Company Name: KB Home
Public Availability Date: January 11, 2008
Document Sections:
INQUIRY LETTER
INQUIRY LETTER
INQUIRY LETTER
APPENDIX 1
APPENDIX 2
STAFF REPLY LETTER
[INQUIRY LETTER]
January 4, 2008
BY OVERNIGHT DELIVERY
Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
100 F Street, N.E.
Washington, DC 20549
Re: KB Home - File No. 1-9195 Shareholder Proposal of Amalgamated Bank LongView
Collective Investment Fund
Ladies and Gentlemen:
On behalf of KB Home, we are writing to reply to the letter dated December 28,
2007 (the "Proponent's Letter") that Cornish F. Hitchcock submitted on behalf of
the Amalgamated Bank LongView Collective Investment Fund (the "Proponent") to
the staff (the "Staff") of the Division of Corporation Finance of the Securities
and Exchange Commission (the "Commission"), a copy of which is attached hereto
as Exhibit A. The Proponent's Letter is in response to a letter dated December
12, 2007 (the "Initial Letter") that we submitted to the Staff on behalf of KB
Home. The Initial Letter requests the Staff's concurrence that it will not
recommend any enforcement action if KB Home excludes from its proxy materials
for its 2008 annual meeting a proposal (the "Proposal") the Proponent submitted
for consideration at the meeting.
The Proposal requests that KB Home's "board of directors establish a new
Compliance Committee, to be composed of independent directors, that would
conduct a thorough review of the Company's regulatory, litigation and compliance
risks with respect to its mortgage lending operations and report to shareholders
within six months of 2008 annual meeting as to the committee's findings and
recommendations, as well as the progress made towards implementing those
recommendations."
In the Initial Letter, we explained that KB Home
intends to exclude the Proposal pursuant to Rule 14a-8(i)(7) because it relates
to the conduct of KB Home's internal legal compliance program and it requires an
internal risk assessment concerning KB Home's ordinary business operations.
The Staff apparently agrees, having concurred two weeks ago with the decision of
Toll Brothers, Inc., a company in the same industry as KB Home, to exclude the
same proposal from the same proponent. Toll Brothers, Inc. (Dec. 20, 2007). Just
as we argued in the Initial Letter, Toll Brothers argued in its no-action
request letter that the proposal focused on an internal risk assessment
concerning ordinary business operations.
Toll Brothers is just the latest in a long line of Staff concurrences with
decisions by companies to exclude similar proposals. The Initial Letter cites a
number of the Staffs more recent concurrences in this regard. The Proponent's
Letter attempts to dismiss these Staff concurrences by arguing that the mortgage
lending laws at issue in this Proposal and in Toll Brothers are more "urgent"
than the laws at issue in the precedent we cited, including laws regulating
securities, bribery, trading with the enemy and government contracting. This
questionable assertion would seem to have been answered by Toll Brothers.
In any event, the Proponent's Letter misses the point. It is not enough to
assert that a proposal refers to a significant policy issue to avoid exclusion;
as the Commission stated in its 1998 release (Rel. 34-40018, May 21, 1998), the
proposal must focus on the significant policy issue. What does the proposal
actually ask the company to do? Here, as in Toll Brothers and the precedent
cited in the Initial Letter, the Proposal is focused on ordinary course
operational matters relating to the conduct of KB Home's internal legal
compliance program (i.e., it asks KB Home to form a board committee to review
its compliance with a broad body of law that is tightly integrated into KB
Home's day-to-day business activities) and an internal risk assessment (i.e., it
asks this committee to report on its review of the regulatory, legal and
compliance risks to KB Home).
None of the precedent cited in the Proponent's Letter supports its argument:
● Beazer Homes USA, Inc.
(Nov. 30, 2007)The mortgage lending practices proposal at issue did not require
formation of a compliance committee or a review of internal compliance risks.
Presumably for this reason, the company did not argue that the proposal related
to the conduct of its legal compliance program or an internal assessment of its
risks.
●
Yahoo! Inc.
(Apr. 16, 2007)The proposal at issue was concerned only with human rights
policies "above and beyond matters of legal compliance" and did not seek an
internal assessment of risk. Presumably for this reason, the company did not
argue that the proposal related to the conduct of its legal compliance program
or an internal assessment of its risks.
● ExxonMobil Corporation (Mar. 18, 2005)The proposal at issue did not involve
the conduct of the company's legal compliance program or an internal assessment
of its risks. Instead, it asked for a report on the potential environmental
damage the company's proposed drilling operations would cause to others. The
Staff cited this proposal in Staff Legal Bulletin 14C as one that could not be
excluded because it did not involve an internal assessment of risk, but instead
focused on how the company's operations affected those outside the company. The
ExxonMobil proposal's external focus is very different from the
internally-focused Proposal at issue here. The Proposal is, instead, very
similar to the proposal in
Xcel Energy Inc. (Apr. 1, 2003) discussed in Staff Legal Bulletin 14C as a counterpoint to ExxonMobil. The Xcel Energy proposal,
like this Proposal, asked the company to report on risks to the company arising
from the company's operations. Because the proposal focused on internal risks
instead of the sort of external risks at issue in ExxonMobil, the Staff
concurred with the company's decision to exclude it.
● General Electric Company (Jan. 28, 2005)The proposal at issue did not involve
the company's legal compliance program and asked for a report relating to the
financial and reputational risks of the company's operations in a specific
foreign country associated with terrorist activities. Presumably for this
reason, the company did not argue that the proposal related to the conduct of
its legal compliance program and the Staff did not agree that the proposal's
required risk assessment was sufficiently ordinary course.
● Associates First Capital Corporation (Mar. 13, 2000)The proposal at issue did
ask for a board committee to monitor accounting and legal compliance issues
raised by predatory lending, but the company here actually did not make any Rule
14a-8(i)(7) arguments in its no-action request letter. Instead, the company
attempted to incorporate by reference arguments it made in its no-action request
letter from the prior year involving a very similar proposal (Associates First Capital Corporation, Feb. 23, 1999), a practice that we understand to be
contrary to the Staff's policy to consider only arguments a company actually
makes in its current request letter. As we noted in the Initial Letter, the
Staff concurred with the Rule 14a-8(i)(7) arguments the company made to support
its decision in 1999 to exclude the similar proposal, noting that the proposal
concerned the conduct of the company's legal compliance program.
For the reasons set forth above and in the Initial Letter, and given the Staff's
very recent concurrence in Toll Brothers, KB Home disagrees with the assertion
in the Proponent's Letter that KB Home has not sufficiently justified its
decision to exclude the Proposal and respectfully reiterates its request that
the Staff confirm that it will not recommend any enforcement action if KB Home
excludes the Proposal from the proxy materials for its 2008 annual meeting
pursuant to Rule 14a-8(i)(7).
***
Pursuant to Rule 14a-8(j), we are including six copies of this letter and are
also sending a copy of this letter to the Proponent's designated representative.
If you have any questions regarding this matter or require additional
information, please contact me at (213) 683-9525 or William A. Richelieu of KB
Home at (310) 231-4098.
Sincerely,
/s/
Michael J. O'Sullivan
cc: Cornish F. Hitchcock, on behalf of
Amalgamated Bank Long View Collective Investment Fund
William A. Richelieu
KB Home
[INQUIRY LETTER]
December 12, 2007
BY OVERNIGHT DELIVERY
Securities and Exchange Commission
Division of Corporation Finance
Office of Chief Counsel
100 F Street, N.E.
Washington, DC 20549
Re: KB Home - File No. 1-9195 Statement of Reasons for Omission of Shareholder
Proposal Securities Exchange Act of 1934; Section 14(a); Rule 14a-8
Ladies and Gentlemen:
On behalf of KB Home, and in accordance with Rule 14a-8 under the Securities
Exchange Act of 1934, we are submitting this letter to respectfully request the
concurrence of the staff (the "Staff") of the Division of Corporation Finance of
the Securities and Exchange Commission (the "Commission") that it will not
recommend any enforcement action to the Commission if KB Home excludes the
shareholder proposal described below (the "Proposal") from its proxy materials
for its 2008 annual meeting of stockholders.
This letter contains the reasons supporting KB Home's belief that it may
properly exclude the Proposal. We have been advised by KB Home as to certain
factual matters set forth in this letter.
The Proposal
The Proposal, submitted by the Amalgamated Bank LongView Collective Investment
Fund (the "Proponent"), concerns the general conduct of KB Home's legal
compliance program for mortgage lending. The resolution portion of the Proposal
is as follows:
The shareholders of KB Home (the "Company") request that the board of directors
establish a new Compliance Committee, to be composed of independent directors,
that would conduct a thorough review of the Company's regulatory, litigation and
compliance risks with respect to its mortgage lending operations and report to
shareholders within six months of 2008 annual meeting as to the committee's
findings and recommendations, as well as the progress made towards implementing
those recommendations. This report should be prepared at reasonable cost and
omit confidential information.
A copy of the Proposal, including both the resolution and the supporting
statement and the Proponent's cover letter, is attached to this letter as
Exhibit A.
Reason for Exclusion
KB Home intends to exclude the Proposal from the proxy materials for its 2008
annual meeting because it relates to ordinary business operations as
contemplated by Rule 14a-8(i)(7).
Analysis
The 14a-8(i)(7) exclusion and the Commission's policy in applying it
Rule 14a-8(i)(7) permits a company to exclude a proposal dealing with matters
relating to its ordinary business operations. In Release 34-40018 (May 21,
1998), the Commission explained that the general underlying policy of this
exclusion is:
to confine the solution of ordinary business problems to the management and the
board of directors, since it is impracticable for shareholders to decide how to
solve such problems at an annual meeting.
This policy, the Commission went on to state in that release, rests on "two
central considerations":
1. Some 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."
2. Some proposals seek "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."
Some proposals that relate to matters fundamental to a company's day-to-day
business may, nevertheless, not be excludable if it they focus on sufficiently
significant policy issues. This is because, as the Commission stated in the
release, those proposals would "transcend the day-to-day business matters and
raise policy issues so significant that it would be appropriate for a
shareholder vote."
When a proposal, like this Proposal, requests formation of a committee or
preparation of a report, the Commission has stated that it will look to the
subject matter of the committee or report in order to determine whether the
proposal involves a matter of ordinary business under Rule 14a-8(i)(7). Release
34-20091 (Aug. 16, 1983).
Applying these standards, the Staff has consistently concurred when companies
exclude proposals just like this Proposal
The Proposal asks for a "thorough review" and a report on all of KB Home's
"regulatory, litigation and compliance risks with respect to its mortgage
lending operations." The evaluation and management of the company's regulatory,
litigation and compliance risks, including its mortgage lending risks, is the
central function of KB Home's legal compliance program. This legal compliance
program is integral to KB Home's day-to-day operations because its business is
so extensively regulated.
When companies like KB Home exclude proposals like this that relate to the
conduct of their legal compliance programs, the Staff has consistently declined
to recommend enforcement action. Similar proposals recently excluded on these
grounds include those that asked a company to:
appoint an independent legal advisory commission to evaluate securities law
issuesFord Motor Company (Mar. 19, 2007);
have its board of directors prepare a report assessing the costs and benefits
to the company of the Sarbanes-Oxley Act, and its impact on one of the company's
operationsThe Bear Stearns Companies Inc. (Feb. 14, 2007), Merrill Lynch & Co.,
Inc. (Jan. 11, 2007), Lehman Brothers Holdings Inc.
(Jan. 11, 2007) and Morgan Stanley
(Jan. 8, 2007);
create an ethics oversight committee of independent directors to monitor a
company's business practices to ensure compliance with law, including
retaliation protectionThe AES Corporation
(Jan. 9, 2007);
establish a special committee of independent directors to review IRA sales
practices, including recent allegations of fraudulent marketing, and report its
findings and recommendations to shareholdersH&R Block, Inc.
(June 26, 2006);
have its board of directors report to shareholders on policies and procedures
adopted and implemented to eliminate the reoccurrence of violations of various
lawsHalliburton Company (Mar. 10, 2006);
have its board of directors investigate, independent of in-house legal
counsel, all potential legal liabilities resulting from a securities law
filingConocoPhillips (Feb. 23, 2006);
have its board of directors prepare a report for the company's shareholders
evaluating the company's compliance with the federal proxy rulesSprint Nextel Corporation
(Feb. 15, 2006); and
create an ethics oversight committee of independent directors for the purpose
of monitoring the company's operations to ensure they comply with its ethics
policy and applicable law, including the Foreign Corrupt Practices ActMonsanto Company (Nov. 3, 2005).
Just as these companies, and many others, have properly excluded legal
compliance proposals under Rule 14a-8(i)(7), KB Home may also properly exclude
the Proposal. The remainder of this letter discusses the reasons for this.
The Proposal relates to the general conduct of KB Home's legal compliance
program, a program that is fundamental to KB Home's ability to conduct its
day-to-day business
KB Home builds and sells homes. Every aspect of this business is heavily
regulated. In order to develop land, KB Home must first comply with numerous
local, state and federal regulations concerning zoning, land use, resource
protection, environmental impacts, permitting and remediation. In order to build
a house, KB Home must comply with detailed building and safety codes, labor
regulations and contracting requirements. In order to sell a house, KB Home must
comply with comprehensive real estate sales regulations and licensing
restrictions. And in order to assist with financing arrangements for the
purchase of a house, KB Home must ensure it acts in compliance with the maze of
detailed regulations that apply to mortgage lending.
Mortgage lending is regulated by many federal, state and local governmental and
quasi-governmental agencies, including: The Department of Housing and Urban
Development, the Federal Housing Administration, the Department of Veterans
Affairs, the Federal Trade Commission, Fannie Mae, Freddie Mac and Ginnie Mae,
as well as comparable bodies in the states, counties and cities and towns in
which KB Home constructs and sells homes. Even the Commission, through its
Regulation AB, regulates an important piece of the mortgage finance process.
These agencies enforce a patchwork quilt of mortgage-lending statutes, rules,
regulations, practices and standards, such as the Fair Housing Act, Equal Credit
Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, the Real
Estate Settlement Procedures Act and the Home Ownership Equity Protection Act
and the regulations promulgated under those statutes, as well as state and local
laws and regulations. These laws regulate nearly every aspect of the mortgage
lending process: they prohibit discrimination, require the disclosure of certain
basic information to mortgagors concerning credit terms and settlement costs,
prohibit referral fees, require the maintenance and disclosure of information
regarding the disposition of mortgage applications based on race, gender,
geographical distribution, income level and annual percentage rate over certain
thresholds, impose licensing restrictions, establish standards for advertising,
processing, underwriting and servicing mortgage loans and closing practices,
restrict certain loan features and closing terms and, depending on the state,
may fix maximum interest rates and fees.
To operate within all these home development, construction, sale and financing
regulations requires an active legal compliance program tightly-integrated into
everything KB Home does. Accordingly, on a day-to-day basis, KB Home makes its
business decisions and conducts its operations with the active oversight of, and
input from, its legal compliance program. Changes in law and KB Home's business
constantly require KB Home to evaluate and adjust its legal compliance program.
As a result, all levels of KB Home participate in its legal compliance program.
At the board level, KB Home's Audit and Compliance Committee actively oversees,
as its name suggests, all compliance matters. At the management level, KB Home's
general counsel, chief accounting officer, head of internal audit, tax manager
and others oversee the day-to-day conduct of KB Home's legal compliance policy.
KB Home employs many individuals who spend all, or substantially all, of their
time administering its legal compliance program, and from time to time obtains
assistance from outside counsel, accountants and other professionals. And all KB
Home employees with decision-making authority are expected to be familiar with
the legal compliance issues that impact their responsibilities.
For these reasons, KB Home's legal compliance program must be, and is,
fundamental to its ability to conduct its business on day-to-day basis. The
Proposal would add another layer of review to this program by giving KB Home's
shareholders a direct role in its oversight. Just as KB Home could not run its
business while giving its shareholders direct oversight over its land buying
decisions, or its marketing strategies, or its home design plans, KB Home could
not run its business while giving its shareholders direct oversight over its
legal compliance program.
This fundamental day-to-day role of legal compliance explains why so many
companies consistently exclude, with Staff concurrence, proposals that interfere
with the conduct of any aspect of their legal compliance programs. Just as KB
Home intends to exclude a Proposal that would oversee the mortgage lending
aspect of its legal compliance program, the Staff has previously permitted
another company to exclude a very similar proposal that sought a review and
report to shareholders of a company's compliance with the mortgage lending
aspect of its legal compliance program. (Associates First Capital Corporation,
Feb. 23, 1999) As noted above, other companies have recently excluded, with the
Staff's concurrence, similar proposals that would also oversee discrete aspects
of their legal compliance programs: compliance with securities laws (Ford Motor,
Sprint Nextel), compliance with the Federal Corrupt Practices Act (Halliburton,
Monsanto), compliance with government contracting requirements (Halliburton),
compliance with federal whistleblower protections (AES) and compliance with IRA
sales requirements (H&R Block).
The Proposal probes deeply, and indiscriminately, into a highly-complex area in
which shareholders are not in a position to make an informed judgment
The Proposal would have KB Home conduct a "thorough review" of all "regulatory,
litigation and compliance risks" in its mortgage lending operations, and then
report the results of this review, including findings, recommendations and
progress towards implementing the recommendations, to its shareholders. And KB
Home would have to do all this within six months after its 2008 annual meeting.
The report the Proposal calls for would have to be massive because, as described
above, nearly every aspect of mortgage lending is regulated by multiple federal,
state and quasi-governmental regulations. The Proposal would have KB Home review
and report on each and every one of them. It does not ask KB Home to focus on
any particular aspect of mortgage lending regulation. It does not permit KB Home
to limit its inquiry only to material or important aspects of its mortgage
lending regulation. Instead, it indiscriminately tells KB Home to review and
report on everything in this broad area.
To "thoroughly" and properly capture the complex and intricately-detailed nature
of mortgage lending operations, the Proposal's report would have to be
similarly-complex and detailed. There is no other way to fairly present the many
intricate and difficult regulatory, litigation and compliance issues that can
arise in this area.
The Commission has indicated a concern that proposals like this would tend to
"micro-manage" a company, probing too deeply into matters of a complex nature
upon which shareholders, as a group, are not in a position to make an informed
judgment. The lengthy, detailed and complex report called for by this Proposal
is precisely this sort of micro-management tool. The Proposal makes no allowance
for the likelihood that few, if any, KB Home shareholders would have the
expertise to work their way through such a lengthy and complex report, let alone
formulate an informed judgment on the numerous issues the Proposal would like
the report to address.
This is why companies consistently exclude, with the Staff's concurrence,
proposals like this one that seek to give shareholders an inappropriate level of
detail and oversight regarding an aspect of a company's legal compliance
program. This Proposal's mortgage lending compliance report would cover the same
territory as the mortgage lending report excluded in Associates First, and it
would be just as ill-suited to shareholder review as that and other compliance
reports the Staff has permitted other companies to excludethe Sarbanes-Oxley
reports in Bear Stearns, Merrill Lynch, Lehman Brothers and Morgan Stanley; the
IRA sales report in H&R Block; the FCPA reports in Halliburton and Monsanto; and
the proxy rules report in Sprint Nextel.
The Proposal fails to focus on a significant social policy and, instead, merely
seeks an internal risk assessment
KB Home is mindful that the Commission has stated that some proposals related to
a company's day-to-day business may not be excludable if it they focus on
sufficiently significant policy issues. This is because those proposals would
"transcend the day-to-day business matters and raise policy issues so
significant that it would be appropriate for a shareholder vote." Release
34-40018 (May 21, 1998).
This is not one of those proposals.
This Proposal is not focused. As discussed above, it is actually very general,
covering the entire mortgage lending areaall regulatory risks, all litigation
risks, all compliance risks. In short, every mortgage-related risk one would
expect a company's legal compliance program to handle, from the biggest to the
most mundane. Mortgage lending regulations cover a wide array of issues, ranging
from discrimination, to disclosure, to referral fees, to licensing requirements,
to advertising restrictions, to underwriting standards, to appraisal
requirements, to interest rate determinations, to foreclosure, and so on. The
Proposal does not focus on any of these specific issues.
This Proposal does not transcend day-to-day business matters. As discussed
above, it instead inserts itself directly into KB Home's day-to-day business
operations by involving itself in everything KB Home's legal compliance program
does with respect to mortgage lending operations, no matter how mundane.
And this Proposal raises no issues appropriate for a shareholder vote. Instead
of presenting a specific issue for consideration by KB Home's shareholders, in a
manner in which they can be expected to make an informed decision, this Proposal
requires KB Home to probe deeply into its compliance program for mortgage
lending and dump what it finds on its shareholders. It provides nothing for them
to decide. It identifies no issue on which their input is needed. Instead it
effectively gives them a plenary, unfettered supervisory role over the general
conduct of KB Home's legal compliance program, a function KB Home, like so many
other companies, rightly considers an integral aspect of the day-to-day
management of its ordinary business affairs.
So even though this Proposal invokes a broad area where there are social policy
concerns "mortgage lending operations" it is neither sufficiently focused nor
sufficiently significant to satisfy the Staff's standards under Rule
14a-8(i)(7). In this, it is very similar to a raft of other compliance-related
proposals that have been excluded with the Staff's concurrence, even though they
invoked broad areas of social policy such as, in the letters cited above,
Sarbanes-Oxley (Bear Stearns, Merrill Lynch, Lehman Brothers and Morgan
Stanley), retaliation protection for whistleblowers (AES), sale of investment
products (H&R Block), bribery (Halliburton, Monsanto), proxy rules (Sprint
Nextel), predatory lending (Associates First), and the like.
In 2005, the Staff stated that, when evaluating a proposal relating to
environmental and public health issues, it will concur with decisions to exclude
proposals that "focus on the company engaging in an internal assessment of the
risks or liabilities that the company faces as a result of its operations that
may adversely affect the environment or the public's health." On the other hand,
to the extent a proposal focuses on "minimizing or eliminating" these
operations, the Staff will not concur with decisions to exclude. Staff Legal
Bulletin 14C, Part D.2 (June 28, 2005).
Applying this standard, the Staff has since concurred with decisions to exclude
a wide variety of proposals that focus on internal risk evaluation even though
they also happen to touch on significant social policy issues in the
environmental and public health area. These include proposals requesting risk
evaluations in connection with climate change (Centex Corporation,
May 14, 2007), energy efficiency (TXU Corp., Apr. 2, 2007), greenhouse gas
emissions (Hewlett-Packard Company, Jan. 22, 2007), carbon tax (Great Plains Energy Incorporated,
Feb. 27, 2007), the HIV/AIDS, tuberculosis and malaria pandemics (Abbott Laboratories, Mar. 9, 2006), and sales to Canadian drug wholesalers (Pfizer
Inc., Jan. 29, 2007).
This Proposal would have KB Home review and report on "regulatory, litigation
and compliance risks with respect to its mortgage lending operations" (emphasis
added)precisely the sort of internal risk assessment contemplated by the
Staff's 2005 policy. The Proposal does not propose that KB Home minimize or
eliminate its involvement in mortgage lending activities. Although this Proposal
is not focused on an environmental or public health policy issue (or on any
other particular social policy for that matter), we believe the policy
underlying the Staff's approach to the environmental and public policy area is
equally applicable here and would apply even if the proponent had tried to focus
its Proposal on a particular social policy.
This approach would be consistent with recent letters applying this risk
evaluation standard to exclude proposals that touch on potentially significant
issues outside of the environmental and public health areas, such as homeland
security (Union Pacific Corporation, Feb. 21, 2007) and outsourcing and
offshoring work (General Electric Company, Jan. 13, 2006).
Conclusion
For the foregoing reasons, KB Home respectfully requests that the Staff confirm
that it will not recommend any enforcement action if KB Home excludes the
Proposal from the proxy materials for its 2008 annual meeting pursuant to Rule
14a-8(i)(7).
***
Pursuant to Rule 14a-8(j)(1), this letter is being submitted least 80 calendar
days before March 3, 2008, the date on which KB Home expects to file with the
Commission its definitive proxy materials for its 2008 annual meeting.
Pursuant to Rule 14a-8(j)(2), we are including six copies of this letter as well
as six copies of the Proposal. We are also sending a copy of this letter and its
exhibits to the Proponent's designated representative in order to inform it of
KB Home's intent to exclude this Proposal.
If you have any questions regarding this matter or require additional
information, please contact me at (213) 683-9525 or Tony Richelieu of KB Home at
(310) 231-4098. Any communication by the Staff may be faxed to the undersigned
at (213) 683-4025 and to the Proponent's representative at (202) 315-3552, the
fax number indicated on the cover letter included in Exhibit A.
If the Staff does not agree with the conclusions set forth herein, we request
that the Staff contact us before issuing any formal written response.
Please acknowledge receipt of this letter by date-stamping the enclosed
additional copy and returning it to me in the enclosed self-addressed stamped
envelope.
Sincerely,
/s/
Michael J. O'Sullivan
cc: Cornish F. Hitchcock, on behalf of Amalgamated Bank LongView Collective
Investment Fund
William A. Richelieu
KB Home
[INQUIRY LETTER]
28 December 2007
Office of the Chief Counsel
Division of Corporation Finance
Securities & Exchange Commission
100 F Street, NE
Washington, DC 20549
By courier and e-mail (cfletters@sec.gov)
Dear Counsel:
I write on behalf of Amalgamated Bank LongView Collective Investment Fund (the
"Fund") in response to the letter from counsel for KB Home ("KB" or the
"Company") dated 12 December 2007. In that letter the Company requests that the
Division grant no-action relief with respect to a shareholder proposal submitted
by the Fund that deals with establishing a Compliance Committee on KB's Board of
Directors. For the reasons set forth below, the Fund submits that the Company
has not carried its burden with respect to establishing that the Fund's proposal
may be excluded from the Company's proxy materials.
The Fund's Proposal.
The Fund requests that the Company "establish a Compliance Committee, to be
composed of independent directors, that would conduct a thorough review of the
Company's regulatory, litigation and compliance risks with respect to its
mortgage lending operations and report to shareholders within six months of the
2008 annual meeting as to the committee's findings and recommendations, as well
as the progress made towards implementing those recommendations."
The Supporting Statement cites the recent turmoil in the housing and mortgage
markets and how that has had a negative effect on KB stock, which lost 45
percent of its value in the first ten months of 2007.
The Supporting Statement cites a report in BUSINESS WEEK suggesting that some
aggressive business practices among the nation's largest
homebuildersparticularly within their mortgage or financing affiliatesmay have
contributed to the recent collapse of the mortgage and housing markets. Concerns
center on the conflict of interest that may occur if a home builder's mortgage
affiliate issues mortgages to home buyers who may not be able to repay their
obligations.
The Supporting Statement cites as well the growing demand for legislative and
regulatory action at both the federal and state levels that could increase legal
obligations on loan originators, as well as crack down on deceptive lending,
foreclosure or fraud. This is in addition to the threats of litigation under
current laws affecting home buildings under the Real Estate Settlement
Procedures Act, the Truth in Lending Act, and the Home Ownership Equity
Protection Act, as well as state anti-predatory lending statues.
The Supporting Statement notes that the concern is far from theoretical. In
October 2007 KB (while denying any wrongdoing) was one of six companies to
settle a federal investigation into whether KB had accepted rebates from
insurers for referrals when selling homes. Indeed KB agreed to pay $456,0000,
more than any of the five other companies that also settled these kickback
charges.
The Supporting Statement expresses concern about the damage to long-term
shareholder value that can result from litigation, regulatory costs and
reputational injury at companies that lack adequate compliance procedures and
active board oversight. Accordingly, the Fund's proposal urges an investigation
of KB's practices in this area and efforts to mitigate any potential conflicts
that might be disclosed.
The "Ordinary Business" Exclusion.
1. The Applicable Standard.
KB invokes the "ordinary business" exclusion in Rule 14a-8(i)(7), which permits
companies to omit proposals that "are mundane in nature and do not involve any
substantial policy or other considerations." This is the standard set out in the
1976 rulemaking which produced Rule 14a-8(c)(7) (later recodified as Rule
14a-8(i)(7)) and explained how it should be applied in particular cases. Release
No. 34-12999, 41 Fed. Reg. 52994, 52998 (3 December 1976) (the "1976 Release").
This interpretation stemmed from the Commission's concern about a noaction
letter advising a utility that it could exclude a resolution on the topic of
whether the company should build a nuclear power plant. The staff's theory was
that the utility's management, "as an ordinary business matter, determines the
fuel mix and the types of electrical generating methods that will be utilized to
furnish electricity to the company's customers." Potomac Electric Power Co. (5
March 1976), 1976 SEC No-Act. LEXIS 622, *3. To avoid this result in the future,
the SEC proposed amending the "ordinary business" exclusion to require the
inclusion of "proposals involving important business matters, notwithstanding
the fact that such matters generally would relate to the conduct of the issuer's
ordinary business operations." SEC Release No. 34-12598, 41 Fed. Reg. 29982,
29984 (20 July 1976).1 After receiving public comments, the SEC adopted the 1976
Release and reissued Rule 14a-8 in amended form; the Commission did not,
however, alter the language of the "ordinary business" exclusion, citing
administrative and interpretational concerns. 41 Fed. Reg. at 52997. The SEC
concluded that the existing standard (which was placed in a new subpart (c)(7))
"appears to be a workable one if it is interpreted in a somewhat more flexible
manner than in the past." Id. at 52998.
The "substantial policy" benchmark well captures the point the Commission sought
to make: It is not enough that the topic of a resolution be "mundane" indeed,
the PEPCO example shows how any policy issue can be characterized to seem like a
part of the company's day-to-day business. What matters is whether the proposal
is also devoid of "any substantial policy or other considerations," 1976
Release, 41 Fed. Reg. at 52998 (emphasis added).
In Release No. 34-40018, 63 Fed. Reg. 29106 (28 May 1998) the Commission
reaffirmed this approach and provided additional guidance for determining what
sort of issues would transcend "ordinary business." The Commission recommended a
focus first on the subject matter of the proposal, noting 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 director
shareholder oversight," e.g., decisions on hiring or promotion of employees,
production quality, and retaining suppliers. Id. at 29108. Even so, the SEC
noted, some proposals would "transcend the day-to-day business matters and raise
policy issues so significant" as to warrant shareholder input. Id.
Secondly, the Commission cited a need to examine the extent to which a proposal
would "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.
In seeking no-action relief KB argues that the Fund's proposal relates merely to
KB's day-to-day operations (KB Letter at pp. 4-6), seeks to probe deeply into a
complex area as to which shareholders are not equipped to make an informed
judgment (KB Letter at pp. 6-7), and involves little more than internal risk
assessments (KB Letter at pp. 7-9). As we now demonstrate, the issues presented
by the Fund's proposal transcend ordinary business considerations, and KB has
not sustained its burden of proving otherwise.
2. Significant Policy Issues.
The issues here transcend day-to-day operational issues and are appropriate for
shareholder participation as they involve governance at the board level..
Contrary to KB's assertions, the proposal does not focus on day-to-day
operations, but rather on governance at the board of directors level. Directors
are elected by the shareholders to act as stewards of the shareholders.
Particularly at a time when the Company's stock price has collapsed with no sign
of immediate recovery, it is plainly not a matter of "ordinary business" for
shareholders to raise questions about how directors carry out that
responsibility in this industry.
Specifically, the Fund's proposal asks the board to create a new committee that
would focus on issues pertaining to the present housing and mortgage crisis, a
"significant policy" issue by anyone's definition.2 The proposal also seeks a
board-level review of the Company's mortgage operations business amidst concerns
that home builders' mortgage financing affiliates may have exacerbated the
current problems by originating mortgages in significant numbers to buyers who
could not afford those mortgages.
Apart from significant policy issues presented by the current housing and credit
crisis, we note that the utilization of compliance committees has itself emerged
as a significant issue of corporate governance in recent years. Nearly two years
THE WALL STREET JOURNAL reported how a "small but growing number" of S&P 500
committees are setting up compliance committees along the line recommended by
the Fund here, rather than simply relying on the audit committee. Joann S.
Lublin, Compliance Panels Slowly Take Hold, WALL ST. JOURNAL (9 January 2006)
(Ex. A hereto). The practice is noticeable in industries that are subject to
significant regulatory requirements, as are home builders.
The Fund's proposal is thus comparable to other proposals seeking the creation
of a board-level committee to look into significant policy issues. Three
no-action determinations in which the Division denied no-action relief are
illustrative.
Associates First Capital Corporation (13 March 2000) chillingly anticipated the subprime lending issues that dominate today's news. The resolution there sought
the creation of a board committee to "oversee the development and enforcement of
policies to ensure that (1) accounting methods and financial statements
adequately reflect the risks of subprime lending and (2) employees do not engage
in predatory lending practices; and to report before the next annual meeting to
the shareholders on policies and their enforcement." Despite pleas from the
company this related to its core business activities, the Division denied
no-action relief.
Similarly in General Electric Co. (28 January 2005), the proposal asked the
board to create a committee to "review General Electric's operations in Iran,
with a particular reference to potential financial and reputational risks
incurred by the company by such operations." A report was similarly requested.
The Division rejected GE's argument that the proposal merely sought a request
for an evaluation on doing business in a single country and did not involve any
overriding social policy issue.
More recently in Yahoo!'(16
April 2007), a proposed bylaw would create a board-level Committee on Human
Rights to review "implications of the company's policies" with respect to human
rights, both at home and abroad. Of particular note, the Division rejected the
company's argument that the "issue of how the Company should respond or alter
its services to comply with government regulations ... is central to the
Company's day-to-day business operations," and the "issue is highly complex, and
requires a detailed understanding of, among other things, the Company's current
and future business models and strategies, available technology and the
regulatory landscape" matters on which shareholders were said to be
ill-equipped to judge. 2007 SEC No-Act. LEXIS 445 at *70-71.
Also germane is the recent determination in Beazer Homes USA, Inc.
(30 November 2007), which denied no-action relief with respect to a proposal
that requested a report "evaluating the Company's potential losses or
liabilities relating to its mortgage operations and/or those of any affiliates
or subsidiaries." In Beazer, as here, the proponent cited the current crises
involving mortgage lending, the credit crunch, and the significant loss of
shareholder value among homebuilders as factors that took the proposal out of
the realm of "ordinary business." The Division rejected Beazer's arguments that
this proposal could be excluded under the "ordinary business" exclusion in Rule
14a-8(i)(7), upon which KB relies here.
The authorities cited by KB involve requests for committees to monitor various
aspects of company operations. However, none of those proposals involved the
same level of urgency to shareholders in a given industry sector, such as
homebuilding, or the same public policy considerations that are presented by the
current mortgage crisis. E.g.., Bear Stearns Cos., Inc. (14 February 2007)
(committee to monitor Sarbanes-Oxley compliance); Ford Motor Co. (19 March 2007)
(committee to monitor securities law issues); Halliburton Co. (10 March 2006)
(same); AES Corp. (9 January 2007) (committee to monitor ethics compliance);
Humana Inc. (25 February 1998) (committee to monitor anti-fraud program); Crown
Central Petroleum Corp. (19 February 1997) (committee to monitor franchisee
compliance with laws regarding cigarette sales to minors); Monsanto Co. (3
November 2005) (committee to monitor Foreign Corrupt Practices Act compliance).
The proposal involves more than day-to-day risk assessment.
KB appears to rely heavily on commentary in STAFF LEGAL BULLETIN 14C (2005),
section D of which dealt with application of the "ordinary business" exclusion
to proposals to evaluate environmental and public health risks. Of course, this
proposal does not address environmental or public health issues, and the only
letters cited by KB deal with topics falling into one category or the other. See Centex Corp.
(14 May 2007); TXU Corp. (2 April 2007); Hewlett-Packard Co. (22 January 2007);
Great Plains Energy Inc. (27 February 2007) (environmental proposals); Abbott Laboratories (9 March 2006); Pfizer Inc. (29 January 2007) (public health
proposals).
More generally, though, the STAFF LEGAL BULLETIN made it clear that the
appearance of the word "risk" in a resolution is not an automatic disqualifier.
The STAFF LEGAL BULLETIN thus cited as an example of a proposal that must be
included a request that ExxonMobil prepare a report "on the potential
environmental damage that would result from the company drilling for oil and gas
in protected areas" such as national parks. ExxonMobil Corp. (18 March 2005).
Choices about where and how to drill for oil are surely part of the day-to-day
decision making that takes place at an oil company such as ExxonMobil. Moreover,
the wrong choice may have not only serious environmental concerns, but also
economic consequences in terms of potential liability and loss of reputation.
Nonetheless the Division approved a proposal seeking a report on those issues.
Similarly, a home builder's choices about how to operate a financing affiliate
are at one level a part of the company's day-to-day activities. Nonetheless, the
wrong choice can have significant consequences not only for the company and its
shareholders, but also for home owners who find themselves faced with
foreclosure, for renters who may find themselves evicted from homes threatened
with foreclosure, for communities that face the risk of crime and economic
decline from foreclosures and a need to issue debt to deal with those threats,3
and for investors in this country and abroad who put their money into
collateralized debt obligations and similar vehicles only to see the value
plummet.
Ironically, KB helps make this point when it describes (at p. 5) the "patchwork
quilt of mortgage-lending statutes, rules, regulations, practices and standards"
under federal law, implementing regulations, state laws and local laws. The
complexity of that system argues in favor of allowing shareholders to voice
their views on how the board of directors should oversee management,
particularly at a time when (as the proposal notes) KB has had to expend
resources and company funds settling federal kickback charges. KB's attempt to
trivialize the Fund's proposal as merely a request for a proposal on risk
assessment thus underestimates the policy significance of the proposal.
Conclusion.
For the foregoing reasons, KB Home has failed to carry its burden of justifying
exclusion of the Fund's proposal, and we would ask the Division to advise the
Company that its request for no-action relief is denied.
Thank you for your consideration of these points. Please do not hesitate to
contact me if there is any further information that can be provided.
Very truly yours,
/s/
Cornish F. Hitchcock
cc: Michael J. O'Sullivan, Esq.
Mr. Scott Zdrazil
-----FOOTNOTES-----
1 The proposed text amendment would have replaced the language then in subpart
(c)(5), which allowed companies to omit requests to act on "a matter relating to
the conduct of the ordinary business operations of the issuer," with a new
subpart (c)(7), which would permit the omission only of "routine, day-to-day matter[s] relating to the conduct of the ordinary business operations of the
issuer." See 41 Fed. Reg. at 29988, 29984.
2 See, e.g., Congress Takes Up Mortgages, WALL ST. JOURNAL at A7 (6 September
2007); Treasury Secretary Paulson Presses for Congress to Act on FHA Bill, WALL
ST. JOURNAL (14 September 2007); Bush Wants to Expand Mortgage Disclosures, WALL
ST., JOURNAL at D3 (20 September 2007); Housing Mess: Congress to the Rescue?,
WALL ST. JOURNAL at A9 (22 September 2007); Paulson Urges Congress to Act on
Loan Woes, WALL ST. JOURNAL at A2 (4 December 2007); Bush to Unveil Aid to
Homeowners, WALL ST. JOURNAL at A3 (5 December 2007); Henry M. Paulson, Jr., Our
Plan to Help Homeowners, WALL ST. JOURNAL at A17 (7 December 2007).
3 See Spreading the Misery, THE NEW YORK TIMES (29 November 2007) and Ohio to
Sell Bonds to Avert Home Foreclosures, BLOOMBERG NEWS (24 March 2007) (Exs. B
and C hereto).
[APPENDIX 1]
Exhibit A
2 November 2007
Mr. William A. Richelieu
Corporate Secretary
KB Home
10990 Wilshire Boulevard
Los Angeles, CA 90024
By UPS
Re: Shareholder proposal for 2008 annual meeting
Dear Mr. Richelieu:
On behalf of the Amalgamated Bank LongView Collective Investment Fund (the
"Fund") I submit the enclosed shareholder proposal for inclusion in the proxy
statement that KB Home (the "Company") plans to circulate to shareholders in
anticipation of the 2008 annual meeting. The proposal is being submitted under
SEC Rule 14a-8 and relates to the Company's board committee practices.
The Fund is an S&P 500 index fund located at 275 Seventh Avenue, New York, N.Y.
10001. The Fund has beneficially owned more than $2000 worth of the Company's
common stock for more than a year. A letter confirming ownership is being
submitted under separate cover. The Fund plans to continue ownership through the
date of the 2008 annual meeting, which a representative plans to attend.
We would be pleased to discuss with you the issues presented by this proposal.
Please do not hesitate to contact me if there is anything further that I can
provide.
Very truly yours.
/s/
Cornish F. Hitchcock
[APPENDIX 2]
RESOLVED: The shareholders of KB Home (the "Company") request that the board of
directors establish a new Compliance Committee, to be composed of independent
directors, that would conduct a thorough review of the Company's regulatory,
litigation and compliance risks with respect to its mortgage lending operations
and report to shareholders within six months of the 2008 annual meeting as to
the committee's findings and recommendations, as well as the progress made
towards implementing those recommendations. This report should be prepared at
reasonable cost and may omit confidential information.
SUPPORTING STATEMENT
The recent turmoil in the housing and mortgage markets has wiped out billions of
dollars in shareholder value at housing-related companies. During the first ten
months of 2007, KB Home stock lost 45% of its value.
In its August 13, 2007 issue, BUSINESS WEEK suggested that improper business
practices among the nation's largest homebuildersparticularly within their
mortgage or financing affiliatesmay have contributed to the recent collapse of
the mortgage and housing markets. The specific concern is the conflict of
interest that may occur if a home builder's mortgage affiliate issues mortgages
to home buyers who may not be able to repay their obligations.
Concerns about housing financing practices have prompted calls for more
regulatory and legislative action, as well as litigation. Reports in the news
media indicate an increased interest by state and federal regulators in
enforcing existing laws affecting home builders and mortgage originators, with a
possibility of new regulations. In addition, some Members of Congress have
indicated an interest in imposing a fiduciary obligation on originators and
possibly placing non-bank lenders under federal oversight. At the state level,
legislatures in a number of states are considering measures that target
deceptive lending, foreclosure or fraud.
Litigation is also pending under the Real Estate Settlement Procedures Act, the
Truth in Lending Act, and the Home Ownership Equity Protection Act, as well as
state anti-predatory lending statues.
In October 2007 KB Home paid $456,000 to settle a federal investigation into
whether the Company had accepted rebates from insurers for referrals when
selling homes. This sum was more than any of the five other homebuilders who
also settled kickback charges; the Company has denied any wrongdoing.
As shareholders, we are concerned about the damage to long-term shareholder
value that can result from litigation, regulatory costs and reputational injury
at companies that lack adequate compliance procedures and active oversight by
the board. Although the board currently has an Audit and Compliance Committee,
that committee's 2006 report suggests that its focus is primarily on financial
reporting. Given the current public scrutiny of homebuilders and their business
practices, we believe that it is important for a new board committee to
undertake a thorough investigation of the Company's practices in this area and
to avoid or mitigate any conflicts that might arise.
We urge you to vote FOR this proposal.
[STAFF REPLY LETTER]
January 11, 2008
Response of the Office of Chief Counsel Division of Corporation Finance
Re: KB Home Incoming letter dated December 12, 2007
The proposal requests that the board establish a compliance committee, to be
composed of independent directors, that would conduct a thorough review of the
company's regulatory, litigation and compliance risks with respect to its
mortgage lending operations and would report to shareholders its findings and
recommendations, as well as the progress made towards implementing those
recommendations.
There appears to be some basis for your view that
KB Home may exclude the proposal under rule 14a-8(i)(7), as relating to KB
Home's ordinary business operations (i.e., evaluation of risk). Accordingly, we
will not recommend enforcement action to the Commission if KB Home omits the
proposal from its proxy materials in reliance on rule 14a-8(i)(7).
Sincerely,
/s/
Eduardo Aleman
Attorney-Adviser
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