Release No. 34-15384
Release No. IC-10510
December 6, 1978
 

Shareholder Communications, Shareholder Participation in the Electoral Process and Corporate Governance Generally

ACTION: Final rules.

SUMMARY: The Commission today issued a release announcing the adoption of proposed rule, form and schedule amendments intended to provide shareholders with information to assist their more informed assessment of the structure, composition and functioning of issuers boards of directors. The Commission also is adopting rules which afford shareholder-proponents an opportunity to review the accuracy of management statements in opposition to shareholder proposals prior to the mailing of issuers proxy soliciting materials and which provide information about the terms of settlement of proxy contests.

EFFECTIVE DATE: The amendments to regulation 14A and schedule 14A are effective for fiscal years ending on or after December 25, 1978 for initial filings on or after January 15, 1979. The amendments to forms 8-K, 10-Q and N-1Q are effective for all issuers for filings made on or after January 15, 1979 for periods ending on or after December 25, 1978.

FOR FURTHER INFORMATION CONTACT: Barbara Leventhal, Richard Nesson, Jennifer Sullivan or Michael Stakias, Division of Corporation Finance, Securities and Exchange Commission, Washington, D.C. 20549 (202) 755-1750.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission today issued a release announcing the adoption of amendments to regulation 14A (17 CFR 240.14a-1 et seq.) and schedule 14A (17 CFR 240.14a-101) under the Securities Exchange Act of 193415 U.S.C. 78a et seq., as amended by Pub. L. No. 94-29 (June 4, 1975), as well as related amendments to forms 8-K (17 CFR 249.308) and 10-Q (17 CFR 249.308a) thereunder and to form N-1Q (17 CFR 274.106) under the Investment Company Act of 1940 15 U.S.C. 80a et seq.. These amendments are intended to improve the information available to shareholders regarding (1) the structure, composition and functioning of issuers boards of directors; (2) resignations of directors; (3) attendance at board and committee meetings; and (4) the terms of settlements of proxy contests. A rule which provides shareholder-proponents with an opportunity to review the accuracy of management statements in opposition to shareholder proposals prior to the mailing of issuers proxy soliciting materials also has been adopted. A related proposal, which would have required disclosure of the voting policies and procedures of institutions subject to the Commissions proxy rules, which exercise voting rights with respect to equity securities held for ¹ their own accounts or for the accounts of others, has been withdrawn. 

I. Background

In April of 1977, the Commission authorized its staff to institute a board re-examination of its rules relating to shareholder communications, shareholder participation in the corporate electoral process and corporate governance generally. As explained in Securities Exchange Act Release No. 13482 (April 28, 1977), 42 FR 23901 (May 11, 1977), the decision to undertake the study was based, in large part, on expressions of concern about the efficacy of existing mechanisms of corporate accountability, including proxy solicitations and the corporate electoral process. Preparatory to holding public hearings, written comments were solicited on a number of questions relating to: (1) the adequacy of existing avenues of communication between shareholders and corporations, and, particularly, whether shareholders should be provided with more information than is now available with respect to socially significant matters affecting their corporations; (2) whether Rule 14a-8, regarding shareholder proposals, should be amended to further facilitate the presentation of shareholder views and concerns in the corporate proxy materials; (3) the role of shareholders in the corporate electoral process, and whether the Commission should amend its proxy rules to provide shareholders access to corporate proxy materials for the purpose of nominating persons of their choice to serve on boards of directors; and (4) whether additional disclosure relevant to an assessment of the quality and integrity of management should be required. The Commission also raised general inquiries concerning the need for federal minimum standards or federal chartering legislation, the role of the self-regulatory organizations in improving corporate governance, and the costs and benefits associated with various regulatory approaches.

In the fall of 1977, the Commission held public hearings on these and related issues ² in Washington, D.C., Los Angeles, New York and Chicago. More than 300 individuals and organizations testified or submitted written comments on a large number of issues, ranging from narrow technical questions arising under existing proxy rules to broad, philosophical inquiries concerning means by which corporations can be made more responsive to shareholders and the public at large.

As discussed in greater detail in Securities Exchange Act Release No. 14970, (July 18, 1978), 43 FR 31945 (July 24, 1978), the participants in the public comment and hearing phase of this proceeding expressed diverse opinions with respect to the scope of existing problems in corporate governance and corporate accountability and the means by which reform could be best achieved. There was, however, general support for the proposition that a strong board of directors, able to exercise independent judgment, is a crucial element of corporate accountability. Various means of promoting more effective boards of directors were suggested, including promulgation by the Commission of disclosure requirements which would provide shareholders with better information concerning the composition, structure and functions of corporate boards, and thus indirectly encourage the adoption of more effective corporate governance mechanisms.

Based on its review of the comments and testimony submitted in this proceeding, as well as its experience in administering and enforcing the federal securities laws, the Commission determined that shareholders may need additional information about the structure, composition and functions of corporate boards of directors and, therefore, on July 18, 1978, proposed for public comment the rule proposals discussed herein. In announcing their publication, the Commission indicated that the proposals represented the first stage of the Commissions response to the issues raised in its ongoing corporate governance study and would be followed by publication of a staff report on other important questions then under consideration, possible additional rule-making proposals and/or legislative recommendations.

The proposals evoked an enormous public response. In total, almost 600 individuals and organizations submitted letters in response to the Commissions request for public comments. Many of the thoughtful and comprehensive views expressed provided the Commission with helpful insights in its further consideration of the proposals.

By far the most controversial portion of the proposals was proposed item 6(a)(6) of schedule 14A, which would have required that directors be identified as ''management,'' ''affiliated nonmanagement'' and ''independent.'' The use of the term ''independent,'' in juxtaposition with statements in the release concerning the Commissions views about the importance of a strong board of directors capable of exercising independent judgment, and the desirability of key standing committees composed entirely of persons independent of management, provoked considerable controversy. Commentators asserted that the term ''independent'' conveyed a value judgment on the part of the Commission that persons meeting the Commissions definition of ''independent'' not only are preferable to ''management'' or ''affiliated nonmanagement'' directors but are, in fact, the only persons who are capable of exercising disinterested oversight and independent judgment. Further, a large number of commentators, on the erroneous assumption that certain of the proposals were designed primarily to influence corporate conduct rather than to provide useful information to shareholders, contended that these proposals were beyond the Commissions statutory authority.

The Commission believes that the rules adopted today will facilitate informed voting decisions and promote fair corporate suffrage and are an appropriate exercise of its rulemaking authority under section 14(a) of the Securities Exchange Act. The rules do not, as some commentators thought, constitute a regulatory effort by the Commission to prescribe or determine board composition or corporate governance mechanisms. The legislative history of the federal securities laws reflects a recognition that disclosure, by providing corporate owners with meaningful information about the way in which their corporations are managed, may promote the accountability of corporate managers. ³ Thus, while the federal securities laws generally embody a disclosure approach, it has long been recognized that disclosure may have beneficial effects on corporate behavior. ⁴ Accordingly, although the Commissions objective in adopting these rules is to provide additional information relevant to an informed voting decision, it recognizes that disclosure may, depending on determinations made by a companys management, directors and shareholders, influence corporate conduct. This sort of impact is clearly consistent with the basic philosophy of the disclosure provisions of the federal securities laws.

After careful analysis of the comments which were submitted, the Commission has concluded that the rules adopted today will provide useful information to shareholders. In some respects it appears that certain of the rule proposals might have raised inferences unintended by the Commission. The Commission has, therefore, revised the proposals in several respects as discussed below.

II. Disclosure of Board Composition-Item 6(b)

Item 6(a)(6), ⁵as proposed, would have required issuers, other than investment companies registered under the Investment Company Act of 1940, to identify each nominee and each director whose term of office as a director will continue after the annual meeting as an ''independent,'' ''affiliated nonmanagement'' or ''management'' director, as those terms were defined in an instruction accompanying the item. In the case of an ''affiliated nonmanagement director,'' issuers would have been required to describe the nature of the relationship by reason of which the nominee was so deemed.

As defined in the instruction to proposed item 6(a)(6), the term ''management director'' included, in addition to an officer or employee of the issuer, an officer or employee of any parent, subsidiary or other affiliate of the issuer. The term ''affiliated nonmanagement director'' referred to persons having certain specified economic and personal relationships to the issuer and its management. An ''independent director'' was defined as an individual who is neither a ''management director'' nor an ''affiliated nonmanagement director.'' However, the instruction indicated that designation of a nominee as an ''independent director'' would be inappropriate if the issuer is aware of relationships between the nominee and the issuer which, under the circumstances, reasonably could be viewed as interfering with the nominees exercise of independent judgment.

In the release announcing publication of this proposed item, the Commission expressed its view that ''the interests of shareholders are best served by a board of directors which is able to exercise independent judgment, ask probing questions of management and bring to the company a broader perspective than that of management.'' The Commission further expressed its belief that board composition is of such importance that shareholders whose proxies are solicited with respect to an election of directors should be provided with information concerning the affiliations of board members and nominees with management. Additionally, the Commission stated that the terms ''independent'' and ''affiliated nonmanagement,'' as defined in proposed item 6(a)(6), were intended to distinguish between nonmanagement directors who are completely unaffiliated with the issuer and its management and those having certain business or personal relationships. The Commission recognized that the terminology it proposed to express this distinction might not be ideal and, therefore, specifically solicited suggestions for alternative terms.

Almost all of the comment letters contained an assessment of proposed item 6(a)(6) and, in fact, many commentators dealt only with this issue. Many believed that the proposal would place too much emphasis on disclosure concerning independence, to the exclusion of information regarding other attributes which are desirable for directors to possess, and a large number of commentators questioned whether the independence of a director can be ascertained solely from a description of his affiliations with the issuer. Nevertheless, there was substantial support for the proposition that shareholders should receive information in the proxy statement concerning the business and personal relationships of directors to the issuer. Commentators views concerning the desirability of additional disclosure varied greatly. On the one hand, many commentators who acknowledged the usefulness of such information to shareholders in exercising their franchise asserted that current disclosure requirements, specifically items 6 and 7 of schedule 14A ⁶ provide sufficient information concerning director affiliations and conflicts of interests for shareholders to make reasonable judgments concerning the independence of directors. On the other hand, a large number of commentators stated that additional information regarding the business and personal relationships of nominees would be useful to shareholders.

Virtually all of the commentators expressed opposition to the proposed requirement that nonmanagement directors be identified in the proxy materials as ''independent'' or ''affiliated.'' These commentators asserted that the use of these categories would provide no additional useful information to, and would, in fact, mislead or confuse, shareholders because the term ''independent'' attempts to reflect a state of mind which is not susceptible of measurement by reference to the existence or non-existence of certain relationships. Some commentators asserted that directors identified as other than ''independent'' would be perceived as incapable of exercising independent judgment and as a result corporations would be encouraged, in nominating persons to serve as directors, to select candidates on the basis of their lack of certain defined relationships with the issuer rather than their expertise or experience. Similarly, it was argued that otherwise well-qualified persons who would be designated as ''affiliated'' or ''management'' directors would be unwilling to serve. Without necessarily agreeing with all of these assertions, on balance the Commission has determined that a requirement that directors be categorized should not be adopted at this time.

The Commission recognizes the fact that the non-existence of a particular economic or personal relationship with the issuer does not determine the quality of a nominees performance on the board. The extent to which nominees possess other intangible attributes such as strength of character and good business judgment is also important. While an individuals capacity to render independent judgment is, in the final analysis, a qualitative matter, the nature and scope of a directors relationship with the issuer and its management certainly bears upon his independence, and, in the Commissions view, information respecting such relationships should be provided to shareholders when they exercise their franchise.

Thus, as adopted, item 6(b) requires a brief description, in tabular form to the extent possible, of any of certain significant economic and personal relationships which exist between the director and the issuer. These relationships are similar to those by virtue of which a director would have been deemed an ''affiliated nonmanagement director'' under proposed item 6(a)(6), but with several modifications. ⁷

A. Former Officers and Employees

As proposed, the term ''affiliated nonmanagement director'' would have included any person who, within the last five years, had been an officer or employee of the issuer or any of its parents, subsidiaries or other affiliates. ⁸ Information concerning the principal occupations and employment of a nominee during the past five years, including the name and principal business of any organizations in which those occupations are carried on, is currently required to be disclosed pursuant to item 3(e) of Regulation S-K. Paragraph (1) of item 6(b) as adopted requires that if the organization is a parent, subsidiary or affiliate of the issuer that fact be disclosed as well.

B. Relatives of Officers

As proposed, the term ''affiliated nonmanagement director'' would have included a person who is related to an officer of the issuer, or any of its parents, subsidiaries or other affiliates by blood, marriage or adoption (except relationships more remote than first cousin). The few commentators who addressed this issue opined that disclosure should cover relationships to ''executive officers'' ⁹ only, consistent with the new proxy disclosure requirements adopted by the Commission subsequent to the publication of the subject proposals, ¹⁰ because family relationships to officers who are not in policy making positions would not be of sufficient significance to warrant disclosure. The Commission agrees in part, and therefore, as adopted, paragraph (2) of item 6(b) requires disclosure only of relationships to executive officers of the issuer, any of its parents, subsidiaries or other affiliates. However, because of the control relationship between an issuer and its affiliates, the Commission believes it appropriate to require disclosure of relationships between the nominee and executive officers of the issuers affiliates.

C. Officer, Director, Employee and Owner of a Significant Supplier or Customer

1. Persons Included

Proposed item 6(a)(6) would have included within the definition of ''affiliated nonmanagement director'' any person who is or has within the last two years been an officer, director, employee or owner of an interest in excess of one percent of the equity of an entity which, as customer or supplier of the issuer, had or will have business transactions of a specified magnitude with the issuer.

Many commentators expressed a preference for the approach taken in item 4(f) of regulation S-K ¹¹ which, as a general matter, would not require the disclosure of certain transactions between the issuer and another entity in which the director has an interest, if that interest arises solely from the directorship of, or ownership of less than ten percent of, the other entity. These commentators asserted that information concerning less significant relationships to the issuer would not facilitate a meaningful assessment of potential conflicts. A small number of commentators also objected to the inclusion of any employee of the other entity, arguing that employees, other than executive officers, may have no influence over the other entity or stand to benefit from its business transactions with the issuer.

The Commission disagrees with these comments. As adopted, paragraph (3) of item 6(b) would require a description of economic relationships of the same persons referred to in proposed item 6(a)(6). In the Commissions view, if there is a significant amount of business between the issuer and the other entity, the interest of an owner of a one percent equity interest, or an officer, director or an employee of that entity in maintaining the business relationship is sufficiently great that the relationships should be disclosed. Shareholders would then be able to reach their own conclusions on the extent to which such interests may conflict with those of the issuer or may impact upon that persons performance as a director of the issuer. For purposes of clarification the phrase ''in excess of one percent equity interest in'' has been substituted for the phrase ''in excess of one percent of the equity of.''

2. Amount of Business Between the Issuer and its Customers or Suppliers

The types and size of business relationships the existence of which would render a director ''affiliated'' were covered by subparagraphs (A), (B), (D) and (E) of instruction 3(iii) to proposed item 6(a)(6). Subparagraphs (A) and (B) referred to customers of the issuer which made payments during the issuers last fiscal year or proposed to make payments during the issuers next fiscal year in an amount in excess of one percent of the issuers gross revenues for its last fiscal year or $1,000,000, whichever is less. Subparagraphs (D) and (E) referred to suppliers to the issuer to which the issuer made payments during such entitys next fiscal year in an amount in excess of one percent of such entitys gross revenues for its last fiscal year or $1,000,000, whichever is less.

Many commentators who addressed this issue opposed retention of the $1,000,000 threshold on the theory that $1,000,000 represents such an insignificant portion of the revenues of large corporations that it would be unreasonable to draw any inference from the existence of such an inconsequential relationship. Others noted that large corporations, because of the relative insignificance to them of transactions aggregating $1,000,000 and the complexity of their operations, would find it virtually impossible to maintain and examine the records necessary to determine whether they had done business in that amount with a particular entity.

The Commission is persuaded that the concerns expressed with respect to the $1,000,000 threshold may be valid and has determined that an economic test of significance expressed in terms of a percentage of revenues may be more workable. Therefore, subparagraph 3(i), (ii), (iv) and (v) of the item 6(b), as adopted, contains an economic standard based on one percent of consolidated gross revenues.

Additionally, in adopting these subparagraphs in final form, the Commission has incorporated the suggestions made by several commentators that suggestions made by several commentators that certain kinds of transactions be excepted from the calculation of the magnitude of business between the issuer and the other entity. Thus, in view of the absence of normal competitive factors in transactions involving the rendering of services as a public utility at rates or charges fixed in conformity with law or governmental authority, subparagraph 3(vii) excepts from the calculation of payments for property or services payments made in such transactions as well as payments representing rates or charges which are determined by competitive bids. Further, in accordance with the Commissions general intent to have included in the calculation payments arising from commercial, rather than ordinary investment transactions, subparagraph 3(vii) also contains an exception for non-preferential dividends and other payments arising solely from the ownership of securities.

3. Creditor Relationships

Under the instruction to proposed item 6(a)(6), a person who is an officer, director or one percent equity owner of certain creditors of the issuer would have been deemed to be an ''affiliated nonmanagement director.'' Subparagraph (C) of paragraph 3(iii) of the instruction to proposed item 6(a)(6) would have included within the class of affected creditors an entity to which the issuer was indebted at any time during the issuers last fiscal year in an aggregate amount in excess of one percent of the issuers total assets at the end of such fiscal year, or $1,000,000, whichever is less. A substantial number of commentators questioned the appropriateness of this test, asserting that an outstanding loan of $1,000,000 would not be of significance to most large banks. Deletion of the dollar threshold was recommended.

The Commission recognizes that a loan of $1,000,000 may represent an insignificant percentage of the total loan portfolio of most large financial institutions. The Commission is concerned, however, that the inherent nature of a debtor-creditor relationship and the potential conflicts between the interests of creditors and shareholders make it appropriate to retain a dollar threshold. In an effort to balance these competing concerns, subparagraph 3(iii) of item 6(b), as adopted, requires disclosure of loans which exceed one percent of the issuers consolidated total assets, or $5,000,000, whichever is less. Additionally, a new subparagraph (viii) has been added which permits debt securities which have been publicly offered or which are listed on a national securities exchange or quoted on the automated quotation system of a registered securities association to be excluded from the calculation of aggregate indebtedness.

4. Technical Amendments Contained in Subparagraph 3(i)-(v) of Item 6(b)

Proposed item 6(a)(6) referred to payments made during the last fiscal year of the issuer or other entity and those proposed to be made during the next fiscal year. A number of commentators expressed confusion concerning whether the term ''next fiscal year'' referred to the current fiscal year and, if not, whether payments for the current fiscal year were inadvertently omitted. As adopted, subparagraphs 3(i)-(v) have been revised to require disclosure concerning payments for the last fiscal year and for the current fiscal year. Consistent with the approach taken in Securities Exchange Act Release No. 14970, payments which are ''proposed'' to be made during the current fiscal year would include payments which are the subject of a formal agreement or are reasonably expected to be made pursuant to any understanding or course of conduct between the issuer and the other entity.

In addition, proposed item 6(a)(6) referred to payments made by or to the ''issuer.'' It was clear from the context in which the term ''issuer'' was being used, however, that it referred to payments made by or to the issuer and its subsidiaries, and the commentators apparently so understood its use. A technical amendment clarifies this reference. A further technical amendment adds the word ''consolidated'' to modify the term ''gross revenues.'' Subparagraph (3)(iii), as adopted, also reflects a technical amendment which adds the word ''consolidated'' to modify the term ''assets.''

5. Recipient of $25,000 from the Issuer

As proposed, the definition of ''affiliated nonmanagement director'' would have included a person (as owner of an equity interest in any entity or otherwise) to whom the issuer directly or indirectly had made payments in the last fiscal year or to whom the issuer proposed to make payments in the next fiscal year, for property or services, in excess of $25,000 (other than fees as a director or retirement allowances). Most commentators who addressed this definition expressed confusion as to its meaning and asserted that the $25,000 threshold figure was unrealistically low. The Commission has determined that this proposal probably would provide little additional information of significance to shareholders since, in most cases, transactions involving payments to a director of $40,000 or more already are reportable under item 4(f) of regulation S-K. Accordingly, item 6(b) as adopted does not require such disclosure.

6. Attorneys and Investment Bankers

The instruction to proposed item 6(a)(6) would have included within the definition of ''affiliated nonmanagement director'' any person who is a member or employee of, or is associated with, a law firm which the issuer has retained in the last two years or proposes to retain in the next year and any person who is a director, partner, officer or employee of any investment banking firm which has performed services for the issuer in the last two years or which the issuer proposes to have perform services in the next year. While few commentators disagreed, in principle, with the concept that the relationship of lawyers and investment bankers with the issuer differs from that of other suppliers of goods and services, and that the significance of their affiliation to the issuer should be measured by a different standard, many felt that some threshold economic standard should be applied. These commentators stated that it is inappropriate to deem ''affiliated'' a partner of a law firm retained for a minor matter or an investment banking firm which merely participates in an underwriting group.

Despite the objections of the commentators to the absence of an economic standard with respect to lawyers, the Commission has determined to require disclosure of the relationships as proposed. In view of the inherent conflicts faced by lawyers who serve both as directors and as counsel to corporations, the Commission is reluctant to limit disclosure of such relationships solely on the basis of an economic test.

With respect to disclosure of investment banking relationships, however, the Commission has determined that information concerning a director or nominees relationship with a firm which has performed services for the issuer only as a participating underwriter in an underwriting syndicate is not sufficiently significant to warrant disclosure. Paragraph (5) of Item 6(b), as adopted, has been revised accordingly and would require disclosure of a director or nominees relationship to an investment banking firm which has performed services for the issuer other than as a participating underwriter in an underwriting syndicate.

8. Control Persons

The proposed definition of ''affiliated nonmanagement director'' would have included any person who is a control person of the issuer (other than as a director of the issuer). This paragraph was the subject of little commentary. As adopted, paragraph 6 of item 6(b) requires disclosure of this relationship.

D. Disclosure of Other Relationships which are Substantially Similar in Nature and Scope

Proposed item 6(a)(6) would have provided for the characterization as ''independent'' of directors who were neither ''management'' nor ''affiliated nonmanagement,'' as defined in the proposed item. In recognition of the difficulties inherent in any rigid definition of independence, an instruction to the proposed item indicated that it would be inappropriate to designate a nominee as independent if the issuer were aware of relationships between the nominee and the issuer which, under the circumstances, reasonably could be viewed as interfering with the nominees exercise of independent judgment.

As indicated above, the Commission has determined not to require that directors be characterized in proxy statements but has adopted a requirement that certain business and personal relationships, discussed in detail above, be disclosed.

It is the Commissions intent, in adopting item 6(b), to provide shareholders with information necessary to an evaluation of a nominees relationships to the issuer and the potential conflicts of interest with which he or she may be confronted. Because of the multiplicity of possible relationships which are similar to those as to which disclosure is specifically required and the Commissions concern that issuers not elevate form over substance in complying with this disclosure requirement, a new paragraph (7) has been included in item 6(b) which states that if the issuer is aware that the nominee has relationships substantially similar in nature and scope to those which are enumerated in paragraphs (1) through (7) of that item, disclosure of such relationships should also be included.

E. Use of Misleading Terminology in Proxy Statements

As discussed above, the Commission has determined that a requirement that directors be categorized in proxy statements should not be adopted at this time. The Commission is concerned, however, that a variety of director ''labels'' are currently being used in a number of different contexts and in publications which reach shareholders. The use of such terms may not be comparable and may be confusing and susceptible to misunderstanding. These labels often obfuscate important distinctions between nonmanagement directors. ¹² For example, the term ''independent'' often is employed to refer to all nonmanagement directors despite the fact that some such directors may have significant business or personal relationships with the issuer or its management.

In light of those concerns which commentators raised in opposition to Commission-mandated ''labeling,'' as well as the confusing nature of ''labels'' as currently used, the Commission urges issuers not to ''label'' their directors until such a time as a system of director categorization which better serves the disclosure purposes of the federal securities laws is developed. A note to item 6(b) indicates that any issuer which, in a proxy statement, nevertheless chooses to categorize its directors should do so only after having considered both the existence or nonexistence of business and personal relationships between each director and the issuer or its management and the inherent inadequacy of ''labels'' currently in use. Where significant relationships do exist-including, but not limited to, those as to which disclosure would be required pursuant to item 6(b)-characterization of a director or nominee by any ''label'' connoting a lack of relationship to the issuer and its management may be materially misleading. ¹³

F. Interested Persons of Investment Companies

Proposed item 6(a)(6)(ii) would have required investment companies registered under the Investment Company Act of 1940 to identify in their proxy statements which nominees and other directors whose term of office will continue after the annual meeting are ''interested persons'' as the term is defined in that act. The item also would have required, with respect to any person so identified, a brief description of the relationship by reason of which the person is deemed to be an ''interested person.'' Relatively few commentators addressed this part of the proposals. Some commentators expressed reservations about the use of the term ''interested,'' pointing out that while some investment companies presently disclose which of their directors are ''interested,'' others prefer to designate only those persons who are ''not interested'' as such determination is a easier to make. The Commission believes that because the term ''interested person'' is defined statutorily in the Investment Company Act and such persons are identified in prospectuses filed by registered investment companies, it is appropriate to require the identified of those persons in proxy statements. As adopted, item 6(c) requires the issuer to identify by an asterisk any nominee or director who is an ''interested person'' within the meaning of Section 2(a)(19) of the Act, and to briefly describe the nature of the relationship which renders him ''interested.''

III. Committee Disclosure-Proposed Item 6(d)

As proposed, item 6(d) would have required disclosure of whether or not the issuer has a standing audit, compensation or nominating committee of its board of directors. If the issuer had such committees, it would have been required to identify each committee member and indicate whether he or she was a ''management director,'' ''unaffiliated nonmanagement director'' or ''independent director'' as those terms were defined in proposed item 6(a)(6). Issuers that had a nominating committee also would have been required to state whether that committee would consider nominees suggested by shareholders and, if so, to indicate the procedure the shareholders should follow in submitting recommendations. Additionally, a note to the item indicated that a statement that the issuer had any of the named committees connoted that its committees perform certain functions customarily performed by such committees. Those functions were identified in the note. If the issuer disclosed the existence of a committee which, in fact, did not perform the enumerated customary functions, it would have been required to identify those customary functions which its committee did not perform. ¹⁴

Although a majority of commentators favored disclosure of the existence of standing audit, nominating and compensation committees and of their membership, a substantial number objected to the requirement that the nonexistence of any of these committees also be disclosed. ¹⁵ This was particularly true with respect to nominating committees, which are less prevalent than other key standing committees. These objections were based on assertions that the disclosure of the nonexistence of committees was intended to encourage companies to establish the named committees, rather than to provide useful information to shareholders.

While the Commission recognizes that the adoption of this disclosure requirement in some instances may indirectly stimulate the establishment of audit, nominating and compensation committees, the Commission believes that disclosure of the nonexistence of the named committees serves a valid informational purpose. In particular, whether or not an issuer has an audit committee and, if so, information concerning its functioning would help the issuers shareholders to assess the effectiveness of the boards oversight of the companys accounting functions. The recent enactment of the Foreign Corrupt Practices Act of 1977 has underscored the importance of effectively functioning audit committees. ¹⁶ Similarly, the Commission believes that disclosure of whether or not an issuer has a nominating committee and the functions performed by the committee would be material information to shareholders and could improve the director selection process by increasing the range of candidates under consideration while intensifying the scrutiny given to their qualifications. Finally, Commission believes that similar disclosure concerning an issuers compensation committee would permit investors to better assess the process by which management and director compensation is determined. ¹⁷

In light of the importance of strong committee systems and their impact on the oversight capabilities of the board of directors, shareholders who are being asked to make voting decisions with respect to the election of directors are entitled to know whether or not these important committees exist. Accordingly, the Commission has determined to adopt the requirements in item 6(d) that the issuer state whether or not it has a standing audit, nominating or compensation committee, however designated, and, if so, identify each committee member. If the issuer is a registered investment company and has such committees, it would be required, pursuant to item 6(d), to identify by an asterisk which committee members are ''interested'' as defined in section 2(a)(19) of the Investment Company Act of 1940. However, under item 6(d) as adopted, information concerning compensation committees is not required of registered investment companies whose management functions are performed by external managers.

While the Commission has determined that there is a need for disclosure of meaningful information about committee functions, it is persuaded that adoption of a negative disclosure requirement-which would provide information to shareholders only of any customary functions not performed by an issuers committee-is not appropriate at this time. In this regard, many commentators challenged the proposition that the indicated ''customary'' committee functions are accepted and stated that a definition of functions are accepted and stated that a definition of functions customarily performed by audit, nominating and compensation committees would not allow for needed flexibility. Similarly, some were concerned that a ''laundry list'' approach would set a ceiling or lowest common denominator and discourage committees from performing different functions, thus tending to deter the evolution of committee functions and limit experimentation. Others incorrectly asserted that negative disclosure serves no legitimate informational purpose and is intended solely to influence conduct.

The use of a negative disclosure approach in providing information concerning committee functioning was intended to shorten the required disclosures and to assure that boilerplate disclosures are avoided. It was not the Commissions intent, as some critics have suggested, to establish a comprehensive, rigid model for all committees operations. Thus, while the Commission believes that the statement of customary functions which was contained in the note to proposed item 6(d) ¹⁸ provides a convenient initial reference for companies subject to the proxy rules, in light of the evolving nature of corporate committee systems and the varying characteristics and needs of different issuers, the Commission has concluded that a compendium of customary functions should not be set forth in a Commission rule at this time. The Commission is concerned, however, that disclosure of the existence of any of the committees named above would not be meaningful, absent some indication of the functions performed by the committees. Therefore, as adopted, the item has been revised to require, as was suggested by many commentators, a brief description of the functions actually performed by issuers committees. ¹⁹

IV. Attendance and Number of Meetings

A. Disclosure of the Number of Board and Committee Meetings Held

Proposed item 6(d) would have required disclosure of the number of meetings held by an issuers standing audit, nominating and compensation committees since the date of the most recent annual meeting of shareholders. Similarly, proposed item 6(e)(1) would have required disclosure of the total number of meetings of the board of directors held since the date of the most recent annual meeting.

Some commentators argued that the number of meetings held is not a meaningful indication of the effectiveness of committee and board functioning and noted that in certain circumstances such disclosure may be misleading because the frequency and length of meetings must necessarily vary, depending on the specific circumstances and corporate entity involved. The Commission recognizes that the quality of the performance of a committee or a board is not necessarily a function of the quantity of time spent by its members. However, the Commission believes that the number of board and committee meetings held is a relevant factor which may be helpful to shareholders in evaluating the performance of their committees or boards and has therefore determined that adoption of the items is appropriate. If the issuer believes that particular circumstances make the number of meetings held susceptible to misinterpretations, it may, of course, include an appropriate explanation.

As a technical matter, several commentators noted that the proposed rule as originally drafted would not elicit disclosure of the total number of board or committee meetings held annually since it would require disclosure only of those meetings held since the date of the last annual meeting. Disclosure of the total number of board and committee meetings held annually would, of course, provide more meaningful information to shareholders. Accordingly, items 6(d) and (e) have been revised to require disclosure of the number of meetings held during the issuers last fiscal year.

B. Disclosure of Director Attendance-Item 6(e)

Proposed item 6(e)(1) would have required identification of each incumbent director who has attended less than 75 percent of the board meetings held. Similarly, proposed item 6(e)(2) would have required identification of any director who has failed to attend at least 75 percent of the total number of meetings held by all committees on which he sits.

Commentators who opposed the proposals indicated that, in their view, the fact that a director has attended less than 75 percent of the meetings of the board or of the relevant committees would not be a meaningful indication of the quality of his contribution to the board. Some were concerned that the disclosure would discourage highly qualified nonmanagement directors from serving on boards. Others observed that it might influence boards to reduce or increase the number of meetings to help directors meet the 75 percent threshold.

Another objection to the proposal was the belief of some commentators that the 75 percent figure was too high. In this regard, it was noted that special board or committee meetings may be scheduled on short notice and some committees may meet infrequently. Further, commentators opined that a failure to attain the 75 percent attendance record would invariably result in some proxy statement explanation and that a threshold that is too high would lead to a proliferation of explanations in the proxy materials. Several of these commentators urged the Commission to apply the 75 percent test in the aggregate. Others suggested that the percentage be lowered.

The Commission recognizes that in particular instances directors may provide the board with valuable insight and expertise without actually attending formal meetings on more than an intermittent basis. However, we believe that these occasions are likely to be the exception and that, in general, attendance is an indication of effective board and committee functioning and is relevant to an evaluation of directors for election purposes. In addition, the Commission is not persuaded that the contemplated disclosure would deter responsible boards from holding meetings when it is appropriate to do so.

Nevertheless, the Commission believes that the threshold is problematic in certain respects. In particular, board committees may not, on the average, meet frequently enough to assure that an attendance threshold based only on committee meetings will be meaningful. Accordingly, item 6(e) has been adopted in revised form to require disclosure only in the event that a director attends fewer than 75 percent of the aggregate number of meetings of the board and of the committees on which he sits. The item has also been revised to require disclosure with respect to meetings held during the ''last fiscal year,'' rather than meetings held since the ''date of the last annual meeting.'' As indicated above, this technical amendment is necessary to make the time period cover a full 12 months.

V. Resignations of Registrants Directors-Item 6 of Form 8-K; Item 6(f) of Schedule 14A

As proposed, item 6 of form 8-K ²⁰ and item 6(f) of schedule 14A would have required that if a director resigned or declined to stand for re-election because of a disagreement on matters involving business operations, policies, or practices, the issuer would be required to report the disagreement on form 8-K as well as in its proxy statement. Before filing its preliminary proxy materials with the Commission, the issuer would be required to furnish the director with a copy of its proposed statement. If the director disagreed with the issuers characterization of the disagreement, he would be permitted to include in the proxy materials a brief statement presenting his views, provided he submitted his statement to the issuer within ten business days after receiving the issuers statement.

Some commentators who opposed adoption of the proposal were concerned that this disclosure would discourage the evolution of stronger boards by increasing divisiveness among board members. Others noted that the proposal might make it more difficult to attract and retain directors with divergent viewpoints. In addition, a number of commentators questioned the appropriateness of relying on an event, rather than the materiality of the underlying facts, to trigger disclosure. It was noted by some that under existing rules disagreements involving material information would already by required to be disclosed.

The Commission believes that disclosure of director resignations or declinations to stand for re-election would provide useful information to investors in assessing the quality of management, consistent with the increasing emphasis on the monitoring function of corporate boards. A director who wishes to make a public record of the disagreement which prompted his resignation from the board should have the opportunity to do so in a manner which will most likely come to the attention of the shareholders who elected him.

In proposing this disclosure requirement, the Commission had determined that the issuer should be required to provide the disclosure because it was concerned that if the requirement were to be premised only on an affirmative request by the director, the dynamics of most situations would be such that a director would feel pressure to refrain from ''rocking the boat.'' However, after considering the commentary, the Commission believes that, on balance, it is more appropriate to require disclosure only upon the request, of the director. If disclosure is triggered by director request, the director will have a forum if he chooses to use it, and the issuer will be relieved of any obligation to document and characterize what it believes are the reasons for director resignations.

Accordingly, item 6 of form 8-K and item 6(f) of schedule 14A have been revised to require disclosure of a directors resignation only if the director has furnished the registrant with a letter describing the disagreement relating to the registrants operations, policies or practices and requesting that the matter be disclosed. If the issuer believes the description provided by the director is inaccurate or incomplete, it may, of course, include a statement of its views of the disagreement. The items, as adopted, include an express statement to that effect. The Commission believes that, as revised, the items will be less likely to create compliance problems and yet will still assure that directors who have resigned or declined to stand for re-election will be able to disclose this information in a manner which is most likely to reach shareholders.

VI. Shareholder-Proponent Consideration of Managements Statement in Opposition-Rule 14a-8(e)

As proposed, rule 14a-8(e) would have required an issuer to transmit to a shareholder-proponent ten business days before the filing of its preliminary proxy material any statement in opposition to the shareholders resolution that the issuer intends to include in the proxy material.

The purpose of this proposal was to provide a shareholder-proponent with the opportunity to bring materially inaccurate statements contained in opposing statements to the attention of management and the Commission before the proxy materials are mailed to shareholders. As noted in the Commissions release announcing the proposed rule, a number of witnesses during the hearings indicated that under the present system a proponent does not have a practical means of curing any misstatements which are made in the discussion of his proposal. A recent federal court decision has raised questions as to the availability of judicial review for materially false statements made by management in connection with precatory shareholder proposals. ²¹ Further, witnesses at the hearings had noted that even if judicial review is available it is questionable in some instances whether it can provide a workable remedy. The deliberate pace of a court action may not be well suited to these types of problems since, unless a temporary restraining order or injunction has been granted, appropriate relief may not be available before the meeting.

A number of commentators opposed adoption of the proposal because they believed it would result in delay and is unnecessary in light of the lack of demonstrated abuses in this area and the legal remedies which are already available to shareholder-proponents. Nevertheless, the Commission believes it is appropriate to adopt proposed rule 14a-8(e) on an experimental basis. First, it simply would be more equitable if shareholder-proponents were permitted to see managements opposing statement before it is mailed to shareholders. Second, in light of the problems associated with a total reliance on judicial remedies and the limited Commission resources available for review of proxy materials, it appears appropriate for an effective administration of the proxy rules that a shareholder-proponent be given the opportunity to examine managements opposing statement for accuracy. Finally, it would appear to be in the best interests of all parties that questions concerning the factual accuracy of the opposing statements be resolved during the comment process.

Commentators also were concerned that the proposal would cause additional difficulties in complying with the already tight time deadlines characteristic of proxy season. A number of commentators suggested alternative means of avoiding extended delays. For example, it was suggested that ''10 business days'' be changed to ''10 calendar days.'' It was also noted that, even though advice may be received from the staff 20 days before the filing date, the advice is often that management may exclude the proponents proposal unless the proponent amends the proposal within a reasonable time. It was argued that it would be impossible in such cases to prepare a response to the shareholder 10 days before filing preliminary materials with the Commission. Some recommended that procedures similar to rule 14a-8(d) be adopted so that management would be provided a copy of the proponents communication to the staff and would, as a result, be in a better position to respond promptly to staff inquiries.

The Commission agrees that timing problems could have arisen under the rule as proposed, particularly in instances where the staff has advised an issuer that the proposal may be omitted unless the proponent amends it in certain respects. Therefore, rule 14a-8(e) has been revised to provide that in those cases the issuer need not forward the statement in opposition until five calendar days after it has received an appropriately revised proposal. In other instances, issuers generally will know no later than 20 days before filing their preliminary proxy materials whether a proposal will be included and therefore would have at least 10 days to draft and mail to a shareholder-proponent any statement in opposition which it intends to include in the proxy statement. ²²

Additionally, commentators had expressed concern that the rule as initially drafted might provide a forum for further debate on the merits of the proposal. It was noted that the rule has the potential for drawing the staff into debate over social and political issues. Nevertheless, a number of commentators concluded that this problem could be adequately remedied by revising the rule to clarify that a proponents review is solely for the purpose of exposing possible violations of rule 14a-9. Rule 14a-8(e), as adopted, includes an additional sentence which states that if the proponent believes the statement in opposition contains a materially inaccurate statement, and wishes to bring this to the attention of the Commission, the proponent should provide the staff with a statement setting forth the reasons for this view and, at the same time, forward a copy of the statement to management. It is anticipated that any questions raised by proponents would be handled in connection with the staffs comments on the issuers proxy material. This statement would clarify the procedure to be followed in administering the rule and also would help to assure that the issuer is able to promptly advise the staff of any appropriate supporting factual material. Further, the Commission believes this explicit statement will help to clarify that the rule is intended to elicit a proponents views only to the extent that these views relate to material misstatements or omissions of a factual nature.

In adopting rule 14a-8(e), the Commission emphasizes that it is adopted on an experimental basis. The Commission intends to monitor closely the effect of the rule on the proxy review process, particularly with respect to timing, and will re-examine the rule at some later date.

VII. Disclosure of Terms of Settlement of Election Contests-Item 3(b)(6) of Schedule 14A; Item 7(d) of Form 10-Q

Proposed items 3(b)(6) of schedule 14A and 7(d) of form 10-Q would have required that an issuer disclose the settlement terms of an election contest, including the anticipated cost to the issuer. Commentators who responded to the proposed items generally either favored or did not oppose the proposed disclosure. The Commission believes that a discussion of the terms on which election contests are settled would provide shareholders with important information useful in making voting decisions and has therefore determined that adoption of the proposals is appropriate. ²³

The release proposing these items stated that the Commission did not intend that issuers be required to file an amended proxy statement solely to disclose the terms of settlement, if such amended proxy statement was not otherwise necessary, for example, because managements slate of nominees had changed. The release also indicated that if the proxy statement relating to the contest is not amended, the disclosure should be included in the proxy statement for the following year as well as in the quarterly report on form 10-Q. It should be noted that, contrary to the description contained in the release proposing the items, item 3(b)(6) would not require that the disclosure be provided in the proxy statement for the following year. Subsequent disclosure would be required only in the next quarterly report on form 10-Q (pursuant to paragraph (d) of item 7 of form 10-Q.) If the settlement has already been disclosed in proxy soliciting materials furnished to shareholders, instruction 5 to item 7 of form 10-Q provides that paragraph (d) of item 7 may be answered by reference to the information contained in such material.

 VIII. Coordination with Regulation S-K

On July 28, 1978, as part of its efforts to standardize and integrate existing disclosure requirements, the Commission added four new disclosure items to regulation S-K, 17 CFR 229.20, including new item 3 which is captioned ''Directors and Executive Officers.'' ²⁴ At the same time, certain of the Commissions forms and regulations were amended to require that information which had been standardized in these new items be disclosed in accordance with the appropriate item of regulation S-K.

In the release announcing adoption of the new items of regulation S-K, it was noted that the amendments to item 6 of schedule 14A which are being adopted today had been published for comment and were then outstanding. The release indicated that, if adopted, the proposals would be adopted as amendments to item 3 of regulation S-K, which contains the type of disclosure requirements previously set forth under item 6. However, if adopted as part of item 3 of regulation S-K, which is required disclosure for a number of Commission forms, an express limitation would be necessary in order to limit their applicability to proxy statements. Moreover, the purpose of regulation S-K is to set forth standardized disclosure items which are common to several Commission forms. Therefore, the Commission believes it would be more appropriate to adopt the proposals as amendments to item 6 of schedule 14A. Accordingly, item 6 has been amended to designate the information required by item 3 of regulation S-K as paragraph (a) of the item. Proposed item 6(a)(6) has been adopted as paragraphs (b) and (c); ²⁵ the remaining rule proposals are adopted under the same designations as proposed.

Additionally, it should be noted that, since the disclosure previously required by item 7(f) of schedule 14A is currently required under item 4(f) of regulation S-K, references to ''item 7(f)'' have been revised to read ''item 4(f) of regulation S-K, 17 CFR 229.20'' in item 6(b).

IX. Item 8 of Schedule 14A

Item 8(e) of schedule 14A, 17 CFR 240.101, currently requires disclosure of whether or not an issuer has an audit committee and, if so, of the names of the individual members of the audit committee. As item 6(d), which is adopted today and which requires information concerning audit, nominating and compensation committees, includes an identical requirement, paragraph (e) of item 8 has been deleted.

X. Certain Findings

As requested by section 23(a)(2) of the Exchange Act, the Commission has specifically considered the impact which the amendments adopted herein would have no competition and has concluded that they impose no significant burden on competition. In any event, the Commission has determined that any possible burden will be outweighed by, and is necessary and appropriate to achieve, the benefits of these amendments to investors and registrants.

TEXT OF AMENDMENTS

PART 240-GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

17 CFR Parts 240 and 249 are amended as follows:

I. Section 240.14a-8 is amended by adding paragraph (e) as follows:

§240.14a-8 Proposals of security holders.

* * * * *

(e) If the management intends to include in the proxy statement a statement in opposition to a proposal received from a proponent, it shall, not later than ten calendar days prior to the date the preliminary copies of the proxy statement and form of proxy are filed pursuant to rule 14a-6(a), or, in the event that the proposal must be revised to be includable, not later than five calendar days after receipt by the issuer of the revised proposal, promptly forward to the proponent a copy of the statement in opposition to the proposal.

In the event the proponent believes that the statement in opposition contains materially false or misleading statements within the meaning of §240.14a-9 and the proponent wishes to bring this matter to the attention of the Commission, the proponent should promptly provide the staff with a letter setting forth the reasons for this view and at the same time promptly provide management with a copy of such letter.

II. Section 240.14a-101 is amended by adding paragraph 6 to Item 3(b); revising Item 6, deleting old paragraph (e) of Item 8 and redesignating paragraph (f) of that item as follows:

§240.14a-101 Schedule 14A. Information required in proxy statement.

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Item 3. Persons Making the Solicitation.

* * * * *

(b) ***

(6) If any such solicitation is terminated pursuant to a settlement between the issuer and any other participant in such solicitation, describe the terms of such settlement, including the cost or anticipated cost thereof to the issuer.

Instructions.

1. With respect to solicitations subject to §240.14a-11 (rule X-14A-11), costs and expenditures within the meaning of this item 3 shall include fees for attorneys, accountants, public relations or financial advisers, solicitors, advertising, printing, transportation, litigation and other costs incidental to the solicitation, except that the issuer may exclude the amount of such costs represented by the amount normally expended for a solicitation for an election of directors in the absence of a contest, and costs represented by salaries and wages of regular employees and officers, provided a statement to the effect is included in the proxy statement.

2. The information required pursuant to paragraph (6) of item 3(b) should be included in any amended or revised proxy statement or other soliciting materials relating to the same meeting or subject matter furnished to security holders by the issuer subsequent to the date of settlement.

* * * * *

Item 6. Directors and executive officers.

If action is to be taken with respect to election of directors, furnish the following information, in tabular form to the extent practicable, with respect to each person nominated for election as a director and each person whose term of office will continue after the meeting. However, if the solicitation is made on behalf of persons other than management, the information required need be furnished only as to nominees of the persons making the solicitation.

(a) The information required by item 3 of regulation S-K, 17 CFR 229.20;

(b) With respect to issuers other than investment companies registered under the Investment Company Act of 1940, describe any of the following relationships which exist:

(1) If the nominee or director has during the past five years had a principal occupation or employment with any of the issuers parents, subsidiaries or other affiliates.

(1) If the nominee or director is related to an executive officer of any of the issuers parents, subsidiaries or other affiliates by blood, marriage or adoption (except relationships more remote than first cousin);

(3) If the nominee or director is, or has within the last two full fiscal years been, an officer, director or employee of, or owns, or has within the last two full fiscal years owned, directly or indirectly, in excess of 1 percent equity interest in any firm, corporation or other business or professional entity:

(i) Which has made payments to the issuer or its subsidiaries for property or services during the issuers last full fiscal year in excess of 1 percent of the issuers consolidated gross revenues for its last full fiscal year;

(ii) Which proposes to make payments to the issuer or its subsidiaries for property or services during the current fiscal year in excess of 1 percent of the issuers consolidated gross revenues for its last full fiscal year;

(iii) To which the issuer or its subsidiaries was indebted at any time during the issuers last fiscal year in an aggregate amount in excess of 1 percent of the issuers total consolidated assets at the end of such fiscal year, or $5,000,000, whichever is less;

(iv) To which the issuer or its subsidiaries has made payments for property or services during such entitys last fiscal year in excess of 1 percent of such entitys gross revenues for its last full fiscal year;

(v) To which the issuer or its subsidiaries proposes to make payments for property or services during such entitys current fiscal year in excess of 1 percent of such entitys consolidated gross revenues for its last full fiscal year;

(vi) In order to determine whether payments made or proposed to be made exceed 1 percent of the consolidated gross revenues of any entity other than the issuer for such entitys last full fiscal year, it is appropriate to rely on information provided by the nominee or director;

(vii) In calculating payments for property and services the following may be excluded:

(A) Payments where the rates or charges involved in the transaction are determined by competitive bids, or the transaction involves the rendering of services as a public utility at rates or charges fixed in conformity with law or governmental authority;

(B) Payments which arise solely from the ownership of securities of the issuer and no extra or special benefit not shared on a pro rata basis by all holders of the class of securities is received;

(viii) In calculating indebtedness for purposes of subparagraph (iii) above, debt securities which have been publicly offered, admitted to trading on a national securities exchange, or quoted on the automated quotation system of a registered securities association may be excluded.

(4) That the nominee or director is a member or employee of, or is associated with, a law firm which the issuer has retained in the last two full fiscal years or proposes to retain in the current fiscal year;

(5) That the nominee or director is a director, partner, officer or employee of any investment banking firm which has performed services for the issuer other than as a participating underwriter in a syndicate in the last two full fiscal years or which the issuer proposes to have perform services in the current year; or

(6) That the nominee or director is a control person of the issuer (other than solely as a director of the issuer).

(7) In addition, the issuer should disclose any other relationships it is aware of between the director or nominee and issuer or its management which are substantially similar in nature and scope to those relationships listed above.

NOTE-In the Commissions view, where significant business or personal relationships exist between the director or nominee and the issuer or its management, including, but not limited to, those as to which disclosure would be required pursuant to item 6(b), characterization of a director or nominee by any ''label'' connoting a lack of relationship to the issuer and its management may be materially misleading.

(c) With respect to investment companies registered under the Investment Company Act of 1940, indicate by an asterisk any nominee or director who is or would be an ''interested person'' within the meaning of section 2(a)(19) of the Investment Company Act of 1940 and briefly describe the relationships by reason of which such person is deemed an ''interested person.''

(d)(1) State whether or not the issuer has standing audit, nominating and compensation committees of the Board of Directors, or committees performing similar functions. If the issuer has such committees, however designated, identify each committee member, state the number of committee meetings held by each such committee during the last fiscal year and describe briefly the functions performed by such committees. In the case of investment companies registered under the Investment Company Act of 1940, indicate by an asterisk whether that member is an ''interested person'' as defined in section 2(a)(19) of that Act. Information concerning compensation committees is not required of registered investment companies whose management functions are performed by external managers.

(2) If the issuer has a nominating or similar committee, state whether the committee will consider nominees recommended by shareholders and, if so, describe the procedures to be followed by shareholders in submitting such recommendations.

(e) State the total number of meetings of the board of directors (including regularly scheduled and special meetings) which were held during the last full fiscal year. Name each incumbent director who during the last full fiscal year attended fewer than 75 percent of the aggregate of (1) the total number of meetings of the board of directors (held during the period for which he has been a director) and (2) the total number of meetings held by all committees of the board on which he served (during the periods that he served).

(f) If a director has resigned or declined to stand for re-election to the board of directors since the date of the last annual meeting of shareholders because of a disagreement with the issuer on any matter relating to the issuers operations, policies or practices, and if the director has furnished the issuer with a letter describing such disagreement and requesting that the matter be disclosed, the issuer shall state the date of resignation or declination to stand for re-election and summarize the directors description of the disagreement.

If the issuer believes that the description provided by the director is incorrect or incomplete, it may include a brief statement presenting its views of the disagreement.

Item 8. Relationship with independent public accountants.

Old paragraph (e) is deleted.

(e) No change from current paragraph (f).

PART 249-FORMS, SECURITIES EXCHANGE ACT OF 1934

Section 249.308 is amended by revising instruction 6 to item 2; adding a new item 6; renumbering old item 6; and adding paragraph 4 to that item.

§249.308 Form 8-K, for current reports.

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Item 2. Acquisition or Disposition of Assets

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Instructions.

6. Attention is directed to the requirements in item 7 of the form with respect to the filing of financial statements for business acquired and to the filing of copies of the plans of acquisition or disposition as exhibits to the report.

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Item 6. Resignations of Registrants Directors

(a) If a director has resigned or declined to stand for re-election to the board of directors since the date of the last annual meeting of shareholders because of a disagreement with the registrants on any matter relating to the registrants operations, policies or practices, and if the director has furnished the registrant with a letter describing such disagreement and requesting that the matter be disclosed, the registrant shall state the date of such resignation or declination to stand for re-election and summarize the directors description of the disagreement.

(b) If the registrant believes that the description provided by the director is incorrect or incomplete, it may include a brief statement presenting its views of the disagreement.

(c) The registrant shall file a copy of the directors letter as an exhibit with all copies of the form 8-K required to be filed pursuant to general Instruction E.

Item 7. Financial Statements and Exhibits

No change from present item 6 except to add paragraph (b)(4) as follows:

4. Letters from directors furnished pursuant to item 6.

IV. Section 249.308a is amended by adding paragraph (d) to item 7; by adding a new instruction 5; and by renumbering old instruction 5.

§249.308a Form 10-Q, for quarterly reports under section 13 or 15(d) of the Securities Exchange Act of 1934.

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Item 7. Submission of Matters to a Vote of Security Holders.

* * * * *

(d) Describe the terms of any settlement between the registrant and any other participant (as defined in rule 14a-11 of regulation 14A under the Act) terminating any solicitation subject to rule 14a-11, including the cost or anticipated cost to the registrant.

* * * * *

Instructions.

5. If the registrant has furnished to its security holders proxy soliciting material containing the information called for by paragraph (d), the paragraph may be answered by reference to the information contained in such material.

6. No change from current instruction 5.

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Item 9. Exhibits and Reports on Form 8-K.

(a) * * *

4. Copies of any published reports furnished in response to item 7 (See item 7, instruction 6.).

PART 274-FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

V. Section 274.106 is amended by adding paragraph (d) to item 2 and by adding a new instruction 4.

§274.106 Form N-1Q, for quarterly reports of registered management investment company.

* * * * *

Item 2. Submission of Matters to a Vote of Security Holders.

* * * * *

(d) Describe the terms of any settlement between the registrant and any other participant (as defined in rule 14a-11 of regulation 14A under that Act) terminating any solicitation subject to rule 14a-11, including the cost or anticipated cost to the registrant.

* * * * *

Instructions.

4. If the registrant has furnished to its security holders proxy soliciting material containing the information called for by paragraph (d), the paragraph may be answered by reference to the information contained in such material.

Sec. 12, 13, 14, 15(d), 23(a), 48 Stat. 892, 894, 895, 901 secs. 1, 3, 8, 49 Stat. 1375, 1377, 1379; sec 203(a) 49 Stat. 704; sec. 202, 69 Stat. 686; secs. 3, 4, 5, 6, 78 Stat. 565-568, 569, 570-574; secs. 1, 2, 3, 82 Stat. 454, 455; secs. 28(c), 1, 2, 3-5, 84 Stat. 1435, 1497; secs. 10, 18, 89 Stat. 119, 155; sec. 308(b), 90 Stat. 57; sec. 204, 91 Stat. 1500; 15 U.S.C. 78 78m 78n, 78o(d), 78w(a)

The Commission finds that any changes in the amended rules and schedules adopted from those published in Securities Exchange Act Release No. 14970 have already been generally subject to comment and are either technical in nature or less burdensome than previous requirements so that further notice and rulemaking procedures pursuant to the Administrative Procedure Act (5 U.S.C. 553) are not necessary.

By the Commission.

George A. Fitzsimmons
Secretary

Footnotes

¹ See Securities Exchange Act Release No. 15385, also published today.

² Securities Exchange Act Release No. 13901 (August 28, 1977) contains a statement of the issues on which testimony and comments were requested. The identification of these issues was based, in part, upon the public comments received in response to its prior release. Transcripts of the hearings and comment letters submitted during the hearing phase of the proceeding are available for inspection at the Commissions Public Reference Room, 1100 L Street, N.W., Washington, D.C. (File No. S7-693).

³ Under section 14(a), the Commission is charged with the responsibility of regulating the proxy soliciting process in order to assure ''fair corporate suffrage'' for every security holder, and to assure that each ''stockholder has adequate knowledge as to the manner in which his interests are being served.'' H.R. No. 1383, 73d. Cong. 2d. Sess. 13 (1934); S. Rep. No. 792, 73d. Cong., 2d. Sess. 12 (1934). In section 14(a), the Congress granted the Commission the authority to promulgate ''such rules and regulations * * * necessary or appropriate in the public interest or for the protection of investors.''

⁴ See, e.g., S. Rep. No. 47, 73 Cong., 1st Sess. 7(1933); Brandeis, ''Other Peoples Money'' 92 (1932 ed.); Frankfurter, ''The Federal Securities Act II,'' Fortune Mag. 53, 55 (Aug. 1933); Anderson, ''The Disclosure Process in Federal Securities Regulation: A Brief Review,'' 25 Hastings L.J. 311, 318, 330 (1974). See generally, ''Laurenzano v. Elinbender,'' 264 F. Supp. 356 (E.D.N.Y. 1968).

⁵ Item 6(b) corresponds to proposed item 6(a)(6)(i) and would apply to issuers other than registered investment companies.

⁶ See discussion of coordination with regulation S-K, infra.

⁷ While the rules adopted herein do not retain the director categories proposed in our July release, for convenience, those categories have been employed in the text of this release solely for the purpose of explaining our responses to comments on those proposals and discussing the affirmative disclosure requirements which are adopted herein.

⁸ An ''affiliate'' of a specified person is defined as a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. Securities Exchange Act rule 12b-2, 17 CFR 240.12b-2.

⁹ The term ''executive officer'' is defined in the instructions to item 3(b) of regulation S-K to mean the president, secretary, treasurer, any vice president in charge of a principal business function (such as sales, administration or finance) and any other person who performs similar policy making functions for the registrant.

¹⁰ See Securities Exchange Act Release No. 15006 (July 28, 1978), 43 FR 34402.

¹¹ See discussion of coordination with regulation S-K, infra.

¹² This problems is illustrated by a comparison of the findings of two recent surveys on the board composition of major U.S. corporations. One was conducted by Heidrick and Struggles, Inc., an executive recruiting firm. This study, which surveyed 1,000 of the largest companies as ranked by ''Fortune'', concluded that ''the average percentage of outside directors on a board is 59.8 in 1978.'' ''The Changing Board Update 1978,'' Heidrick & Struggles, Inc. The other survey, conducted by Spencer Stuart & Associates, Inc., a management consulting firm, examined 100 of the largest companies as ranked by ''Fortune'' for 1978. This survey studied, in addition to ''inside'' and ''outside'' directors, the number of ''quasi-insiders,'' a term which included lawyers, commercial bankers, investment bankers, retired officers and persons with family relationships to corporate management, but did not include directors who may be affiliated with significant customers or suppliers of the issuer. The study did not determine whether persons identified as ''quasi-insiders'' had a business relationship with the issuer. The figures provided by the Spencer Stuart study indicated that, if ''quasi-insiders'' are excluded, the average percentage of outside directors on corporate boards is 41.5 percent. See also, ''The Board-room is Becoming a Different Scene,'' Fortune Mag. (May 8, 1978).

¹³ See ''TSC Industries, Inc. v. Northway, Inc.,'' 426 U.S. 438 (1976).

¹⁴ As proposed, the item would also have required disclosure of the number of meetings held by each named committee. See discussion of Board Meetings and Attendance, infra.

¹⁵ Item 8(e) of schedule 14A currently requires an issuer to state whether or not it has an audit or similar committee of the board of directors and, if so, to name the members of the committee.

¹⁶ Pub. L. No. 95-213. Tit. I. §§ 102-103 (December 19, 1977). See also ''SEC v. Falstaff Brewing Co.,'' Civ. Action No. 77-894 supra, where the court found that the statement in the 1977 proxy statement regarding the existence of an audit committee of Falstaffs board of directors was materially false and misleading, in that the audit committee never met, or functioned. The proxy statement, thus, falsely conveyed to Falstaffs shareholders the impression that effective oversight of their companys accounting functions was being exercised by the board of directors.

¹⁷ It should be noted that rule 16b-3, 17 CFR 240.16b-3, which provides an exemption from section 16(b) of the Securities Exchange Act for certain acquisitions of securities by officers, directors and principal stockholders, requires that discretionary allocations of such securities be made by, or only in accordance with the recommendation of a committee of disinterested persons, as defined therein.

¹⁸ With respect to audit committees, the functions included engaging and discharging the independent auditors (or recommending such actions), directing and supervising special investigations, reviewing with the independent auditors the plan and results of the auditing engagement, reviewing the scope and results of the issuers procedures for internal auditing, approving each professional service provided by the independent auditors prior to the performance of such services, reviewing the independence of the independent auditors, considering the range of audit and non-audit fees and reviewing the adequacy of the issuers system of internal accounting controls. With respect to nominating committees, the functions included selecting or recommending to the full board nominees for election as directors and consideration of the performance of incumbent directors in determining whether to nominate them for re-election. The functions of compensation committees included approval (or recommendation to the full board) of the remuneration arrangements for senior management and directors, adoption of compensation plans in which officers and directors are eligible to participate and granting of options or other benefits under any such plans.

¹⁹ In the interest of contributing to the ongoing evolution of committee functions, the Commission has instructed its Division of Corporation Finance to monitor proxy statement disclosures made in response to this item.

²⁰ This item was originally proposed as item 5 but as adopted has been redesignated item 6.

²¹ ''Sisters of the Precious Blood v. Bristol-Myers Co.,'' Fed. Sec. L. Rep. 96,047 (1977), appeal dismissed, C.A. 2, 77-7299 (January 11, 1978). In that case, the district court in effect held that there is no judicial remedy under section 14(a) for materially inaccurate statements made by management in connection with precatory shareholder proposals, i.e., proposals that request, rather than require, that management take certain actions.

²² Where includability of a shareholder proposal is contested, in order to take advantage of the staffs no-action procedures, an issuer must file its objections with the Commission at least 50 days prior to filing its preliminary proxy materials (Rule 14a-8(d)). As a general rule, the staffs no action position is communicated within 30 days of receipt of the issuers objections.

²³ Since certain investment companies registered under the Investment Company Act of 1940 file their quarterly reports on Form N-1Q (17 CFR 274.106), a conforming amendment to that form has been adopted.

²⁴ Securities Exchange Act Release No. 15006 (July 28, 1978), 43 FR 34402. Regulation S-K was adopted in order to establish uniform disclosure requirements which may be used in preparing similar disclosures which were required by a number of Commission forms and regulations. See Securities Act Release No. 5893 (December 23, 1977), 42 FR 65554.

²⁵ Paragraph (b) corresponds to proposed item 6(a)(6)(i). Paragraph (c) corresponds to proposed item 6(a)(6)(ii).