Release No. IC-9344

Release No. 35-19603

Release No. 34-12599

July 7, 1976

Statement of Informal Procedures for the Rendering of Staff Advice with respect to Shareholder Proposals

In connection with its proposals to revise Securities Exchange Act Rule 14a-8, issued this day, ¹ the Commission deems it appropriate to publish this statement describing the purposes of the Commissions rules regarding shareholder proposals and the informal advisory assistance available to members of the public, from the Commissions staff, with respect to those shareholder proposals management has indicated it intends to omit from its proxy materials pursuant to Rule 14a-8(d).

Since the earliest days of its existence, the Commission has utilized informal administrative action rather than formal administrative proceedings in situations where the need for speed and the character of the agencys function normally made such formal proceedings inappropriate. ² The first of the federal securities laws, the Securities Act of 1933, requires that a registration statement covering securities to be publicly sold must be filed with the Commission 20 days before its effective date. ³ If the Commission concludes that a statement is false or misleading, it can initiate formal administrative proceedings in which, after notice and hearing, it can deny or revoke the effectiveness of the statement. ⁴

The Commission quickly realized, however, that it would be impossible for it as a practical matter to take such formal action in any substantial number of cases. ⁵ As a result, there evolved the informal deficiency letter or letter of comment, in which the staff indicates to the issuer its views as to any deficiencies in the statement and gives the issuer the opportunity to correct them before the statement becomes effective. This procedure aids compliance with the disclosure requirements of the Act without the need for protracted formal administrative proceedings, the very initiation of which could cause serious problems in selling the securities. ⁶

Unlike the Securities Act of 1933, which requires the filing of registration statements prior to their effective date and specifies in considerable detail the information they must contain, ⁷ the Securities Exchange Act of 1934 merely prohibits the solicitation of proxies in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. ⁸ Congress thus left it to the Commission to prescribe not only the substantive standards governing the solicitation of proxies, but also the procedures to be followed. That Act, however, differs from the Securities Act of 1933, in that Congress made no provision for the Commission to initiate formal administrative procedures to prevent violations of the proxy rules; ⁹ the only sanction available to the Commission to prohibit a violation is to initiate a district court suit for an injunction, under Section 21(e) of the Act. ¹⁰

The Commissions first proxy rules, adopted in 1935, did not require that the materials be filed with the agency before distribution; they merely specified certain information that had to be disclosed. ¹¹ This arrangement proved unsatisfactory, however, because there were a number of instances in which the Commission, upon examining the material that had been distributed, concluded that the material had not complied with the rules and requested the company to make a supplemental solicitation. ¹²

In 1938, the Commission advised persons desiring informal opinions or suggestions in connection with proxy material to present the request as far in advance of the solicitation as practicable. ¹³ The procedure did not materially reduce the number of proxy solicitations in violation of the rules, however, and, in 1940, the Commission amended its rules to require, as they have provided ever since, that proxy materials he filed with the Commission for its inspection prior to solicitation. ¹⁴

The prefiling requirement enables the Commission to examine and comment upon the proposed proxy material before distribution to security holders. In accordance with our practice, ¹⁵ the examination ordinarily is made by the staff, with participation by the Commission itself only in those relatively rare cases where unusual problems exist and the staff or an interested person requests it.

The Commissions rules with respect to security holder proposals underwent a similar development, reflecting the Commissions practical experience in dealing with them. In 1938, the Commission took the view that a proxy statement was misleading if management did not indicate any security holder proposals which it knew would be presented at the meeting and against which it intended to vote the proxy it was soliciting. ¹⁶ It provided a requirement for such disclosure in an amendment to the rules in 1940, which also required that the proxy itself provide a space for the shareholder to vote on the proposal ¹⁷ Two years later, the rules were amended to require the company to include proposals of which it had been given reasonable notice by the security holder. ¹⁸ A 1947 amendment required the company to notify the Commission, when it filed its preliminary material, of any security holder proposal it intended to omit; ¹⁹ in 1954, a further amendment required the company to give such notice to the Commission before it filed its materials ²⁰ Amendments in 1948, 1952 and 1954 specified circumstances in which the company was not required to include security holder proposals. ²¹

Thus, over the years the information required to be included in proxy solicitation materials, the time for filing such materials with the Commission and company obligations with respect to security holder proposals underwent significant development and improvement. But, two interrelated aspects of the Commissions review of proxy materials remained the same:

(a) the Commissions sole purpose in conducting such review has been to insure full disclosure to public investors; and

(b) the Commission has never purported or attempted definitively to determine whether particular proxy material complied with the rules.

The Commission, of course, has no interest in the merits of particular security holder proposals; the right of security holders to present proposals at the meeting, as distinguished from the right to include such proposals in managements proxy materials, turns upon state law. ²² The Commissions sole concern is to insure that public investors receive full and accurate information about all security holder proposals that are to, or should, be submitted to them for their action. If the company fails to include in its proxy materials a security holder proposal that it should have included, the other security holders have not only been denied necessary information and the opportunity to vote for a proposal they favor, but unwittingly may have been given a proxy that management would vote against the proposal.

Staff review of proxy solicitation materials is concentrated in the two or three months in the spring, when most corporate meetings are held. In the 1974 fiscal year, the Commission reviewed more than 6,700 proxy statements. ²³ With its limited staff and the need for rapid examination, the Commission necessarily cannot do more in each case than make a quick analysis of the material submitted that, perforce, lacks the kind of in-depth study that would be essential to a definitive determination whether a particular filing complies with the rules. Indeed, it was the impossibility generally of making definitive determinations in formal proceedings with respect to registration statements that led the Commission to initiate the informal review of those statements that is now the keystone of Commission enforcement of the registration provisions of the Securities Act of 1933.

In processing proxy materials, the Commissions staff makes a prompt judgment, based upon the limited information available to it, whether the information disclosed appears to be adequate, accurate and understandable and whether the solicitation seems to comply with the rules. The staff then explains to the company the respects in which it believes that the materials are deficient, in an attempt to persuade the company to change them to conform with the rules, and thereby to provide better information to public investor. ²⁴ If, on the other hand, the proxy materials as filed appear to the staff to satisfy the rules, it informs the company that it would not recommend action to the Commission if the proposal is omitted from managements proxy material. The latter thereby obtains some measure of assurance that, if it distributes the materials as filed, the Commission will not seek to enjoin the solicitation by filing an injunctive suit.

Accordingly, the Commission and its staff do not purport in any way to issue rulings or decisions on shareholder proposals management indicates it intends to omit, and they do not adjudicate the merits of a managements posture concerning such a proposal. As a result, the informal advice and suggestions emanating from the staff in this area are not binding on either managements or proponents. And, nothing the Commission or its staff does or omits to do in connection with such proposals affects the right of the proponent, or any shareholder for that matter, to institute a private action with respect to the managements intention to omit that proposal from its proxy materials. In summary, the sole purpose of staff review and comment with respect to proxy matters, including stockholder proposals, is to promote compliance with the proxy rules and to assist both management and the Commission in avoiding the possibility of unnecessary litigation between them.

Consistent with the foregoing, the Commission does not engage in any formal proceedings in connection with shareholder proposal matters, nor has it adopted any formal procedures in that regard. While paragraph (d) of Rule 14a-8 requires that a management inform both the Commission and the proponent whenever it intends to omit a proposal from its proxy materials, this requirement is informational only, and is also intended to alert the shareholder proponent of managements likely course of action so that the shareholder can pursue any remedy believed available in a federal court. No response or other action by the Commission or its staff is required in regard to such communications, although the notification requirement of paragraph (d) may alert the Commission that enforcement action may be appropriate in the event the management follows through on its announced intention to omit the proposal at issue, and that action would violate the Commissions rules. ²⁵

Although there is no requirement that the Commission or its staff respond to submissions by managements under Rule 14a-8(d), the staff, as a convenience to both managements and proponents, has for many years engaged in the informal practice of expressing its enforcement position on such submissions. This is done in order to provide guidance as to the staffs enforcement views and to assist both managements and proponents in complying with the proxy rules. It must again be emphasized, however, that the staffs views are advisory only, and that there is no requirement that managements or proponents adhere to them. The ultimate decision as to whether a shareholder proposal will be omitted from an issuers proxy materials must be made by the management, although, as previously noted, that decision is subject to review by a district court in the event appropriate enforcement action is instituted by either the Commission or the proponent.

As is true in all instances in which persons otherwise subject to the requirements of the federal securities laws claim they are exempt from such requirements, in making the required filing under rule 14a-8(d), the management must, of course, have a valid basis for omitting the particular proposal involved. ²⁶ If management does not have such a basis, that fact may, in appropriate circumstances, result in the Commission or the proponent instituting an action in a district court to compel the management to include the proposal in its proxy materials.

Proponents and other interested persons often voluntarily submit letters and other materials to the proposal from its proxy materials. While Rule 14a-8 does not provide for any communications from such persons to the Commissions staff, the staff will always consider information concerning alleged violations of the statutes or rules administered by the Commission, and this may include arguments as to why it is believed that the intended omission of a shareholder proposal would be violative of the proxy rules. However, neither the receipt of such information or arguments, nor the acknowledgement of them by the staff in its response to the managements submission under Rule 14a-8(d), should be construed as changing the staffs informal procedures and proxy review into a formal or adversary procedure or proceeding.

Because the staffs advice on contested proposals is informal and nonjudicial in nature, it does not have precedential value with respect to identical or similar proposals submitted to other issuers in the future. Many factors are considered by the staff in formulating such advice in a particular instance, including the reasons for omission advanced by the particular management. Moreover, the staffs views on certain issues may change from time-to-time, in light of re-examination, new considerations, or changing conditions which indicate that its earlier views are no longer in keeping with the objectives of Rule 14a-8. Accordingly, managements should not consider the prior enforcement positions of the staff on proposals submitted to other issuers to be dispositive of identical or similar proposals submitted to them.

From time-to-time, the staff receives requests from either managements or proponents that it reconsider the informal view previously expressed by it on a proposal management has indicated it intends to omit. When such requests are accompanied by material information that has not been previously furnished (for example, the management has raised a new ground for omission), the staff gives consideration to them. This is in keeping with its function of determining whether enforcement action appears to be necessary or appropriate in a particular instance. Again, however, it must be emphasized that the receipt of such a request, or the subsequent response to it by the staff, should not be construed as changing the staffs informal procedures into a formal or adversary procedure or proceeding.

The staff endeavors to act upon a request for reconsideration with a reasonable time, giving due consideration to the demands of the managements schedule for printing its proxy materials. However, the primary concern with respect to such request is that the other person affected by it (for example, the proponent, if the management has made the request) be provided with adequate notice in order that he may have sufficient time to take whatever action he deems appropriate. Accordingly, a request for reconsideration ordinarily is not acted upon until all affected persons have had as adequate opportunity to consider the implications of the request.

On some occasions in the past, requests have been made by either proponents or managements that the Commission consider the staffs informal advice on proposals management intends to omit. There are no formal procedures applicable to such proposals, and, concomitantly, there is no right to such Commission consideration. Nor is there any requirement that such requests be presented by the staff to the Commission. The staff, however, endeavors to forward all such requests to the Commission, provided they are received sufficiently far in advance of the scheduled printing date for the managements definitive proxy materials to avoid a delay in the printing process.

As stated in 17 CFR 202.1(d), the Commission, in its discretion, either may grant such request for consideration, or it may deny them. ²⁷

By the Commission.

George A. Fitzsimmons
Secretary

Footnotes

¹ See Securities Exchange Act Rel. No. 12598.

² The Commissions rendering of informal advice through such procedures has been commended as an excellent practice in administrative procedure. Commission on Organization of the Executive Branch of the Government, Task Force Report on Legal Services and Procedures (1955), p.189. See also, Report of the Committee on Administrative Procedure, Administrative Procedure in Government Agencies, S. Doc. No. 8, 77th Cong., 1st Sess. 39-40 (1941); Aranow & Einhorn, Proxy Contests for Corporate Control 294-297 (2d ed., 1968); III Loss, Securities Regulation 1894-1896 (2d ed., 1961), VI Loss, id. 4023-4026 (Supp. 1969); 1 Davis; Administrative Law Treatise Section 4.09 (1958); Cary Administrative Agencies and the Securities and Exchange Commission, 29 Law & Contemp. Prob. 653, 660 (1964); Cohen & Rabin, Broker-Dealer Selling Practice Standards: The Importance of Administrative Adjudication in Their Development, 29 Law & Contemp. Prob. 691, 692 (1964); Von Mehren & McCarroll, The Proxy Rules: A Case Study in the Administrative Process, 29 Law & Contemp. Prob. 728, 748 (1964).

³ 15 U.S.C. 77h(a).

⁴   15 U.S.C. 77h(b) and (d).

⁵ Report of the Committee on Administrative Procedure, Administrative Procedure in Government Agencies, S. Doc. No. 8, 77th Cong., 1st Sess. 40 (1941).

⁶ Cf. 17 CFR 202.3(a). See generally, Blair-Smith, Forms of Administrative Interpretation Under the Securities Laws, 26 lowa L. Rev. 241, 249-250 (1941); Johnson & Jackson, The Securities and Exchange Commission: Its Organization and Functions Under the Securities Act of 1933, 4 Law & Contemp. Prob. 3, 10-11 (1937).

⁷ 15 U.S.C. 77g.

⁸ Section 14(a), 15 U.S.C. 78n(a).

⁹ Compare Section 12(e) of the Public Utility Holding Company Act of 1935, 15 U.S.C. 791(e).

¹⁰ 15 U.S.C. 78u(e). See II Loss, Securities Regulation 931 (2d ed., 1961). Hearings before a Subcommittee of the Senate Committee on Banking and Currency on S. 879, Stock Market Study (Corporate Proxy Contests), 84th Cong., 1st Sess. Pt. 3 (1956) pp. 1540-1542; see also, Aranow & Einhorn, Corporate Proxy Contests: Enforcement of SEC Proxy Rules by the Commission and Private Parties, 31 N.Y.U.L. Rev. 875, 876, 886-887, and n. 50 (1956); Armstrong, The SEC and Proxy Contests, 182 Comm. & Fin. Chron. 875, 888 (1955); Loss, The SEC Proxy Rules in the Courts, 73 Harv. L. Rev. 1041, 1043-1044 (1960); Hearings before the House Committee on Interstate and Foreign Commerce on H. R. 1493 (SEC Proxy Rules), 78th Cong., 1st Sess. 81-82 (1943) (hereafter cited as 1943 Hearings) (Statement of Commission Chairman Purcell).

¹¹ Securities Exchange Act Release No. 378 (Sept. 24, 1935) (Class A).

¹² 1943 Hearings at p. 15 (statement of Commission Chairman Purcell).

¹³ Securities Exchange Act Release No. 1823 (Aug. 11, 1938), p. 2.

¹⁴ Securities Exchange Act Release No. 2376 (Jan. 12, 1940), p. 2. See 1943 Hearings, supra, n. 11, pp. 15-16.

¹⁵ 17 CFR 202.3(a), 202.1(d).

¹⁶ 1943 Hearings, pp. 16, 118, 169, 170; Securities Exchange Act Release No. 1823 (Aug. 11, 1938), p. 14. As Commission Chairman Purcell explained at the 1943 Hearings (p. 170):

The proxy statement purports to tell the stockholders everything that is going to be taken up at the meeting. The management knew these proposals were going to be taken up at the meeting. It knew that it intended to oppose them. Any statement which did not include those proposals and the position of the management was obviously misleading, because the soliciting material purported to tell the stockholders everything that is going to be taken up at a meeting that the management knew about.

* * * the company will then present from the proposals, or usually does, with their preliminary proxy material * * *. We take the facts which are submitted to use either by the company or which we can get anywhere else, and if it appears right from the fact of the statements, in the light of the facts that we know that the 100-word statement is false or misleading, we will tell the company they need not carry it.

On the other hand, he pointed out:

If we * * * believed that * * * the statement in support of the shareholder proposal was not false or libelous, we would advise the management that in our opinion it was necessary for them to include the 100-word statement. Under those circumstances, if the management insisted on sending out its material without the 100-word statement, we would sue for an injunction restraining them from sending out their material without including the 100-word statement. In such a proceeding the court would, of course, determine definitively whether we were correct in our position.

Id. at 118.

¹⁷ Securities Exchange Act Rel. No. 2376 (Jan. 12, 1940), p. 3.

¹⁸ Securities Exchange Act Rel. No. 3347 (Dec. 18, 1942). The 1942 amendment also required the company to distribute a 100-word statement submitted by the shareholder in support of his proposal. As Chairman Purcell explained (1943 Hearings, p. 112): ___

¹⁹ 12 Fed. Reg. 8768 (Dec. 24, 1947) at p. 8770.

²⁰ Securities Exchange Act Rel. No. 4979 (Jan. 6, 1954) at p. 2.

²¹ See Securities Exchange Act Rel. No. 4114 (Jul. 6, 1948), p. 2 (proposed amendment), and Securities Exchange Act Rel. No. 4185 (Nov. 5, 1948) (amendment as adopted); Securities Exchange Act Rel. No. 4775 (Dec. 11, 1952), pp. 7-9; and Securities Exchange Act Rel. No. 4979 (Jan. 6, 1954), pp. 4-5.

²² As former Chairman Demmler stated:

The stuff of these controversies under the Securities and Exchange Commissions proxy rules is the sort of thing which courts have been adjudicating since corporate elections began. The injury to the complainant, real or fancied, may, and usually does, include substantive matters unrelated to the proxy rule violation.

Demmler, Private Suits Based on Violation of the Proxy Rules, 20 U. Pitt. L. Rev. 587, 591 (1959), cited in Loss, The SEC Proxy Rules and State Law, 73 Harv. L. Rev. 1249 (1960). Accord, 1943 Hearings, pp. 133-134, 172, 180, 181.

See, also, 1943 Hearings, pp. 99-100 (Commission Chairman Purcell):

Of course, the rules govern the solicitation of the proxies.

I do not want to appear to hammer this, but it is a fact they govern the solicitation of proxies and not what happened at the meeting, and it is rather difficult to give you good answers to questions concerning actions which do not in the main concern our Commission * * *.

²³ Securities and Exchange Commission, Fortieth Annual Report, p. 33.

²⁴ Staff review also makes it possible for the staff to advise the Commission whether it appears that the person soliciting is or is not complying with the proxy requirements, and in the event of noncompliance, to permit an appropriate recommendations to what action to enforce the rules the Commission might wish to pursue. Hearings before a Subcommittee of the Senate Committee on Banking and Currency on SEC Enforcement Problems, 85th Cong., 1st Sess. Pt. 1 (1957), pp. 17-18 (testimony of Commission Chairman Armstrong).

²⁵ See Securities and Exchange Commission v. Transamerica Corp., 163 F. 2d 511 (C.A. 3), certiorari denied, 332 U.S. 847 (1951).

²⁶ See in this regard Securities Exchange Act Rel. No. 4979 (Jan. 6, 1954).

²⁷ 17 CFR 202.1(d) provides in pertinent part that 

In certain instances an informal statement of the views of the Commission may be obtained. The staff, upon request or on its own motion, will generally present questions to the Commission which involve matters of substantial importance and where the issuers are novel or highly complex, although the granting of a request for an informal statement by the Commission is entirely within its discretion.