SUMMARY OF COMMENTS:
In Response to the Commission's Proposed Rules
Relating to Security Holder Director Nominations

Exchange Act Release No. 34-48626
Investment Company Act Release No. 26206
File No. S7-19-03

Prepared by:
Division of Corporation Finance
March 5, 2004

Table of Contents

1. List of Commenters

2. Overview 37

3. General questions

4. To which companies would the proposed rule apply?

5. For those companies to which the proposed rule would apply, what events must occur before the company would be required to include a security holder nominee in its proxy materials?

6. What notice must a subject company give regarding the occurrence of an event that triggers operation of the proposed rule?

7. Once a nomination procedure triggering event occurs at a subject company, which security holders or security holder groups may submit a nominee that the company would be required to include in its proxy materials?

8. What are the eligibility requirements for a person whom a security holder or security holder group may nominate?

9. What is the maximum number of security holder nominees that the company must include in its proxy materials?

10. What notice must the security holder or security holder group provide to the company and file with the commission?

    What must the company do after it receives such a notice?

11. How would the liability provisions of the federal securities laws apply to statements made by the company and the nominating security holder or nominating security holder group?

12. How do the other exchange act proxy rules apply to solicitations by the nominating security holder or nominating security holder group?

13. How would the proposed rule apply to investment companies?

14. Beneficial Ownership Reporting Requirements - Rule Changes

15. Proposed amendments to rules under Exchange Act Section 16

16. Cost Benefit Analysis

17. Related Suggestions

I. List of Commenters

Academics
1.	Susan E. Dudley	George Mason University
2.	Wendy L. Gramm	George Mason University
3.	Comments of Lucian A. Bebchuk, William J. Friedman and Alicia Townsend Friedman Professor, Harvard Law School; John C. Coates IV, Professor, Harvard Law School; Dwight B. Crane, George Fisher Baker, Jr. Professor, Harvard Business School; Alexander Dyck, Associate Professor, Harvard Business School; Boris Groysberg, Assistant Professor, Harvard Business School; Brian J. Hall, Professor, Harvard Business School; Paul M. Healy, James R. Williston Professor, Harvard Business School; Howell Jackson, Finn M.W. Caspersen and Household International Professor, Harvard Law School; W. Carl Kester, Professor, Harvard Business School; Rakesh Khurana, Assistant Professor, Harvard Business School; Reinier H. Kraakman, Ezra Ripley Thayer Professor, Harvard Law School; Jay W. Lorsch, Louis E. Kirstein Professor, Harvard Business School; Krishna G. Palepu, Ross Graham Walker Professor, Harvard Business School; Mark J. Roe, David Berg Professor, Harvard Law School; Guhan Subramanian, Joseph Flom Assistant Professor, Harvard Law School, December 3, 2003	Harvard Law School; Harvard Business School	("Harvard")
4.	Lucian A. Bebchuk	Harvard Law School	("Bechuk")
5.	Alicia Townsend	Harvard Law School
6.	Donald G. Margotta	Northeastern University
7.	James L. Bicksler	Rutgers University
8.	Joseph A. Grundfest	Stanford Law School	("Grundfest")
9.	Kenneth Scott	Stanford Law School	("Shadow Reg. Comte.")
10.	Jayne Elizabeth Zanglein	The College of New Jersey	("Zanglein")
11.	Stephen M. Bainbridge	UCLA School of Law	("Bainbridge")
12.	Randall S. Kroszner	University of Chicago
Associations
13.	America's Community Bankers		("ACB")
14.	American Bar Association Monday, November 03, 2003		("ABA")
15.	American Bar Association Wednesday, January 07, 2004		("ABA")
16.	American Society of Corporate Secretaries		("ASCS")
17.	Association of BellTel Retirees Inc.		("ABTR")
18.	Association of US West Retirees		("AVSWR")
19.	Association for Investment Management and Research		("AIMR")
20.	Association of Corporate Counsel		("ACC")
21.	Committee on Securities Regulation, New York State Bar Association		("NYSBAR")
22.	Corporations Committee, Business Law, State		("California State Bar of California Bar")
23.	Financial Services Roundtable		("FSR")
24.	HR Policy Association		("HR Policy")
25.	Independent Corporate Directors Association		("ICDA")
26.	Independent Community Bankers of America		("ICBA")
27.	Investment Company Institute		("ICI")
28.	Manufacturers Alliance/MAPI Inc.		("MAPI")
29.	National Association of Real Estate Investment Trusts		("NAREIT")
30.	National Association of Corporate Directors		("NACD")
31.	National Coalition for Corporate Reform		("NCCR")
32.	New Jersey League of Community Bankers
33.	Software & Information Industry Association		("Software and Information")
34.	Task Force on Security Holder Director Nominations, The New York City Bar Association		("NYCBAR")
35.	The Business Roundtable Monday, November 17, 2003		("BRT")
36.	The Business Roundtable Friday, November 21, 2003
37.	The Business Roundtable Monday, December 22, 2003
38.	The Employment Policy Foundation		("EPF")
39.	United States Chamber of Commerce Thursday, December 11, 2003		("CC")
40.	United States Chamber of Commerce Friday, December 19, 2003
Corporations, Corporate Executives, and Corporate Directors
41.	3M Company	W. James McNerney, Jr.	("McNerney")
42.	Abbott Laboratories	Miles D. White	("Abbott")
43.	Accenture, Ltd.	Joe W. Forehand	("Accenture")
44.	Aetna	William J. Casazza	("Aetna")
45.	Agilent Technologies	Edward W. Barnholt	("Agilent")
46.	Alltel Corporation	Joe T. Ford	("Alltel")
47.	Amalgamated Bank Long View Funds	Gabriel P. Caprio	("Longview")
48.	American International Group, Inc.	Maurice R. Greenberg	("AIG")
49.	AMGEN, Inc.	Kevin W. Sharer	("AMGEN")
50.	Anadarko Petroleum Corporation Wednesday, December 10, 2003	John R. Butler	("Butler")
51.	Anadarko Petroleum Corporation Friday, December 12, 2003	James T. Hackett
52.	Anadarko Petroleum Corporation Monday, December 15, 2003	Robert J. Allison
53.	Apache Corporation	Raymond Plank	("Apache")
54.	Armstrong Holdings, Inc.	Walter T. Gangl	("Armstrong")
55.	Ashland, Inc.	Richard P. Thomas	("Ashland")
56.	ATA Holdings Corp.	Brian T. Hunt
57.	Axcelis Technologies
58.	Bowes, Inc.; Dayton Power and Light Company
59.	Box USA	Roger W. Stone
60.	Cadence Design Systems, Inc.	R. Raymond Bingham
61.	Callaway Golf Company	Brian P. Lynch	("Callaway")
62.	Capital Guardian Trust Company	Eugene P. Stein	("Capital Guardian")
63.	Caterpillar Inc. Thursday, December 04, 2003	James B. Buda	("Caterpillar")
64.	Caterpillar Inc. Friday, December 12, 2003	John R. Brazil	("Brazil")
65.	Caterpillar Inc. Thursday, December 18, 2003	James B. Buda	("Caterpillar")
66.	Cendant Corporation	Robert E. Nederlander
67.	Chemung Financial Corp.	Jane Adamy
68.	CIGNA Corporation Friday, December 19, 2003	Judith E. Soltz
69.	CIGNA Corporation Friday, January 02, 2004	("Cigna")
70.	Cleco Corporation	("Cleco")
71.	Compass Bancshares, Inc.	Jerry W. Powell	("Compass")
72.	ConocoPhillips Friday, October 03, 2003	Stephen F. Gates	("ConocoPhillips")
73.	ConocoPhillips Friday, December 19, 2003	Stephen F. Gates	("ConocoPhillips")
74.	ConocoPhillips Wednesday, December 31, 2003	James J. Mulva
75.	Convergys Corporation	James F. Orr	("Convergys")
76.	Cummins, Inc.	J. Lawrence Wilson	("Cummins")
77.	CUNA Mutual Life	Michael B. Kitchen
78.	Delphi Corporation Tuesday, December 09, 2003	Logan G. Robinson	("Delphi")
79.	Delphi Corporation Wednesday, December 10, 2003	J.T. Battenberg, III
80.	Eastman Chemical Company	Brian L. Henry	("Eastman")
81.	Eaton Corporation, Graphic Packaging Corporation and Cambrex Corporation	John R. Miller	("Miller")
82.	Eli Lilly and Company	Alecia A. DeCourdreaux	("Lilly")
83.	EMC Corporation Monday, December 22, 2003	Gail Deegan	("Deegan")
84.	EMC Corporation Monday, December 22, 2003	Alfred Zeien	("Zeien")
85.	EMC Corporation Friday, December 19, 2003	EMC Corporation
86.	Emerson Electric Co. Monday, December 15, 2003	Harley Smith	("Harley Smith")
87.	Emerson Electric Co. Monday, December 15, 2003	("Emerson")
88.	Ernie Green, Ernie Green Industries, Inc.
89.	Exelon Corporation	M. Walter D'Alessio	("Exelon")
90.	FedEx Corporation	Kenneth R. Materson	("Fedex")
91.	FirstEnergy Corp.	("FirstEnergy")
92.	Fluor Corporation	Lawrence N. Fisher
93.	General Electric Co.	Jeffrey R. Immelt
94.	General Mills	Judith Richards Hope	("General Mills")
95.	General Motors Corporation	Philip A. Laskawy
96.	Georgeson Shareholder Communications, Inc.	John C. Wilcox	("Georgeson")
97.	Georgia-Pacific	A.D. Correll	("Georgia Pacific")
98.	IndyMac Bancorp, Inc.	Stephanie S. Irey
99.	Intel Corporation	Cary Klafter	("Intel")
100.	Intel Corp., Charles Schwab Corp.	David B. Yoffie
101.	Inter-Con Security Systems, Inc.	Enrique Hernandez
102.	International Kellogg Company	Jim Markey	("Kellog")
103.	International Paper Company Monday, December 22, 2003	Maura S. Smith	("International Paper")
104.	International Paper Company Monday, December 22, 2003	James Melican	("Melican")
105.	J.P. Morgan Chase & Co.	Anthony J. Horan	("JP Morgan")
106.	J.P. Morgan Fleming	David Paterson	("JPMorgan Fleming")
107.	Kerr-McGee Corporation Monday, December 08, 2003	Luke R. Corbett	("Kerr-McGee")
108.	Kerr-McGee Corporation Monday, December 22, 2003	Gregory F. Pilcher	("Pilcher")
109.	KeyCorp
110.	Lend Lease Rosen Real Estate Securities LLC
111.	McDATA Corporation	Thomas O. McGimpsey	("McDATA")
112.	McDonald's Corporation, Inc.	McDonald's Corporation
113.	MDU Resources	Lester H. Loble, II	("MDU")
114.	Mestek, Inc.	John E. Reed	("Mestek")
115.	Microsoft Corporation	John A. Seethoff	("Microsoft")
116.	Minerals Technologies Inc.	Paul Saueracker
117.	Nationwide Corporation	W.G. Jurgensen
118.	Norfolk Southern Corporation	Joseph C. Dimino
119.	Northern Trust Corporation	William A. Osborn	("Osborn")
120.	NSTAR	Douglas S. Horan	("NSTAR")
121.	Office Depot, Inc.	Bruce Nelson	("Office Depot")
122.	Ovation Pharmaceuticals Inc.	Wilbur Gantz	("Gantz")
123.	PACCAR, Inc.	G. Glen Morie
124.	Pfizer, Inc.	Henry A. McKinnell, Jr.	("McKinnell")
125.	PPG Industries, Inc.	Michael C. Hanzel	("PPG")
126.	Praxair, Inc.	Dennis H. Reilley
127.	Praxair, Inc. Monday, December 08, 2003	Praxair, Inc.	("Praxair")
128.	Procter and Gamble Company	James J. Johnson
129.	Progress Energy	William Cavanaugh	("Progress")
130.	Prudential Financial, Inc.	Kathleen M. Gibson
131.	Questar Corporation	Connie C. Holbrook	("Questar")
132.	Republic Services, Inc.	("Republic Services")
133.	Rural/Metro Corporation	Frank L. Fernandez	("Rural Metro")
134.	Sandy Spring Bank	Theresa A. Cornish
135.	Sears, Roebuck and Co. Wednesday, December 10, 2003	W. James Farrell	("Sears")
136.	Sears, Roebuck and Co. Monday, December 22, 2003	Andrea Zopp
137.	Sprint Corporation	Gary D. Forsee	("Sprint")
138.	Target Corporation	James T. Hale	("Target")
139.	The Allstate Corporation	Emma M. Kalaidjian	("Allstate")
140.	The Charles Schwab Corporation	McMillen, R. Scott	("Schwab")
141.	The Home Depot, Inc.	("Home Depot")
142.	The Liberty Corporation	Hayne Hipp	("Liberty")
143.	Trex Company, Inc.	Lynne MacDonald
144.	Tribune Company Tuesday, December 02, 2003	("Tribune")
145.	Tribune Company Thursday, December 18, 2003
146.	United Parcel Service, Inc.	Michael L. Eskew
147.	Valero Energy Corporation	Jay D. Browing	("Valero")
148.	W.W. Grainger Inc. Tuesday, December 16, 2003	W.W. Grainger, Inc.
149.	W.W. Grainger Inc. Tuesday, December 16, 2003	Jim Slavik	("Slavik")
150.	W.W Grainger Inc. Tuesday, December 16, 2003	Janience Webb	("Webb")
151.	Weis Market, Inc.	Robert F. Weis
152.	Wells Fargo & Company	Laurel A. Holschuh	("Wells Fargo")
153.	WorldWide PCE	Richard L. Wise
Form Letter Types
154.	24 individuals or entities using Letter Type A		("Letter Type A")
155.	136 individuals or entities using Letter Type B		("Letter Type B")
156.	4,127 individuals or entities using Letter Type C		("Letter Type C")
157.	8 individuals or entities using Letter Type D		("Letter Type D")
158.	357 individuals or entities using Letter Type E		("Letter Type E")
159.	3 individuals or entities using Letter Type F		("Letter Type F")
160.	185 individuals or entities using Letter Type G		("Letter Type G")
161.	7 individuals or entities using Letter Type H		("Letter Type H")
162.	5,853 individuals or entities using Letter Type I		("Letter Type I")
163.	34 individuals or entities using Letter Type J		("Letter Type J")
164.	13 individuals or entities using Letter Type K		("Letter Type K")
165.	4 individuals or entities using Letter Type L		("Letter Type L")
166.	251 individuals or entities expressing brief sentiments of support; Letter Type M		("Letter Type M")
167.	38 individuals or entities using Letter Type N		("Letter Type N")
168.	1,470 individuals or entities using Letter Type		("Letter Type O")
169.	4 individuals or entities using Letter Type P		("Letter Type P")
170.	4 individuals or entities using Letter Type Q		("Letter Type Q")
171.	5 individuals or entities using Letter Type R		("Letter Type R")
172.	4 individuals or entities using Letter Type S		("Letter Type S")
173.	4 individuals or entities using Letter Type T		("Letter Type T")
174.	35 individuals or entities using Letter Type U		("Letter Type U")
Individual
175.	Eleanor Bloxham		("Bloxham")
176.	Jonathan W. Clark
177.	Kay R.H. Evans		("Evans")
178.	Dan M. Ignall		("Ignall")
179.	William Schaff		("Schaff")
180.	Shelley Smith		("S. Smith")
181.	Doug Smith
182.	Jim Wagner		("Wagner")
183.	Carl Aiello
184.	Thomas Anderson
185.	Rev. Joshua M. Angelus		("Rev. Angelus")
186.	Richard H. Ayers		("Ayers")
187.	Gordon Bader		("Bader")
188.	Andrew Bain		("Bain")
189.	William Baker
190.	Leigh Bangs
191.	John Barmack
192.	Michael Beckner
193.	Dan Berarducci
194.	Tim Bush
195.	Joan Caine
196.	Peggy Campbell
197.	Carmen Campollo
198.	Charles Capito		("Capito")
199.	Megan P. Caposel		("Caposel")
200.	Cataldo Stolfa
201.	Jane Chamberlain
202.	John Chevedden		("Chevedden")
203.	Judith Claire
204.	Sally Chase Clark		("Clark")
205.	Harry Clarke
206.	Richard W. Cohen
207.	Eliot Cohen		("Cohen")
208.	David Cole
209.	Peter Collinge		("Collinge")
210.	Wally Collins
211.	Matthew Corbet		("Corbet")
212.	Richard Cornelison
213.	Robert Cornish
214.	John A. Dal Pan
215.	Evelyn Y. Davis		("Davis")
216.	Laurence R. Davis
217.	Pamela de Liz
218.	Le Roy Dockter
219.	T.W. Doyle
220.	Gary K. Duberstein		("Duberstein")
221.	Emil Rossi
222.	Sandra Ernest
223.	Alex Faber		("Faber")
224.	Michael Fanning		("Fanning")
225.	Scott Fettig
226.	Trina Fischer
227.	Geoffrey F. Foisie
228.	John Fortier		("Fortier")
229.	Jim Gale
230.	Christine M. Gallagher
231.	Mark S. Gardiner		("Gardiner")
232.	Erica L. George
233.	Lori-jean Gille
234.	Martin Glotzer
235.	Steven Golden
236.	Phillip Goldstein
237.	Albert Goodis
238.	Sarah Gorin		("Gorin")
239.	Mark Gregory		("Gregory")
240.	Andrew Grove
241.	Jennette Gudgel
242.	Michael Gunderson
243.	Carl T. Hagberg		("Hagberg")
244.	Albert and Marilyn Hall
245.	Richard Hall		("Hall")
246.	Caryl Hansen
247.	Justin Hart
248.	Joseph Harty
249.	Heather Hipp
250.	Jonathan Hoban		("Hoban")
251.	Roger L. Howe		("Howe")
252.	R. Hughes
253.	Reed Hundt		("Hundt")
254.	Dan M Ingall
255.	Roger Javens
256.	Karen Johnson		("Johnson")
257.	Dixie Johnson
258.	David B Kahn
259.	Bruce Kallos
260.	Lindsey Key
261.	Kurt Kiebler		("Kiebler")
262.	Carrell R. Killebrew, Jr.		("Killebrew")
263.	John Kirk		("Kirk")
264.	Roger Klein
265.	Charles J. Knight
266.	Gary Koski
267.	Scott Kravitz
268.	Nathan Kubel
269.	Dale Lamm
270.	Kate Lehman Landishaw		("Landishaw")
271.	Michael Lawler
272.	Dr. Dan Lawlor, M.D.
273.	Karen and John Lemes
274.	Andrew N. Lenz		("Lenz")
275.	Bob Leppien
276.	Roberta and Maishe Levitan
277.	Tim Lugbill
278.	Jerry Lyon
279.	Alexander Mar
280.	Carol Mattson
281.	Sarah McFadden
282.	Jane McGehee
283.	Donald McHenry
284.	Vera McLean
285.	James McRitchie
286.	George Misail
287.	Kendra Mon
288.	Robert A.G. Monks
289.	Malcolm S. Morris		("Morris")
290.	Robert S. Morrison
291.	Harry L Morton		("Morton")
292.	Les Myers
293.	Chris Nelson
294.	Deborah J Nelson
295.	Phil Nicholas, Jr.		("Nicholas")
296.	Aaron Niedermayer
297.	Jennifer S. O'Dell		("O'Dell")
298.	Chris Owens
299.	Charles R. Partridge		("Partridge")
300.	Rajnikant Patel
301.	George Pavloff
302.	Jeff Pelletier		("Pelletier")
303.	Victor A. Pelson
304.	James Petroff
305.	Floyd Pickrell
306.	Donald Pierce
307.	Bill Podley
308.	Andrew Randall		("Randall")
309.	Tracey Coker Rembert		("Rembert")
310.	Sidney A. Ribeau
311.	Gregor Riesser, PhD
312.	Cecil E. Roberts
313.	Aaron Rosenthal
314.	Nick Rossi
315.	Victor Rossi
316.	Chris Rossi
317.	Veena Sadana
318.	Richard Sampson
319.	Thomas C. Sanger		("Sanger")
320.	John Santoro
321.	Jack Saucier
322.	Stephanie Schaaf
323.	Ronald C. Schick
324.	Payson Schwin
325.	Michael Scott		("Scott")
326.	Mark A. Sear
327.	Howard Sherman
328.	John Sherrill
329.	Tomas J. Simon
330.	Anil Singhal
331.	Michael Sprinker		("Sprinker")
332.	B. Stennett
333.	Judith M. Stone
334.	Gail H. Stone
335.	John Szczur		("Szczur")
336.	Gary Tannahill		("Tannahill")
337.	Ken Thomas		("Thomas")
338.	Jim Thomas
339.	Vicky Thomas
340.	Paul Tomasik		("Tomasik")
341.	David Toy
342.	Joseph Traugott		("Traugott")
343.	Anthony Tucci
344.	Jim Turner
345.	Sandra K. Tuttle
346.	Patrick Von Bargen
347.	Jim & Virginia Wagner		("Wagners")
348.	David S. Wakelin
349.	Peter Wall
350.	David D. Watson
351.	Marc D. Weinber
352.	Jerrie Wells
353.	Jennifer Winters		("Winters")
354.	Joy Wood		("Wood")
355.	Christianna Wood
356.	John Young		("Young")
357.	Francisco Zamora
358.	Kristen Zehner		("Zehner")
359.	Mike Zucker		("Zucker")
Investment Advisors and Managers
360.	Peter Montagnon		("Montagnon")
361.	Alliance Capital Management L.P.		("Alliance Capital")
362.	Amalgamated Bank Long View Funds		("Longview")
363.	Aronson+Ortiz, LP
364.	Clean Yield Asset Management		("Clean Yield")
365.	Creative Investment Research, Inc.		("CIR")
366.	DNP Select Income Fund		("DNP Select")
367.	EndPoint Late-Stage Funds
368.	HGK Asset Management, Inc.
369.	Iridian Asset Management LLC		("Iridian")
370.	Karpus Management Inc.
371.	KDP Investment Advisors		("KDP")
372.	LIATI Group LLC
373.	LSV Asset Management		("LSV Asset")
374.	Marshfield Associates
375.	Millcap Advisors, LLC
376.	Morley Management		("Morley")
377.	Newground Investment Services		("Newground")
378.	Relational Investors LLC		("Relational")
379.	Scott & Stringfellow, Inc.
380.	Shamrock Holdings, Inc.		("Shamrock")
381.	Stanford Management Company		("Gilbertson")
382.	T. Rowe Price Associates, Inc.		("T. Rowe")
383.	The Mexico Equity and Income Fund, Inc.,
384.	Tweedy, Browne Company LLC
385.	Waddell & Reed Financial Inc.
386.	Wyser-Pratte & Co.		("Wyser-Pratte")
Law Firms and Attorneys
387.	Blackwell Sanders Peper Martin LLP		("Blackwell Sanders")
388.	Debevoise & Plimpton LLP		("Debevoise")
389.	Lyle Ganske, Christopher Kelley, Robert Profusek (JonesDay)		("Ganske, Kelley & Profusek")
390.	Kent Benson, Esq.
391.	Peter Clauss, J. Peter Wolf (Pepper Hamilton LLP)		("Clauss & Wolf")
392.	Sidley Austin Brown & Wood LLP		("Sidley Austin")
393.	Simpson Thacher & Bartlett LLP		("Simpson Thatcher")
394.	Sullivan & Cromwell LLP		("Sullivan")
395.	Wachtell, Lipton, Rosen & Katz		("Wachtell")
396.	Wolf Haldenstein Adler Freeman & Herz LLP		("Wolf Haldenstein")
Miscellaneous
397.	Anonymous reviewer
398.	Anonymous reviewer
399.	Anonymous reviewer
400.	Comments of a reviewer (illegible signature)
401.	Jules Family
Security Holder Resource Provider
402.	Committee of Concerned Shareholders Wednesday, October 08, 2003		("CCS")
403.	Committee of Concerned Shareholders Tuesday, November 18, 2003		("CCS")
404.	CorpGov.Net; James McRitchie, Editor Sunday, November 16, 2003		("McRitchie")
405.	CorpGov.Net; James McRitchie, Editor Monday, December 22, 2003
406.	Institutional Shareholder Services		("ISS")
407.	The Corporate Library		("Corporate Library")
Social, Environmental and Religious Funds and Related Service Providers
408.	Calvert Group, Ltd.		("Calvert")
409.	Christain Brothers Investment Services Inc.		("CBIS")
410.	Coalition for Environmentally Responsible Economics		("CERES")
411.	Domini Social Investments LLC		("Domini")
412.	Jessie Smith Noyes Foundation		("Noyes Foundation")
413.	Responsible Wealth		("Responsible Wealth")
414.	Rockefeller & Co. Inc.
415.	Social Investment Forum Ltd.		("SIF")
416.	The Nathans Cummings Foundation Trust		("Cummings")
417.	Trillium Asset Management Corporation		("Trillium")
418.	Unitarian Universalist Association
419.	Walden Asset Management		("Walden")
420.	Woodard & Curran
State & Federal Government Representatives
421.	Alan G. Hevesi	Comptroller of the State of New	("Hevesi")
422.	William C. Thompson, Jr.	Comptroller of the City of New York	("Thompson")
423.	Dale McCormick	Maine, Office of the Treasurer of State	("Maine Treasurer")
424.	Mark E. Amodei	Nevada State Senator
425.	Richard Moore	North Carolina Treasurer
426.	Chuck Blasdel	Ohio House of Representatives
427.	Chris Widener	Ohio House of Representatives
428.	Jeff Jacobson	Ohio Senate
429.	Randall Edwards	Oregon State Treasurer
430.	Jason Geddes	State of Nevada Assembly
431.	Gregory F. Lavelle	State Representative, 11th District, State of Delaware
432.	Steve Stivers	State Senator, Ohio
433.	Carl Levin	United States Senate	("Sen. Carl Levin")
U.S. Securities and Exchange Commission
434.	David G. Nason Wednesday, October 15, 2003	Counsel to Commissioner Atkins
435.	Russell Mancuso Friday, October 31, 2003	Counsel to Chairman Donaldson
436.	David G. Nason Saturday, December 06, 2003	Counsel to Commissioner Atkins
437.	Brian A. Stern Monday, December 22, 2003	Counsel to Commissioner Glassman
438.	Brian A. Stern Monday, December 22, 2003	Counsel to Commissioner Glassman
439.	Brian A. Stern Monday, December 22, 2003	Counsel to Commissioner Glassman
440.	David G. Nason Friday, February 06, 2004	Counsel to Commissioner Atkins
441.	Consuelo J. Hitchcock Wednesday, December 03, 2003	Division of Corporate Finance
442.	Lillian Brown Monday, December 22, 2003	Special Counsel, Office of Mergers and Acquisitions, Division of Corporation Finance
Unions, Pension Funds, Institutional Investors, Institutional Investor Associations, and Governmental Representatives
443.	American Federation of State, County and Municipal Employees		("AFSCME")
444.	American Federation of Musicians and Employers' Pension Fund
445.	American Federation of Labor and Congress of Industrial Organizations		("AFL-CIO")
446.	Arkansas State Police Retirement System
447.	Arkansas State Judicial Retirement System
448.	Bricklayers and Trowel Trades International Pension Fund
449.	California Public Employees' Retirement System		("CalPERS")
450.	City of Hartford Pension Commission		("Hartford")
451.	City of Miami
452.	College Retirement and Equities Fund		("TIAA-CREF")
453.	Colorado Public Employees' Retirement Association		("Colorado PERA")
454.	Committee on Investment of Employee Benefit Assets		("CIEBA")
455.	Communications Workers of America		("CWA")
456.	Connecticut Retirement Plans & Trust Funds		("CRPTF")
457.	Council of Institutional Investors Wednesday, December 03, 2003		("CII")
458.	Council of Institutional Investors Friday, December 12, 2003
459.	CWA/ITU Negotiated Pension Plan
460.	Delaware State Representative
461.	District of Columbia Retirement Board		("DCRB")
462.	Educational Employees' Supplementary Retirement System of Fairfax County
463.	Fire Fighters and Police Officers' Retirement
464.	General Teamsters, Chauffers and Helpers, Local No. 378
465.	Hermes Pensions Management Limited		("Hermes")
466.	IBEW Local Union 308
467.	IBEW Local Union 308
468.	IBEW Local Union 606
469.	IBEW Local Union 26
470.	IBEW Local Union 269
471.	IBEW Local Union 430
472.	IBEW Local Union 110
473.	IBEW Local Union 428 (Danny Kane) Monday, December 22, 2003		("Kane")
474.	International Corporate Governance Network
475.	International Brotherhood of Teamsters		("IBT")
476.	International Brotherhood of Electrical Workers Wednesday, December 17, 2003
477.	Laborers' International Union of North America
478.	Lawndale Capital Management, LLC		("Lawndale")
479.	London Pensions Fund Authority, UK
480.	Los Angeles County Employees Retirement Association		("LACERS")
481.	Missouri State Employees' Retirement System; Teachers' Retirement System of Louisiana; Public Employees Retirement System of Ohio; New Hampshire Retirement System; Arkansas Public Employees Retirement System; Public School Retirement System of Missouri; Kentucky Teachers' Retirement System; Washington State Depart. of Retirement Systems; Minnesota State Retirement System; Kansas Public Employees Retirement System; New Mexico Public Employees Retirement Assn.; Tennessee Consolidated Retirement System; California State Teachers' Retirement System; North Dakota Public Employees' Retirement System; Maine State Retirement System; Pennsylvania State Employees' Retirement System; Minnesota Teachers Retirement Association; Montana Teachers' Retirement System; Illinois Teachers' Retirement System; Fairfax County, Virginia; Teachers' Retirement System of Oklahoma; Indiana State Teachers' Retirement Fund; North Dakota Retirement and Investment Office; Iowa Public Employees Retirement System; Minneapolis Teachers' Retirement Fund Association; New York State Teachers' Retirement System; Public Employees' Retirement System of Mississippi; Wisconsin Department of Employee Trust Funds; Duluth Teachers' Retirement Fund Association; Nebraska Public Employees Retirement System; Vermont State Retirement System; Washington State Investment Board; Oklahoma Public Employees Retirement System; Maryland Retirement System; Montana Public Employee Retirement Administration; Wyoming Retirement System; Colorado Public Employees Retirement Assn.; South Carolina Retirement Systems; Retirement Systems of Alabama		("38 retirement Systems")
482.	National Association of State Retirement Administrators
483.	National Association of Pension Funds		("NAPF")
484.	National Council on Teacher Retirement
485.	Office of Advocacy, United States Small Business Administration		("USSBA")
486.	Ohio Public Employees Retirement System		("ORS")
487.	Pennsylvania State Employees' Retirement		("SERS")
488.	Railways Pension Trustee Company Limited		("Railways")
489.	San Diego Electrical Pension Trust
490.	San Diego City Employees' Retirement System		("SDCERS")
491.	SEIU National Industry Pension Fund
492.	State Board of Administration of Florida		("SBDFla")
493.	State Teachers Retirement System of Ohio		("STRS Ohio")
494.	Stichting Pensioenfonds ABP, Netherlands; Investment Management, Co-operative Insurance Society, United Kingdom (UK); Henderson Global Investors, UK; ISIS Asset Management PLC, UK; Investment Management Limited, UK; RAILPEN Investments, UK; Shell Pensions Management Services Limited, UK; Standard Life Investments, UK; Timber Industry Superannuation Scheme, Australia; UniSuper Limited, Australia; Universities Superannuation Scheme Ltd, UK		("Foreign Institutional Shareholders")
495.	Teachers' Retirement System of the City of New York
496.	Teamster's Central States Southeast and Southwest Areas Health and Welfare and Pension Funds
497.	Teamsters Local 728		("Teamsters 728")
498.	TIAA-CREF		("TIAA-CREF")
499.	UNITE		("UNITE")
500.	United Brotherhood of Carpenters and Joiners of America		("UBC")
501.	United National Retirement Fund and Textile Workers Pension Fund
502.	Virginia Retirement System
503.	Western Conference Pension Fund
504.	Wisconsin Coalition of Annuitants

II. Overview

In Exchange Act Release No. 34-48626 (October 14, 2003), the Commission solicited comment in connection with proposed rules that would, under certain circumstances, require companies to include in their proxy materials security holder nominees for election as director.¹ The commenters who responded were comprised of the following groups:²

• 185 individuals;

• 13 social, environmental, and religious funds and related service providers;

• 62 unions, pension funds, governmental representatives, institutional investors, and institutional investor associations;

• 10 law firms and attorneys;

• 113 corporations, corporate executives, and corporate directors;

• 24 associations;

• 27 investment advisors and managers;

• 21 Form Letter Types (representing approximately 12,582 individuals or entities);

• 4 security holder resource providers;

• 13 state or federal governmental representatives;

• 12 academics; and

• 5 miscellaneous.

A significant majority of the commenters, comprising virtually all of the unions; pension funds; social, environmental, and religious funds; a majority of institutional investors and institutional investor associations; a majority of investment advisers and managers; and a majority of individuals, supported the proposed rules. The exceptions were corporations, corporate executives, and corporate directors; law firms and attorneys; and most of the associations (primarily business associations), which were nearly unanimous in their opposition to the proposed rules.

The majority of commenters that favored the proposed rules ("Favoring Commenters") identified the recent corporate scandals as symptomatic of an overall problem in the system of corporate governance. Although a number of these commenters acknowledged the importance of recent initiatives under the Sarbanes-Oxley Act of 2002, and to a lesser extent the markets' amendments to listing standards and the Commission's efforts related to the transparency of nominating committee functions and communications between security holders and boards of directors, in addressing director conflicts of interests and accountability, a majority were of the view that greater accountability of board members to security holders was a necessary step in addressing these systemic issues.

Favoring Commenters expressed general dissatisfaction with the effectiveness of the current alternatives to effect changes in corporate governance, including conducting election contests, submitting security holder proposals under Exchange Act Rule 14a-8, submitting nominee candidates to the nominating committee, and communicating privately or publicly with the board about security holder concerns. As such, the commenters supported the proposed change to the proxy rules to require companies, under certain circumstances, to include in their proxy materials security holder nominees for election to the board.

A substantial majority of the commenters who opposed the rules ("Opposing Commenters"), on the other hand, recommended that the Commission not adopt or defer implementing the proposed rules until the Commission has had time to assess the impact of the Sarbanes-Oxley Act of 2002, the markets' amendments to their listing standards, and the Commission's own recent reforms. These commenters also expressed concern over purported detrimental effects that the proposed rules would have on companies and their boards. For example, commenters stated that the proposed rules, among other things, would facilitate special interest directors, disrupt and polarize boards, discourage qualified candidates from serving on boards, encourage the likelihood of costly election contests and result in director nominees who do not meet legal requirements, and diminish board accountability by bypassing companies' nominating committees.

A number of commenters also noted that the nomination and election of directors is an area governed generally by state law and, accordingly, questioned the weight of federal rules in an area that is traditionally governed by state law. A number of commenters also questioned the Commission's statutory authority to promulgate the proposed rules.

The portions of the proposed rules that generated the most extensive comment are addressed below.

To Which Companies Would the Proposed Rules Apply

Commenters that addressed this issue were close to evenly split on the application of the proposed rules. A slight majority of the commenters believed that the Commission should restrict application of the proposed rules to accelerated filers or to similarly large, sophisticated issuers. Several of these commenters favored application of the proposed rules to a limited sample of sophisticated issuers on a trial basis. The remainder of the commenters believed that the proposed rules should not be restricted to accelerated filers and should apply to all companies subject to the proxy rules.

Triggering Events - What Events Must Occur Before the Company Would Be Required to Include a Security Holder Nominee in Its Proxy Materials

Triggering Events Generally

Favoring Commenters overwhelmingly opposed the "triggering events," either in general or as currently drafted. Favoring Commenters that opposed triggering events on principle believed that any triggering events would undercut unfettered access to an issuer's proxy materials, which they viewed as a fundamental right attached to share ownership. Favoring Commenters that opposed the triggering events as drafted believed that: (1) the high ownership thresholds would render proxy access beyond the reach of most security holders, including even the largest pension funds and institutional investors; and (2) the two-step, two-year process required to elect a director under the proposed triggers is too lengthy.

In order to strengthen the proposal and enhance its effectiveness, Favoring Commenters generally supported relaxation of some of the obstacles raised by the triggering events. In this regard, the majority of commenters that addressed the proposed threshold requiring a withhold vote for one or more directors of more than 35% of the votes cast believed the threshold was too high. Support was strongest for a threshold requiring a withhold vote for one or more directors of only more than 20% of the votes cast. A slight majority of commenters that addressed the 1% ownership threshold for the security holder direct access proposal believed it, also, was too high. Support was strongest for requiring security holders or security holder groups to meet an ownership threshold similar to that set forth in Exchange Act Rule 14a-8.

Opposing Commenters, on the other hand, believed that, if adopted, the rules should require revised triggering events that are objective and narrowly tailored to limit their impact to only those issuers that truly demonstrate a significant level of security holder dissatisfaction with the proxy process. The significant majority of the commenters that favored the triggering events believed that the "withhold votes trigger," if significantly revised to protect adequately responsive issuers, was more appropriate than the "direct access trigger." These commenters believed that, as drafted, the direct access triggering event contains several unacceptable flaws, including: (1) it is overbroad in its sweep because it would be available to all security holders of all public issuers, not only those issuers with an ineffective proxy process; (2) the 1% ownership threshold is too low and would facilitate a deluge of direct access proposals; and (3) it fails to acknowledge the impact that institutional investor voting practices will have on the number of direct access proposals.

The "Third Triggering Event"

A majority of commenters that responded to the Commission's inquiries regarding a third triggering event strongly urged the Commission to refrain from adopting a trigger based on non-implementation of a security holder proposal that receives more than 50% of the votes cast on that proposal. The most commonly cited objections to this triggering event were: (1) a general disagreement with the automatic assumption that a failure to implement a precatory security holder proposal is indicative of security holder dissatisfaction or a failure of the proxy process; and (2) potential conflicts between boards of directors charged with a fiduciary obligations under state law to make an independent judgment and security holder proposals that may not be in a company's best interests.

A minority of commenters that responded to the Commission's inquiries regarding a third triggering event believed that non-implementation of a security holder proposal indicates clearly an ineffectiveness of, or a security holder dissatisfaction with, an issuer's proxy process.

Additional Triggers

In light of the "two-year delay" attendant to the triggering events, a large number of commenters supported revisions that would permit more immediate security holder access to a company's proxy materials upon events or circumstances in addition to those set forth in the proposed triggering events.³ The vast majority of commenters that supported more immediate access supported either triggering events based on the occurrence of specific events related to poor performance and/or poor governance or access to the proxy based solely on the share ownership of a security holder or security holder group. Support was slightly stronger for additional triggering events based on the occurrence of specific events related to poor performance and/or poor governance. Among the specific events most commonly suggested as additional triggers were the following:

• Issuer non-response to security holder proposals receiving a majority vote;

• Commission enforcement actions, including negotiated settlements;

• Material restatements of financial reports;

• Delisting by a market;

• Significant underperformance relative to an applicable peer group for an extended period of time; and

• Indictment of the issuer, or any executive or director on criminal charges directly related to his or her corporate duties.

The level of ownership most commonly cited as appropriate to entitle a security holder or security holder group to, upon its own motion, submit director nominees was at least 5% of the voting shares. An almost equivalent number of commenters, however, supported a higher level of ownership, but could not agree on the proper threshold, with support existing for thresholds ranging from 6% of the voting shares to 15% of the voting shares.⁴

Duration of the Process After a Triggering Events

With regard to the question of how long after a nomination procedure triggering event security holders should be able to use the nomination procedure, a significant majority of the commenters that addressed the issue believed that the procedure should be available for a period of longer than two years. Support was strongest for a period of five years. A minority of the commenters that addressed the issue believed that the nomination procedure should apply only to the annual meeting of security holders (or special meeting in lieu of an annual meeting) following the meeting at which a triggering event occurs.

Upon the Occurrence of a Triggering Event at a Subject Company, Which Security Holders or Security Holder Groups May Submit a Nominee

Most of the commenters that submitted substantive, targeted responses to this question acknowledged that eligibility to submit a nominee should be based on long-term ownership by a large security holder or group of security holders. A majority of these commenters, nonetheless, believed that the proposed ownership thresholds were too high.

Of the commenters that offered alternative thresholds, the letters evidenced a wide range of opinion. Support for a minimum ownership threshold of 3% was strongest, with eighteen commenters. Nine commenters recommended a minimum threshold of 5%; seven commenters supported a minimum threshold of 1%; five commenters recommended a minimum threshold of 10%; and three commenters recommended a minimum threshold of 25%.

The majority of commenters, notwithstanding whether they generally favored or objected to the proposed rules, supported the proposed eligibility standard requiring nominating security holders or nominating security holder groups to have held the securities at issue for at least two years. Furthermore, there was near unanimous agreement that such holders or groups should be required to continue to hold the securities at least until the date of the election of directors. Commenters, however, disagreed on whether nominating security holders or nominating security holder groups should be required to hold the securities beyond the date of the election of the directors. A majority, comprised exclusively of commenters that generally disfavored the proposed rules, believed that nominating security holders should be required to represent their intent to continue to satisfy the requisite ownership threshold for the duration of their nominee's service on the board.

Eligibility Requirements for a Person Whom a Security Holder or Security Holder Group May Nominate

Issues regarding the eligibility of security holder nominees generated significant comment, particularly as they related to: (1) whether the proposed rules should include additional limitations regarding nominee eligibility; and (2) whether the requirements regarding independence of the nominee from the nominating security holder, nominating security holder group, or company were appropriate. Opposing Commenters focused on the first issue noted above, while Favoring Commenters expressed more concern with the second issue.

Approximately a dozen commenters that objected generally to the proposed rules believed that there should be additional limitations related to nominee eligibility. Prospective security holder nominees, according to these commenters, should be required to meet any additional objective director qualifications set forth in an issuer's organizational documents, provided such qualifications would apply equally to all board members and be administered in good faith by the board of directors. A portion of these commenters further believed that prospective security holder nominees should be required to meet any additional objective director independence standards adopted by the company.

Over two-dozen Favoring Commenters expressed serious concern and/or outright disagreement with the requirements regarding independence of the nominee from the nominating security holder, nominating security holder group, or company. These commenters noted that the proposed requirements would hold a candidate suggested by a security holder or security holder group to a different independence standard than board-nominated candidates. Furthermore, the commenters noted that the proposed requirements would inhibit large security holders from seeking seats on boards as part of actively managed governance strategies. Accordingly, the Favoring Commenters questioned the fairness and wisdom of the proposed eligibility requirements.

Maximum Number of Security Holder Nominees

Commenters were unanimous in recognizing that the proposed rules were not intended to become a method to effect a change in control. Nevertheless, the significant majority of commenters that addressed the issue of the appropriate number of security holder nominees believed that the proposed limitation was too low. The commenters, primarily pension funds, persons or entities affiliated with pension funds and, to a lesser extent, individuals, were in agreement that the number of security holder nominees in no event should be less than two. Broad support was evidenced for each of two separate suggestions that would set the number of security holder nominees permitted by the proposed rules at either: (1) "one less than half" the eligible board seats in any given election cycle; or (2) two directors or 35% of the board, whichever is greater.

A minority of commenters believed that the proposed limitations were too generous. Several recommended that the proposed limitation be lowered to one nominee, regardless of the board's size. Several other commenters, recognizing the prevalence of staggered boards and data indicating that the median public company board size is nine directors, suggested that the number of security holder nominees that a company would be required to include in its proxy materials should be one for a company with a board of nine or fewer directors, two for a board of between 10 and 20 directors and three for a board of over 20 directors.

III. General questions

A.1. Should the Commission adopt revisions to the proxy rules to require companies to place security holder nominees in the company's proxy materials? Are the means that currently are available to security holders to address a company's perceived unresponsiveness to security holder concerns adequate?

The substantial majority of commenters believed that the Commission should adopt the proposed nomination procedure requiring issuers to place security holder nominees in their proxy materials.⁵ These commenters were comprised of nearly all of the unions; pension funds; social, environmental, and religious funds; a majority of institutional investors and institutional investor associations; a majority of investment advisers and managers; and a majority of individuals.

A number of commenters noted above expressed dissatisfaction with the effectiveness of the current alternatives to effect changes in corporate governance, such as conducting election contests, submitting shareholder proposals under Exchange Act Rule 14a-8, submitting candidates to an issuer's nominating committee, or engaging an issuer's management in private and/or public dialogue.⁶ In this regard, one commenter noted that the current alternatives available to shareholders to impact meaningfully director nominations "have not worked for decades" and, notwithstanding the recent reforms aimed at strengthening the independence of issuer nominating committees, still "are not working."⁷ The commenter stated, "Some companies don't have nominating committees, others won't accept shareowner nominations for directors, and our members' sense is that shareowner-suggested candidates-whether or not submitted to all-independent nominating committees-are rarely given serious consideration."⁸

One commenter stated the alternatives were "inadequate, inefficient, and expensive."⁹ Another commenter similarly believed that the current options for dissatisfied shareholders are prohibitively expensive.¹⁰ This commenter noted,

Shareholders can sell the stock at what they perceive to be a substantial discount. Or they can run their own slate of candidates, paying 100 percent of the costs, which may come to hundreds of thousands or even millions of dollars, for only a pro rata share of any increase in shareholder value as a result of the contested election. Meanwhile, management will spend the shareholders' money to fight them. This is not a level playing field. It is close to perpendicular.¹¹

Another commenter further addressed contested solicitations to replace directors.¹² Drawing on a study it conducted regarding the instances of contested solicitations from 1996-2002, the commenter found that the incidence of attempts by shareholders to replace incumbent directors with a slate that presumably would achieve greater performance and accountability was "more rare than commonly recognized."¹³ The commenter found that during the relevant period 215 contested solicitations took place, or approximately 30 per year.¹⁴ The majority of the cases, however, did not involve attempts to replace the board with a new, more responsive board, but rather involved a possible sale of the issuer, proposed bylaw amendments, or possible opening or restructuring of a closed-end fund.¹⁵ According to the commenter, contests over the team of directors that would run the issuer in the future occurred in about 80 companies and most of the issuers where contests occurred were small. In particular, only 10 issuers, or less than two a year on average, had in the year of the contested solicitation a market capitalization exceeding $200 million. Thus, the commenter noted, "[T]he safety valve of potential ouster via the ballot is currently not working. In the absence of an attempt to acquire the company, the prospect of being removed in a proxy contest is far too remote to provide the safety valve on which our corporate governance system is supposed to rely."¹⁶

A minority of commenters, on the other hand, believed that the Commission should not require issuers to include security holder nominees in their proxy materials to nominate directors. Representing the minority was a significant majority of the corporations and corporate executives and directors; a significant majority of law firms and attorneys; and most of the associations (primarily business associations). The commenters believed that adequate mechanisms already exist whereby security holders may effect changes in corporate governance. These commenters most frequently pointed to election contests under the current proxy rules;¹⁷ security holder proposals submitted under Exchange Act Rule 14a-8;¹⁸ and submission of candidates as potential board nominees to an issuer's nominating committee, which many commenters noted would be comprised entirely of independent directors as a result of recent governance reforms.¹⁹ Commenters further highlighted public or private negotiations with an issuer's management,²⁰ tender offers,²¹ and submission of a nominee candidate at an issuer's annual meeting.²²

A.2. What would be the cost to companies if the Commission adopted proxy rules requiring companies to include security holder nominees in company proxy materials?

The majority of Favoring Commenters did not address directly the cost to companies. Of the several that chose to address the costs, a general consensus existed that any increase in costs related to the nomination procedure would be limited and would be outweighed by the value of enhanced director accountability.²³ Several reasons were cited as the bases for this belief. First, the commenters did not believe the nomination procedure would be subject to extensive use. In this regard, one commenter stated that the nomination procedure "[would] be a tool of last resort."²⁴ Similarly, two large institutional investors pledged that they would utilize the nomination procedure only after all other steps have failed to produce results.²⁵ Second, the commenters noted that the proposal would simply permit shareowners the ability to access existing proxy material, and would not force issuers to produce separate proxy statements.²⁶ The commenters acknowledged that some issuers might spend significant resources in response to a shareowner nominee, but insisted that these costs were discretionary and stated that it was not appropriate to consider such potential expenses as a negative consequence of the proposal.²⁷

From a security holder's perspective, one of the Favoring Commenters noted that the nomination procedure provided obvious benefits in that it would eliminate the need for costly mailings of proxy materials.²⁸

The majority of Opposing Commenters, similar to the majority that supported the proposal, did not address directly the cost to companies. However, several commenters that did address directly the costs believed that the Commission has significantly underestimated such costs.²⁹ First, the commenters believed that many issuers would consider opt-in shareholder proposals as contested events and would expend additional resources to review, challenge, and attempt to defeat such proposals.³⁰ The commenters further believed that challenges to the opt-in shareholder proposals via no-action requests in an attempt to have them excluded would consume significant financial, administrative, and professional resources.³¹ The drain on resources would be magnified if, as predicted by the commenters, the number of opt-in shareholder proposals significantly exceeds the Commission's estimates.³²

Second, several of the Opposing Commenters believed that issuers affected by the proposal would incur printing and mailing costs that likely would outpace current printing and mailing expenditures. ³³ Finally, dozens of Opposing Commenters suggested that the proposal has the potential to turn every director election into an election contest.³⁴ In this regard, these commenters noted that pursuant to their fiduciary duties, company directors often would be forced to expend all necessary and permissible resources to defeat unqualified or under-qualified security holder nominees.³⁵

A.3. What direct or indirect effect would this procedure have on companies' corporate governance policies relating to the election of directors? For example, will companies be more or less likely to adopt cumulative voting policies and/or elect directors annually?

Although not directly responsive to the above question, a large number of Favoring Commenters believed that among the most, if not the most, important benefits that would derive from the proposal would be increased accountability of boards to investors.³⁶ A number of these commenters believed that the increased accountability necessarily would result in a number of positive developments for corporate governance policies relating to the election of directors. Six commenters anticipated improved communications between company boards and security holders.³⁷

At least four commenters were more specific and suggested that companies would be more likely to respond to clear shareholder mandates and/or adopt best practice corporate governance structures.³⁸ One of these commenters noted that company boards already appear to have developed a greater willingness to respond to shareholder mandates.³⁹ Another of the commenters noted,

Companies should be inclined to adopt standards of corporate governance that are commonly accepted and be more responsive to shareholder concerns that present at the ballot, such as elimination of classified boards, separation of chair and chief executive officer positions, [and] shareholder approval of poison pills. In addition, the adoption of such a rule should improve the quality of the corporate board election nominating process.⁴⁰

One Favoring Commenter suggested that the proposed nomination procedure would operate as a "deterrent" against companies nominating "the usual suspects" and would instead cause the nomination of director candidates that would vigorously serve the interests of all shareholders.⁴¹ Another commenter expressed a similar sentiment and stated that the proposal would have a "dramatic impact on the quality of corporate nominating and perhaps most important re-nominating processes."⁴²

A significant number of Opposing Commenters believed that the nomination procedure would undercut the role of the board and its nominating committee in the critical process of nominating director candidates.⁴³ Moreover, these commenters believed that bypassing the nominating committee would diminish board accountability to shareholders.⁴⁴

One Opposing Commenter believed that issuers would be reluctant to make necessary changes or discretionary enhancements to their governance policies relating to the election of directors until the final rules have been in place and their impact is measured, a period the commenter estimated would span at least five years.⁴⁵ Another commenter voiced a similar opinion by stating that a security holder nominee that won election to a board would face a fragmented or balkanized board (an outcome anticipated by a number of opponents of the nomination procedure⁴⁶) unlikely to make any substantive changes to its corporate governance, such as moving from a classified board to annual elections, that would weaken the board's position in negotiations with potential acquirors.⁴⁷

Two commenters noted that, upon the election of a security holder nominee, board meetings might become perfunctory, with the real business of the board conducted outside the boardroom, likely in special committees or caucuses from which the new security holder representative would be excluded.⁴⁸

IV. To which companies would the proposed rule apply?

B.1. As proposed, the security holder nomination procedure in Exchange Act Rule 14a-11 would apply to all companies subject to the proxy rules. Would this broad application have a disproportionate impact on smaller operating companies? Are there modifications that would accommodate the needs of small entities while accomplishing the goals of the proposal? Would it instead be more appropriate to apply the procedure only to "accelerated filers" and funds? Would it be more appropriate to apply the procedure only to "accelerated filers" and funds as an initial step? If so, are there any special provisions that would be necessary for companies transitioning to "accelerated filer" status with respect to the nomination procedure in proposed Exchange Act Rule 14a-11, such as the timing of nomination procedure triggering events or the proposed disclosure requirements? Would other limitations be more appropriate, such as applying the proposed rules to all companies other than small business issuers or all companies other than those that have been subject to the proxy rules for less than a specified period of time (e.g., 3 years)?

At least eight commenters believed the proposal would have a disproportionate impact on smaller issuers and urged the Commission to restrict application of the proposed rules to accelerated filers.⁴⁹ These commenters believed that the proposed rules generally would saddle smaller companies with considerable costs and other burdens that would outweigh the consequent benefits afforded their shareholders. Two of these commenters urged that the Commission forgo any rules that would "transition" or "phase in" smaller issuers.⁵⁰ These commenters believed that the costs to non-accelerated filers and the limited benefits that would accrue to security holders as a result of the proposed rules would in all likelihood persist indefinitely into the future, regardless of whether application of the rules was phased in.⁵¹ Another of the commenters, however, favored a "transition" provision that would gradually expand the reach of the proposal to all filers.⁵² The commenter did not provide details on how the "transition" would work.⁵³

At least thirteen commenters believed the proposed rules should not be restricted to accelerated filers and should apply to all companies subject to the proxy rules.⁵⁴ One commenter that favored an expansive application of the rule believed it would not be equitable to carve out smaller issuers and dismissed concerns raised about the potential financial impact on such issuers.⁵⁵ This commenter noted,

If a company benefits from the advantages of public ownership and trading then it should be held to the same high standard of investor protection regardless of size. In response to concerns of a smaller company's financial limitations, note that the proposed rule only mandates inclusion of alternative candidates in management's proxy. This in itself is not a substantial cost burden on any size company. The rule does not mandate the company to expend monies campaigning for management's slate. That is a decision for each company's board to individually weigh in the proper exercise of its fiduciary duties.⁵⁶

At least three commenters favored application of the proposed rules to a limited sample of issuers on a trial basis.⁵⁷ One of these commenters suggested a sample trial on "as small of group as possible."⁵⁸ Another commenter suggested a limited sample involving the largest 500 to 1000 companies.⁵⁹ The last commenter supported a trial program targeting a limited number of companies that demonstrate "objective earmarks of poor governance."⁶⁰

A number of additional comments were received supporting application of the rules to "relatively large companies,"⁶¹ companies with a market capitalization in excess of $900 million,⁶² and companies with a market capitalization in excess of $1 billion.⁶³

Finally, one commenter stated that sufficient evidence did not exist to make an "informed judgment" on which issuers should be subject to the proposed rules.⁶⁴

B.2. Should companies be able to take specified steps or actions that would prevent application of the proposed nomination procedure where such procedure would otherwise apply? If so, what such steps or actions would be appropriate? For example, should companies that agree not to exclude any security holder proposal submitted by an eligible security holder pursuant to Exchange Act Rule 14a-8 be exempted from application of the proposed nomination procedure for a specified period of time? Should a company that implements all security holder proposals that receive passing votes in a given year be exempted? Conversely, should companies subject to Exchange Act Rule 14a-11 be permitted to exclude certain security holder proposals that they would otherwise be required to include? If so, what categories of proposals? For example, should the company be able to exclude proposals that are precatory, proposals that relate to corporate governance matters generally, proposals that relate to the structure or composition of boards of directors, or other proposals?

At least eight commenters stated that it was not appropriate for companies to take actions that prevent application of the proposed nomination procedure when it would otherwise apply.⁶⁵ All of these commenters were in general agreement that any carve-outs would significantly undercut the effectiveness of the rule.⁶⁶ One of the commenters noted that it supported additional triggers in the rule and therefore was unable to support exempting issuers from application of the nominating procedure if they implement all shareowner proposals passed by majority vote in any given year.⁶⁷

Three Opposing Commenters stated that it was not appropriate to exempt issuers from application of the proposed nomination procedure for a specified period of time if the issuer agreed not to exclude any security holder proposal submitted by an eligible security holder pursuant to Exchange Act Rule 14a-8.⁶⁸ One of the commenters thought any exemption based on the blanket acceptance of security holders' proposals submitted under Exchange Act Rule 14a-8 risked the introduction of "inappropriate incentives."⁶⁹ This commenter cautioned, "[T]he board of directors must be able to make business judgments on the merits of a proposal, without the presence of unrelated incentives, such as the perceived need to avoid the application of the access procedure to the company."⁷⁰ Another of the commenters stated that such an exemption likely would result in a number of shareholder proposals that in no way benefit security holders being included in the issuer's proxy materials.⁷¹

One commenter expressed support for allowing issuers to exclude precatory shareholder proposals in any election cycle in which proposed Exchange Act Rule 14a-11 has been triggered.⁷² Another commenter recommended a similar approach that would allow issuers to exclude shareholder proposals relating to the procedures for election of directors in any election cycle in which proposed Exchange Act Rule 14a-11 has been triggered.⁷³ Another commenter stated that if the Commission adopts the proposed nominating procedure, all Exchange Act Rule 14a-8 proposals on corporate governance matters should be eliminated.⁷⁴

Three commenters suggested that if a director who has received a more than 35% "withhold" vote resigns prior to the end of the fiscal year, the proposed nomination procedure should not be triggered.⁷⁵

At least five commenters expressed support for a variety of methods by which an issuer could exempt itself from application of the proposed rules.⁷⁶ One of these commenters proposed a series of exemptions.⁷⁷ First, the commenter proposed exempting an issuer from the nomination procedure and the triggering events if the issuer has included on behalf of a 5% security holder or group of security holders the maximum number of nominees permitted by paragraph (d) of proposed Exchange Act Rule 14a-11.⁷⁸

Second, the commenter proposed exempting an issuer if its security holders have voted to exempt the company from the new rule or approved an alternative access procedure.⁷⁹ In this regard, the commenter noted, "Since the rule's basic purpose is to enhance the shareholders' ability to influence the proxy process, it would seem only logical to allow shareholders to `opt out' of the proxy access procedure if they wish or to approve a different kind of proxy access procedure."⁸⁰ Three additional commenters generally agreed and stated that issuers should be encouraged to establish procedures regarding security holder nominees and access to the board's proxy materials that may be different but are not less favorable in material respects than those established by rules of the Commission.⁸¹

Third, the commenter proposed exempting controlled companies (i.e., issuers where more than 50% of the voting power is held by an individual, a group, or another company) from application of the nomination procedure and the triggering events.⁸² Three additional commenters supported the exemption of controlled companies.⁸³ These commenters believed it would be futile to subject to the rule companies where a controlling shareholder or group has the ability to elect all directors.⁸⁴

Fourth, the commenter supported exempting issuers that have recently become public companies for the three annual shareholder meetings following the consummation of the IPO.⁸⁵ The commenter stated that it would be "unwarranted and counterproductive" for a new public issuer to be burdened with the access procedure at the same time as it, in all likelihood, is working to recruit independent directors and to resolve basic organizational issues.⁸⁶

One commenter suggested that the Commission revise the proposed nomination process to include "safeguards" to prevent the process from being used as leverage by special interest groups.⁸⁷ Rather than exempting certain issuers via limited carve-outs, the commenter suggested that Commission "add preconditions that would apply prior to the right to use the triggers."⁸⁸ One suggested precondition was an electronic "town hall meeting."⁸⁹ The town hall meeting process could be triggered in two ways: (1) any majority vote of the outstanding shares on any shareholder proposal on any subject; or (2) a written request by holders of at least 5% of the outstanding shares, held for one full calendar year prior to the proposal, who state that they intend to hold for an additional full calendar year after the request and who state publicly the reasons for their belief that a board is ineffective.⁹⁰ Senior management and board committee chairs would be required to attend. Institutional and retail security holders would be extended invitations to attend and participate in person if such holders could demonstrate a pre-determined level of ownership. The commenter believed the town hall meeting concept would "facilitate meaningful interaction among shareholders, directors, and management."⁹¹ The triggers for the new nomination procedure could be initiated at the annual meeting that followed the completion of the town hall meeting, but only if the security holders wishing to activate the triggers certified in writing that they believed the board had failed to make a good faith effort to address the concerns articulated at the town hall meeting.⁹²

A second precondition suggested by the commenter was also based upon encouraging interaction and dialogue between the issuer and security holders.⁹³ The commenter proposed that security holders initiating a trigger for the proposed nomination procedure should be required to disclose publicly their concerns with the effectiveness of the board as a precondition.⁹⁴ According to the commenter, if the final rules include a town hall meeting, then security holders wishing to trigger the nomination process would be required to disclose publicly that there had been no good faith effort by the board to address the concerns raised at the town hall meeting. If the final rules do not require a town hall meeting, then the security holders would disclose publicly how the board was not effective in specified circumstances.⁹⁵

Finally, one commenter proposed a series of carve-outs that would apply to the third triggering event, should the Commission adopt such a trigger.⁹⁶ First, the commenter suggested that if a significant percentage of security holders, perhaps 35% of the votes cast, voted against the security holder proposal that was the basis for the third trigger being initiated, then the failure of the board of directors to implement that proposal should not be a triggering event.⁹⁷ Second, if a majority of an issuer's independent directors determined that a proposal should not be implemented, the commenter stated that the failure to implement the proposal should not qualify as a triggering event.⁹⁸ Third, the commenter suggested that if a board of directors decides not to implement a proposal in reliance upon a legal opinion that they are not required or not permitted to do so under controlling state law, then the failure to implement would not be a triggering event.⁹⁹

B.3. Would adoption of this procedure conflict with any state law, federal law, or rule of a national securities exchange or national securities association? To the extent you indicate that the procedure would conflict with any of these provisions, please be specific in your discussion of those provisions that you believe would be violated.

At least twelve commenters suggested that the proposed nomination procedure would exceed the Commission's statutory authority under Exchange Act Section 14(a) and the other statutory provisions cited as authority for the new rule.¹⁰⁰ The commenters noted that neither Exchange Act Section 14(a) nor the other statutory provisions authorize the Commission to regulate corporate governance.¹⁰¹ These commenters stated that the nomination procedure - by creating a right in certain shareholders to solicit proxies for their director nominees in the issuer's proxy materials, at the issuer's expense, under specified circumstances and conditions - constituted impermissible substantive regulation rather than regulation based on disclosure and process.¹⁰² One commenter noted, "Under the guise of disclosure, the Commission would be effectively adopting federal corporate governance standards that would provide certain large shareholders with a new federal substantive right of shareholder access that does not generally exist under state law."¹⁰³

Two commenters stated that the limitation of the proposed rule solely to issuers organized in states where shareholders are not prohibited from making nominations does not alter the conclusion that the proposed rule would create a new substantive right.¹⁰⁴

Three commenters disputed the Commission's attempts to analogize the proposed rules to other proxy rules, i.e., Exchange Act Rule 14a-8, promulgated under the Exchange Act. ¹⁰⁵ The commenters believed that it was not appropriate to use Exchange Act Rule 14a-8 as precedent for the creation of the access rights set forth in the proposed nomination procedure because Exchange Act Rule 14a-8 specifically excludes, among other things, proposals related to director elections.¹⁰⁶

Three commenters believed that the Commission did not exceed its authority under Exchange Act Section 14(a).¹⁰⁷

A number of commenters suggested that the Commission's proposal would violate the Administrative Procedure Act (APA).¹⁰⁸ The commenters believed that permitting the inclusion in an issuer's proxy materials of an opt-in shareholder proposal before the Commission has completed its rulemaking would raise issues under the notice and comment requirements of the APA.¹⁰⁹ One commenter stated,

[I]t is inconsistent with the notice and comment requirements of the Administrative Procedure Act to attempt to compel regulated entities to take steps that are not required by law now, and that would only be required if the rulemaking now underway resulted in a final rule in which the pertinent provisions of the proposals were retained without material change.¹¹⁰

Two of the commenters further believed that the nomination procedure might violate other relevant constraints with respect to the Commission's rulemaking responsibilities, including the Exchange Act; Executive Order 12,866, 58 Fed. Reg. 51,735 (1993), as amended by Executive Order No. 13,258, 67 Fed. Reg. 9385 (2002); Paperwork Reduction Act of 1995, 44 U.S.C. § 3501 et seq; Regulatory Flexibility Act of 1980, 5 U.S.C. § 601 et seq.; Small Business Regulatory Enforcement Act of 1996, P.L. 104-121, tit. II, 110 Stat. 857 (1996); Executive Order 13,272, 67 Fed. Reg. 53,461 (2002); and Executive Order 12,988, 61 Fed. Reg. 4,729 (1996). ¹¹¹

A number of commenters stated that the proposed nomination procedure would raise significant issues involving inconsistency with applicable state corporate law.¹¹² Six commenters stated that the nomination procedure effectively would create, in contravention of state law provisions that require shares of the same class to carry the same rights,¹¹³ different classes of shareholders within a single class of shares, with different rights regarding, among other things, director nominations and the use of company funds and resources.¹¹⁴ These commenters also believed that the nomination procedure generally would interfere with the state law duty and responsibility of directors to manage the business and affairs of the corporation, including the process of considering and nominating qualified directors.¹¹⁵

One commenter stated that the proposed nomination procedure would provide beneficial owners with substantive rights to which they are not entitled under California state law.¹¹⁶ In particular, the commenter noted that the proposed rules would grant beneficial owners the direct right to nominate directors. The commenter noted that under California state law only record holders of a corporation's shares have the right to vote or take action as shareholders under the Code.¹¹⁷

One commenter sought to preempt a potential conflict with existing state law.¹¹⁸ This commenter noted that many states permit shareholders to remove directors with or without cause.¹¹⁹ The commenter recommended that the Commission indicate that the proposal is not intended to affect those state laws and that any existing right to remove a director under state law would continue to apply.¹²⁰

B.4. Is it appropriate to limit the availability of the proposed nomination procedure to those situations where state law permits security holders to nominate candidates for director? Is it appropriate to permit companies to limit the availability of the proposed procedure by limiting the right to nominate directors, when allowed by state law? Will the proposed procedure's reliance on the pre-existence of a state law right, combined with the possibility that companies may limit security holders' rights in this regard, adversely affect the effectiveness of the procedure? Is the proposed procedure's reliance on the pre-existence of a state law right of nomination a proper balance between federal law and state law? Regardless of the existence of a state law right to nominate candidates for director, should companies be subject to the proposed procedure?

At least five commenters believed that the proposed nomination procedure, ideally, should be universally available regardless of state law.¹²¹ Two commenters recognized that it was appropriate for the Commission to be "sensitive" to situations where state law is in direct conflict with the proposed rules, but the commenters, nonetheless, stated that it was not appropriate "to require permissive state law for the application of the proposed procedure."¹²²

One commenter urged that the proposed nomination procedure should not apply where it is inconsistent with a company's jurisdiction of incorporation.¹²³ As drafted, paragraph (a)(1) of the proposed Exchange Act Rule 14a-11 provides that the nomination procedure will apply only if applicable state law does not prohibit an issuer's security holders from nominating candidates for election as director. The commenter stated that this provision should be revised to refer not only to applicable state law, "but also to the law of a company's country of incorporation in order to address the case of companies who are organized in non-U.S. jurisdictions but do not meet the definition of a `foreign private issuer' under Exchange Act Rule 3b-4 and are therefore not exempt from the proxy rules."¹²⁴ The commenter further urged that the reference to "state" should be modified to include the District of Columbia and U.S. territories and possessions.¹²⁵

Three commenters were comfortable that the proposed rules generally evidenced a proper balance between federal and state law, nevertheless, the commenters sought clarification from the Commission that the proposed nomination procedure was inapplicable not only when in conflict with state law, but also when inconsistent with an issuer's organizational documents validly adopted under state law.¹²⁶ These commenters believed the text of the proposed rules, when compared against the Commission's intent as set forth in the Proposing Release, needlessly left room for uncertainty. In this regard, one commenter stated, "Based on [the proposed rule's] language, it could be argued that only state law-and not a company's governing documents-can be the source of a prohibition on shareholder nominations."¹²⁷

At least eleven commenters believed that the proposed procedure's reliance on the pre-existence of a state law right, combined with an issuer's ability to limit a security holder's right in this regard, would adversely impact the effectiveness of the procedure.¹²⁸ Commenters believed that issuers might be encouraged to change their state of incorporation to evade the requirements of the proposed procedure,¹²⁹ and, as such, state legislatures might be pressured to respond by amending their laws to prohibit security holder nominations or otherwise establish obstacles to the nomination process.¹³⁰ According to one commenter, "The result of such state actions would reduce the existing rights of shareholders to nominate directors and conceivably leave the shareholders with fewer rights than they had before the proposed rules were enacted."¹³¹

In response to the possibility that states might be pressured into adopting new laws banning or limiting security holder nominations, several commenters requested that the Commission require prompt Exchange Act Form 8-K disclosure of any bylaw or charter amendments or state law changes impacting the effectiveness of the shareholder nomination mechanism.¹³²

B.5. Most companies currently use plurality voting in the election of directors; accordingly, proposed Exchange Act Rule 14a-11 is drafted assuming that in most cases plurality voting would apply to an election of directors in which the inclusion of a security holder nominee resulted in more nominees than available seats on the board of directors. What specific issues would arise in an election where state law or the company's governing instruments provided for other than plurality voting, (e.g., majority voting)? Would these issues need to be addressed in revisions to the proposed rule text? If so, how?

Only one commenter responded to the above questions.¹³³ The commenter did not address directly the questions, but rather noted, "It appears that plurality voting would be the most reasonable means of electing directors under the proposed rules, especially since companies tend to use plurality voting anyway."¹³⁴

V. For those companies to which the proposed rule would apply, what events must occur before the company would be required to include a security holder nominee in its proxy materials?

C.1. As proposed, the new procedure would require a triggering event for security holders to be able to use the security holder nomination procedure. Is this appropriate? If so, are the proposed nomination procedure triggering events appropriate? Are there other events that should trigger the procedure? For example, should the following trigger the procedure: lagging a peer index for a specified number of consecutive years; being delisted by a market; being sanctioned by the Commission; being indicted on criminal charges; or having to restate earnings once or restate earnings more than once in a specified period? Should the election of a security holder nominee as a member of a company's board of directors be deemed a triggering event in itself that would extend the process by another year or longer period of time?

The questions noted above elicited a significant number of comments. The types of responses were based largely on whether the commenter favored or objected to the proposed nomination procedure. A large number of the commenters that favored permitting security holders to participate meaningfully in the proxy process were opposed to the triggering events, which they viewed generally as unnecessary burdens that would severely limit the impact of the proposed rule. On the other hand, commenters that objected to the proposed rule believed that, if adopted, the rule should require triggering events that are objective and narrowly tailored to limit the rule's impact only to issuers that truly demonstrate a significant level of security holder dissatisfaction with the proxy process. A more detailed analysis of the various responses is set forth below.

At least forty-four commenters stated that triggering events of any kind are not appropriate.¹³⁵ These commenters believed that triggering events undercut what should be a fundamental right of security holders - unfettered access to an issuer's proxy materials to submit nominees for election to the board of directors.¹³⁶

At least seventy-eight commenters stated that the two proposed triggering events were not appropriate.¹³⁷ Another fifteen commenters expressed significant concern about the proposed triggering events.¹³⁸ The substantial majority of these commenters were in agreement that the proposed triggers were inappropriate or inadequate primarily for two reasons: (1) the ownership thresholds contained in the triggering events were too onerous and would prevent many security holders, even institutional security holders, from using the nomination procedure;¹³⁹ and (2) the two-step, two-year process required to elect a director under the proposed triggering events is too lengthy when the value of security holders' assets is put at risk.¹⁴⁰

At least two commenters believed that the two proposed triggering events were appropriate.¹⁴¹ One of these commenters stated that the two proposed triggers "strike an appropriate balance between the objectives of providing greater security holder access to the corporate proxy and ensuring that the security holder nomination procedures are not abused."¹⁴²

To the extent there was support for triggering events, it came almost exclusively from commenters that preferred that the proposed rule be withdrawn.¹⁴³ Notwithstanding their objections to the rule, these commenters stated that any rule, if adopted, necessarily must include revised triggering events to ensure that the new rule would come into play only when objective criteria indicated a failed or ineffective proxy process.¹⁴⁴ In this regard, one commenter noted, "Without a meaningful triggering event, the procedure would apply to all companies regardless of whether such a fundamental change in corporate governance involved in providing direct access is necessary or even desirable."¹⁴⁵

While support for objective, narrowly tailored triggers was evident, many of the commenters favored one of the triggering events at the expense of the other. A substantial difference of opinion, however, existed as to which of the triggers was more appropriate. The vast majority of the commenters that favored the triggers believed that the withhold votes trigger, if significantly revised to protect adequately responsive issuers, was more appropriate than the opt-in security holder proposal trigger.¹⁴⁶

In particular, those in favor of the withhold votes trigger identified several purported flaws with the opt-in shareholder proposal trigger event that rendered the trigger, in their eyes, unacceptable and/or less desirable.¹⁴⁷ First, the commenters believed that because the opt-in shareholder proposal triggering event would be available to all security holders of all public issuers, not only those issuers with an ineffective proxy process, it would not meet the proposed rule's stated objective of targeting only those issuers with an ineffective proxy process.¹⁴⁸ In this regard, one commenter noted, "[I]t does not require the proposing shareholder to provide, and does not by itself constitute, evidence that the company has been unresponsive to shareholder concerns."¹⁴⁹

Second, the commenters believed that the Commission has underestimated substantially the number of security holders that are likely to file opt-in shareholder proposals.¹⁵⁰ Commenters noted, in particular, that the relative ease with which security holders will be able to aggregate their holdings to reach the 1% threshold, as well as the lack of any material attendant costs, would impact dramatically the number of opt-in shareholder proposals.¹⁵¹

Third, the commenters believed that the Commission has failed to recognize the impact that institutional investor voting practices will have on the number of opt-in shareholder proposals.¹⁵² Institutional investors, according to the commenters, might develop internal voting guidelines or follow voting guidelines provided by third-party vendors to automatically vote in favor of such proposals without any consideration of the underlying performance and/or responsiveness of the subject company.¹⁵³ A number of commenters were concerned particularly about the influence of ISS if it, as anticipated by the commenters, revises its proxy voting guidelines to support opt-in shareholder proposals at all issuers.¹⁵⁴

Finally, one commenter believed that, as structured, the opt-in shareholder proposal trigger was not appropriate because security holders or security holder groups are not required to first demonstrate that they have submitted a proposed nominee to the nominating committee of a relevant issuer and had that candidate rejected.¹⁵⁵

Several commenters that favored triggering events believed that the opt-in shareholder proposal trigger, if significantly revised to protect adequately responsive issuers, was more appropriate than the withhold votes trigger.¹⁵⁶ The commenters expressed three primary concerns with the proposed withhold votes trigger that made such a trigger inappropriate and/or less desirable. First, the commenters believed that a withhold vote for any one director might have nothing to do with security holder dissatisfaction with the proxy process.¹⁵⁷ According to the commenters, the triggering event is vulnerable to those who seek to access the issuer's proxy materials, but cloak their aspirations with the pretext of dissatisfaction with a particular director.¹⁵⁸ Second, the withhold votes trigger would not give a company's board and its nominating committee the opportunity to respond to security holder concerns about a director before the company's proxy process is deemed ineffective.¹⁵⁹ Third, sponsors of a withhold votes campaign are not required to give any notice to the issuer or to security holders of their campaign or their reasons for it, nor will they have to make any filings with the Commission so long as they do not solicit proxies (which are not needed for withholding votes) and do not form a 5% or greater group.¹⁶⁰

At least twenty-one commenters, concerned that the two-year process contemplated by the triggers is too lengthy, supported additional triggering events that do not require a security holder sponsored event.¹⁶¹ The commenters highlighted a variety of specific events that should trigger the nomination procedure for the next shareholder meeting at which directors will be elected. In the words of one commenter, "Each of these criteria is consistent with cases where shareowners have reason to be dissatisfied with the existing board or management."¹⁶² Among the specific events suggested as additional triggers were the following:

• Issuer non-response to security holder proposals receiving a majority vote;¹⁶³

• Commission enforcement actions, including negotiated settlements;¹⁶⁴

• Material restatements of financial reports;¹⁶⁵

• Delisting by a market;¹⁶⁶

• Significant underperformance relative to an applicable peer group for an extended period of time;¹⁶⁷

• Indictment of the issuer, or any executive or director on criminal charges directly related to his or her corporate duties;¹⁶⁸

• Bankruptcy;¹⁶⁹

• Civil fines, penalties, damages or sanctions for violating federal or state law;¹⁷⁰

• Significant or prolonged share price decline;¹⁷¹ and

• Significant increases in CEO or executive officer compensation.¹⁷²

At least eighteen commenters agreed that the two-year process contemplated by the triggering events is too lengthy, but recommended an additional, more timely method of access based upon level of share ownership rather than or in addition to the occurrence of one or several of the events set forth above.¹⁷³ In this regard, one of the commenters noted, "We recommend . . . an override feature that would enable very substantial shareholders to respond with appropriate speed to redress urgent and egregious problems, such as financial malfeasance, insider trading or other criminal conduct."¹⁷⁴ Shareholders evidencing the appropriate level of ownership would be entitled to submit director nominees for the next shareholder meeting at which directors will be elected. The commenters, however, differed on the proper level of ownership necessary to trigger the additional "immediate access trigger."

• One commenter did not identify a specific level of ownership.¹⁷⁵

• One commenter proposed that a security holder or security holder group own at least 3% of the voting shares.¹⁷⁶

• Three commenters proposed that a security holder or security holder group own at least between 3%-6% of the voting shares.¹⁷⁷

• Seven commenters proposed that a security holder or security holder group own at least 5% of the voting shares.¹⁷⁸

• One commenter proposed that a security holder or security holder group own at least 5% or $1 billion in "share value."¹⁷⁹

• One commenter proposed that a security holder or security holder group own at least 6% of the voting shares.¹⁸⁰

• Four commenters proposed that a security holder or security holder group own at least 10% of the voting shares.¹⁸¹

• One commenter proposed that a security holder or security holder group own at least 15% of the voting shares.¹⁸²

• One commenter proposed that a security holder own at least 10% of the voting shares and a security holder group own at least 20% of the voting shares.¹⁸³

Two commenters addressed whether the election of a security holder nominee as a member of a company's board of directors should be deemed a triggering event in itself that would extend the process by another year or longer period of time.¹⁸⁴ The commenters recommended that unless the rule is revised to apply for a period of at least five years following a triggering event, the election of a security holder nominee as a member of a company's board of directors should be deemed a triggering event that would extend the process by another year or longer period of time.¹⁸⁵

C.2. How long after a nomination procedure triggering event should security holders be able to use the nomination procedure, if not two years, as is proposed (e.g., one year, three years, or longer)? Should there be other ways for the operation of the procedure to terminate at a company? If so, what other means would be appropriate? For example, should companies be able to take specified actions that would terminate operation of the nomination procedure? If so, what such actions would be appropriate?

At least fifteen commenters stated that the nomination procedure should be available for a period longer than two years.¹⁸⁶ Five of the comments provided no alternative,¹⁸⁷ but nine of the commenters favored a period of at least five years.¹⁸⁸ One of the commenters favored a period ranging from three to five years.¹⁸⁹ Two of the commenters stated that if a period of at least five years is provided for the application of the rule following a trigger, it would be acceptable to permit companies to submit to a vote of its security holders a proposal during that period to eliminate the procedure.¹⁹⁰

At least six commenters stated that the nomination procedure should apply only to the annual meeting of shareholders (or special meeting in lieu of an annual meeting) following the meeting at which a triggering event occurs.¹⁹¹ These commenters generally believed that an issuer should not be burdened by two contested elections as a result of the same triggering event.¹⁹² One of the commenters urged, "[T]he access procedure should apply only to the shareholder meeting following the occurrence of a triggering event and, in any case, should not continue into a second year if a shareholder nominee is elected at the first annual meeting."¹⁹³

Two commenters chose to address the potential that an issuer might face successive opt-in proposals at a time when that issuer is already subject to the nomination procedure as a result of an earlier, successful opt-in shareholder proposal.¹⁹⁴ In such an instance, the commenters urged that the rule should not permit an opt-in shareholder proposal to be presented for a vote at the next shareholders' meeting since there will automatically be access at that meeting and the meeting that follows.¹⁹⁵

C.3. As proposed, the nomination procedure could be triggered by withhold votes for one or more directors of more than 35% of the votes cast. Is 35% the correct percentage? If not, what would be a more appropriate percentage and why? Is it appropriate to base this trigger on votes cast rather than votes outstanding? If not, please provide a basis for the recommendation, including numeric data, where available. Is the percentage of withhold votes the appropriate standard in all cases? For example, what standard is appropriate for companies that do not use plurality voting? If your comments are based upon data with regard to withhold votes for individual directors, please provide such data in your response.

At least thirty-two commenters believed that the proposed threshold requiring a withhold vote of at least 35% of the votes cast was too high.¹⁹⁶ In support of their contention that the threshold was inappropriate, three commenters cited a statistical sample of director elections consisting of 308 companies.¹⁹⁷ The sample consisted of 100 S&P 500 large cap issuers, 100 S&P mid-cap issuers and 108 S&P small cap issuers. According to the commenters, the percentage of issuers within the sample that had withhold votes of 35% or more of votes cast was approximately 1.9%, which is in line with the percentages put forth in the Commission's proposing release.¹⁹⁸ The commenters, however, highlighted data in the sample showing that there were no S&P 500 large cap issuers that had total withhold votes of 35% or more votes cast, while 2% of the mid cap issuers and almost 4% of the small cap issuers did.¹⁹⁹ In light of such data, the commenters reasoned that it was not likely that investors using the 35% withhold vote could trigger access to the proxy at large cap companies.²⁰⁰ If the nomination procedure were limited to accelerated filers, the commenters worried that the limitation would further diminish the impact of the withhold trigger since most accelerated issuers are large cap issuers.²⁰¹

Twenty-five of the commenters that objected to the 35% threshold believed that the nomination procedure should be triggered by withhold votes for one or more directors of more than 20% of the votes cast.²⁰² Several of the commenters cited data from the statistical sample referenced above that indicated that a 20% withhold vote was achieved at approximately 15% percent of the issuers within the sample, including 13% of the large cap issuers.²⁰³ Regarding the diminished threshold, another commenter stated, "[A] threshold of 20% would be more appropriate and would maintain the balance between demonstrating significant shareowner dissatisfaction on one hand and yet still ensuring that the process would provide a reasonable opportunity for shareowners to trigger the nominating procedure."²⁰⁴

The remainder of the commenters that objected to the 35% withhold threshold differed in their opinions as to the proper threshold or did not identify an alternative threshold. Thresholds of 10%²⁰⁵ and 5%²⁰⁶ were each supported by one commenter. Four commenters supported a threshold of 25%.²⁰⁷ Three commenters did not provide an alternative threshold.²⁰⁸

At least twenty commenters believed that the proposed threshold requiring a withhold vote of at least 35% of the votes cast was too low.²⁰⁹ The commenters cited a number of reasons for objecting to the proposed threshold; most of the responses, however, focused on three purported flaws inherent to the proposed threshold for the withhold vote. First, commenters stated that the proposed threshold does not adequately take into account the realities of the current proxy process, particularly the existence of inflexible voting guidelines and/or the influence of proxy advisory services, and the impact that the process will have on the highly concentrated institutional ownership in most large public issuers.²¹⁰ In this regard, several commenters stated that large institutional investors often follow automatically either their own pre-determined guidelines for withholding votes or similar pre-determined recommendations of proxy advisory services.²¹¹ According to one commenter,

Consequently, a 35% withhold threshold can easily be reached in the complete absence of any factors indicating an ineffective proxy process and although the company's performance has been stellar and shareholder value has been significantly enhanced. Such an event will regularly occur not because a board has been unresponsive to shareholder concerns, but simply because it is the by-product of the proxy process and the voting practices of institutional investors.²¹²

Second, commenters stated that the proposed threshold was inappropriate because it might be triggered despite the fact that a director, or even the entire board, received the voting support of a majority of security holders.²¹³ One commenter noted that if more than 77% of the shares entitled to vote do so, a director can receive an absolute majority of votes entitled to be cast and still receive a 35% withheld vote.²¹⁴

Third, commenters expressed concern that voting standards based on votes cast will be impacted heavily by any determination that excludes broker non-votes.²¹⁵ According to these commenters, if broker non-votes are excluded from any tabulation of votes related to the triggering events or if the "10 day rule"²¹⁶ is abolished, the overall number of votes cast would decrease significantly because beneficial owners of shares held in street name who do not give voting instructions to their brokers would no longer have votes cast on their behalf.²¹⁷ As a consequence, the number of votes cast would no longer constitute a representative base of shareholders of the company. More importantly, in the eyes of the commenters, the threshold for withhold votes would be substantially easier to trigger.²¹⁸

The commenters that believed the 35% withhold threshold was too low differed in their opinions as to the proper threshold²¹⁹ or, in the case of one commenter,²²⁰ did not identify an alternative threshold. The alternatives are discussed below:

• Three commenters stated that the threshold should require a withhold vote in excess of 50% of the votes cast.²²¹

• Four commenters stated that the threshold should require a withhold vote in excess of 50% of the outstanding shares.²²²

• Two commenters stated that the threshold should require a withhold vote in excess of 50% of the outstanding shares and a subsequent board determination to re-nominate the relevant director.²²³

• One commenter stated that the threshold should require a withhold vote in excess of 50% of the outstanding shares with respect to at least a majority of the management supported nominees.²²⁴

• One commenter stated that the threshold should require a withhold vote in excess of 50% of the outstanding shares with respect to at least a third of the candidates up for election.²²⁵

• One commenter stated that the threshold should require a withhold vote in excess of 50% of the outstanding shares for two consecutive years with respect to three or more board nominees standing for election.²²⁶

Three commenters believed the 35% threshold as proposed was appropriate.²²⁷ Six commenters believed that the 35% threshold related to the withhold votes triggering event is generally appropriate, provided the triggering event is revised in a number of ways.²²⁸ For example, one commenter supported the 35% threshold, so long as broker non-votes are excluded from any calculation used to determine whether the threshold for the withhold votes triggering event has been reached.²²⁹ Another commenter believed that the threshold was appropriate only if security holders are in some manner informed in advance of the impact of the withhold vote, ideally via the proxy card.²³⁰

Four commenters expressed concern that the withholding of votes for only one director was not a reliable indication of security holder dissatisfaction with the issuer, the board, and/or the proxy process.²³¹ Receipt of a significant percentage of withhold votes by one director, for instance, might relate solely to circumstances peculiar to that director or to efforts by institutional investors or special interests to obtain a "costless option" that might be exercised in the future, if necessary.²³² Accordingly, the four commenters urged that the triggering event apply only when votes are withheld from a majority of the directors up for election.²³³

Notwithstanding the modification noted immediately above, three of the four commenters favored adding additional protections to the withhold votes triggering event.²³⁴ One commenter recommended that the percentage of withhold votes represent at least 35% of the voting power entitled to vote at that election.²³⁵ This commenter further recommended that the receipt of withhold votes amounting to 35% of the votes cast not be considered a triggering event with respect to a director if that director received a favorable vote of the majority of the votes cast on the election of the director.²³⁶

Another of the commenters did not address whether the withhold votes should represent a minimum percentage of an issuer's shares entitled to vote, but recommended that the receipt of withhold votes amounting to 35% of the votes cast not be considered a triggering event with respect to a director if that director received a favorable vote from the holders of a majority of the shares outstanding.²³⁷

Another of the commenters urged that the number of withhold votes represent at least 25% of all the outstanding shares of the issuer.²³⁸ The commenter also urged that the receipt of withhold votes amounting to 35% of the votes cast not be considered a triggering event with respect to a director if that director received a favorable vote from the holders of a majority of the shares outstanding.²³⁹

In the event the Commission determined that the withhold votes triggering event would not be applied to a majority of the directors, one of the commenters referenced above recommended that the trigger be amended to include additional protections.²⁴⁰ First, the rule should require the receipt of 35% withhold votes for a number of directors equal to the maximum number of shareholder nominees the company may be required to include in its proxy materials under the rule (i.e., the number of permitted security holder nominees that could be placed on the ballot could not exceed the number of directors that had received withhold votes in excess of 35%).²⁴¹ Second, the threshold percentage under the withhold votes trigger would be calculated based upon votes outstanding, not votes cast.²⁴² Third, the withhold votes triggering event should not apply to any election of directors where a shareholder nominee is on the ballot due to the prior occurrence of a triggering event.²⁴³

Two commenters did not address the proper threshold for a withhold vote, but did offer their positions on issues related to calculating the withhold vote. One commenter urged that the proper threshold should be a percentage of the outstanding stock or, at a minimum, a percentage of the votes present and entitled to vote at the meeting.²⁴⁴ The second commenter suggested that if the Commission retains a threshold based on a percentage of votes cast rather than outstanding, the threshold should be based on a percentage of votes cast only when shareholders owning a specified minimum percentage of outstanding shares vote on the issue.²⁴⁵

Several commenters responded to the issue of whether the withhold vote triggering event was viable or advisable in the case of an issuer that did not use plurality voting. Two commenters stated that there was no reason to differentiate between issuers using plurality voting and issuers using majority voting.²⁴⁶ Two commenters, however, expressed concern that for issuers that used cumulative voting application of the withhold votes trigger would present distinct problems, particularly with regard "to the allocation and tallying of votes, as well as the form and content of the proxy card."²⁴⁷ As such, both commenters urged that should the Commission adopt the withhold votes trigger, the final rule should specify that the cumulation of shares is not permissible with respect to the withhold vote tabulation.²⁴⁸

C.4. Should the nomination procedure triggering event related to direct access security holder proposals trigger the procedure only where a more than 1% holder or group submits the proposal? If not, what would be a more appropriate threshold, if any? For example, should the standards otherwise applicable for inclusion of a proposal under Exchange Act Rule 14a-8 apply? Should the required holding period for the securities used to calculate the security holder's ownership be longer than one year? If so, what is the appropriate holding period? Should that holding period be shorter than one year? If so, what is the appropriate holding period?

A slight majority of the commenters that addressed specifically the required ownership thresholds related to opt-in security holder proposals thought the 1% threshold is too high.²⁴⁹ Many of the commenters stated that the ownership level of the security holders or security holder groups sponsoring the opt-in shareholder proposal is not relevant.²⁵⁰ The critical factor, instead, is whether the opt-in shareholder proposal garners the support of a majority of the votes necessary to trigger the nomination procedure.²⁵¹ The commenters, nonetheless, were unanimous in their support for at least some type ownership threshold.²⁵² The commenters, if they chose to identify an alternative threshold (many did not), differed on what would be a proper ownership threshold.

• Thirteen commenters believed the 1% ownership threshold is too high, but the commenters did not offer an alternative ownership threshold.²⁵³

• Two commenters offered only a general suggestion that the nomination procedure be open to "all long-term shareholders."²⁵⁴

• One commenter urged only that the thresholds should be "fair."²⁵⁵

• Ten commenters favored an ownership threshold based on the thresholds set forth in Exchange Act Rule 14a-8.²⁵⁶ Two of these commenters stated that if the Commission chooses a threshold different from that expressed in Exchange Act Rule 14a-8, they would favor a threshold of 0.25%.²⁵⁷

• One commenter favored an ownership threshold of 0.50%.²⁵⁸

Several commenters expressed general satisfaction with the 1% threshold.²⁵⁹

A significant minority of the commenters that addressed specifically the required ownership thresholds related to opt-in security holder proposals thought the 1% threshold is too low.²⁶⁰ Many of the commenters believed that the 1% threshold would be too easily achieved and would not necessarily indicate security holder dissatisfaction or issuer unresponsiveness.²⁶¹ Many of the commenters also expressed concern that the proposed threshold would give a variety of security holders the ability to threaten to bring an opt-in shareholder proposal in order to gain leverage and push for short-term concessions that would not benefit the company and its security holders as a whole.²⁶²

The commenters that believed that the proposed 1% threshold is too low differed on what was a proper ownership threshold.

• Three commenters did not identify a proper threshold.²⁶³

• One commenter believed a threshold of 2% is appropriate.²⁶⁴

• One commenter favored a threshold of 5% if a security holder initiates the trigger acting alone. If a group of security holders initiates a trigger, the commenter favored a threshold of 3%.²⁶⁵

• Nine commenters favored a threshold of 5%.²⁶⁶

• One commenter favored a threshold of 10%.²⁶⁷

• Three commenters favored a threshold of 25%.²⁶⁸

A majority of the commenters that chose to address specifically the required holding period provisions related to opt-in security holder proposals thought the one year holding period was appropriate.²⁶⁹

One commenter believed that a holding period requirement of any consequence was not necessary and suggested that the Commission retain only the ownership threshold.²⁷⁰

At least nine commenters believed a holding period of two years was more appropriate than the proposed one-year holding period.²⁷¹ Two commenters supported a holding period of two years and a stated intent to continue to hold the securities for two calendar years after the year in which the trigger is initiated.²⁷² One commenter suggested a holding period of three years.²⁷³ Two commenters suggested a holding period of five years.²⁷⁴

One commenter sought clarification regarding the 1% ownership threshold for those situations where a company has two or more classes of shares, with each class having a different voting power.²⁷⁵ In those instances, the commenter believed that in order to trigger the direct access proposal, the security holder or security holder group should own more than 1% of the class entitled to elect a majority of directors.²⁷⁶ In addition, the commenter urged that the proposed rule be revised to clarify that the share ownership and holding period should be determined based on the company's quarterly or annual reports filed during the relevant period (similar to the manner provided in Exchange Act Rule 13d-1(j)). The commenter noted, "This will avoid a situation where a shareholder who has reached the more than 1% ownership level shortly before submitting the proposal as a result of a reduction in the number of outstanding shares, such as due to share repurchases by the company, will be eligible to make a direct access proposal."

Given that the stated purpose of the opt-in shareholder proposal is not intended to be part of a plan effectuate a change in control, two commenters urged that the Commission add a requirement that any security holder seeking to submit an opt-in shareholder proposal cannot have filed an Exchange Act Schedule 13D with respect to the issuer's shares.²⁷⁷ One of these commenters also believed it appropriate that the proponent of the direct access proposal provide the information required by Items 2, 4, 7, 8, and 10 of Exchange Act Schedule 13G.²⁷⁸

C.5. Are the existing methods under Exchange Act Rule 14a-8 sufficient to demonstrate that a proposal was submitted by a more than 1% security holder? If not, what other methods would be appropriate?

At least four commenters responded to the questions posed above.²⁷⁹ Three of the commenters believed that existing methods under Exchange Act Rule 14a-8 were sufficient to demonstrate that a proposal was submitted by a more than 1% security holder.²⁸⁰ One commenter disagreed.²⁸¹ This commenter stated that only beneficial owners, representing the real economic interest in the issuer, should be permitted to nominate director candidates under the proposed rules.²⁸² According to this commenter:

Intermediaries, custodians and other agents should be disqualified from acting without authorization from the ultimate beneficial owner. To enforce this requirement, there must be an unbroken chain of authorizations from the registered share position back through each successive intermediary layer to reach the beneficial owner. Each step in this chain of authorizations should be transparent, fully documented and verifiable. There should also be a form of certification of beneficial ownership to be completed by the person(s) claiming that authority. This information will be additionally useful in determining whether the proposed candidate has any conflicts of interest and in verifying whether the candidate fulfills the independence requirements set forth in the proposed rule and in applicable listing standards.²⁸³

C.6. As proposed, a direct access security holder proposal could result in a nomination procedure triggering event if it receives more than 50% of the votes cast with regard to that proposal. Is this the proper standard? Should the standard be higher (e.g., 55%, 60%, or 65%)? Should the standard be based on votes cast for the proposal as a percentage of the outstanding securities that are eligible to vote on the proposal (e.g., 50% of the outstanding securities)?

One commenter stated that the proposed standard requiring 50% of the votes cast for a successful opt-in shareholder proposal is too high.²⁸⁴ The commenter did not offer an alternative.²⁸⁵

At least four commenters stated that the proposed standard was appropriate.²⁸⁶ These commenters strongly supported maintaining a triggering standard based on votes cast, rather than votes cast.²⁸⁷ One commenter noted that if the Commission adopted a standard based on "votes outstanding," rather than "votes cast," the standard undoubtedly would cause issuers to adopt higher voting standards to the detriment of all shareowners.²⁸⁸ Another commenter noted that the majority of management proposals, including those related to the election of directors, equity compensation plans and other compensation plans, only need approval of a majority of votes cast.²⁸⁹

Twelve commenters favored a standard that would require an opt-in shareholder proposal to obtain in excess of 50% of votes outstanding.²⁹⁰ These commenters cited several reasons for favoring a standard based on votes outstanding rather than votes cast. First, several of the commenters equated the potential impact of the opt-in proposal with an amendment to a corporation's governance documents.²⁹¹ Thus, the commenters believed that the vote required for an opt-in shareholder proposal should be comparable and analogous to the voting requirements for charter amendments, which, in most cases, would require the affirmative vote of a majority of the outstanding shares.²⁹² Second, commenters believed that a votes cast standard in certain circumstances might produce results that do not represent accurately the views of a company's shareholder base. For instance, one commenter noted, "[A] low shareholder turnout (particularly when coupled with low quorum requirements) could result in an anomaly of as few as 25% of shares entitled to vote (or lower percentages with lower quorums) deciding questions of fundamental governance rights."²⁹³ Third, commenters believed that the votes cast standard ignores the possibility that brokers will not exercise the discretion granted to them under NYSE Rule 452 and will not vote on opt-in shareholder proposals without specific instructions from beneficial holders or that the proposed rule will be interpreted so that brokers will not have discretion to vote without instructions.²⁹⁴ One commenter noted, "The result, were this to occur, would be to reduce greatly the number of votes cast on an opt-in proposal, without affecting the quorum count and to undermine further the meaningfulness of achieving a 50% vote standard."²⁹⁵ Fourth, commenters believed that the standard based upon votes cast ignores the possibility that many institutional investors will adopt structured voting policies that will vote in favor of all opt-in shareholder proposals, without consideration of facts and circumstances unique to the company in question.²⁹⁶

One commenter favored a standard requiring a majority of outstanding shares voted in favor of an opt-in shareholder proposal, without the ability to count broker non-votes.²⁹⁷

One commenter stated that, given the control exercised over a typical board meeting by ISS, the appropriate standard was 50% of the outstanding shares or 60% of the shares voting.²⁹⁸ One commenter suggested a standard based both on votes cast and votes outstanding. A successful opt-in shareholder proposal would require support of 66.67% of votes cast, provided that 50% of shares outstanding have been voted on the proposal.²⁹⁹

Finally, two commenters did not address the proper percentage threshold for an opt-in shareholder proposal, but rather offered suggestions regarding calculating that threshold percentage based on votes cast or votes outstanding. One commenter supported a standard based on a percentage of votes outstanding, or, at a minimum, a percentage of votes present and entitled to vote at the meeting.³⁰⁰ The commenter, similar to a number of the commenters noted above, was concerned that an opt-in shareholder proposal might result in a large number of broker non-votes.³⁰¹ As such, this commenter believed that relying solely on votes cast would not reflect accurately the views of all of the company's shareholders.³⁰² The second commenter suggested that if the Commission retains a threshold based on a percentage of votes cast rather than votes outstanding, the threshold should be based on a percentage of votes cast only when shareholders owning a specified minimum percentage of outstanding shares vote on the issue.³⁰³

C.7. Should direct access security holder proposals be subject to a higher resubmission standard than other Exchange Act Rule 14a-8 proposals? If so, what standard would be appropriate?

At least four commenters stated that opt-in shareholder proposals should not be subject to a resubmission standard greater than that set forth in Exchange Act Rule 14a-8.³⁰⁴

At least seven commenters disagreed and urged that opt-in security holder proposals should be subject to a higher resubmission standard than other Exchange Act Rule 14a-8 proposals.³⁰⁵ Two commenters, citing a belief that other security holders should not be penalized by costs and distractions associated with an opt-in proposal that failed to garner significant support, recommended a resubmission standard that would require an opt-in shareholder proposal to achieve the support of 20% of outstanding shares in the first year and 40% of outstanding shares in the second year, with no resubmission for five years if those thresholds are not met.³⁰⁶ Another commenter recommended that the Commission permit issuers to exclude opt-in shareholder proposals for two years (the same period of time the nomination procedure would be triggered if an opt-in shareholder proposal were approved) following a vote in which less than 25% of shares outstanding voted in favor of such a proposal.³⁰⁷

Two commenters recommended prohibiting resubmission of an opt-in proposal for three years, if the proposal received less than the required approval.³⁰⁸ One commenter recommended prohibiting resubmission of an opt-in proposal for five years, if the proposal received less than the required approval.³⁰⁹ One commenter favored a resubmission standard for opt-in proposals, but did not elaborate on any minimum level of required support.³¹⁰

One commenter chose to address resubmission standards in the context of the withhold votes trigger.³¹¹ This commenter believed it was not appropriate to subject issuers and their security holders to withhold votes campaigns on a continuous basis.³¹² The commenter recommended that if a withhold votes campaign against any of the board's nominees fails to trigger access, then the triggering event would not apply for the next two annual meetings.³¹³

C.8. We have proposed that nomination procedure triggering events could occur after January 1, 2004. Is this the proper date? Should it be an earlier date? Should it be a later date?

The vast majority of commenters strongly urged the Commission not to use January 1, 2004 as an effective "start date" for the triggers.³¹⁴ Issuers that will be impacted by the January 1, 2004 start date, in fact, were unanimous in their objection to the date.³¹⁵

Commenters offered a number of reasons that a date of January 1, 2004 is not appropriate. Foremost, commenters stated that it would be fundamentally unfair and unmanageable to have the spring 2004 proxy season serve as a generator of "triggering events" when the contents of the final rule are unknown.³¹⁶ In this regard, commenters noted that the proposed rules likely will require that companies place opt-in proposals in their proxy materials to be distributed to security holders before the general details of the rule are finalized.³¹⁷ Until the contents of the final rule are agreed upon and duly noticed, however, commenters stated that proxy disclosure related to the opt-in proposals cannot be complete or accurate.³¹⁸

Second, several commenters noted that in order to facilitate opt-in proposals the Commission intends to amend Exchange Act Rule 14a-8(i)(8) to provide that such proposals are not excludable under that rule.³¹⁹ The commenters were troubled by the Division's intent to apply Exchange Act Rule 14a-8(i)(8) as proposed to be amended (thus permitting direct access proposals) prior to adoption of proposed Exchange Act Rule 14a-11.³²⁰ One commenter recognized the Commission's authority to amend its rules, but questioned "whether, pending the effectiveness of those amendments, the Staff has the authority to `interpret' the Rule as proposed to be amended when that interpretation flies in the face of the plain meaning of the rule and the way it has been applied historically."³²¹

Third, two commenters noted that proposed Exchange Act Rule 14a-1l(a)(2)(ii) imposes different requirements on security ownership for a proposing shareholder from those that currently apply to proposing shareholders under Exchange Act Rule 14a-8, thereby raising an issue as to whether opt-in proposals as contemplated conform to Exchange Rule 14a-8.³²² The commenters believed that Exchange Act Rule 14a-8 must be amended accordingly before the proponent of an opt-in proposal submitted under the rule that is less than a 1% stockholder can be disqualified.³²³

Although not generally supportive of the necessity of triggering events, two Favoring Commenters stated that if the final rule included triggers then January 1, 2004 was an appropriate start date.³²⁴ Two additional commenters suggested that any triggering event "in the preceding three year period" should be applicable to the extent permitted by law.³²⁵ In the alternative, these commenters urged that the nomination procedure and the triggering events be effective no later than January 1, 2004.³²⁶

C.9. What are the possible consequences of the use of nomination procedure triggering events? Will there be more expense and effort related to votes on direct access security holder proposals? Will there be more campaigns seeking "withhold" votes? How will any such consequences affect the operation and governance of companies?

Responses to the above questions were significantly influenced, in number and content, by whether the commenter supported the new nomination procedure or opposed it.

Few Favoring Commenters addressed directly the questions at issue. One commenter believed that company directors likely would endure greater scrutiny and more frequent withhold vote campaigns if the new nominating procedure is adopted, which the commenter called "an ancillary benefit of the proposed rule."³²⁷ This commenter, however, believed that adoption of the nominating procedure would not result in a significant difference in the resources dedicated to shareholder proposals.³²⁸ The commenter also believed that the proposed nominating procedure will impact positively the governance of public companies.³²⁹ This commenter stated, "Not only will companies be much more inclined to adopt rigorous nominating and re-nominating standards, they will also be highly inclined to adopt majority vote shareowner proposals and generally be more accountable to owners."³³⁰

Another commenter dismissed concerns that the triggering events, as currently structured or even with diminished thresholds, would "open the floodgates" and result in a significant increase in the number of opt-in proposals.³³¹ This commenter was also dismissive of concerns that the nomination procedure might have the unintentional consequence of increasing the power of proxy advisory firms, particularly ISS.³³² In this regard, the commenter stated that: (1) the largest institutional money managers have their own voting guidelines and, contrary to the assertions of many issuers, do not blindly follow the recommendations of proxy advisory services; (2) approximately 70% of the equity holdings of all institutional investors are held by "corporate pension funds, mutual funds, bank trust funds and insurance companies," which tend generally to support management's voting recommendations; and (3) the number of institutional investors, particularly mutual funds, that will adopt voting based on their own guidelines likely will increase in the future as a consequence of the Commission's recent requirements addressing the transparency of proxy votes by mutual funds and money managers.³³³

The majority of Opposing Commenters believed that there would be a significant increase in the number of withhold vote campaigns and opt-in proposals, which would necessitate and/or cause a commensurate increase in funds and other resources expended by issuers to analyze, process, and if necessary, oppose such measures.³³⁴ These commenters expressed concern that the triggers would not be a method by which security holders would express dissatisfaction with the issuer, the board, or the proxy process, but rather a means to an end. In short, issuers believed that special interests, at little or no cost to themselves, might use the triggers strategically to serve other goals.³³⁵ Opposing Commenters were further concerned that, given what they viewed as low thresholds, the impact of proxy advisory firms on the voting process would be substantial.³³⁶

C.10. Should companies be exempted from the security holder nomination procedure for any election of directors in which another party commences or evidences its intent to commence a solicitation in opposition subject to Exchange Act Rule 14a-12(c) prior to the company mailing its proxy materials? If so, should the period in which security holders in such companies may use the nomination procedure be extended to the next year (assuming that a nomination procedure triggering event is required)? What should be the effect if another party commences a solicitation in opposition after the company had mailed its proxy materials?

At least six commenters stated that issuers should be exempted from the security holder nomination procedure for any election of directors in which another party commences or evidences its intent to commence a solicitation in opposition subject to Exchange Act Rule 14a-12(c) prior to the company mailing its proxy materials.³³⁷

One of the commenters urged that the nomination procedure should not be extended following a contested solicitation.³³⁸ This commenter believed that after the contested solicitation security holders must first evaluate the new management (or prior management) of the issuer before the proposed nomination procedure is again invoked.³³⁹

Two of the commenters requested expansion of the proposed rules to provide that neither the triggering events nor procedure in the proposed rule (if previously triggered) should apply to an election in which another party commences a solicitation in opposition.³⁴⁰ One of the two commenters noted:

While the proposed rule currently provides that the withhold votes triggering event will not occur with regard to any contested election to which Rule 14a-12(c) applies, it should also provide that the subsequent commencement of a solicitation in opposition would nullify the earlier triggering event since it will provide shareholders with an alternative avenue of expressing dissatisfaction with the company's board of directors or proxy process.³⁴¹