-Day Operations.
The Division has consistently found that proposals seeking additional detailed
disclosure (whether in Exchange Act filings or special reports) may be excluded
under Rule 14a-8(i)(7). See Johnson Controls, Inc. (October 26, 1999). In many
of these proposals, the proponents have cited insufficient disclosure by a
company that the proponents deem necessary to enable them to gauge the company's
exposure to risk. In J.P. Morgan Chase & Co. (February 28, 2001) ("J.P.
Morgan"), a proposal requested detailed disclosure regarding the risks of
inflation and deflation on the company's financial condition was excludable
because it related to the company's ordinary business. In J.P. Morgan, the
proponent complained that the current level of disclosure was insufficient for
stockholders to understand the company's exposure from interest rate movements.
In Travelers Group, Inc. (February 5, 1998, affirmed March 13, 1998) ("Travelers
Group"), a proposal was excludable that requested the company adopt proposed
accounting rules related to disclosure for its derivative operations. In
Travelers Group, noting that the company "trades in some of the most complex and
exotic derivatives products," the proponent complained that "current reporting
standards do not require market value accounting for this trading and
stockholders, therefore, have no reliable means of assessing off-balance sheet
risks of derivative exposure." In BankAmerica Corporation (February 8, 1996)
("BankAmerica"), a proposal requesting that the company's governing instruments
be amended to require very detailed disclosure regarding the company's reserve
accounts was excludable because it related to the format and content of the
company's periodic reports. In BankAmerica, the proponent complained that
stockholders could not determine the "true profitability of BAC" based on the
current disclosures. In Crescent Real Estate Equities Company (April 28, 2004)
("Crescent"), a proposal that requested additional disclosure regarding related
party transactions was excludable. In Crescent, the proponent complained that
stockholders cannot determine from the current disclosures whether related party
transactions were "evaluated to ensure [that] they were in Crescent's best
interests and on arms length terms." The proponent continued, "[w]e believe that
shareholders should receive such information, which will assist them in
monitoring Crescent's board and management." In The Dow Chemical Company
(February 13, 2004) ("Dow"), a proposal requesting a detailed report related to
certain toxic substances was excludable because it related to the company's
ordinary business (i.e., the evaluation of risks and liabilities). In Dow, the
proponent complained that the current level of disclosure did not clearly
discuss "some of the most important policy issues confronting Dow, because [the
disclosures] leave gaps." In Conseco, Inc. (April 18, 2000) ("Conseco"), a
proposal to adopt a policy to ensure that accounting methods and financial
statements adequately reflect the risk of sub prime lending was excludable as
relating to the presentation of financial statements in reports to stockholders.
In Conseco, the proponent complained, among other things, that the current level
of disclosure was insufficient for stockholders to understand the company's
exposure to financial loss from its lending activities. In Occidental Petroleum
Corporation (December 11, 1997) ("Occidental Petroleum"), a proposal requesting
detailed disclosure regarding the financial capacity of the company's auditors
was excludable. In Occidental Petroleum, the proponent complained that the
current disclosure was insufficient for stockholders to assess the auditor's
ability to pay claims in the event of a financial loss due to accounting errors.
The clear thrust of the Proposal and its supporting statement is that the
disclosure of off-balance sheet liabilities by the Corporation is insufficient.
In the supporting statement, the Proponent perceives an "absence of reliable
information about the many off-balance sheet instruments" and lack of
transparency regarding market risk management systems. By requesting the
Corporation to disclose "quarterly collateral and other credit risk management
policy for off balance sheet liabilities and exposure in" certain structured
finance arrangements, the Proposal, in essence, calls for added disclosure
regarding a small segment of the Corporation's day-to-day operations beyond that
called for by Commission rules and regulations and GAAP, i.e., its management of
liabilities and obligations that do not meet GAAP's requirement for inclusion in
the consolidated balance sheet.
The proposed reports would be required to detail specific aspects of off-balance
sheet liabilities, namely collateral and credit risk management policies and
exposure to three types of arrangements that GAAP may not require be included on
a bank's balance sheet (i.e., structured investment\1/ vehicles, structured
securities and conduits). As with the letters discussed above, the Proposal
appears to seek additional disclosure not otherwise required or already provided
for under the requirements of GAAP and the Commission's rule and regulations so
as to provide the Proponent with more information it believes is necessary to
evaluate the Corporation's management of and exposure to arrangements not
required or properly recorded on its consolidated balance sheet.
Furthermore, the responsibility for overseeing the disclosure process is a
complex task with respect to which stockholders at large, are not in a position
to make an informed judgment. The Proposal requests that the Corporation provide
certain additional specified disclosures, some of which are already required to
be included in the Corporation's filings with the Commission and various other
government agencies. The requested disclosure goes beyond what is currently
required under GAAP, Commission rules and regulations, banking regulations and
other applicable disclosure requirements. Once applicable regulatory
requirements have been met, a determination of what additional information, if
any, is to be included in the Corporation's disclosures, is within the
discretion of the Corporation's Board of Directors and management, and is
fundamentally a part of the ordinary business decisions made by the Corporation.
See e.g., Refac (March 27, 2002) (allowing omission of a proposal requesting
improved corporate disclosure practices); and Time Warner, Inc. (March 3, 1998)
(allowing omission of a proposal requesting additional Year 2000 disclosure).
The Proposal Relates to Evaluation of Risk and Risk Management Policies.
In addition to the numerous no-action letters cited above that deal with risk
assessment, the Division has long found proposals generally relating to the
"evaluation of risk" or "risk management" by a company to be excludable pursuant
to Rule 14a-8(i)(7). In Wachovia Corporation (February 10, 2006), the Division
found that matters relating to the "evaluation or risk" are ordinary business
and therefore, excludable under Rule 14a-8(i)(7). In Dow Chemical Co. (February
23, 2005), a proposal sought the creation of a report to stockholders concerning
the impact of certain litigation on the company. The Division agreed with Dow
Chemical Co. that such a proposal was excludable pursuant to Rule 14a-8(i)(7) on
the basis that it involved an "evaluation of risk." A stockholder proposal
seeking the board of directors of General Electric Company to "establish an
independent committee to: 1) prepare a report evaluating risk of damage to GE's
brand name and reputation in the United States as a result of the growing
tendency to send manufacturing and service work to other countries" was also
found by the Division to be excludable under Rule 14a-8(i)(7) on the grounds of
"evaluation of risk." See General Electric Company (January 1, 2006). In
McDonald's Corporation (March 14, 2006), the Division agreed with the company
that a proposal seeking implementation of a "comprehensive risk strategy" was
"risk management" and therefore excludable pursuant to Rule 14a-8(i)(7). As was
the case in the aforementioned letters, the Proposal calls for the Corporation
to disclose information involving the evaluation of risk. The Proposal calls for
the Corporation to provide information relating to its exposure in the areas of
structured investment vehicles\1/, structured securities and conduits. Providing
such information inherently involves judgment regarding the credit and market
risks associated with offering, managing and/or investing in those various
financial products. Further, the Proposal specifically requests information
pertaining to the Corporation's "credit risk management policy" (emphasis
added). As the Proponent's request would require the Corporation to provide
information that specifically and intrinsically involves an evaluation of risk,
namely credit and market risk of off-balance sheet liabilities, the Proposal is
not proper for inclusion in the Corporation's 2008 Annual Report.
The Proposal's Excludability is Not Overridden by a Significant Policy Issue
The Corporation recognizes that certain proposals could transcend day-to-day
business matters and raise policy issues so significant that they could be
appropriate for a stockholder vote. As noted above, the Proposal's main concern
is disclosure in an area the Proponent believes there is "an absence of reliable
information about many off-balance sheet instruments that are included in the
portfolios of many financial institutions...." Although managing off-balance
sheet risk is significant to the Corporation and part of its day-to-day
operations, such management and disclosure regarding such management policies do
not raise any significant policy issues. Instead, the Proposal is merely seeking
additional detailed disclosure regarding one part of the Corporation's business.
Conclusion
The Proposal is clear, it relates solely to gaining more detailed disclosure
regarding the Corporation's policies relating to management of off-balance sheet
arrangements and the day-to-day management of the Corporation's financial risk,
specifically relating to off-balance sheet arrangements, and disclosure of
related management policies. Consistent with the foregoing discussion, the
Corporation believes that the Proposal should be excluded pursuant to Rule
14a-8(i)(7).
2. The Corporation may omit the Proposal pursuant to Rules
14a-8(i)(10) because
it has been substantially implemented.
The Corporation believes that the Proposal may be properly omitted from the
proxy materials for the 2008 Annual Meeting pursuant to Rule 14a-8(i)(10), which
permits the omission of a stockholder proposal if "the company has already
substantially implemented the proposal." The "substantially implemented"
standard replaced the predecessor rule, which allowed the omission of a proposal
that was "moot." See 1998 Release. The Commission has made explicitly clear that
a proposal need not be "fully effected" by the company to meet the substantially
implemented standard under Rule 14a-8(i)(10). See 1998 Release (confirming the
Commission's position in the 1983 Release). In the 1983 Release, the Commission
noted that the "previously formalistic application [(i.e., a "fully-implemented"
interpretation that required line-by-line compliance by companies)] of [Rule
14a-8(i)(10)] defeated its purpose."
The Division has taken the position that if a major portion of a stockholder's
proposal may be omitted pursuant to Rule 14a-8(i)(10), the entire proposal may
be omitted. See American Brands, Inc. (February 3, 1993). Therefore, if the
Corporation has substantially implemented a major portion of the Proposal, the
entire Proposal is excludable. "[A] determination that [a] [c]ompany has
substantially implemented [a] proposal depends upon whether its particular
policies, practices and procedures compare favorably with the guidelines of the
proposal. See Texaco Inc. (March 28, 1991). In addition, a proposal need not be
implemented in full or precisely as presented for it to be omitted as moot under
Rule 14a-8(i)(10). See The Gap Inc. (March 16, 2001).
The Proposal has been substantially implemented pursuant to the requirements
found in Regulation S-K, Item 303(a)(4) ("Item 303(a)"). Item 303(a) requires
that the Corporation discuss, in a separately-captioned section, its off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on its financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors. To the extent necessary for
such an understanding, the Corporation must state "(A) [t]he nature and business
purpose ... of such off-balance sheet arrangements; (B) [t]he importance ... of
such off-balance sheet arrangements in respect of its liquidity, capital
resources, market risk support, credit risk support or other benefits; (C) [t]he
amounts of revenues, expenses and cash flows ... arising from such arrangements;
the nature and amounts of any interests retained, securities issued and other
indebtedness incurred by the registrant in connection with such arrangements;
and the nature and amounts of any other obligations or liabilities (including
contingent obligations or liabilities) of the registrant arising from such
arrangements that are or are reasonably likely to become material and the
triggering events or circumstances that could cause them to arise; and (D) [a]ny
known event, demand, commitment, trend or uncertainty that will result in or is
reasonably likely to result in the termination, or material reduction in
availability to the registrant, of its off-balance sheet arrangements that
provide material benefits to it, and the course of action that the registrant
has taken or proposes to take in response to any such circumstances." Pursuant
to Regulation S-K, Item 303(b) ("Item 303(b)"), companies must report on any
material changes in its off-balance sheet arrangements in its quarterly reports
on Form 10-Q.
The Corporation has complied, and will continue to comply, with the requirements
of Item 303(a) in its annual reports on Form 10-K by providing disclosure
concerning its material off-balance sheet arrangements. Further, the Corporation
has provided, and will continue to provide, quarterly updates identifying
material changes in its off-balance sheet liabilities in its quarterly reports
on Form 10-Q. While Commission regulations do not expressly require the
Corporation to provide information on "collateral and other credit risk
management policy for off balance sheet liabilities" as requested in the
Proposal, Items 303(a) and 303(b) require the Corporation to provide information
regarding its off-balance sheet arrangements "that have or are reasonably likely
to have a current or future effect on the [Corporation's] financial condition,
changes in financial condition, revenues or expenses, results of operation,
liquidity, capital expenditures or capital resources that is material to
investors" (emphasis added). This broad requirement would capture any aspects of
the Corporation's collateral and other credit risk management policy that are
material to off-balance sheet liabilities.
Disclosure pursuant to Items 303(a) and 303(b) would also require discussion of
the Corporation's exposure to structured investment vehicles\1/, structured
securities and conduits to the extent such disclosure is material to its
stockholders. Because the requirements of Items 303(a) and 303(b) are broader
than the disclosure sought in the Proposal, the Corporation may be required to
provide information beyond what is sought by the Proposal. Further, the
disclosure required pursuant to Items 303(a) and 303(b) is made on a quarterly
basis, which is the time period requested by the Proponent in its Proposal.
Further, the Corporation's Annual Report on Form 10-K and Quarterly Reports on
Form 10-Q are made available to stockholders on its website at
http://www.bankofamerica.com, satisfying the Proposal's request that such
information be posted to the Corporation's website. The Proposal is further
satisfied currently by the posting of information relating to the Corporation's
Asset Quality Committee on its website.
In addition to the disclosure required by Item 303 of Regulation S-K, the
Corporation's periodic filings discuss off-balance sheet risks in numerous
sections. For example, the Corporation's 2006 Form 10-K discusses regulatory
risk weighting of off-balance sheet exposures and the four categories of risk
assigned to such exposures under the caption "Government Supervision and
Regulation - Capital and Operational Requirements." Further, detailed disclosure
is provided in the 2006 Form 10-K under the heading "Off- and On-Balance Sheet
Financing Entities." In that section, the Corporation states that it manages its
"credit risk on these commitments by subjecting them to our normal underwriting
and risk management processes." Under "Credit and Liquidity Risks," the
Corporation states that it manages "risks, along with all other credit and
liquidity risks, within our policies and practices." Finally, the Corporation's
periodic reports provide substantial disclosure regarding the day-to-day
business of managing the numerous operational risks faced by the Corporation as
part of its normal operations.
The Corporation currently engages in a determination of what information
relating to off-balance sheet arrangements is material to its financial
condition and results of operations and is required disclosure and makes such
disclosure in its Form 10-K and Form 10-Q reports, which are made publicly
available. In addition, the Corporation makes substantial additional disclosure
regarding risk management, in particular as it relates to off-balance sheet
exposure. In light of the broad disclosure requirements of Items 303(a) and
303(b), and the Corporation's current compliance with such regulation and
voluntary disclosures, the Corporation believes that it has substantially
implemented the Proposal.
CONCLUSION
On the basis of the foregoing and on behalf of the Corporation, we respectfully
request the concurrence of the Division that the Proposal may be excluded from
the Corporation's proxy materials for the 2008 Annual Meeting. Based on the
Corporation's timetable for the 2008 Annual Meeting, a response from the
Division by February 3, 2008 would be of great assistance.
If you have any questions or would like any additional information regarding the
foregoing, please do not hesitate to contact me at 704-378-4718 or, in my
absence, Teresa M. Brenner, Associate General Counsel, at 704-386-4238.
Please acknowledge receipt of this letter by stamping and returning the enclosed
receipt copy of this letter. Thank you for your prompt attention to this matter.
Very truly yours,
/s/
Andrew A. Gerber
cc: Teresa M. Brenner
Missionary Oblates of Mary Immaculate
Adrian Dominican Sisters
Providence Trust
St. Scholastica Monastery
Mount St. Scholastica
Monasterio Pan de Vida
Sisters of Charity of Saint Elizabeth
-----FOOTNOTES-----
1 The Corporation does not participate in any structured investment vehicles or
sponsor any structured investment vehicles on behalf of clients. The Corporation
does, on occasion, help its clients structure certain investment vehicles to
meet their financial needs, such as a single seller commercial paper conduit.
However, the Corporation is not exposed to any additional risk as a result of
these advisory services.
[APPENDIX]
EXHIBIT A
Disclosure of off balance sheet liabilities and exposure
Whereas the absence of reliable information about the many off-balance sheet
instruments that are included in the portfolios of many financial institutions
increases panic type behavior during times of crisis, a problem that the new
accounting rules, which were put in place after the collapse of Enron, were
intended to address and have failed to do so,
Whereas according to David Dodge, Governor of the Bank of Canada "credit
conditions were eased by increased securitization and movement of financial risk
off the balance sheets" and now this cure is a significant source of the current
crisis;
Whereas according the Financial Times "the toll of big bank losses from the
credit squeeze topped $180 billion",
Whereas "history shows that panicky conditions end when information improves.
Markets would stabilise when banks, hedge funds and other institutional
investors start disclosing more about their holdings of questionable assets".
(Henry T. Azzman, CEO of Middle East & North Africa/Deutsche Bank)
Whereas the IMF, in its September 2007, `Global Financial Stability Report'
stated that "Financial institutions could be more transparent and disclose to
investors and counterparties how their market risk management systems would
react and could be managed in a stressed environment."
Whereas the instability triggered in the financial markets by the subprime
lending problem is prompting calls by regulators and others to update the
regulation dealing with innovations in the mortgage business and the broader
financial markets;
Whereas even Federal regulators have been unable to obtain needed information
about off-balance sheet exposures. Secretary Paulson stated: `The regulators
didn't have clear enough visibility with what was going on in terms of these
off-balance-sheet SIV's."
Whereas Bank of America Corp. disclosed in October 2007 that it set aside $2.03
billion in the third quarter to cover bad loans amid the worst U.S. housing
slump in 16 years. and saw third-quarter profit to drop 32 percent, more than
analysts estimated;
Whereas Bank of America disclosed in October 2007 that it's non-performing
assets rose to $3.37 billion from $2.39 in the previous quarter;
Resolved that shareholders request the company to disclose on its website
(omitting proprietary information and at a reasonable cost) quarterly collateral
and other credit risk management policy for off balance sheet liabilities and
exposure in the following areas:
Structured Investment Vehicles;
Structured securities
Conduits;
[INQUIRY LETTER]
February 15, 2008
Securities & Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Att: Will Hines, Esq.
Office of the Chief Counsel
Division of Corporation Finance
Via fax 202-772-9201
Re: Shareholder Proposal submitted to Bank of America Corporation
Dear Sir/Madam:
I have been asked by the Missionary Oblates of Mary Immaculate, the Sisters of
Charity of St. Elizabeth, the Adrian Dominican Sisters, the Providence Trust,
St. Scholastica Monastery (Sisters of Fort Smith), the Benedictine Sisters of
Mount St. Scholastica, and the Monistrio Pan de Vida (hereinafter collectively
referred to as the "Proponents"), each of which is a beneficial owner of shares
of common stock of Bank of America Corporation (hereinafter referred to either
as "BAC" or the Company"), and who have jointly submitted a shareholder proposal
to BAC, to respond to the letter dated December 21, 2007, sent to the Securities
& Exchange Commission by Hunton & Williams on behalf of the Company, in which
BAC contends that the Proponents' shareholder proposal may be excluded from the
Company's year 2008 proxy statement by virtue of Rules 14a-8(i)(7) and
14a-8(i)(10).
I have reviewed the Proponents' shareholder proposal, as well as the aforesaid
letter sent by the Company, and based upon the foregoing, as well as upon a
review of Rule 14a-8, it is my opinion that the Proponents' shareholder proposal
must be included in BAC's year 2008 proxy statement and that it is not
excludable by virtue of either of the cited rules.
The Proponents' shareholder proposal requests BAC to disclose periodically its
"collateral and other credit risk management policy for off balance sheet
liabilities and exposures to "Structured Investment Vehicles", "Structured
Securities" and "Conduits".
BACKGROUND
It is unnecessary to rehearse the credit crunch that has resulted from the
sub-prime mortgage crisis. Suffice it to say that at the core of the problem has
been the various bank and investment bank created off balance sheet investment
vehicles that have been created in abundance in recent years to hold, among
other assets, CMOs (containing many, or mostly, sub prime mortgages) and credit
swaps (usually based on these types of CMOs). Since the underlying assets of
these vehicles are themselves opaque, these off balance sheet entities
themselves have been, to say the least, opaque.
This lack of disclosure has been widely decried. For example, the Financial
Times of January 26/27, 2008, (all Financial Times dates refer to the US
edition) stated, with respect to the underlying assets of these off balance
sheet entities:
Banks that produce complex and illiquid derivative products that have been at
the heart of the credit squeeze might be forced to provide more information
about their products on public stock exchanges.
Leaders of NYSE Euronext, the US-European exchange group, said yesterday that
global regulators were considering telling banks they must disclose basic data
about such contracts, many of which have fallen sharply after the US subprime
housing crisis.
The move would be a first step towards increasing disclosure on one of the most
illiquid and little-understood areas of modern financial markets. The rapid
growth of the credit derivative markets, and the lack of information about many
contracts, has exacerbated the loss of investor confidence in debt markets.
Duncan Niederauer, chief executive of NYSE Euronext, told a media briefing in
Davos that the exchange had been approached by global regulators asking whether
it and other stock exchanges could become clearing houses for information on
over-the-counter contracts such as collateralised debt obligations and credit
default swaps.
"There is a severe lack of transparency in some of these instruments. You cannot
punch a screen and say: `What is the quote for this exotic piece of paper?' I
would think a natural first step might be to, say, turn us into a quoting and
reporting facility," he said.
European securities regulators and the Securities and Exchange Commission in the
US are reviewing the steps needed to prevent a recurrence of the credit crisis
of the past few months. One of the biggest shocks was the rapid loss of
confidence in complex instruments that were sold by banks to handfuls of
investors.
Jean-Francois Theodore, NYSE Euronext deputy chief executive, said banks might
initially be asked to provide some data about securities and disclose the price
of transactions.
"They [regulators] want to oblige the person who creates the piece of paper to
do a little more than absolutely nothing," he said.
Even if regulators tell banks that they must disclose data on OTC contracts,
they may prefer to do so through their own trade reporting platforms rather than
public stock exchanges, with which they compete for equity trades.
Similarly, The New York Times of January 27, 2008 (Financial Section) quoted the
economist Henry Kaufman as indicating that the current credit problems are much
more severe than other credit crunches of recent memory:
In the latter part of the 1970s and early 80s we had the problems of Brazil,
Argentina, Mexico not paying their debts. Those were kind of nice, isolated
items and could be clearly defined. They weren't as opaque and they weren't as
heterogeneous as the problems in the credit market now.
One reason why the crisis is so severe is uncertainty concerning counter-party
risk. The Wall Street Journal published, on January 18, 2008, a first page
article entitled "Growing Default Fears Unnerve U.S. Markets", which, inter
alia, described many interest swaps as the equivalent of naked short sales:
The turmoil on Wall Street is beginning to rock a foundation of the financial
system: the ability of institutions to make good on their many trades with one
another....
At the center of these concerns is a vast, barely regulated market in which
banks, hedge funds and others trade insurance against debt defaults. This isn't
like life insurance or homeowners' insurance, which states regulate closely. It
consists of financial contracts called credit-default swaps, in which one party,
for a price, assumes the risk that a bond or loan will go bad. This market is
vast: about $45 trillion, a number comparable to all of the deposits in banks
around the world. [An op ed by Wolfgang Munchau in the Financial Times of
January 14, 2008, states that this $45 trillion market is "not an easy figure to
imagine. It is more than three times the annual gross domestic product of the
U.S."]
Not everyone who buys one of these contracts has bonds to insure; because the
value of an insurance contract rises or falls with perceptions of risk, some
players buy them just to speculate. In much the way gamblers make side bets on
football games, a financial institution, hedge fund or other player can make
unlimited bets on whether corporate loans or mortgage-backed securities will
either strengthen or go sour.
If they default, everyone is supposed to settle up with each other, the way
gamblers settle up with their bookies after a game. Even if there isn't a
default, if the market value of the debt changes, parties in a swap may be
required to make large payments to each other.
This being Wall Street, the investors often use heavy borrowing to magnify their
wagers.
The article went on to state:
With many bond values falling and defaults rising, especially in the mortgage
arena, some institutions involved in these trades are weakened. This has
investors and regulators worried that, through such swaps, some market players
could spread their own problems to the wider financial system.
"You are essentially counting on the reliability of strangers" to pay up on
their contracts, notes Warren Buffett, the Omaha billionaire. In some cases, he
says, market players can't determine whether their trading partners have the
ability to pay in times of severe market stress.
The issue is raising broader concern among regulators and investors over what
Wall Street calls "counterparty risk," the danger that one party in a trade
can't pay its losses. A recent survey by Greenwich Associates found that 26% of
investors were worried about counterparty risk, nearly double those who said so
in a poll last March.
Federal Reserve Chairman Ben Bernanke, testifying before Congress yesterday,
noted that "market participants still express considerable uncertainty about the
appropriate valuation of complex financial assets and about the extent of
additional losses that may be disclosed in the future." He said bad financial
news has the potential to limit the amount of credit available to households and
businesses....
This isn't the first time the financial world has shuddered at counterparty
risk. In the spring of 2005, the downgrading of General Motors Corp. and Ford
Motor Co. bonds to "junk" status led to losses for hedge funds that had bought
exposure to these bonds through credit-default swaps.
A far bigger problem came in 1998, when the big hedge fund Long Term Capital
Management nearly collapsed. Regulators scrambled to arrange an industry
bailout, fearing broad damage to the world financial system if LTCM couldn't
make good on billions of dollars of trades with others.
The LTCM crisis involved just one fund, enabling regulators to track its scope
quickly. It's possible that as in the LTCM and auto-bond instances, the markets
will soon stabilize without further trouble. But the landscape today is more
complex. Traders increasingly sell their credit-risk commitments to other
investors in multiple layers, making it difficult to know where the risk
ultimately resides....
The market for swaps has grown fivefold just since 2004. It has no publicly
posted prices; the contracts are sold privately among dealers. The market began
12 years ago with insurance against defaults on corporate bonds, expanding in
2005 to mortgage securities....
Bill Gross, chief investment officer at Allianz SE's Pacific Investment
Management Co, or Pimco, recently told investors that if defaults in
investment-grade and junk corporate bonds this year approach historical norms of
1.25% (versus a mere 0.5% in 2007), sellers of default insurance on such bonds
could face losses of $250 billion on the contracts. That, he said, would equal
the losses some expect in the subprime-mortgage arena.
With no central trade processing of credit-default swaps, defining
trading-partner risks can be a Herculean task. Mr. Buffett learned the
difficulty of unraveling such complex instruments in 2002 when he directed
General Re Corp., a reinsurer that had been acquired by his Berkshire Hathaway
Inc., to pull back from the business of these swaps and other derivatives. It
took General Re four years to whittle the business from 23,218 contracts to 197
by the end of 2006.
Doing so involved tracking down hundreds of counterparties to General Re's
trades, many of which Mr. Buffett and his colleagues had never heard of, he
says, including a bank in Finland and a small loan company in Japan, to name
just two. One contract, Mr. Buffett says, was designed to run for 100 years. "We
lost over $400 million on contracts that were supposedly" safe and properly
priced, "and we did it in a leisurely way in a benign market," Mr. Buffett says.
"If we had to unwind it in one month, who knows what would have happened?"
Bill Gross, "manager of the world's largest bond fund at Pimco" and the bond
world's equivalent to Warren Buffet in the stock world, was quoted in the
Financial Times of January 11, 2008:
So when Bill Gross, manager of the world's largest bond fund at Pimco, warned
this week the CDS world could create new systemic risks, investors were
understandably concerned.
Mr Gross pointed out that in recent years credit derivatives had been heavily
used by the so-called shadow banking system - or the assortment of thinly
capitalised, off balance sheet velicles that have been created by banks this
decade. These entities might struggle to meet their obligations if derivative
contracts are triggered, creating so-called counterparty risk for those
expecting to be paid.
"The conduits that hold CDS contracts are, in effect, non-regulated banks," says
Mr Gross. "[There are] no requirements to hold reserves against a significant
`black swan' run that might break them."
The lack of transparency with respect to the types of off balance sheet vehicles
that are the subject of the Proponents' shareholder proposal was discussed in
the "Lex Column" of the Financial Times on January 10, 2008:
The idea that accounts represent the truth would amuse many seasoned investors.
Still, even fanatical annual report readers would have struggled to predict
banks' exposure to financial detritus such as structured investment vehicles,
collateralised debt obligations and conduits. Citigroup estimates European banks
could see [Euro-dollar]450bn worth of "involuntary" growth in assets as
off-balance sheet activity is consolidated in their accounts.
The International Accounting Standards Board, with the blessing of US standard
setters, is considering how better to capture off-balance sheet activity. One
idea is to publish a "parallel balance sheet" in the form of a footnote. This
would detail exposure to unconsolidated vehicles, along with a sensitivity
analysis. There are some good arguments for this. Capital adequacy rules, unlike
accounts, often define assets taking into account contingent commitments to
extend loans to customers.
Similarly, according to the Financial Times (January 17, 2008):
Josef Ackermann, chief executive of Deutsche Bank, has called for a thorough
overhaul of the operations of investment banks and regulators to combat a
widespread loss of investor confidence in complex finance.
Banks needed to find ways of making complex structured products, such as
mortgage securities, far more transparent, thus reducing investors' dependency
on credit ratings, Mr Ackermann said.
"Improved transparency is decisive, including disclosure of off-balance-sheet
exposures, such as structured investment vehicles," Mr Ackermann said in a
private speech to the London School of Economics this week. Deutsche Bank is now
circulating the speech to key clients and regulators.
Regulators had to shift from their emphasis on regulatory capital issues to a
more "holistic" approach that also monitored banks' liquidity positions.
"In the early 1930s, the SEC restored confidence in markets by providing
transparency on share prices ... sound pricing infrastructurre needs to be
developed [for complex] new products," said Mr Ackermann.
The comments are some of the most outspoken calls for reform made by a senior
banker. But Mr Ackermann's remarks reflect an intensifying debate behind the
scenes between policymakers and bankers about how best to respond to the credit
squeeze.
These discussions are likely to intensify next week when regulators, bankers and
world leaders gather for the World Economic Forum in Davos, not least because
central bankers and regulators are expected to issue calls for policy reform in
the spring.
Some Wall Street and City bankers fear the mounting toll of losses linked to
subprime-linked securities and other debt will soon prompt US politicians and
regulators to clamp down on complex finance.
However, bankers such as Mr Ackermann hope this can be avoided if the industry
is seen to reform itself.
The Proponents' shareholder proposal is a step in the attempt to convince the
industry to reform itself.
As a result of the credit crisis, total write downs worldwide have thus far
approximated $150,000,000,000., with some $120,000,000,000. more anticipated In
its 8-K dated January 22, 2008, BAC reported that it had suffered write downs in
excess of $5,250,000,000.
RULE 14a-8(i)(10)
The Company contends that it has substantially complied with the Proponents
request because it provides the information required by Items 303(a)(4) and
303(b) of Regulation S-K. Item 303(a)(4) requires that in the registrant's MD&A
it discuss any "Off-balance sheet arrangements" as of the end of its most recent
fiscal year and Item 303(b) requires updating such information in interim
reports.
However, the Company has not quoted any information that it has actually
supplied via its MD&A. We are therefore more than a little perplexed by BAC's
contention that it has already disclosed the information requested in the
Proponents' shareholder proposal. BAC, without citing any specific page or
statistic, merely says that it reports what is required by Item 303(a). Without
more specificity, this hardly meets the burden of proof, that rests on BAC, to
establish the applicability of Rule 14a-8(i)(10).
If, despite the Company's failure to establish that the Proponents' shareholder
proposal has been substantially implemented, one were nevertheless to examine
the MD&A set forth in BAC's most recent 10-K (at pages 11-99), filed on February
28, 2007, there is not one specific reference to off-balance sheet special
entities in the entire 39 page portion of the MD&A (pp. 46-84) devoted to the
Company's discussion of risk. Although the MD&A contains a short section (pp
43-45) that refers to off-balance sheet entities, there is nothing in those
pages that responds directly to the Proponent's request for disclosure of
"collateral and other credit risk management policies" for SIVs, conduits and
other structured products other than (as quoted by the Company in its letter)
that BAC manages its risks "within our policies and practices", without
attempting to specify what those policies and practices are or how they would be
applied to off-balance sheet entities. Rather than do so, the Company contends
that it releases whatever information that it, itself, deems to be material. By
definition, all shareholder disclosure resolutions ask for information over and
above what the registrant is required under the SEC's disclosure rules to
disclose as material to the company. If the Company's argument were to be
accepted, the logical result would be that NO disclosure resolution would ever
pass muster under Rule 14a-8(i)(10). In this connection, we draw the Staff's
attention, by analogy, to the Staff's approach under Rule 14a-8(i)(7) with
respect to requests to supplement the information contained in mandatory
Commission filings. That Staff position is described hereinafter in connection
with the Johnson Controls no-action letter discussed in the following (Rule
14a-8(i)(7)) portion of this letter.
For the foregoing reasons, the Proponents' shareholder proposal is not
excludable by virtue of Rule 14a-8(i)(10).
RULE 14a-8(i)(7)
The no-action letters relied on by the Company are readily distinguishable. The
J.P.Morgan letter, for example, excluded a proposal that requested the
registrant to "include a discussion of the risks of inflation and deflation" and
the proposal was excluded on the ground that it related "to [the registrant's]
ordinary business operations (i.e., evaluation of risk in reports to
shareholders)." In contrast, the Proponents' shareholder proposal does not
request an evaluation of risk, but rather than the Company disclose its existing
policies. The Dow letter is also readily distinguishable on identical grounds.
(See also the more detailed discussion below concerning "evaluation of risk".)
Even less applicable to the instant situation is the Johnson Controls no-action
letter. In that case, the shareholder had requested that the registrant take
"the necessary steps that Johnson controls, Inc. specifically identify the true
value of the Shareholders' equity when the goodwill is (as it is now) nearly as
high as the shareholders' equity. This new disclosure could be discontinued when
the Goodwill is reduced to a realist number ... say 10% of the shareholders'
equity." Not surprisingly, the Staff determined that the proposal dealt with
"the presentation of financial statements in reports to shareholders" and was
therefore excludable under Rule 14a-8(i)(7). The Proponents' shareholder
proposal, however, does not request any financial presentation, in the financial
statements or otherwise.
The Johnson Controls no-action letter is also notable for an additional reason.
In that letter the Staff announced a new policy with respect to shareholder
proposals, stating that "we have determined that proposals requesting additional
disclosures in Commission prescribed documents should not be omitted under the
`ordinary business' exclusion solely because they relate to the preparation and
content of documents filed with or submitted to the Commission". Therefore, even
if the Proponents' shareholder proposal were to be deemed to request that
supplementary information be supplied in the 10-K or 10-Q, that would not, in
and of itself, justify exclusion of the proposal under Rule 14a-8(i)(7).
Consequently, the Company's argument on page 6, first and second full
paragraphs, is wholly without merit. There is nothing inherently wrong with
"requested disclosure that goes beyond what is currently required".
In Travelers, the proponent requested the registrant to adopt a specific
accounting method. It was therefore not surprising that the Staff deemed the
matter to be "ordinary business" No similar request has been made by the
Proponents, who have requested disclosure of non-accounting policies, not
adoption of specific accounting treatments. In a like manner, the proponent in
Bank America requested "detailed disclosure regarding the Company's reserve
accounts", again a balance sheet disclosure item, even aside from the question
of whether the letter was overruled by Johnson Controls. Similarly to Travelers
and Bank America, the proponent in Conseco requested specific accounting
treatment of certain items.
In Crescent, the proponent requested a policy that would have required that very
detailed, prescribed information be disclosed in connection with all conflict of
interest transactions engaged in by members of the governing board. The Staff,
not surprisingly, barred the proposal. In the instant case, however, the
Proponents are not prescribing the disclosure of specific detailed facts, but
rather of the Company's own policies.
Finally, the relevancy of the Occidental no-action letter is unclear, since it
pertains to the selection of auditors, a topic that the Staff has (at least in
recent years) consistently ruled is a matter of ordinary business.
The Company also argues that the Proponents' shareholder proposal involves the
evaluation of risk. As noted above in connection with the J.P. Morgan and Dow
no-action letters, in those cases the proponent requested the Company to
evaluate its own actions to see if they were creating a risk to the registrant.
Both of those letters bear no resemblance to the instant situation. The
Proponents are not asking the Company to evaluate the risks inherent in SIVs,
conduits or other structured investment vehicles. Instead, they are asking the
Company to inform its shareholders of its existing risk management policies
concerning these off balance sheet investment vehicles.
The Wachovia no-action letter, cited by BAC, requested a "report on the effect
on Wachovia's business strategy of the challenges created by global climate
change." Like the J.P. Morgan and Dow no-action letters, the proposal clearly
called for a risk assessment by the registrant. The Proponents' shareholder
proposal makes no such request Similarly, in the second Dow no-action letter
cited by the Company, the proponent requested a "report describing the impacts
that outstanding Bhopal issues, if left unresolved, may pose on Dow Chemical,
its reputation, its finances and its expansion in Asia and elsewhere". Not
surprisingly, this proposal was deemed by the Staff to be one that involved the
"evaluation of risks and liabilities". And, as noted in the Company's letter,
the proposals to General Electric (no-action letter dated January 12, 2006, not
January 1, 2006) and McDonalds clearly were pure risk evaluation proposals. In
contrast, the Proponents' shareholder proposal does not call for an evaluation
of risk. It does not, as asserted by the Company, request information "relating
to its exposure" to structured investment vehicles, but rather requests the
disclosure of an existing policy already adopted by the Company. In short, there
is no evaluation called for by the proposal, whether of risk or otherwise.
Finally, we believe that the Proponents' shareholder proposal clearly raises an
important policy matter so as to preclude the application of Rule 14a-8(i)(7).
As briefly outlined in the "Background" section of this letter, the inadequacy
of disclose is at the core of the current credit crunch. Since the Proponents'
shareholder proposal is an attempt to get at one important aspect of that
inadequate disclosure, their proposal is not subject to exclusion by virtue of
Rule 14a-8(i)(7).
In conclusion, we request the Staff to inform the Company that the SEC proxy
rules require denial of the Company's no action request. We would appreciate
your telephoning the undersigned at 941-349-6164 with respect to any questions
in connection with this matter or if the staff wishes any further information.
Faxes can be received at the same number. Please also note that the undersigned
may be reached by mail or express delivery at the letterhead address (or via the
email address).
Very truly yours,
/s/
Paul M. Neuhauser
Attorney at Law
cc: Andrew A. Gerber, Esq.
Rev Seamus Finn and all other proponents
Nadim Narine
Laura Berry
[STAFF REPLY LETTER]
February 20, 2008
Response of the Office of Chief Counsel Division of Corporation Finance
Re: Bank of America Corporation Incoming letter dated December 21, 2007
The proposal requests that the company disclose collateral and other credit risk
management policy for off balance sheet liabilities and exposure in three areas
specified in the proposal.
There appears to be some basis for your view that Bank of America may exclude
the proposal under rule 14a-8(i)(7), as relating to Bank of America's ordinary
business operations (i.e., evaluation of risk). Accordingly, we will not
recommend enforcement action to the Commission if Bank of America 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 basis
for omission upon which Bank of America relies.
Sincerely,
/s/
Peggy Kim
Attorney-Adviser |
