69204 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

1 17 CFR 228.401.

2 17 CFR 228.10 et seq. 3 17 CFR 229.401.

4 17 CFR 229.10 et seq. 5 15 U.S.C. 77a et seq.

6 17 CFR 240.14a–101.

7 15 U.S.C. 78a et seq.

8 17 CFR 270.30a–2.

9 15 U.S.C. 80a–1 et seq.

10 17 CFR 249.308a.

11 17 CFR 249.308b.

12 17 CFR 249.331 and 17 CFR 274.128.

13 17 CFR 240.14c–101.

14 17 CFR 249.310.

15 17 CFR 249.310b.

16See Release No. 34–48301 (August 8, 2003) [68 

FR 48724]. Comments received in response to the 

proposals, as well as a summary of these comments 

(‘‘Summary of Comments’’) may be found in File 

No. S7–14–03 and on our Web site at http://

www.sec.gov.

17See Summary of Comments—File No. S7–14–

03.

18See id.

19See Release No. 34–48301 (August 8, 2003).

20The Division also recommended that we 

propose amendments to the proxy rules regarding 

the inclusion in company proxy materials of 

security holder nominees for election as directors. 

Our proposals regarding this issue were included in 

a separate release. See Release No. 34–48626 

(October 14, 2003) [68 FR 60784]. As such, this 

adopting release does not address that issue 

directly. The Division’s Staff Report to the 

Commission, detailing the results of its review of 

the proxy process related to the nomination and 

election of directors, can be found on our Web site 

at http://www.sec.gov. Staff Report: Review of the 

Proxy Process Regarding the Nomination and 

Election of Directors, Division of Corporation 

Finance (July 15, 2003).

21See Press Release No. 2003–46 (April 14, 2003).

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 228, 229, 240, 249, 270 

and 274

[Release Nos. 33–8340; 34–48825; IC–

26262; File No. S7–14–03] 

RIN 3235–AI90

Disclosure Regarding Nominating 

Committee Functions and 

Communications Between Security 

Holders and Boards of Directors; 

Republication

Editorial Note: Federal Register Rule 

document 03–29723 was originally published 

at page 66991 in the issue of Friday, 

November 28, 2003. In that publication text 

was left out. The corrected document is 

republished below in its entirety.

AGENCY: Securities and Exchange 

Commission.

ACTION: Final rule.

SUMMARY: We are adopting new 

disclosure requirements and 

amendments to existing disclosure 

requirements to enhance the 

transparency of the operations of boards 

of directors. Specifically, we are 

adopting enhancements to existing 

disclosure requirements regarding the 

operations of board nominating 

committees and a new disclosure 

requirement concerning the means, if 

any, by which security holders may 

communicate with directors. These 

rules require disclosure but do not 

mandate any particular action by a 

company or its board of directors; 

rather, the new disclosure requirements 

are intended to make more transparent 

to security holders the operation of the 

boards of directors of the companies in 

which they invest.

DATES: Effective Date: January 1, 2004. 

Compliance Dates: Registrants must 

comply with these disclosure 

requirements in proxy or information 

statements that are first sent or given to 

security holders on or after January 1, 

2004, and in Forms 10–Q, 10–QSB, 10–

K, 10–KSB, and N–CSR for the first 

reporting period ending after January 1, 

2004. Registrants may comply 

voluntarily with these disclosure 

requirements before the compliance 

date. 

Comments: Comments regarding the 

‘‘collection of information’’ 

requirements, within the meaning of the 

Paperwork Reduction Act of 1995, of 

Regulations S–B and S–K, and Forms 

10–Q, 10–QSB, 10–K, 10–KSB, and N–

CSR should be received by January 1, 

2004.

ADDRESSES: To help us process and 

review your comments more efficiently, 

comments should be sent by one 

method—U.S. mail or electronic mail—

only. Comments should be submitted in 

triplicate to Jonathan G. Katz, Secretary, 

U.S. Securities and Exchange 

Commission, 450 Fifth Street, NW., 

Washington, DC 20549–0609. 

Comments also may be submitted 

electronically at the following e-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File No. 

S7–14–03. This number should be 

included in the subject line if sent via 

electronic mail. Electronically 

submitted comment letters will be 

posted on the Commission’s Internet 

Web site (http://www.sec.gov). We do 

not edit personal information, such as 

names or electronic mail addresses, 

from electronic submissions. You 

should submit only information that 

you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Lillian C. Brown, at (202) 942–2920, 

Andrew Thorpe, at (202) 942–2910, or 

Andrew Brady, at (202) 942–2900, in the 

Division of Corporation Finance, or with 

respect to investment companies, 

Christian L. Broadbent, at (202) 942–

0721, in the Division of Investment 

Management, U.S. Securities and 

Exchange Commission, 450 Fifth Street, 

NW., Washington DC 20549.

SUPPLEMENTARY INFORMATION: We are 

adopting amendments to Item 4011 of 

Regulation S–B2 and Item 4013 of 

Regulation S–K 4 under the Securities 

Act of 1933,5 Items 7 and 22 of Schedule 

14A 6 under the Securities Exchange Act 

of 1934,7 Rule 30a–28 under the 

Investment Company Act of 1940,9

Forms 10–Q 10 and 10–QSB11 under the 

Exchange Act, and Form N–CSR12

under the Exchange Act and the 

Investment Company Act. Although we 

are not adopting amendments to 

Schedule 14C13 under the Exchange 

Act, the amendments will affect the 

disclosure provided in Schedule 14C, as 

Schedule 14C requires disclosure of 

some items of Schedule 14A. Similarly, 

although we are not adopting 

amendments to Forms 10–K 14 and 10–

KSB15 under the Exchange Act, the 

amendments to Item 401 of Regulations 

S–B and S–K will affect the disclosure 

under Forms 10–K and 10–KSB, as 

those forms require disclosure of the 

information required by Item 401 of 

Regulations S–K and S–B.

I. Background 

On August 8, 2003, we proposed new 

disclosure standards intended to 

increase the transparency of nominating 

committee functions and the processes 

by which security holders may 

communicate with boards of directors of 

the companies in which they invest.16

The disclosure standards that we adopt 

today are, in most respects, those 

proposed on August 8, 2003. Overall, 

most commenters supported new 

disclosure standards relating to 

nominating committee functions and 

security holder communications with 

directors;17 however, as noted below, 

we received a number of comments and 

suggestions with regard to specific 

components of the proposed disclosure 

standards.18 We have revised some 

elements of the proposed disclosure 

standards in response to these 

comments and suggestions.

The requirements we proposed on 

August 8, 2003,19 and are adopting 

today, follow in many respects the 

recommendations made by the Division 

of Corporation Finance in a report 

provided to the Commission on July 15, 

2003.20 This report resulted from our 

April 14, 2003 directive to the Division 

to review the proxy rules relating to the 

election of corporate directors.21 In 

preparing the report and developing its 

recommendations, the Division 

considered the input of members of the 

investing, business, legal, and academic 

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69205

22On May 1, 2003, we solicited public views on 

the Division’s review of the proxy rules relating to 

the nomination and election of directors. See

Release No. 34–47778 (May 1, 2003) [68 FR 24530]. 

In addition to receiving written comments, the 

Division spoke with a number of interested parties 

representing security holders, the business 

community, and the legal community. Each of the 

comment letters received, memoranda documenting 

the Division’s meetings, and a summary of the 

comments (‘‘Summary of Comments’’) may be 

found in File No. S7–10–03 and on our Web site, 

http://www.sec.gov. Summary of Comments in 

Response to the Commission’s Solicitation of Public 

Views Regarding Possible Changes to the Proxy 

Rules (July 15, 2003).

23See Summary of Comments—File No. S7–10–

03.

24See id.

25See id.

26Prior to the effectiveness of these amendments, 

companies must disclose whether they have a 

nominating committee and, if so, whether that 

committee considers nominees recommended by 

security holders and how any such 

recommendations may be submitted. See

Paragraphs (d)(1) and (d)(2) of Item 7 of Exchange 

Act Schedule 14A. See also Release No. 34–15384 

(December 6, 1978) [43 FR 58522], in which the 

Commission adopted these disclosure standards. In 

the 1978 release proposing these disclosure 

requirements, the Commission stated generally its 

belief that the new disclosure requirements would 

facilitate improved accountability and, more 

specifically, that: 

[I]nformation relating to nominating committees 

would be important to security holders because a 

nominating committee can, over time, have a 

significant impact on the composition of the board 

and also can improve the director selection process 

by increasing the range of candidates under 

consideration and intensifying the scrutiny given to 

their qualifications. Additionally, the Commission 

believes that the institution of nominating 

committees can represent a significant step in 

increasing security holder participation in the 

corporate electoral process, a subject which the 

Commission will consider further in connection 

with its continuing proxy rule re-examination. 

Release No. 34–14970 (July 18, 1978) [43 FR 

31945].

27See Release No. 34–48301 (August 8, 2003).

28See Release No. 34–14970 (July 18, 1978). See 

also Summary of Comments ‘‘File No. S7–10–03 

and Summary of Comments ‘‘File No. S7–14–03.

29As noted earlier in this release, this disclosure 

currently is required under Paragraph (d)(1) of Item 

7 of Exchange Act Schedule 14A.

communities.22 The majority of these 

commenters supported our decision to 

direct the review and, reflecting concern 

over corporate director accountability 

and recent corporate scandals, generally 

urged us to adopt rules that would grant 

security holders greater access to the 

nomination process and greater ability 

to exercise their rights and 

responsibilities as owners of their 

companies.23 Many of the comments 

received in connection with the 

Division’s review evidenced a growing 

concern among security holders that 

they lack sufficient input into decisions 

made by the boards of directors of the 

companies in which they invest.24 Two 

particular areas of concern related to the 

nomination of candidates for election as 

director and the ability of security 

holders to communicate effectively with 

members of boards of directors.25 We 

seek to address these concerns with the 

new disclosure standards we are 

adopting today.

II. New Disclosure Requirements 

A. Disclosure Regarding Nominating 

Committee Processes 

1. Discussion 

We are adopting new proxy statement 

disclosure requirements that will 

provide greater transparency regarding 

the nominating committee and the 

nomination process.26 This enhanced 

disclosure is intended to provide 

security holders with additional, 

specific information upon which to 

evaluate the boards of directors and 

nominating committees of the 

companies in which they invest. 

Further, we intend that increased 

transparency of the nomination process 

will make that process more 

understandable to security holders. In 

particular, we are adopting a number of 

specific and detailed disclosure 

requirements because we believe that 

disclosure in response to each of these 

requirements will assist security holders 

in understanding each of the processes 

and policies of nominating committees 

and boards of directors regarding the 

nomination of candidates for director.

Detailed disclosure regarding 

nomination processes will provide 

security holders with important 

information regarding the management 

and oversight of the companies in 

which they invest. The specific 

disclosure requirements we are adopting 

today will cause companies to provide 

security holders with that information. 

We believe that specific, detailed 

disclosure requirements are necessary 

and appropriate to assure that investors 

are provided with disclosure that 

presents the desired degree of clarity 

and transparency. In the absence of 

these specific disclosure requirements, 

we believe that disclosure could be at a 

level of generality that would not be 

sufficiently useful to security holders. 

Each of the requirements we are 

adopting today furthers the goal of 

providing the transparency that is 

necessary for security holders to 

understand the nomination process. For 

example, the rules we are adopting 

requiring disclosure of the following 

matters are necessary to give security 

holders a more complete overview of 

the nomination process for directors of 

the companies in which they invest:

• A company’s determination 

whether to have a nominating 

committee; 

• The nominating committee’s 

charter, if any; 

• The nominating committee’s 

processes for identifying and evaluating 

candidates; and 

• The minimum qualifications for a 

nominating committee-recommended 

nominee and any qualities and skills 

that the nominating committee believes 

are necessary or desirable for board 

members to possess. 

In addition, as noted in the proposing 

release,27 we believe that information as 

to whether nominating committee 

members are independent within the 

requirements of listing standards 

applicable to a company is meaningful 

to security holders in evaluating the 

nomination process of a company, how 

that process works, and the seriousness 

with which the nomination process is 

considered by a company. Further, 

information regarding the persons who 

recommended each nominee and 

disclosure as to whether there are third 

parties that receive compensation 

related to identifying and evaluating 

candidates will provide important 

information as to the process followed 

by a company.

The ability to participate in the 

nomination process is an important 

matter for security holders.28

Accordingly, we believe that it is 

important for security holders to 

understand the specific application of 

the nomination processes to candidates 

put forward by security holders. 

Disclosure as to whether and how they 

may participate in a company’s 

nomination process, and the manner in 

which their candidates are evaluated, 

including differences between how their 

candidates and how other candidates 

are evaluated, therefore, represents 

important information for security 

holders. Finally, an additional, specific 

disclosure requirement regarding the 

treatment of candidates put forward by 

large security holders or groups of 

security holders that have a long-term 

investment interest is appropriate, as it 

will provide investors with information 

that is useful in assessing the actions of 

the nominating committee.

2. Disclosure Requirements 

The amendments we are adopting 

today will expand the current proxy 

statement disclosure regarding a 

company’s nominating or similar 

committee to include: 

• A statement as to whether the 

company has a standing nominating 

committee or a committee performing 

similar functions 29 and, if the company 

69206 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

30See new Paragraph (d)(2)(i) of Item 7 of 

Exchange Act Schedule 14A. 31For the remainder of our discussion of this 

disclosure requirement, the term ‘‘nominating 

committee’’ refers to a nominating committee or 

similar committee or group of directors fulfilling 

the role of a nominating committee. That group may 

comprise the full board. See the Instruction to new 

Paragraph (d)(2)(ii) of Item 7 of Exchange Act 

Schedule 14A. If the company has a standing 

nominating committee or a committee fulfilling the 

role of a nominating committee, Item 7(d)(1) of 

Exchange Act Schedule 14A requires identification 

of the members of that committee. If the company 

does not have such a standing committee, new 

Paragraph (d)(2)(i) of Item 7 of Exchange Act 

Schedule 14A will require identification of each 

director who participates in the consideration of 

director nominees.

32See new Paragraph (d)(2)(ii)(A) of Item 7 of 

Exchange Act Schedule 14A.

33See new Paragraph (d)(2)(ii)(B) of Item 7 of 

Exchange Act Schedule 14A.

34As defined in Exchange Act Rule 10A–3 [17 

CFR 240.10A–3].

35 15 U.S.C. 78f(a).

36 15 U.S.C. 78o–3(a).

37See new Paragraph (d)(2)(ii)(C) of Item 7 of 

Exchange Act Schedule 14A.

38As defined in Exchange Act Rule 10A–3.

39See new Paragraph (d)(2)(ii)(D) of Item 7 of 

Exchange Act Schedule 14A.

40See new Paragraph (d)(2)(ii)(E) of Item 7 of 

Exchange Act Schedule 14A. As adopted, this 

disclosure requirement specifies that the company’s 

description of the material elements of its policy 

with regard to consideration of security holder 

candidates ‘‘need not’’ be limited to a statement as 

to whether the nominating committee will consider 

security holder-recommended candidates. This 

revision was made in response to a commenter’s 

concern that the proposed requirement (that the 

disclosure ‘‘shall not’’ be limited to a statement as 

to whether the committee will consider security 

holder recommended candidates) implied that a 

company could not merely have a policy of 

considering security holder recommended 

candidates, but instead was required to put in place 

a more detailed policy with respect to consideration 

of such candidates. See Committee on Federal 

Regulation of Securities of the American Bar 

Association’s section of Business Law (‘‘ABA’’).

41See new Paragraph (d)(2)(ii)(F) of Item 7 of 

Exchange Act Schedule 14A.

42Prior to the effectiveness of these amendments, 

this disclosure is required under Paragraph (d)(2) of 

Item 7 of Exchange Act Schedule 14A. As a result 

of the amendments to Item 7 of Exchange Act 

Schedule 14A that we are adopting today, this 

requirement will be moved to new Paragraph 

(d)(2)(ii)(G) of Item 7 of Exchange Act Schedule 

14A. In addition, we are adopting a new 

requirement in Regulations S–B and S–K, and a 

new reference to that requirement in Exchange Act 

Forms 10–Q and 10–QSB, that will require 

companies to disclose any material changes to the 

procedures that were previously disclosed pursuant 

to this item. See new Paragraph (b) of Item 5 of Part 

II to Exchange Act Forms 10–Q and 10–QSB, new 

Paragraph (g) of Item 401 of Exchange Act 

Regulation S–B, and new Paragraph (j) of Item 401 

of Exchange Act Regulation S–K. In those instances 

where a material change is implemented during the 

last quarter of a company’s fiscal year, companies 

will be required to include disclosure of such 

change in their Exchange Act Form 10–K or 10–

KSB. See Item 10 of Part III of Exchange Act Form 

10–K, Item 9 of Part III of Exchange Act Form 10–

KSB, new Paragraph (g) of Item 401 of Exchange Act 

Regulation S–B, and new Paragraph (j) of Item 401 

of Exchange Act Regulation S–K.

43See new Paragraph (d)(2)(ii)(H) of Item 7 of 

Exchange Act Schedule 14A.

44See new Paragraph (d)(2)(ii)(I) of Item 7 of 

Exchange Act Schedule 14A.

does not have a standing nominating 

committee or committee performing 

similar functions, a statement of the 

basis for the view of the board of 

directors that it is appropriate for the 

company not to have such a committee 

and identification of each director who 

participates in the consideration of 

director nominees;30

• The following information 

regarding the company’s director 

nomination process:31

• If the nominating committee has a 

charter, disclosure of whether a current 

copy of the charter is available to 

security holders on the company’s Web 

site. If the nominating committee has a 

charter and a current copy of the charter 

is available to security holders on the 

company’s Web site, disclosure of the 

company’s Web site address. If the 

nominating committee has a charter and 

a current copy of the charter is not 

available to security holders on the 

company’s Web site, inclusion of a copy 

of the charter as an appendix to the 

company’s proxy statement at least once 

every three fiscal years. If a current copy 

of the charter is not available to security 

holders on the company’s Web site, and 

is not included as an appendix to the 

company’s proxy statement, 

identification of the prior fiscal year in 

which the charter was so included in 

satisfaction of the requirement;32

• If the nominating committee does 

not have a charter, a statement of that 

fact;33

• If the company is a listed issuer 34

whose securities are listed on a national 

securities exchange registered pursuant 

to section 6(a) of the Exchange Act 35 or 

in an automated inter-dealer quotation 

system of a national securities 

association registered pursuant to 

section 15A(a) of the Exchange Act 36

that has independence requirements for 

nominating committee members, 

disclosure as to whether the members of 

the nominating committee are 

independent, as independence for 

nominating committee members is 

defined in the listing standards 

applicable to the listed issuer;37

• If the company is not a listed 

issuer,38 disclosure as to whether each 

of the members of the nominating 

committee is independent. In 

determining whether a member is 

independent, the company must use a 

definition of independence of a national 

securities exchange registered pursuant 

to section 6(a) of the Exchange Act or a 

national securities association registered 

pursuant to section 15A(a) of the 

Exchange Act that has been approved by 

the Commission (as that definition may 

be modified or supplemented), and state 

which definition it used. Whatever 

definition the company chooses, it must 

apply that definition consistently to all 

members of the nominating committee 

and use the independence standards of 

the same national securities exchange or 

national securities association for 

purposes of nominating committee 

disclosure under this requirement and 

audit committee disclosure required 

under Item 7(d)(3)(iv) of Exchange Act 

Schedule 14A;39

• If the nominating committee has a 

policy with regard to the consideration 

of any director candidates 

recommended by security holders, a 

description of the material elements of 

that policy, which shall include, but 

need not be limited to, a statement as to 

whether the committee will consider 

director candidates recommended by 

security holders;40

• If the nominating committee does 

not have a policy with regard to the 

consideration of any director candidates 

recommended by security holders, a 

statement of that fact and a statement of 

the basis for the view of the board of 

directors that it is appropriate for the 

company not to have such a policy;41

• If the nominating committee will 

consider candidates recommended by 

security holders, a description of the 

procedures to be followed by security 

holders in submitting such 

recommendations;42

• A description of any specific, 

minimum qualifications that the 

nominating committee believes must be 

met by a nominating committeerecommended nominee for a position on 

the company’s board of directors, and a 

description of any specific qualities or 

skills that the nominating committee 

believes are necessary for one or more 

of the company’s directors to possess;43

• A description of the nominating 

committee’s process for identifying and 

evaluating nominees for director, 

including nominees recommended by 

security holders, and any differences in 

the manner in which the nominating 

committee evaluates nominees for 

director based on whether the nominee 

is recommended by a security holder;44

• With regard to each nominee 

approved by the nominating committee 

for inclusion on the company’s proxy 

card (other than nominees who are 

executive officers or who are directors 

standing for re-election), a statement as 

to which one or more of the following 

categories of persons or entities 

recommended that nominee: security 

holder, non-management director, chief 

executive officer, other executive 

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69207

45See new Paragraph (d)(2)(ii)(J) of Item 7 of 

Exchange Act Schedule 14A.

46See new Paragraph (d)(2)(ii)(K) of Item 7 of 

Exchange Act Schedule 14A.

47Our use of a more than 5% beneficial 

ownership threshold to trigger this additional 

disclosure obligation means that recommendations 

generally will be made by security holders or 

groups that have a reporting obligation under 

Exchange Act Regulation 13D [17 CFR 240.13d–

240.13d–102]. Recommending security holders, like 

other beneficial owners, will continue to report on 

Exchange Act Schedule 13G [17 CFR 240.13d–102] 

or Exchange Act Schedule 13D [17 CFR 240.13d–

101] based on their purpose or effect in acquiring 

or holding the company’s securities. That 

determination is not intended to be affected by our 

adoption of this new disclosure obligation. In 

addition, we anticipate that security holders may 

communicate with each other in an effort to 

aggregate more than 5% of a company’s securities 

before submitting a recommended candidate to a 

company’s nominating committee. The 

determination as to what communications may be 

deemed solicitations, either subject to or exempt 

from the proxy rules, is based on facts and 

circumstances and is not intended to be affected by 

our adoption of this new disclosure obligation.

48Similar to the method used in Exchange Act 

Rule 14a–8 [17 CFR 240.14a–8] with regard to 

security holder proponents, the percentage of 

securities held by a recommending security holder, 

as well as the holding period of those securities 

may be determined by the company, on its own, if 

the security holder is the registered holder of the 

securities. If not, the security holder can submit one 

of the following to the company to evidence the 

required ownership and holding period: 

(1) a written statement from the ‘‘record’’ holder 

of the securities (usually a broker or bank) verifying 

that, at the time the security holder made the 

recommendation, he or she had held the required 

securities for at least one year; or 

(2) if the security holder has filed a Schedule 

13D, Schedule 13G, Form 3 [17 CFR 249.103], Form 

4 [17 CFR 249.104], and/or Form 5 [17 CFR 

249.105], or amendments to those documents or 

updated forms, reflecting ownership of the 

securities as of or before the date of the 

recommendation, a copy of the schedule and/or 

form, and any subsequent amendments reporting a 

change in ownership level, as well as a written 

statement that the security holder continuously 

held the required securities for the one-year period 

as of the date of the recommendation. 

See Instruction 3 to new Paragraph (d)(2)(ii)(L) of 

Item 7 of Item 7 of Exchange Act Schedule 14A.

49See new Paragraph (d)(2)(ii)(L) of Item 7 of 

Exchange Act Schedule 14A.

50See, e.g., American Federation of State, County, 

and Municipal Employees (‘‘AFSCME’’); Council of 

Institutional Investors (‘‘CII’’); Creative Investment 

Research, Inc. (‘‘CIR’’); Andrew Randall; 

Pennsylvania State Employees’ Retirement System 

(‘‘SERS’’).

51See, e.g., J.A. Glynn & Co. (‘‘J.A. Glynn’’); 

Robert Schneeweiss.

52See, e.g., CII; CIR.

53See, e.g., American Community Bankers 

(‘‘ACB’’); California Public Employees’ Retirement 

System (‘‘CalPERS’’); CIR; United Brotherhood of 

Carpenters and Joiners of America (‘‘UBC’’).

54See, e.g., The Business Roundtable (‘‘BRT’’); 

Foley & Lardner (‘‘Foley’’); Independent 

Community Bankers Association (‘‘ICBA’’); 

International Paper Company (‘‘Int’l Paper’’); 

Jenkens & Gilchrist (‘‘Jenkens’’); McGuireWoods 

LLP (‘‘McGuireWoods’’); Committee on Securities 

Regulation of the Business Section of the New York 

State Bar Association (‘‘NYSBAR’’); Sullivan & 

Cromwell, LLP (‘‘Sullivan’’); Wells Fargo & 

Company (‘‘Wells Fargo’’).

55See, e.g., ICBA; Int’l Paper; McGuireWoods; 

NYSBAR.

56See, e.g., ABA; Sullivan.

57See ABA.

58See Sullivan. This disclosure requirement is set 

forth in Paragraph (d)(3)(iv) of Item 7 of Exchange 

Act Schedule 14A.

officer, third-party search firm, or other, 

specified source;45

• If the company pays a fee to any 

third party or parties to identify or 

evaluate or assist in identifying or 

evaluating potential nominees, 

disclosure of the function performed by 

each such third party;46 and

• If the company’s nominating 

committee received, by a date not later 

than the 120th calendar day before the 

date of the company’s proxy statement 

released to security holders in 

connection with the previous year’s 

annual meeting, a recommended 

nominee from a security holder that 

beneficially owned more than 5% of the 

company’s voting common stock for at 

least one year as of the date the 

recommendation was made, or from a 

group of security holders that 

beneficially owned, in the aggregate, 

more than 5% of the company’s voting 

common stock,47 with each of the 

securities used to calculate that 

ownership held for at least one year as 

of the date the recommendation was 

made,48 identification of the candidate 

and the security holder or security 

holder group that recommended the 

candidate and disclosure as to whether 

the nominating committee chose to 

nominate the candidate, provided, 

however, that no such identification or 

disclosure is required without the 

written consent of both the security 

holder or security holder group and the 

candidate to be so identified.49

3. Comments Regarding, and Revisions 

to, the Proposed Disclosure 

Requirements 

In response to our request for 

comment on the proposed nominating 

committee disclosure requirements, a 

majority of commenters who supported 

the proposed rules believed that 

increased disclosure about nominating 

committee processes would be effective 

in increasing security holder 

understanding of the nomination 

process,50 board accountability,51 board 

responsiveness,52 and a company’s 

corporate governance policies.53 With 

regard to the particular components of 

the proposed disclosure standards, 

commenters provided more specific 

input, which we considered carefully in 

revising certain of the disclosure 

standards that we are adopting today.

a. Nominating Committee Charter 

Commenters generally were of the 

view that summary disclosure of the 

material terms of the nominating 

committee’s charter within a company’s 

proxy statement was unnecessary and 

would lead to excessively lengthy proxy 

statements.54 These commenters 

suggested that it would be adequate to 

identify where the charter could be 

found, provide the charter to security 

holders upon request, and/or attach the 

charter to the proxy statement once 

every three years (as is the case for audit 

committee charters).55

The disclosure standard that we are 

adopting today does not include the 

proposed requirement that companies 

describe the material terms of the 

nominating committee charter. 

Companies will, instead, be required to 

disclose whether a current copy of the 

charter is available to security holders 

on the company’s Web site. Where a 

company does not make the charter 

available on its Web site, the company 

would be required to include a copy of 

the charter as an appendix to its proxy 

statement at least once every three fiscal 

years and, in those proxy statements 

that do not include the charter as an 

appendix, the company would be 

required to identify in which of the 

prior years the charter was so included. 

We believe that this disclosure standard 

will provide security holders with the 

information regarding a company’s 

nominating committee that was sought 

in the proposal, without unduly 

burdening companies. 

b. Independence of Nominating 

Committee Members 

In response to the proposed 

disclosure requirement that listed 

issuers disclose any instance during the 

prior fiscal year in which any member 

of the nominating committee did not 

satisfy the definition of independence 

included in the listing standards to 

which the company is subject, a number 

of commenters suggested that we revise 

or delete this requirement.56 At least 

one of these commenters believed that 

independence determinations are 

interpretive matters and that board 

members could be unaware of 

developments that would impact 

independence.57 Another commenter 

suggested that we revise the disclosure 

requirement to conform to the recently 

adopted provision that requires 

companies to state whether members of 

their audit committees are independent, 

as defined in applicable listing 

standards.58 We believe that it is 

appropriate to use an approach 

consistent with the audit committee 

disclosure standards. Accordingly, the 

disclosure standard we are adopting 

69208 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

59See, e.g., Foley; Jenkens; McGuireWoods; 

NYSBAR; Wells Fargo.

60Release No. 34–48301 (August 8, 2003).

61See, e.g., Boston Common Asset Management 

(‘‘Boston’’); Calvert Group Ltd. (‘‘Calvert’’); 

Christian Brothers Investment Services (‘‘CBIS’’); 

Nathan Cummings Foundation (‘‘Cummings’’); 

Domini Social Investments LLC (‘‘Domini’’); ISIS 

Asset Management (‘‘ISIS’’); J.A. Glynn; James 

McRitchie, Editor, CorpGov.net and 

PERSWatch.net, Letter dated September 13, 2003 

(‘‘McRitchie2’’); Mehri & Skalet PLLC (‘‘Mehri 

&Skalet’’); Denise L. Nappier, Connecticut State 

Treasurer (‘‘Nappier’’); Social Investment Forum 

Ltd. (‘‘SIF’’); Socially Responsible Investment 

Coalition (‘‘SRIC’’); William C. Thompson, Jr., 

Controller of the City of New York (‘‘Thompson’’); 

The General Board of Pension and Health Benefits 

of the United Methodist Church (‘‘UMC’’); Walden 

Asset Management (‘‘Walden’’). See also Jesse 

Smith Noyes Foundation (‘‘Noyes’’). We also 

received a number of letters that are substantially 

similar in content that supported additional 

disclosure describing board consideration of 

diversity. See Letter Type A (‘‘Letter A’’); Letter 

Type B (‘‘Letter B’’).

62See, e.g., ABA; BRT; Intel Corporation (‘‘Intel’’); 

Leggett & Platt Inc. (‘‘Leggett’’); NYSBAR; Valero 

Energy Corporation (‘‘Valero’’); Wells Fargo.

63See id.

64American Society of Corporate Secretaries. See 

also, American Corporate Counsel Association 

(‘‘ACCA’’); Valero.

65See, e.g., BRT.

66See Sullivan.

67See Boston; Intel; Walden.

68See ABA.

69See, e.g., ACB; ACCA; Compass Bancshares, 

Inc. (‘‘Compass’’); Foley; ICBA; Intel; Int’l Paper; 

Jenkens; Leggett; NYSBAR; Sullivan; Wells Fargo.

70See Sullivan.

71See id.

72 Id. See also ABA.

73See ABA.

will require companies to disclose 

whether each member of the nominating 

committee is independent, as 

independence for nominating 

committee members is defined in the 

listing standards applicable to the listed 

issuer.

c. Qualifications and Skills of 

Candidates and Overall Board 

Composition 

Commenters provided input with 

regard to the proposed requirement that 

companies describe the qualifications, 

qualities, skills, and overall composition 

that companies are seeking with regard 

to board membership. In this regard, 

some commenters noted that 

nominating committees’ selection 

processes do not tend to be precise, and 

that the characteristics a nominating 

committee looks for may change as the 

composition of the board changes.59 In 

consideration of these comments, the 

disclosure requirements we are adopting 

today do not include the proposed 

requirement that companies describe 

‘‘any specific standards for the overall 

structure and composition of the 

company’s board of directors.’’60 We are 

adopting the remaining disclosure items 

substantially as proposed, as we believe 

that they will provide valuable 

information to security holders 

regarding the nomination process, 

without resulting in boilerplate 

disclosures.

Many commenters that supported the 

disclosure requirements suggested that 

we expand the requirements to require 

companies to disclose the extent to 

which they take into consideration 

diversity, in particular race and gender, 

in nominating candidates.61 We have 

not included such a requirement in the 

standards we are adopting today, as we 

believe this particular consideration, as 

well as other considerations made by a 

company, will likely be addressed 

adequately by the new disclosure item 

requiring companies to disclose their 

criteria for considering board 

candidates. Further, we do not view it 

as appropriate to identify any specific 

criteria that a company must address in 

describing the qualities it looks for in 

board candidates.

d. Sources of Nominees 

Some of the most extensive comment, 

particularly from the business and legal 

communities, arose from the proposal to 

require companies to identify the source 

of all director nominees, other than 

incumbent directors and executive 

officers.62 Generally speaking, these 

commenters were of the view that, as 

proposed, the required disclosure would 

be difficult to make in a clear and 

accurate manner because there are 

multiple ‘‘sources’’ for most 

nominees.63 In addition, these 

commenters objected to naming the 

specific source on the basis that this 

disclosure could have a ‘‘chilling effect 

on the search process,’’64 would be 

immaterial,65 and could imply that a 

nominee was unqualified to serve on the 

board based solely on the position held 

by the individual (e.g., the chief 

executive officer) who originally 

recommended the nominee.66 While 

some commenters recommended that 

we delete this provision, others 

recommended that we instead require 

disclosure of the general category of 

persons who recommended the nominee 

(e.g., management or security holders).67

Another commenter recommended that 

we, instead, require companies to 

disclose whether nominees are 

independent from the company and, in 

the case of nominees proposed by 

security holders, from the 

recommending security holders.68

We continue to believe that 

information regarding the sources of 

company nominees is important for 

security holders; however, we have 

revised the disclosure standard to 

require companies to identify the 

category or categories of persons or 

entities that recommended each 

nominee. In this regard, we have 

retained the requirement that companies 

specifically note those instances where 

a nominee was recommended by the 

chief executive officer of the company. 

In providing the required disclosure, 

companies should consider what 

category of person initially 

recommended, or otherwise brought to 

the attention of the nominating 

committee, each candidate. In 

disclosing the category of persons or 

entities that initially recommended a 

candidate to the nominating committee, 

companies should ensure that they 

identify also any person or entity that 

caused a particular candidate to be 

recommended. For example, if the chief 

executive officer asks a third party to 

evaluate a potential candidate, and that 

third party ultimately recommends the 

candidate to the nominating committee, 

both the chief executive officer and the 

third party should be identified as 

recommending parties in the company’s 

disclosure. We have provided for 

disclosure of more than one type of 

source for a nominee to address the 

possibility of multiple sources. 

e. Additional Disclosure Regarding 

Nominees of Large, Long-Term Security 

Holders 

The additional disclosure requirement 

with regard to nominees recommended 

by large, long-term security holders 

elicited a great deal of comment from 

most categories of commenters. 

Generally, commenters from the 

business and legal communities 

recommended either deleting the 

disclosure requirement related to 

security holder recommendations 

altogether or increasing the beneficial 

ownership requirement to 5% or 10% 

and/or increasing the holding period to 

two or more years.69 With regard to the 

5% and 10% recommendations, at least 

one commenter noted that those 

recommending security holders would 

be required to report their beneficial 

ownership under Exchange Act 

Regulation 13D.70

Some of the reasons given by 

commenters for deleting the 

requirement were: 

• The requirement would give special 

status to larger security holders; 71

• 3% security holders could use the 

disclosure requirement for their own 

‘‘special interests’’; 72

• There could be more than one 

triggering nomination, thus resulting in 

complex and confusing disclosure; 73

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69209

74See Sullivan.

75See, e.g., id.

76See id.

77See id.

78See, e.g., American Federation of Labor and 

Congress of Industrial Organizations (‘‘AFL–CIO’’); 

CII; International Brotherhood of Teamsters (‘‘IBT’’); 

ISIS; McRitchie2; Nappier; SERS; Trillium Asset 

Management (‘‘Trillium’’); UBC. See also AFSCME; 

Association of the Bar of the City of New York’s 

Special Committee on Mergers, Acquisitions and 

Corporate Control Contests (‘‘NYCBAR’’).

79See, e.g., ABA; BRT; Foley; Jenkens; NYSBAR; 

Sullivan; Valero.

80See, e.g., Compass; Foley; Jenkens.

81See CII; CIR; Cummings; SERS.

82On October 14, 2003, we proposed new rules 

regarding the inclusion of security holder nominees 

for director in company proxy materials. See

Release No. 34–48626 (October 14, 2003). The issue 

of the appropriate ownership threshold, if any, for 

any such inclusion of security holder nominees for 

director is a separate issue from the appropriate 

ownership threshold for the disclosure we are 

adopting today and is not addressed in this release.

83 In this regard, information available to our 

Office of Economic Analysis indicates that, of the 

companies listed on the New York Stock Exchange, 

Nasdaq Stock Market and American Stock Exchange 

as of December 31, 2002, 57% had at least one 

institutional security holder that beneficially owned 

5% of the common equity or similar securities and 

1.4% had five or more such security holders. This 

information was derived from filings on Exchange 

Act Form 13-F [17 CFR 249.325] that indicated that 

the filing security holder had held its securities for 

at least one year.

84See Instruction 4 to new Paragraph (d)(2)(ii)(L) 

of Item 7 of Exchange Act Schedule 14A.

85As is currently required in Exchange Act Rule 

14a–8, this date would be calculated by 

determining the release date disclosed in the 

previous year’s proxy statement, increasing the year 

by one, and counting back 120 calendar days.

86See Instruction 2 to new Paragraph (d)(2)(ii)(L) 

of Item 7 of Exchange Act Schedule 14A. The new 

instruction is modeled after the approach used with 

regard to Exchange Act Rule 14a–8 security holder 

proposals, as set forth in Exchange Act Rule 14a–

8(e)(2) [17 CFR 240.14a–8(e)(2)].

• The requirement would create a 

bias to accept marginal director 

candidates; 74

• The requirements, specifically those 

regarding giving the reasons for rejecting 

nominees, would ‘‘chill’’ nominating 

committee discussions; 75

• The disclosure would not be 

material to security holders; 76 and

• The disclosure would raise privacy 

issues for the nominating security 

holder and candidate.77

Conversely, this disclosure item also 

received strong support from security 

holders, many of whom recommended 

that we use a lower ownership 

percentage trigger or a trigger no more 

stringent than that proposed.78

With regard to the requirement that 

the reasons for not nominating a 

candidate be given, many commenters 

believed that this requirement would be 

difficult to satisfy, as: 

• Nominating committee 

determinations are not always precise in 

nature; 

• The disclosure would expose 

candidates to ridicule; and/or 

• The disclosure would be an 

invasion of privacy for all parties 

involved in the process, including the 

nominating committee members, whose 

deliberations would be made public as 

a result of the disclosure requirement.79

Some commenters also expressed the 

view that this requirement would 

expose the company and nominating 

committee members to risk of litigation 

and would allow security holders to 

‘‘second guess’’ the nominating 

committee’s determinations.80 On the 

other hand, some commenters were of 

the view that we should retain the 

proposed disclosure standard and 

expand it to require companies to 

disclose the identity of rejected 

candidates, provided that the candidates 

consent to be so identified.81

After considering the comments, we 

continue to believe that disclosure of 

director recommendations made by 

large, long-term security holders would 

provide valuable information that 

would enable security holders to better 

understand the nomination process. We 

have re-evaluated the 3% threshold to 

trigger the additional disclosure 

requirement, however, and have 

determined that ownership of more than 

5% is a more appropriate threshold at 

which to require companies to provide 

additional disclosure.82 In this regard, 

we agree with commenters that a more 

than 5% ownership threshold has a 

significant advantage over a lesser 

ownership threshold, in that 

recommending security holders would 

be subject to the beneficial ownership 

reporting requirements of Exchange Act 

Regulation 13D. We anticipate that a 

more than 5% ownership threshold 

will, in many cases, simplify the process 

by which a company and the 

recommending security holder 

determine that the recommending 

security holder satisfies the ownership 

threshold to trigger the additional 

disclosure requirement and, where a 

security holder or group has reported its 

beneficial ownership prior to making a 

recommendation, will help to ensure 

that the company and its security 

holders have basic information about 

the recommending security holder. This 

will benefit the company by providing 

the nominating committee with 

additional information regarding the 

recommending security holder and, 

possibly, the recommended candidate. 

Further, security holders will benefit 

through having additional information 

upon which they can evaluate the 

nominating committee’s response to the 

security holder recommendation.83

In addition, the new disclosure 

standard will require that companies 

make the specified disclosures, 

including identifying both the 

nominating security holder or security 

holder group and candidate, only in 

those instances where both parties have 

provided to the company their consent 

to be identified and, where the security 

holder or group members are not 

registered holders, the security holder or 

group members have provided proof of 

the required ownership and holding 

period to the company. A security 

holder or group that seeks to require a 

company to provide disclosure related 

to a recommendation would provide 

their written consent and proof of 

ownership to the company at the time 

of the recommendation. The company 

would not be obligated to request such 

materials where a security holder or 

group does not otherwise provide their 

consent and proof of ownership.84

In consideration of the concerns 

expressed by commenters, including 

those with regard to boilerplate 

disclosure and privacy issues, the 

disclosure standard that we are adopting 

today does not include the proposed 

requirement that companies disclose the 

specific reasons for not nominating a 

candidate. The requirement will, 

however, require that companies 

identify the candidate in addition to the 

recommending security holder or group. 

While not required, a company could, of 

course, choose to explain why it did not 

nominate one or all of the security 

holder-recommended candidates. 

We also have added language to the 

disclosure requirement to clarify the 

date by which a security holder must 

submit a recommended nominee in 

order to trigger the additional disclosure 

requirement by the company—a security 

holder’s recommendation would have to 

be received by a company’s nominating 

committee by a date not later than the 

120th calendar day before the date the 

company’s proxy statement was 

released to security holders in 

connection with the previous year’s 

annual meeting.85 We have added a new 

instruction clarifying that, where a 

company has changed its meeting date 

by more than 30 days, a security holder 

must make its recommendation by a 

date that is a reasonable time before the 

company begins to print and mail its 

proxy statement in order to trigger the 

additional disclosures.86

In addition, we have added a new 

instruction that responds to 

commenters’ suggestion that we address 

how the percentage of securities owned 

by a nominating security holder would 

69210 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

87See, e.g., ABA. 88See Instruction 1 to new Paragraph (d)(2)(ii)(L) 

of Item 7 of Exchange Act Schedule 14A. The new 

instruction is modeled after Exchange Act Rule 

13d–1(j) [17 CFR 240.13d–1(j)], which specifies on 

what basis beneficial holders may calculate the 

percentage of subject securities they hold for 

purposes of Exchange Act Regulation 13D. 89See Release No. 34–48745 (November 4, 2003) 

[68 FR 64154]. While the NYSE standards include 

a requirement that listed companies have an 

independent nominating committee (NYSE section 

303A(4)(a)), the Nasdaq standards provide that the 

nomination of directors may, alternatively, be 

determined by a majority of the independent 

directors (NASD Rule 4350(c)). In discussing the 

NYSE and Nasdaq standards, our references to 

independent nominating committees encompass 

this alternative under the Nasdaq standards.

90See, e.g., ABA; ACB; ACCA; BRT; CSX 

Corporation; Foley; ICBA; Jenkens; Valero.

91 In Exchange Act Release No. 34–48745 

(November 4, 2003), the Commission approved a 

new NYSE listing standard that addresses security 

holder communications with board members. This 

standard provides that: ‘‘In order that interested 

parties may be able to make their concerns known 

to non-management directors, a company must 

disclose a method for such parties to communicate 

directly and confidentially with the presiding 

director [of the non-management directors] or with 

non-management directors as a group.’’ See NYSE 

Section 303A(3). This method could be analogous 

to the method in the NYSE listing standards 

required by Exchange Act Rule 10A–3 regarding 

audit committees. See Commentary to NYSE 

Section 303A(3). Exchange Act Rule 10A–3(b)(2) 

requires listing standards relating to audit 

committees to require that ‘‘[e]ach audit committee 

* * * establish procedures for the receipt, retention 

and treatment of complaints regarding accounting, 

internal accounting controls or auditing matters, 

including procedures for the confidential, 

anonymous submission by employees of the issuer 

of concerns regarding questionable accounting or 

auditing matters.’’

92See Summary of Comments—File No. S7–10–

03.

93See id.

94See id.

95See Summary of Comments—File No. S7–14–

03.

96See CIR.

97See, e.g., ABA; BRT; Les Greenberg, Chairman, 

Committee of Concerned Shareholders, Letter dated 

August 9, 2003 (‘‘CCS1’’); Valero.

be calculated.87 In this regard we have 

clarified that the percentage of securities 

held by a recommending security holder 

may be determined by reference to the 

company’s most recently filed quarterly 

or annual report (or any subsequent 

current report), unless the party relying 

on such report knows or has reason to 

believe that the information included in 

the report is inaccurate.88

4. Interaction of the Disclosure 

Requirements With Recently Revised 

Market Listing Standards 

The New York Stock Exchange and 

the Nasdaq Stock Market have adopted 

revised listing standards that, among 

other requirements, require listed 

companies to have independent 

nominating committees.89 While these 

listing standard changes demonstrate 

the importance of the nomination 

process and the nominating committee, 

and represent a strengthening of the role 

and independence of the nominating 

committee, they do not require 

nominating committees to consider 

security holder nominees or companies 

to make the disclosures described in 

this release. The disclosure 

requirements we are adopting today will 

provide useful information to security 

holders regarding the nomination 

process, the manner of evaluating 

nominees, and the extent to which the 

boards of directors of the companies in 

which they invest have a process for 

considering, and do in fact consider, 

security holder recommendations. 

Accordingly, the disclosure 

requirements we are adopting today will 

operate in conjunction with the revised 

listing standards regarding nominating 

committees.

A number of commenters from the 

business and legal communities 

recommended that we delay adoption of 

the proposed disclosure standards in 

order to allow the new listing standards 

regarding nominating committees to 

take effect.90 We agree with these 

commenters that the new listing 

standards represent a significant 

strengthening of the nomination 

process; however, we believe that the 

disclosure standards that we adopt 

today are a necessary complement to 

those listing standards and, accordingly, 

do not believe such a delay is necessary 

or appropriate.

B. Disclosure Regarding the Ability of 

Security Holders To Communicate With 

Boards of Directors 

1. Discussion 

We are adopting new disclosure 

standards with regard to security holder 

communications with board members. 

These disclosure standards are intended 

to improve the transparency of board 

operations, as well as security holder 

understanding of the companies in 

which they invest.91

In response to our May 1, 2003 

solicitation of input into the proxy 

process review by the Division of 

Corporation Finance, representatives of 

the business community commented 

that disclosure regarding the means by 

which security holders may 

communicate directly with the board of 

directors would address issues of 

accountability and responsiveness 

without extensive disruption or costs.92

Comments from investors and investor 

advocacy groups also indicated the view 

that this disclosure would be helpful;93

however, these commenters also noted 

that disclosure alone would not address 

all issues related to accountability and 

responsiveness.94

We received similar comment with 

regard to the proposed disclosure 

requirements, with no clear consensus 

as to whether the proposed rules would 

be an effective means to improve board 

accountability, board responsiveness, 

and corporate governance policies.95

Some commenters believed the 

disclosure would be useful to security 

holders, including one commenter who 

expressed the view that the proposed 

disclosure would provide security 

holders with important information that 

provides an understanding of a 

company’s process for communications 

with the board.96 Conversely, other 

commenters did not believe that the 

proposed rules would be an effective 

means to improve board accountability, 

board responsiveness, and corporate 

governance policies and expressed the 

view that the disclosure would not be 

useful to security holders.97 Overall, we 

continue to believe that the disclosure 

will provide security holders with 

useful information about their ability to 

communicate with board members. 

Accordingly, we are adopting, 

substantially as proposed, the disclosure 

standards related to security holder 

communications with board members.

2. Disclosure Requirements 

We are adopting a number of specific 

and detailed disclosure requirements 

regarding communications by security 

holders with boards of directors because 

we believe that these requirements will 

provide security holders with a better 

understanding of the manner in which 

security holders can engage in these 

communications. In particular, we 

believe that the disclosure requirements, 

including whether a board has a process 

by which security holders can 

communicate with it, are necessary to 

give security holders a better picture of 

a critical component of the board’s 

interaction with security holders. 

Detailed disclosure regarding that 

process at a company, if it exists, will 

be important to security holders in 

evaluating the nature and quality of the 

communications process. Further, we 

believe that the level of specificity in 

the new disclosure standards will 

discourage boilerplate disclosure. 

Companies will be required to 

provide the following disclosure with 

regard to their processes for security 

holder communications with board 

members: 

• A statement as to whether or not the 

company’s board of directors provides a 

process for security holders to send 

communications to the board of 

directors and, if the company does not 

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69211

98See new Paragraph (h)(1) of Item 7 of Exchange 

Act Schedule 14A.

99See new Paragraph (h)(2)(i) of Item 7 of 

Exchange Act Schedule 14A.

100See new Paragraph (h)(2)(ii) of Item 7 of 

Exchange Act Schedule 14A.

101See new Paragraph (h)(3) of Item 7 of 

Exchange Act Schedule 14A.

102See, e.g., Wells Fargo.

103See Instruction 1 to new Paragraph (h) of Item 

7 of Exchange Act Schedule 14A.

104See id.

105AFSCME.

106See NYSBAR; Valero.

107NYSBAR.

108See Instruction 2 to new Paragraph (h) of Item 

7 of Exchange Act Schedule 14A.

109See NYSBAR.

110See new Paragraph (h)(2)(i) of Item 7 of 

Exchange Act Schedule 14A.

111See the Instruction to new Paragraphs (h)(2) 

and (h)(3) of Item 7 of Exchange Act Schedule 14A.

112See, e.g., ABA; BRT; Intel; NYSBAR; Sullivan.

113See Sullivan. See also ABA.

114See, e.g., Wells Fargo.

115See ABA.

116See Sullivan.

117See, e.g., NYSBAR; Wells Fargo.

have such a process for security holders 

to send communications to the board of 

directors, a statement of the basis for the 

view of the board of directors that it is 

appropriate for the company not to have 

such a process; 98

• If the company has a process for 

security holders to send 

communications to the board of 

directors: 

• a description of the manner in 

which security holders can send 

communications to the board and, if 

applicable, to specified individual 

directors; 99 and

• If all security holder 

communications are not sent directly to 

board members, a description of the 

company’s process for determining 

which communications will be relayed 

to board members; 100 and

• A description of the company’s 

policy, if any, with regard to board 

members’ attendance at annual meetings 

and a statement of the number of board 

members who attended the prior year’s 

annual meeting.101

3. Comments Regarding, and Revisions 

to, the Proposed Disclosure 

Requirements 

a. Scope of the Disclosure Requirement 

We received a number of comments 

suggesting that we clarify the 

application of the disclosure 

requirements to communications with 

the board by officers, directors, 

employees, and agents of the company 

who also own company securities.102

We do not believe that all 

communications from officers, directors, 

employees, and agents of the company 

are the types of communications that 

the disclosure standards should capture. 

We have, therefore, added a general 

instruction to the new disclosure 

requirements clarifying that:

• Communications from an officer or 

director of the company will not be 

viewed as security holder 

communications for purposes of the 

disclosure requirement; 103 and

• Communications from an employee 

or agent of the company will be viewed 

as security holder communications for 

purposes of the disclosure requirement 

only if those communications are made 

solely in such employee’s or agent’s 

capacity as a security holder.104

In response to our request for 

comment as to whether the new 

disclosure standard should apply to 

communications made in connection 

with security holder proposals 

submitted pursuant to Exchange Act 

Rule 14a–8, one commenter suggested 

that it would be ‘‘inappropriate’’ to 

exclude Exchange Act Rule 14a–8 

proposals from the new disclosure 

standard; 105 however, other 

commenters suggested that Exchange 

Act Rule 14a–8 communications should 

be expressly excluded.106 In particular, 

one commenter noted that, ‘‘[b]oth the 

security holder proponent and the 

company are subject to specific, detailed 

requirements, conditions and deadlines, 

including regulation of the content of 

statements about the proposal * * * 

There is no need to impose another 

disclosure requirement on this 

process.’’ 107 We agree that the current 

disclosure requirements with regard to 

security holder proposals are adequate 

to inform security holders of how they 

may communicate with boards via that 

mechanism. Accordingly, we have 

expressly excluded security holder 

proposals submitted pursuant to 

Exchange Act Rule 14a–8, and 

communications made in connection 

with such proposals, from the definition 

of ‘‘security holder communications’’

for purposes of the new disclosure 

standard.108

b. Process for Communicating With 

Board Members 

We proposed a standard that would 

have required companies to identify 

those directors to whom security 

holders could send communications. 

Commenters noted that they did not 

believe that it would be appropriate to 

include such a requirement on the basis 

that named directors could then be 

targeted for inappropriate 

correspondence and that some 

companies may not include specified 

recipients of security holder 

communications in their 

communications procedures.109

In consideration of these concerns, we 

have revised the disclosure requirement 

to specify that companies should 

describe how security holders can send 

communications to the board and, if 

applicable, to specified individual 

directors.110 We also have added a new 

instruction providing that, in lieu of 

describing in the proxy statement the 

manner in which security holders may 

communicate with board members, the 

manner in which the company 

determines those communications that 

will be forwarded to board members, the 

company’s policy regarding director 

attendance at annual meetings, and the 

number of directors who attended the 

prior year’s annual meeting, such 

information may instead be placed on 

the company’s Web site, provided that 

the company discloses in its proxy 

statement the Web site address where 

such information may be found.111

Commenters also expressed concern 

about the proposed disclosure item 

related to companies’ policies with 

regard to ‘‘filtering’’ communications.112

Some commenters suggested that 

extensive disclosure of a company’s 

process for determining which 

communications are forwarded to board 

members would imply that a company 

was improperly blocking 

communications from security 

holders.113 Such a filtering process is 

necessary, in the opinion of these 

commenters, because many security 

holder communications are related to 

company products and services, are 

solicitations, or otherwise relate to 

improper or irrelevant topics.114 At least 

one commenter posited that the 

proposed disclosure item does not relate 

directly to company processes to 

facilitate communications with directors 

and should be deleted as 

unnecessary.115 Another commenter 

suggested that we revise the disclosure 

requirement to clarify that purely 

ministerial activities, such as organizing 

and collating security holder 

communications, need not be 

disclosed.116 Other commenters noted 

that, should we retain the disclosure 

requirement, we should not expand it to 

include the identity of the party that is 

responsible for filtering 

communications.117

In consideration of these comments, 

the disclosure item we are adopting 

today does not include the requirement 

that companies identify the department 

or other group within the company that 

is responsible for determining which 

communications are forwarded to 

69212 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

118See the Instruction to new Paragraph (h)(2)(ii) 

of Item 7 of Exchange Act Schedule 14A.

119See, e.g., ABA; ACB; ACCA; Warren J. Archer 

(‘‘Archer’’); BRT; DKW Law Group; Domini; Foley; 

Intel; Int’l Paper; Jenkens; NYCBAR; NYSBAR.

120See, e.g., ABA; BRT; Domini; Foley; Intel; Int’l 

Paper; Jenkens; NYCBAR; NYSBAR.

121See NYSBAR.

122See Amalgamated Bank and its Long View 

Funds (‘‘Amalgamated’’); Boston; CBIS; CII; Granary 

Foundation (‘‘Granary’’); Letter B; Maine Retirement 

System; McRitchie2; SERS; SIF; Walden. See also

Connie Hansen.

123See, e.g., AFL–CIO; AFSCME; Amalgamated; 

CalPERS; CII; CIR; Cummings; IBT; Int’l Paper; 

McRitchie2; SERS; SIF; Smith; Trillium; UBC.

124See id.

125See new Paragraph (b) of Item 5 of Part II to 

Exchange Act Forms 10–Q and 10–QSB, new 

Paragraph (g) of Item 401 of Exchange Act 

Regulation S–B, and new Paragraph (j) of Exchange 

Act Regulation S–K. In those instances where a 

material change is implemented during the last 

quarter of a company’s fiscal year, companies will 

be required to include disclosure of the change in 

their Exchange Act Form 10–K or 10–KSB. See Item 

10 of Part III of Exchange Act Form 10–K, Item 9 

of Part III of Exchange Act Form 10–KSB, new 

Paragraph (g) of Item 401 of Exchange Act 

Regulation S–B, and new Paragraph (j) of Item 401 

of Exchange Act Regulation S–K.

126See Instruction 2 to new Paragraph (g) of Item 

401 of Exchange Act Regulation S–B and new 

Paragraph (j) of Item 401 of Exchange Act 

Regulation S–K.

127See Paragraphs (e) of Item 7 and (b) of Item 

22 of Exchange Act Schedule 14A. The disclosure 

requirements will apply to business development 

companies as well as investment companies 

registered under the Investment Company Act of 

1940 (‘‘Investment Company Act),’’ except where 

otherwise noted. Business development companies 

are a category of closed-end investment company 

that are not registered under the Investment 

Company Act, but are subject to certain provisions 

of that Act. See sections 2(a)(48) and 54–65 of the 

Investment Company Act [15 U.S.C. 80a–2(a)(48) 

and 80a–53 – 64].

128See Investment Company Act Rule 20a–1 [17 

CFR 270.20a–1] (requiring investment companies to 

comply with Regulation 14A [17 CFR 240.14a–1—

240.14a–101]), Schedule 14A, and all other rules 

and regulations adopted pursuant to section 14(a) 

of the Exchange Act [15 U.S.C. 78n] that would be 

applicable to a proxy solicitation if it were made in 

respect of a security registered pursuant to section 

12 of the Exchange Act [15 U.S.C. 78l]).

129 Investment companies are subject to Items 7 

and 22(b) of Exchange Act Schedule 14A when 

soliciting proxies regarding the election of directors. 

Currently, in lieu of the disclosure required by 

Paragraphs (a)–(d)(2) of Item 7, investment 

companies must provide the information required 

by Paragraph (b) of Item 22. See Paragraph (e) of 

Item 7. We are amending Paragraph (e) of Item 7 

to apply the disclosure requirements regarding 

nominating committees in Paragraph (d)(2) of Item 

7 to investment companies, and deleting the current 

disclosure requirement regarding nominating 

committees in Paragraph (b)(14)(iv) of Item 22 as 

duplicative.

directors. We also have added an 

instruction to clarify that a company’s 

process for collecting and organizing 

security holder communications, as well 

as similar or related activities, need not 

be disclosed, provided that the 

company’s process is approved by a 

majority of the independent 

directors.118

c. Material Actions Taken by the Board 

of Directors as a Result of Security 

Holder Communications 

Many commenters expressed concern 

with regard to the proposal that would 

have required companies to describe 

any material action taken by the board 

of directors during the preceding fiscal 

year as a result of security holder 

communications.119 Most of these 

commenters suggested deleting this 

disclosure requirement on the basis that 

it would be too difficult to tie board 

actions to specific security holder 

recommendations.120 One commenter 

suggested that the disclosure 

requirement was too vague and 

companies would be unsure as to what 

actions must be disclosed.121 In 

consideration of these concerns, the 

disclosure requirements we are adopting 

today do not include the proposed 

requirement related to material actions 

taken in response to security holder 

communications.

d. Director Attendance at Annual 

Meetings 

In the proposing release, we asked 

whether there were alternative ways to 

achieve our objectives. We further 

solicited comment on whether we 

should provide guidance to companies 

or otherwise address appropriate 

procedures for companies to implement 

with regard to security holder 

communications with board members. 

We also noted that the term 

‘‘communications’’ was meant to be 

broadly construed. Several commenters 

suggested that we require companies to 

disclose whether they have a policy 

regarding attendance by directors at 

annual meetings and provide 

information about annual meeting 

attendance by directors.122 We believe 

that such a disclosure requirement 

would further our broad objective to 

provide investors with information 

about a company’s communications 

policies and general responsiveness to 

investors’ concerns.

Directors’ attendance at annual 

meetings can provide investors with an 

opportunity to communicate with 

directors about issues affecting the 

company. We are adopting a 

requirement that companies disclose 

their policy with regard to director 

attendance at annual meetings and the 

number of directors who attend the 

annual meetings, as that disclosure will 

give security holders a more complete 

picture of a company’s policies related 

to opportunities for communicating 

with directors. 

C. Related Disclosure in Quarterly and 

Annual Reports 

In response to our request for 

comment regarding whether material 

changes to a company’s process for 

security holders to submit nominees for 

election as director to the company 

should be disclosed in periodic or 

current reports, a number of 

commenters indicated the need to 

provide security holders with more 

current information regarding that 

process.123 These commenters 

expressed the concern that the 

procedures described in a company’s 

proxy statement could change during 

the course of a fiscal year, and the 

absence of information regarding those 

changes could impair significantly 

security holders’ opportunities to 

submit recommended nominees.124 In 

response to these comments, we are 

adopting new disclosure standards that 

will require companies to report any 

material changes to the procedures for 

security holder nominations in the 

Exchange Act Form 10–Q, 10–QSB, 10–

K, or 10–KSB filed for the period in 

which the material change occurs.125

We also are including an instruction 

clarifying that, for purposes of this 

disclosure obligation, adoption of 

procedures by which security holders 

may recommend nominees to a 

company’s board of directors, where the 

company previously disclosed that it 

did not have in place such procedures, 

will constitute a material change.126

D. Investment Companies 

The new disclosure requirements 

regarding board nominating committees 

and security holders’ communications 

with members of boards will apply to 

proxy statements of investment 

companies.127 Investment companies 

currently are required to comply with 

Exchange Act Schedule 14A when 

soliciting proxies, including proxies 

relating to the election of directors.128

Item 22(b)(14)(iv) of Exchange Act 

Schedule 14A requires investment 

companies to disclose the same 

information about nominating 

committees that currently is required for 

operating companies by Item 7(d)(2).129

As with operating companies, the 

enhanced transparency provided by the 

amendments is intended to provide 

security holders with additional, 

specific information upon which to 

evaluate the boards of directors and 

nominating committees of the 

investment companies in which they 

invest. Commenters generally supported 

the application of the proposed 

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69213

130See, e.g., ABA; AFL–CIO; Investment 

Company Institute (‘‘ICI’’).

131 15 U.S.C 80a–2(a)(19).

132New Paragraph (b)(14)(ii) of Item 22 of 

Exchange Act Schedule 14A.

133See, e.g., ABA; ICI.

134See the Instruction to new Paragraph (h)(2)(ii) 

of Item 7 of Exchange Act Schedule 14A.

135See new Paragraph (d)(2)(ii)(J) of Item 7 of 

Exchange Act Schedule 14A.

136See Instruction 1 to new Paragraph (d)(2)(ii)(L) 

of Item 7 of Exchange Act Schedule 14A. In the case 

of business development companies, which are not 

required to file reports on Form N–CSR, the 

percentage of securities would be determined by 

reference to the company’s reports on Exchange Act 

Forms 10–K and 10–Q.

137See new Item 9 of Form N–CSR. We are 

renumbering current Items 9 and 10 as Items 10 and 

11, and are adopting a conforming change to Rule 

30a–2 under the Investment Company Act to reflect 

the renumbering of Item 10. Because business 

development companies file reports on Forms 10–

K and 10–Q rather than Form N–CSR, they would 

provide the required disclosure on these forms.

138 44 U.S.C. 3501 et seq.

139 44 U.S.C. 3507(d) and 5 CFR 1320.11.

140Exchange Act Schedule 14C requires 

disclosure of some items of Exchange Act Schedule 

14A. Therefore, while we are not amending the text 

of Exchange Act Schedule 14C, the amendments to 

Exchange Act Schedule 14A must also be reflected 

in the PRA burdens for Exchange Act Schedule 14C.

141 Investment Company Act Rule 20a–1 requires 

registered investment companies to comply with 

Exchange Act Regulation 14A or 14C, as applicable. 

Therefore, the annual responses to Investment 

Company Act Rule 20a–1 reflect the number of 

proxy and information statements that are filed by 

registered investment companies.

142The changes to the collections of information 

entitled ‘‘Regulation S–B’’ and ‘‘Regulation S–K’’

are reflected in our estimates for Forms 10–Q, 10–

QSB, 10–K and 10–KSB. Therefore, we are not 

changing the burden estimates for those titles.

143The proxy rules apply to domestic companies 

with equity securities registered under section 12 of 

the Exchange Act and to investment companies 

registered under the Investment Company Act. 

There is a discrepancy between the number of 

annual reports by reporting companies and the 

number of proxy and information statements filed 

with the Commission in any given year. This is 

because some companies are subject to reporting 

requirements by virtue of section 15(d) of the 

Exchange Act [15 U.S.C. 78o], and therefore are not 

covered by the proxy rules. In addition, companies 

that are not listed on a national securities exchange 

or the Nasdaq Stock Market may not hold annual 

meetings and therefore would not be required to file 

a proxy or information statement.

disclosure requirements to investment 

companies.130

The rules that we are adopting will 

require disclosure as to whether or not 

the members of an investment 

company’s nominating committee are 

‘‘interested persons’’ of the company as 

defined in section 2(a)(19) of the 

Investment Company Act,131 rather than 

independent under the listing standards 

of a national securities exchange or 

national securities association, as in the 

case of operating companies.132 We are 

requiring disclosure with respect to the 

section 2(a)(19) test for investment 

companies because that test is tailored 

to capture the broad range of affiliations 

with investment advisers, principal 

underwriters, and others that are 

relevant to ‘‘independence’’ in the case 

of investment companies. Commenters 

generally supported the use of this test 

for independence in the case of 

investment companies.133 Similarly, 

with respect to the instruction that 

states that in describing a company’s 

process for determining which 

communications will be relayed to 

board members, collecting and 

organizing security holder 

communications need not be disclosed 

provided that the company’s process is 

approved by a majority of the 

independent directors, we are 

specifying in the case of investment 

companies that the approval required is 

of a majority of the directors who are 

not ‘‘interested persons’’ under section 

2(a)(19).134

As with operating companies, 

investment companies will be required 

to state which one or more of certain 

categories of persons or entities 

recommended each nominee who is 

approved by the nominating committee 

for inclusion on the company’s proxy 

card.135 However, in recognition of the 

fact that investment companies are 

generally externally managed by an 

investment adviser, the categories will 

include the following: security holder, 

director, chief executive officer, other 

executive officer, or employee of the 

investment company’s investment 

adviser, principal underwriter, or any 

affiliated person of the investment 

adviser or principal underwriter. With 

respect to the disclosure requirement 

regarding nominees recommended by 

large, long-term security holders, we are 

adopting an instruction clarifying that, 

for a registered investment company, 

the percentage of securities held by a 

recommending security holder may be 

determined by reference to the 

company’s most recent report on Form 

N–CSR.136

Finally, as with operating companies, 

we are requiring a registered investment 

company to provide disclosure 

regarding material changes to the 

procedures for security holder 

nominations of directors. This 

information will be provided in Form 

N–CSR.137

III. Paperwork Reduction Act 

A. Background 

The amendments to Exchange Act 

Schedule 14A contain ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995.138 We published a notice 

requesting comment on the collection of 

information requirements in the 

proposing release, and we submitted 

these requirements to the Office of 

Management and Budget for review in 

accordance with the PRA.139 The titles 

for the collections of information are:

(1) ‘‘Proxy Statements—Regulation 

14A (Commission Rules 14a–1 through 

14a–15 and Schedule 14A)’’ (OMB 

Control No. 3235–0059);

(2) ‘‘Information Statements—

Regulation 14C (Commission Rules 14c–

1 through 14c–7 and Schedule 14C)’’ 140

(OMB Control No. 3235–0057);

(3) ‘‘Rule 20a–1 under the Investment 

Company Act of 1940, Solicitations of 

Proxies, Consents and Authorizations’’

(OMB Control No. 3235–0158); 141

(4) ‘‘Form 10–K’’ (OMB Control No. 

3235–0063); 

(5) ‘‘Form 10–KSB’’ (OMB Control No. 

3235–0420); 

(6) ‘‘Form 10–Q’’ (OMB Control No. 

3235–0070); 

(7) ‘‘Form 10–QSB’’ (OMB Control No. 

3235–0416); 

(8) ‘‘Regulation S–K’’ (OMB Control 

No. 3235–0071); 

(9) ‘‘Regulation S–B’’ (OMB Control 

No. 3235–0417); and 

(10) ‘‘Form N–CSR’’ (OMB Control 

No. 3235–0570).142

These regulations, forms and 

schedules were adopted pursuant to the 

Securities Act, Exchange Act and 

Investment Company Act and set forth 

the disclosure requirements for annual 

and quarterly reports and proxy and 

information statements filed by 

companies to ensure that investors are 

informed.143 The hours and costs 

associated with preparing, filing, and 

sending these forms and schedules 

constitute reporting and cost burdens 

imposed by each collection of 

information. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid control number.

B. Summary of Amendments 

Under the amendments, we are 

expanding the disclosure that currently 

is required in company proxy or 

information statements regarding the 

activities of a company’s nominating 

committee. The new disclosure 

requirements also will require 

disclosure in proxy or information 

statements regarding the policies and 

procedures regarding security holder 

communications with boards of 

directors. We are adopting new 

requirements for disclosure of company 

policies with regard to board members’

attendance at annual meetings and the 

number of board members who attended 

the prior year’s annual meeting, as well 

69214 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

144See discussion of comments in Part II of this 

release and Summary of Comments—S7–14–03. 145See ABA; Stoecklein Law Group 

(‘‘Stoecklein’’). 146See ABA. 147See Stoecklein. Using those numbers as inputs 

into our model, the annual incremental disclosure 

burden over a three-year time period would be an 

average of 5 hours per schedule. Accordingly, using 

the commenter’s assumptions, the annual 

incremental paperwork burden for all companies to 

prepare the disclosure would be approximately 

32,595 hours of company personnel time and a cost 

of approximately $3,259,500 for the services of 

outside professionals.

148For convenience, the estimated PRA hour 

burdens have been rounded to the nearest whole 

number. 149 In connection with other recent rulemakings, 

we have had discussions with several private law 

firms to estimate an hourly rate of $300 as the cost 

of outside professionals that assist companies in 

preparing these disclosures. 150We estimated that it will take 6 hours to 

prepare the disclosure in year one, 3.13 hours in 

year two, and 2.03 hours in year three.

151We estimate that 20% of all proxy and 

information statements do not include disclosure 

about directors, and therefore would not include 

the disclosure required by the amendments. This 

estimate is based on the proportion of preliminary 

proxy statements to definitive proxy statements 

filed in our 2002 fiscal year (2,555/8,692=29%), 

which has been adjusted downward by 9% to 

reflect the fact that some preliminary proxy 

statements contain disclosure about directors. This 

estimate is based on the rationale that preliminary 

proxy statements are less likely to contain 

disclosure about directors because registrants do 

not file preliminary proxy statements for security 

holder meetings where the matters to be acted upon 

involve only the election of directors or other 

specified matters. See Exchange Act Rule 14a–6 [17 

CFR 240.14a–6].

as disclosure in periodic reports of any 

material changes to company 

procedures for security holder 

nominations. Compliance with the 

disclosure requirements will be 

mandatory. There will be no mandatory 

retention period for the information 

disclosed, and responses to the 

disclosure requirements will not be kept 

confidential. 

C. Responses to Request for Comments 

We requested comment on the PRA 

analysis contained in the proposing 

release. While we received only two 

comment letters specifically addressing 

our PRA analysis, we received several 

comment letters responding to the 

proposals in general.144 Although we 

are adopting the disclosure amendments 

substantially as proposed, we have 

made some additions and subtractions 

to the disclosure requirements in the 

final rules that will have the net effect 

of reducing the amount of required 

disclosures. In response to comments, 

we are adding a requirement for 

companies to provide updates in 

periodic reports regarding material 

changes to the procedures for security 

holder nominations. We also are adding 

a requirement for companies to describe 

in proxy and information statements 

their policies regarding director 

attendance at annual meetings and the 

number of directors who attended the 

prior year’s annual meeting. After 

considering the comments, we are not 

adopting certain of the proposed 

disclosure requirements. For example, 

the amendments will not require 

companies to describe:

• The material terms of their 

nominating committee charters; 

• Any specific standards for the 

overall structure and composition of the 

board of directors; 

• The specific reasons for the 

nominating committee’s determination 

not to include a security holder 

candidate as a nominee; and 

• Any material action taken by the 

board of directors as a result of 

communications from security holders. 

The majority of commenters did not 

comment on the hours and cost burdens 

for companies that will result from the 

amendments; however, we received two 

comment letters that specifically 

addressed the paperwork burdens in the 

proposing release.145 One commenter 

noted that given the number of unlisted 

companies, it is difficult to estimate the 

compliance burden.146 One commenter 

believed that the proposing release 

underestimated the disclosure burden 

for the proposed rules, and that the 

burden could be as high as 12 hours for 

the first year and 4 hours for following 

years.147

The actual paperwork burden for 

some companies could be 5 hours per 

schedule; however, in devising the 

estimates we considered a number of 

factors. For example, large companies 

may incur a greater paperwork burden 

than small companies, the pre-existing 

disclosure requirements may enable 

companies to streamline the collection 

of information necessary for the new 

disclosure, and the amendments contain 

more simplified disclosure requirements 

from the proposals, which will lower 

the paperwork burden. After 

considering these factors, we do not 

believe that 5 hours per schedule is an 

accurate burden estimate. However, 

after considering the comments 

indicating that we may have 

underestimated slightly the burden, we 

are not reducing our burden estimates 

for proxy and information statements, 

even though the amendments will 

reduce the amount of disclosure from 

that which would have been required by 

the proposals. 

D. Paperwork Burden Estimates 

As a result of the changes described 

above, the reporting and cost burden 

estimates for the collections of 

information have changed. While we are 

not changing the paperwork burden 

estimates for proxy and information 

statements, we are adding collection of 

information requirements in periodic 

reports under the Exchange Act.

1. Proxy and Information Statements 

For purposes of the PRA, we 

estimated the annual incremental 

paperwork burden for proxy and 

information statements under the new 

disclosure requirements to be 

approximately 19,557 hours of company 

personnel time and a cost of 

approximately $1,955,700 for the 

services of outside professionals.148

That estimate included the time and the 

cost of preparing disclosure that has 

been appropriately reviewed by 

executive officers, the disclosure 

committee, in-house counsel, outside 

counsel, and members of the board of 

directors.149 Because the current rules 

already require a company to collect 

and disclose information about the 

composition, functions, policies and 

procedures of its nominating committee, 

we factored the pre-existing burdens 

into our estimates for the new 

disclosure requirements.

We derived the paperwork burden 

estimates by estimating the total amount 

of time it will take a company to prepare 

and review the disclosure. We estimated 

that, over a three-year time period, the 

annual incremental disclosure burden 

will be an average of 3 hours per 

schedule. This estimate was based on 

two assumptions: 

• Companies spend a greater amount 

of time preparing the disclosure in year 

one and will become more efficient in 

preparing the disclosure over the 

following two years; 150 and

• Not all proxy and information 

statements involve action to be taken 

with respect to the election of directors, 

and therefore will not require 

companies to provide the disclosure.151

This estimate represents the average 

burden for all companies, both large and 

small, that are subject to the proxy rules. 

We expect that the disclosure burden 

could be greater for larger companies 

and lower for smaller companies. Table 

1, below, illustrates the incremental 

annual compliance burden of the 

collection of information in hours and 

in cost for proxy and information 

statements under the Exchange Act and 

Investment Company Act.

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69215

152For example, the average burden per form for 

Form 10–K is calculated as follows: [(8,484 Form 

10–Ks × 5% frequency of disclosure × 0.25 hours)/

8,484 Form 10–Ks] = .01. The calculation for Form 

10–Q is as follows: [(23,743 Form 10–Qs × 15% 

frequency of disclosure × 0.25 hours)/23,743 Form 

10–Qs] = .04. The calculation for Form N–CSR is 

as follows: [(7,400 Form N–CSRs × 10% frequency 

of disclosure × 0.25 hours)/7,400 Form N–CSRs] = 

.03. The discrepancy in quotients is due to the fact 

that operating companies report on a quarterly 

basis, while registered management investment 

companies report on a semi-annual basis.

153Under our assumptions, 5% of operating 

companies will provide the disclosure each quarter 

(for a total of 20%), while 10% of registered 

management investment companies will provide 

the information semi-annually (for a total of 20%).

154Comments are requested pursuant to 44 U.S.C. 

3506(c)(2)(B).

155See Release No. 34–48301 (August 8, 2003).

156See Staff Report: Review of the Proxy Process 

Regarding the Nomination and Election of 

Directors, Division of Corporation Finance (July 15, 

2003). The Division’s Staff Report, detailing the 

results of its review of the proxy process related to 

Continued

TABLE 1: CALCULATION OF INCREMENTAL PRA BURDEN ESTIMATES

Annual responses Incremental 

hours/form 

Incremental burden 75% company 25% professional $300 prof. cost 

(A) (B) (C)=(A) × (B) (D)=(C) × 0.75 (E)=(C) × 0.25 (F)=(E) × $300

SCH 14A .......................... 7,188 3.00 21,564.00 16,173 5,391.00 $1,617,300.00

SCH 14C .......................... 446 3.00 1,338.00 1,004 334.50 100,350.00

Rule 20a–1 ....................... 1,058 3.00 3,174.00 2,381 793.50 238,050.00

Total .......................... 8,692 ........................ ............................ 19,557 ................................ 1,955,700.00

2. Periodic Reports 

For purposes of the PRA, we estimate 

the annual incremental paperwork 

burden for Exchange Act periodic 

reports under the new disclosure 

requirements to be approximately 1,311 

hours of company personnel time and a 

cost of approximately $131,100 for the 

services of outside professionals. We 

estimate that, over a three-year time 

period, the annual incremental 

disclosure burden would be an average 

of 0.01 hours per Form 10–K and Form 

10–KSB, 0.04 hours per Form 10–Q and 

Form 10–QSB, and 0.03 hours per Form 

N–CSR.152 This estimate was based on 

the following two assumptions:

• Each year, 20% of reporting 

companies will change materially the 

procedures by which security holders 

may recommend nominees to the board 

of directors; 153 and

• It will take .25 hours to prepare the 

disclosure regarding material changes to 

security holder nomination procedures. 

Table 2, below, illustrates the 

incremental annual compliance burden 

of the collection of information in hours 

and in cost for periodic reports under 

the Exchange Act and Investment 

Company Act.

TABLE 2: CALCULATION OF INCREMENTAL PRA BURDEN ESTIMATES

Annual responses Incremental 

hours/form 

Incremental burden 75% company 25% professional $300 prof. cost 

(A) (B) (C)=(A) × (B) (D)=(C) × 0.75 (E)=(C) × 0.25 (F)=(E) × $300

10–K ................................. 8,484 0.01 84.84 64 21.21 $6,000.00

10–KSB ............................ 3,820 0.01 38.20 29 9.55 3,000.00

10–Q ................................ 23,743 0.04 949.72 712 237.43 71,000.00

10–QSB ............................ 11,299 0.04 451.96 339 112.99 34,000.00

N–CSR ............................. 7,400 0.03 222.00 167 55.50 17,000.00

Total .......................... .................... ........................ ............................ 1,311 ................................ $131,000.00

E. Request for Comment 

We request comment in order to (a) 

evaluate whether the collections of 

information are necessary for the proper 

performance of our functions, including 

whether the information will have 

practical utility, (b) evaluate the 

accuracy of our estimate of the burden 

of the collections of information, (c) 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected, and 

(d) evaluate whether there are ways to 

minimize the burden of the collections 

of information on those who respond, 

including through the use of automated 

collection techniques or other forms of 

information technology.154

Any member of the public may direct 

to us any comments concerning the 

accuracy of this burden estimate and 

any suggestions for reducing this 

burden. Persons who desire to submit 

comments on the collection of 

information requirements should direct 

their comments to the OMB, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and send a copy 

of the comments to Jonathan G. Katz, 

Secretary, Securities and Exchange 

Commission, 450 Fifth Street, NW., 

Washington, DC 20549, with reference 

to File No. S7–14–03. Requests for 

materials submitted to the OMB by us 

with regard to this collection of 

information should be in writing, refer 

to File No. S7–14–03, and be submitted 

to the Securities and Exchange 

Commission, Office of Filings and 

Information Services, Branch of Records 

Management, 450 Fifth Street, NW., 

Washington, DC 20549. Because the 

OMB is required to make a decision 

concerning the collections of 

information between 30 and 60 days 

after publication, your comments are 

best assured of having their full effect if 

the OMB receives them within 30 days 

of publication. 

IV. Cost-Benefit Analysis 

A. Background 

On August 8, 2003 we proposed new 

disclosure requirements intended to 

increase the transparency of nominating 

committee functions and the processes 

by which security holders may 

communicate with boards of directors of 

the companies in which they invest.155

These proposals followed substantially 

the recommendations made by the 

Division of Corporation Finance in a 

staff report dated July 15, 2003.156 In 

69216 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

the nomination and election of directors, can be 

found on our Web site at http://www.sec.gov.

157On May 1, 2003, the Commission solicited 

public views on the Division’s review of the proxy 

rules relating to the nomination and election of 

directors. See Release No. 34–47778 (May 1, 2003). 

In addition to receiving written comments, the 

Division spoke with a number of interested parties 

representing security holders, the business 

community, and the legal community. Each of the 

comment letters received, memoranda documenting 

the Division’s meetings, and a summary of the 

comments are included on the Commission’s Web 

site, http://www.sec.gov, in comment file number 

S7–10–03. Summary of Comments in Response to 

the Commission’s Solicitation of Public Views 

Regarding Possible Changes to the Proxy Rules (July 

15, 2003).

158See AFL–CIO; IBT.

159See, e.g., CCS1; Eliot Cohen; Phillip Goldstein, 

Opportunity Partners L.P., Kimball & Winthrop, Inc. 

(‘‘Goldstein’’); James McRitchie, Editor, 

CorpGov.net and PERSWatch.net, Letter dated 

August 17, 2003 (‘‘McRitchie1’’).

160See, e.g., J. Robert Brown, Jr., Professor, 

University of Denver College of Law (‘‘Brown’’); 

BRT; CCS1; Goldstein; Stoecklein.

161See, e.g., ACB; Brown; Granary; Letter B; 

McRitchie1; Nappier; Stoecklein; Valero.

162See Eleanor Bloxham, President, The Value 

Alliance and Corporate Governance Alliance.

163The proxy rules apply to domestic companies 

with equity securities registered under section 12 of 

the Exchange Act and to investment companies 

registered under the Investment Company Act.

164See ABA.

165See id.

166See Robert C. Pozen.

167See id.

168 20,868 hours/ 8,692 companies = 2.4 hours per 

company.

169We estimate the average hourly cost of inhouse personnel to be $85. This cost estimate is 

based on data obtained from The SIA Report on 

Management and Professional Earnings in the 

Securities Industry (October 2001).

170 $2,086,700/8,692 companies = $240 per 

company. In connection with other recent 

rulemakings, we have had discussions with several 

private law firms to estimate an hourly rate of $300 

as the cost of outside professionals that assist 

companies in preparing these disclosures.

171 2,548 hours/1,058 companies = 2.4 hours per 

company.

172 $255,050/1,058 companies = $240 per 

company.

preparing this report and developing its 

recommendations, the Division 

considered the input of members of the 

investing, business, legal, and academic 

communities.157

The Commission is adopting the 

amendments substantially as proposed. 

The disclosures are designed to build 

upon existing disclosure requirements 

to elicit a more detailed discussion of 

the policies, procedures, and activities 

of nominating committees as well as the 

means by which security holders can 

communicate with boards of directors. 

We recognize that the amendments will 

create costs and benefits to the 

economy. We are sensitive to the costs 

and benefits imposed by our rules, and 

we have identified certain costs and 

benefits of the amendments. 

B. Benefits 

The primary benefit of the 

amendments will be to assist security 

holders in better understanding the 

policies and procedures that companies 

maintain to nominate directors and to 

enable security holders to communicate 

with directors. In the proposing release, 

we requested comment on the potential 

benefits of the proposed rules and have 

considered the responses. Two 

commenters in support of the proposals 

indicated that the rules would provide 

useful information with little cost.158

Other commenters believed that the 

proposed rules would provide little or 

no benefit.159 Commenters also 

suggested that the proposed rules would 

not provide meaningful disclosure 160 or 

that the disclosure would be 

boilerplate.161

To address the commenters’ concerns, 

the amendments are drafted in a manner 

designed to avoid boilerplate and to 

elicit meaningful disclosure. The more 

precise disclosure requirements will 

promote more transparent disclosure 

among a cross-section of public 

companies because they will have 

greater certainty as to the required 

disclosure. In addition, increasing the 

amount and quality of information 

available to investors concerning board 

policies and procedures also may 

improve investor confidence because 

investors may be able to identify the 

degree to which companies are 

responsive to security holder concerns. 

One commenter noted that the proposed 

disclosure would provide potential 

investors and potential directors with 

the ability to compare companies before 

they choose to invest or agree to be 

considered for directorship.162 By 

providing greater transparency of board 

policies, we anticipate that the new 

requirements will allow investors to 

make more informed choices when 

deciding how to invest.

To the extent that security holders 

would prefer to invest in companies 

with boards that maintain policies and 

procedures that provide greater security 

holder oversight, companies may have 

incentives to adopt more meaningful 

policies and procedures regarding 

director nominations and security 

holder communications. The 

amendments also may encourage 

companies to consider their existing 

policies in relation to policies adopted 

by other companies and could facilitate 

competition among companies to adopt 

policies that reduce costs to security 

holders. For example, if security holder 

board nominees are given adequate 

consideration through the nomination 

process, a security holder may choose to 

submit its candidate to the nominating 

committee rather than incur the expense 

of soliciting proxies to support the 

nominee. Moreover, disclosure of the 

manner in which security holders can 

send communications to the board may 

encourage a less costly communications 

process for providing recommendations 

to the board than the current process 

embodied in Exchange Act Rule 14a–8. 

C. Costs 

The amendments will impose new 

disclosure requirements on companies 

subject to the proxy rules.163 The new 

requirements are designed to build upon 

existing disclosure requirements 

regarding the composition, functions, 

policies, and procedures of company 

nominating committees. Thus, the task 

of complying with the new disclosure 

requirements could be performed by the 

same person or group of persons 

responsible for compliance under the 

current rules. One commenter believed 

that the costs would be different on a 

company-by-company basis and that the 

disclosure requirements would not 

result in substantial additional costs for 

companies that already disclose and 

have a security holder communications 

process.164 For companies that do not 

have a system in place, the commenter 

believed that the proposal would 

burden company resources by requiring 

a person to administer the 

communications system.165 One 

commenter believed that both the cost 

of submitting candidates to the 

nominating committee and the probable 

benefits are minimal.166 This 

commenter noted that, even if a 

nominating committee were composed 

entirely of independent directors, it 

would not likely nominate a candidate 

recommended by security holders.167

For purposes of the PRA, we estimate 

the annual incremental paperwork 

burden for all companies to prepare the 

new disclosure to be approximately 

20,868 hours of company personnel 

time (2.4 hours per company),168 which 

translates into an estimated cost of 

$1,774,000 ($204 per company).169 We 

also estimate a cost of approximately 

$2,086,700 for the services of outside 

professionals ($240 per company).170

The figures above include the estimated 

burdens for investment companies. For 

investment companies, we estimate the 

incremental burden to be 2,548 hours of 

company personnel time (2.4 hours per 

company),171 which translates into an 

estimated cost of $216,580 ($204 per 

company). We also estimate a cost for 

investment companies of approximately 

$255,050 for the services of outside 

professionals ($240 per company).172

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69217

173See CIR.

174See id.

175See id.

176See Foley.

177See id.

178See CIR; Foley.

179See CalPERS; CII; Granary; Letter B; 

McRitchie2; SERS; SIF; Trillium.

180See ABA; Archer; Foley; Stoecklein.

181See ABA.

182See Archer.

183See id.

184See id.

185See id.

186See id.

187See Stoecklein.

188See id.

189 15 U.S.C. 78w(a)(2).

On balance, we believe these estimates 

are reasonable.

To the extent that the new disclosures 

influence corporate behavior, however, 

the costs would extend beyond a 

disclosure burden. For example, 

companies may incur additional costs in 

instituting more responsive policies and 

procedures regarding director 

nominations and security holder 

communications. We have not included 

these costs in our analysis of the 

additional disclosure requirement, but 

have sought comment regarding such 

costs and related matters. After 

considering the comments, which are 

summarized below, we continue to 

believe that the amendments provide 

useful information to investors. The 

amendments do not require a company 

to adopt any particular policies and 

procedures. To the extent that a 

company voluntarily incurs the expense 

of adopting more responsive board 

policies, we believe that those costs are 

justified by the benefits of such policies. 

In response to our request for 

comment, one commenter noted that the 

initial cost of implementing and 

maintaining procedures would be 

high.173 This commenter identified the 

indirect cost of the increase in the 

amount of time that must be spent 

monitoring corporate activities, which 

may detract from effective management 

of the company.174 The commenter 

identified costs such as legal fees 

associated with structuring and 

reviewing policies, the cost of 

management time related to structuring 

policies, fees paid to accountants for 

managerial and financial statement 

creation and review, opportunity costs 

related to missed business 

opportunities, and other costs.175

One commenter believed that the 

rules could be ‘‘extremely costly, timeconsuming and potentially 

disruptive. ’’176 This commenter 

explained that the rules could increase 

significantly the number of 

communications that are sent to board 

members and the more corporate 

directors must divide their time, the less 

effectively they will discharge their 

competing functions.177 Two 

commenters believed that the disclosure 

requirements would increase the burden 

on boards and discourage service.178

D. Small Business Issuers 

Although the new rules apply to small 

business issuers, we do not anticipate 

any disproportionate impact on small 

business issuers. Like other issuers, 

small business issuers should incur 

relatively minor compliance costs to 

fulfill their disclosure obligations, and 

should find it unnecessary to hire extra 

personnel. Several commenters 

supported requiring small companies to 

provide the disclosure.179

Other commenters recommended 

granting outright relief to small 

businesses or deferring application of 

the rules to small businesses until the 

Commission evaluates the impact of the 

rules.180 One commenter suggested that 

small companies that have established 

procedures could comply voluntarily.181

These commenters sought relief for 

small businesses for several reasons. 

One commenter recommended that we 

not apply the rules to small businesses 

because it will ‘‘waste the money of 

small publicly held companies, create 

confusion * * * and provide no useful 

service to security holders. ’’182 This 

commenter noted that there does not 

appear to be a significant number of 

instances where major security holders 

of small publicly held companies were 

unable to communicate with boards of 

directors, particularly because major 

security holders are in management 

and/or on the board.183 Further, this 

commenter was of the view that, 

because major unaffiliated security 

holders potentially can impact the 

trading price of small business 

securities, management and the board 

‘‘take the views of major unaffiliated 

security holders very seriously. ’’184

This commenter also noted that the 

board and security holders will not 

agree on every aspect of running the 

company and it is not clear why small 

businesses need to set up a procedure 

for every communication with security 

holders.185

One commenter noted that increasing 

the incremental cost to small businesses 

by a certain number of hours and 

assuming that the staff is available 

already is flawed.186 One commenter 

believed that the benefits of increased 

disclosure would not outweigh a small 

business issuer’s need to reduce 

expenses.187 This commenter noted 

that, as regulatory requirements 

increase, small businesses will have to 

hire additional staff or reduce the 

number of hours spent managing the 

company.188

After reviewing these comments, we 

are convinced that issues relating to 

corporate accountability and security 

holder rights affect small companies as 

much as they affect large companies. 

The concerns raised by the commenters 

addressed primarily the cost of 

establishing and maintaining new board 

policies and procedures—not the cost of 

the disclosure required by the 

amendments. A small business issuer is 

not required to adopt new policies and 

procedures under the amendments. 

Thus, we do not believe that applying 

the rules to small business issuers 

would be inconsistent with the policies 

underlying the small business issuer 

disclosure system. 

V. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition, and Capital 

Formation 

Section 23(a)(2) of the Exchange 

Act 189 requires us, when adopting rules 

under the Exchange Act, to consider the 

impact that any new rule would have on 

competition. In addition, section 

23(a)(2) prohibits us from adopting any 

rule that would impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. The 

amendments are intended to make 

information about the functions of a 

company’s nominating committee of the 

board of directors, as well as the ability 

of security holders to communicate with 

the board of directors, more transparent 

to investors. We anticipate that the new 

rules will provide increased information 

upon which to evaluate the functioning 

of boards of directors and make 

investment decisions. The rules may 

affect competition because they will 

allow companies to consider their 

existing policies in relation to policies 

adopted by other companies. As a 

result, companies may compete to adopt 

policies that effectively balance security 

holder and director interests and, 

therefore, attract investors.

We have identified one possible area 

where the rules could potentially place 

a burden on competition. The new 

disclosure will enable investors to 

compare companies’ policies and 

procedures for director nominations and 

communications with directors. To the 

69218 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

190 15 U.S.C. 77b(b).

191 15 U.S.C. 78c(f).

192 15 U.S.C. 80a–2(c).

193 5 U.S.C. 601.

194 5 U.S.C. 603. 195See Paragraph (d)(1) of Item 7 of Exchange Act 

Schedule 14A. 196See Paragraph (d)(2) of Item 7 of Exchange Act 

Schedule 14A, prior to adoption of these 

amendments.

197See CalPERS; CII; Granary; Letter B; 

McRitchie2; SERS; SIF; Trillium. 198See Letter B; McRitchie2. 199See ABA; Archer; Foley; Stoecklein. 200See ABA.

201See Archer.

202See id.

203See id.

extent that investors may place a 

premium on a company that provides 

security holders with favorable director 

nomination and communication 

procedures, a company will be at a 

disadvantage to other companies that 

maintain more favorable procedures. 

Section 2(b) of the Securities Act,190

section 3(f) of the Exchange Act 191 and 

section 2(c) of the Investment Company 

Act 192 require us, when engaging in 

rulemaking that requires us to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action will promote efficiency, 

competition, and capital formation. We 

believe the disclosure will make 

information about the operation of a 

company’s director nomination process 

more transparent. In addition, 

disclosure regarding the means by 

which security holders may 

communicate directly with a company’s 

board of directors may increase security 

holder involvement in the companies in 

which they invest. As a result, we 

believe that investors may be able to 

evaluate a company’s board of directors 

more effectively and make more 

informed investment decisions. We 

believe that, as a consequence of these 

developments, there may be some 

positive impact on the efficiency of 

markets and capital formation. The 

possibility of these effects, their 

magnitude if they were to occur, and the 

extent to which they will be offset by 

the costs of the new rules, are difficult 

to quantify.

We requested comment on these 

matters in the proposing release. We 

received no comments in response to 

these requests. 

VI. Final Regulatory Flexibility 

Analysis 

This Final Regulatory Flexibility 

Analysis has been prepared in 

accordance with the Regulatory 

Flexibility Act.193 This FRFA involves 

amendments to Items 7 and 22 of 

Exchange Act Schedule 14A, Item 5 of 

Exchange Act Forms 10–Q and 10–QSB, 

Form N–CSR, and Item 401 of 

Regulations S–B and S–K. The 

amendments will expand the disclosure 

that currently is required in company 

filings regarding the functions of a 

company’s nominating committee. In 

addition, the amendments will require 

disclosure regarding the policies and 

procedures regarding security holder 

communications with boards of 

directors. An Initial Regulatory 

Flexibility Analysis was prepared in 

accordance with the Regulatory 

Flexibility Act 194 in conjunction with 

the proposing release. The proposing 

release included the IRFA and solicited 

comments on it.

A. Need for the Amendments 

The amendments are designed to 

address the growing concern among 

security holders over the accountability 

of corporate directors and the lack of 

sufficient security holder input into 

decisions made by the boards of 

directors of the companies in which 

they invest. Currently, companies must 

state whether they have a nominating 

committee and, if so, must identify the 

members of the nominating committee, 

state the number of committee meetings 

held, and briefly describe the functions 

performed by such committees.195 In 

addition, if a company has a nominating 

or similar committee, it must state 

whether the committee considers 

nominees recommended by security 

holders and, if so, must describe how 

security holders may submit 

recommended nominees.196 The 

amendments are designed to build upon 

existing disclosure requirements to 

elicit a more detailed discussion of the 

policies and procedures of nominating 

committees as well as the means by 

which security holders can 

communicate with boards of directors.

The amended disclosure requirements 

are designed to enhance transparency of 

the policies of boards of directors, with 

the goal of providing security holders a 

better understanding of the functions 

and activities of the boards of the 

companies in which they invest. For 

example, the amendments relating to 

nominating committees will require 

disclosure about the source of director 

candidates and the level of scrutiny 

accorded to each candidate. The 

amendments relating to security holder 

communications with directors may 

strengthen the association among 

security holders and directors by 

providing security holders with a better 

understanding of the means by which 

they may communicate with board 

members. For example, the amended 

disclosure will inform security holders 

of the manner in which to send 

communications to the board. Moreover, 

the amendments aim to enable investors 

to better evaluate a company’s 

responsiveness to security holder issues 

and inquiries by illuminating the degree 

of director involvement with security 

holder concerns. 

B. Significant Issues Raised by Public 

Comment 

The Initial Regulatory Flexibility 

Analysis appeared in the proposing 

release. We requested comment on any 

aspect of the IRFA, including the 

number of small entities that would be 

affected by the proposals, the nature of 

the impact, how to quantify the number 

of small entities that would be affected, 

and how to quantify the impact of the 

proposals. While we did not receive any 

comments that responded directly to the 

IRFA, we did receive comments 

addressing the impact on small business 

issuers. Several commenters supported 

requiring small companies to provide 

the disclosure.197 In that regard, 

commenters stated, ‘‘enhanced 

disclosure would be of great value to all 

types of investors.’’198 Other 

commenters recommended granting 

outright relief to small businesses or 

deferring application of the rules to 

small businesses until the Commission 

evaluates the impact of the rules.199 One 

commenter suggested that small 

companies that have established 

procedures could comply voluntarily.200

Those commenters who sought relief 

for small businesses did so for several 

reasons. One commenter recommended 

that we not apply the rules to small 

businesses because it will ‘‘waste the 

money of small publicly held 

companies, create confusion * * * and 

provide no useful service to security 

holders.’’201 This commenter noted that 

there does not appear to be a significant 

number of instances where major 

security holders of small publicly held 

companies were unable to communicate 

with boards of directors, particularly 

because major security holders are in 

management and/or on the board.202

Further, this commenter was of the view 

that, because major unaffiliated security 

holders potentially can impact the 

trading price of small business 

securities, management and the board 

‘‘take the views of major unaffiliated 

security holders very seriously.’’203 This 

commenter also noted that the board 

and security holders will not agree on 

every aspect of running the company 

and it is not clear why small businesses 

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69219

204See id.

205See id.

206See Stoecklein.

207See id.

208 17 CFR 240.0–10(a).

209 Id.

210We estimate that 20% of all proxy and 

information statements do not include disclosure 

about directors, and therefore would not include 

the disclosure required by the amendments. This 

estimate is based on the proportion of preliminary 

proxy statements to definitive proxy statements 

filed in our 2002 fiscal year (2,555/8,692=29%), 

which has been adjusted downward by 9% to 

reflect the fact that some preliminary proxy 

statements contain disclosure about directors. This 

estimate is based on the rationale that preliminary 

proxy statements are less likely to contain 

disclosure about directors because registrants do 

not file preliminary proxy statements for security 

holder meetings where the matters to be acted upon 

involve only the election of directors or other 

specified matters. See Exchange Act Rule 14a-6.

211We derived this estimate from the database 

provided by the Center for Research in Securities 

Prices at the University of Chicago, the Standard & 

Poors Research Insight Compustat Database 

(‘‘Compustat’’), and SEC Form 1392.

212See, e.g., Rule 302.00 of NYSE listing 

standards and Rule 4350(e) of Nasdaq listing 

standards.

213 Data obtained from Compustat indicates that 

there are less than 225 listed operating companies 

that are small entities. Information compiled by the 

Commission staff indicates that there are less than 

25 listed investment companies that are small 

entities.

214 6,536–5,257=1,697.

215This estimate is based on the proportion of 

small entities that are reporting companies (2,500) 

to the total domestic companies quoted on the 

OTCBB or the Pink Sheets (7,317). We derived the 

latter figure from individuals within the 

organization called http://www.pinksheets.com and 

from the OTCBB Web site at http://www.otcbb.com.

216The calculation for the total number of small 

entities is as follows: 225 listed operating 

companies + 25 listed investment companies + 580 

non-listed operating companies + 25 non-listed 

investment companies = 855.

need to set up a procedure for every 

communication with security 

holders.204

One commenter noted that increasing 

the incremental cost to small businesses 

by a certain number of hours and 

assuming that the staff is available 

already is flawed.205 One commenter 

believed that the benefits of increased 

disclosure would not outweigh a small 

business issuer’s need to reduce 

expenses.206 This commenter noted 

that, as regulatory requirements 

increase, small businesses will have to 

hire additional staff or reduce the 

number of hours spent managing the 

company.207

After reviewing these comments, we 

are convinced that issues relating to 

corporate accountability and security 

holder rights affect small companies as 

much as they affect large companies. 

The concerns raised by the commenters 

addressed primarily the cost of 

establishing and maintaining new board 

policies and procedures ‘‘not the cost 

of the disclosure required by the 

amendments. A small business issuer is 

not required to adopt new policies and 

procedures under the amendments. 

Thus, we do not believe that applying 

the rules to small business issuers 

would be inconsistent with the policies 

underlying the small business issuer 

disclosure system. Like other issuers, 

small business issuers should incur 

relatively minor compliance costs to 

fulfill their disclosure obligations, and 

should find it unnecessary to hire extra 

personnel. To the extent small 

businesses decide to adopt such 

policies, they are likely to do so because 

they believe the benefits justify the 

costs. 

C. Small Entities Subject to the 

Amendments 

The amendments will affect 

companies that are small entities. 

Exchange Act Rule 0–10(a) 208 defines a 

company, other than an investment 

company, to be a ‘‘small business’’ or 

‘‘small organization’’ for purposes of the 

Regulatory Flexibility Act if it had total 

assets of $5 million or less on the last 

day of its most recent fiscal year. An 

investment company is considered to be 

a ‘‘small business’’ if it, together with 

other investment companies in the same 

group of related investment companies, 

has net assets of $50 million or less as 

of the end of its most recent fiscal 

year.209 As discussed below, we believe 

that the amendments will affect 

approximately 805, or 32%, of the small 

entities that are operating companies. 

We believe that the amendments also 

will affect approximately 50 of the small 

entities that are investment companies.

The Commission received 8,692 

separate proxy and information 

statements in its 2002 fiscal year. We 

estimate that 6,954, or 80%, of those 

filings involved the election of directors, 

and therefore will be affected by the 

new disclosure requirements.210

Furthermore, we estimate that 5,257 

companies are ‘‘listed issuers’’ (as 

defined in Exchange Act Rule 10A–3) 

that are subject to the proxy rules.211

Because the relevant listing standards of 

national securities exchanges and 

Nasdaq require that listed issuers hold 

annual meetings, and state law provides 

for the election of directors at annual 

meetings, we estimate that at least 5,257 

proxy and information statements 

involve elections of directors.212 Of 

these proxy and information statements, 

less than 225 relate to operating 

companies and less than 25 relate to 

investment companies that constitute 

‘‘small entities.’’ 213 Therefore, we 

deduced that 1,697 proxy and 

information statements relate to the 

election of directors for companies that 

are not ‘‘listed issuers.’’214 We estimate 

that approximately 580 of the proxy and 

information statements for operating 

companies that are not ‘‘listed issuers’’

will be filed by small entities affected by 

the new rules.215 We also estimate that 

approximately 25 of the proxy and 

information statements for investment 

companies that are not ‘‘listed issuers’’

will be filed by small entities affected by 

the new disclosure requirements. 

Therefore, we estimate that the 

amendments will, in total, affect 

approximately 855 small entities.216

We requested comment on the 

number of small entities that would be 

impacted by our proposals, including 

any available empirical data. We 

received no responses to this request. 

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The amendments are expected to 

result in some additional costs to 

comply with the disclosure 

requirements. Because the current rules 

already require a company to collect 

and disclose information about the 

composition, functions, policies and 

procedures of its nominating committee, 

the disclosure should not impose 

significant new costs for the collection 

of information. Thus, the task of 

complying with the nominating 

committee disclosure could be 

performed by the same person or group 

of persons responsible for compliance 

under the current rules at a minimal 

incremental cost. Moreover, if a small 

entity were to maintain a process for 

security holders to send 

communications to its board of 

directors, company personnel would be 

aware of such procedures and the 

disclosure burden also would be 

minimal. If a small entity does not 

maintain such a process, then the 

disclosure will consist of a statement 

that the board does not have a 

communications process and a 

statement of the specific basis for the 

view of the board of directors that it is 

appropriate for the company not to have 

such a communications process. 

To the extent that the new rules 

influence corporate behavior, however, 

the costs will extend beyond a 

disclosure burden. For example, 

companies may incur additional costs in 

instituting more responsive policies and 

procedures regarding director 

nominations and security holder 

communications. The new disclosure 

69220 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

217We estimate the average hourly cost of inhouse personnel to be $85. This cost estimate is 

based on data obtained from The SIA Report on 

Management and Professional Earnings in the 

Securities Industry (October 2001).

218 In connection with other recent rulemakings, 

we have had discussions with several private law 

firms to estimate an hourly rate of $300 as the cost 

of outside professionals that assist companies in 

preparing these disclosures.

219 17 CFR 240.14a–8(i)(8).

220 15 U.S.C. 77b.

221 15 U.S.C. 77f.

222 15 U.S.C. 77g.

223 15 U.S.C. 77j.

224 15 U.S.C. 77s.

225 15 U.S.C. 78c(b).

226 15 U.S.C. 78m.

227 15 U.S.C. 78w(a).

228 15 U.S.C. 78mm.

229 15 U.S.C. 80a–8.

230 15 U.S.C. 80a–20(a).

231 15 U.S.C. 80a–29.

232 15 U.S.C. 80a–30.

233 15 U.S.C. 80a–37.

requirements, however, do not mandate 

any specific procedures. 

For purposes of the PRA, we 

estimated that it will take an average of 

approximately 3 hours per year for 

companies, large and small, to comply 

with the new disclosure requirements. 

We estimated that 75% of the 

compliance burden will be carried by 

the company internally and that 25% of 

the compliance burden will be carried 

by outside professionals retained by the 

company. Thus, we estimate the annual 

incremental paperwork burden for a 

company subject to the proxy rules will 

be 2.4 hours per company, which 

translates into an estimated cost of $204 

per company,217 and a cost of 

approximately $240 per company for 

the services of outside professionals.218

A cost of $444 per small entity may not, 

however, constitute a significant 

economic impact. That conclusion is 

based on our analysis of 1,245 small 

entities available on the Compustat 

database. We found that the average 

revenue of those small entities is $2.07 

million per company. Therefore, on 

average, the estimated $444 compliance 

expense will constitute approximately 

.02% of a small entity’s revenues, based 

on the Compustat data.

E. Agency Action To Minimize Effect on 

Small Entities 

The Regulatory Flexibility Act directs 

the Commission to consider significant 

alternatives that would accomplish the 

stated objective, while minimizing any 

significant adverse impact on small 

entities. In connection with the 

proposals, we considered the following 

alternatives: 

(a) The establishment of differing 

compliance or reporting requirements or 

timetables that take into account the 

resources available to small entities; 

(b) The clarification, consolidation, or 

simplification of disclosure for small 

entities; 

(c) The use of performance rather than 

design standards; and 

(d) An exemption for small entities 

from coverage under the proposals. 

The Commission has considered a 

variety of reforms to achieve its 

regulatory objectives. As one possible 

approach, we considered requiring 

companies to include the security 

holder’s proxy card and materials in the 

company mailing. Alternatively, we 

considered amending or reinterpreting 

Exchange Act Rule 14a–8(i)(8) 219 to 

allow security holder proposals 

requesting access to the company’s 

proxy card for the purpose of making 

nominations. We believe that the 

current disclosure requirements are the 

most cost-effective approach to address 

specific concerns related to small 

entities because the proposals build on 

existing disclosure requirements.

We have drafted the new disclosure 

rules to require clear and 

straightforward disclosure of a 

company’s policies and procedures 

regarding the nomination of directors 

and security holder communications. 

Separate disclosure requirements for 

small entities would not yield the 

disclosure that we believe to be 

necessary to achieve our objectives. In 

addition, the informational needs of 

investors in small entities are typically 

as great as the needs of investors in 

larger companies. Therefore, it did not 

seem appropriate to develop separate 

requirements for small entities 

involving clarification, consolidation, or 

simplification of the disclosure. 

We have used design rather than 

performance standards in connection 

with the new requirements for two 

reasons. First, based on our past 

experience, we believe the disclosure 

will be more useful to investors if there 

are enumerated informational 

requirements. The mandated disclosures 

may be likely to result in a more focused 

and comprehensive discussion. Second, 

more precise disclosure requirements 

will promote more consistent disclosure 

among a cross-section of public 

companies because they will have 

greater certainty as to the required 

disclosure. In addition, more precise 

disclosure requirements will improve 

our ability to enforce the rules. 

Therefore, adding to the disclosure 

requirements in existing proxy and 

information statements appears to be the 

most effective method of eliciting the 

disclosure.

VII. Statutory Basis and Text of 

Amendments 

The amendments are being adopted 

pursuant to sections 2,220 6,221 7,222

10,223 and 19 224 of the Securities Act, 

sections 3(b),225 12, 13,226 14, 15, 

23(a)227 and 36 228 of the Exchange Act, 

as amended, and sections 8,229 20(a),230

30,231 31,232 and 38 233 of the 

Investment Company Act, as amended.

List of Subjects 

17 CFR Parts 228, 229, 240 and 249

Reporting and recordkeeping 

requirements, Securities. 

17 CFR Parts 270 and 274

Investment companies, Reporting and 

recordkeeping requirements, Securities.

Text of the Amendments

■ In accordance with the foregoing, the 

Securities and Exchange Commission 

amends Title 17, chapter II of the Code 

of Federal Regulations as follows:

PART 228—INTEGRATED 

DISCLOSURE SYSTEM FOR SMALL 

BUSINESS ISSUERS

■ 1. The general authority citation for 

Part 228 is revised to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 

77sss, 78l, 78m, 78n, 78o, 78u–5, 78w, 78ll, 

78mm, 80a–8, 80a–29, 80a–30, 80a–37, 80b–

11, and 7201 et seq.; and 18 U.S.C. 1350.

* * * * *

■ 2. Amend § 228.401 by adding 

paragraph (g) to read as follows:

§ 228.401 (Item 401) Directors, Executive 

Officers, Promoters and Control Persons.

* * * * *

(g) Describe any material changes to 

the procedures by which security 

holders may recommend nominees to 

the registrant’s board of directors, where 

those changes were implemented after 

the registrant last provided disclosure in 

response to the requirements of Item 

7(d)(2)(ii)(G) of Schedule 14A 

(§ 240.14a–101), or this Item.

Instructions to paragraph (g) of Item 401:

1. The disclosure required in paragraph (g) 

need only be provided in a registrant’s 

quarterly or annual reports. 

2. For purposes of paragraph (g), adoption 

of procedures by which security holders may 

recommend nominees to the registrant’s 

board of directors, where the registrant’s 

most recent disclosure in response to the 

requirements of Item 7(d)(2)(ii)(G) of 

Schedule 14A (§ 240.14a–101), or this Item, 

indicated that the registrant did not have in 

place such procedures, will constitute a 

material change.

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69221

PART 229—STANDARD 

INSTRUCTIONS FOR FILING FORMS 

UNDER SECURITIES ACT OF 1933, 

SECURITIES EXCHANGE ACT OF 1934 

AND ENERGY POLICY AND 

CONVERVATIONS ACT OF 1975—

REGULATION S–K

■ 3. The general authority citation for 

Part 229 is revised to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 

77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26), 

77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 

77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 

78o, 78u–5, 78w, 78ll, 78mm, 79e, 79j, 79n, 

79t, 80a–8, 80a–9, 80a–20, 80a–29, 80a–30, 

80a–31(c), 80a–37, 80a–38(a), 80a–39, 80b–

11, and 7201 et seq.; and 18 U.S.C. 1350, 

unless otherwise noted.

* * * * *

■ 4. Amend § 229.401 by adding 

paragraph (j) to read as follows:

§ 229.401 (Item 401) Directors, executive 

officers, promoters and control persons.

* * * * *

(j) Describe any material changes to 

the procedures by which security 

holders may recommend nominees to 

the registrant’s board of directors, where 

those changes were implemented after 

the registrant last provided disclosure in 

response to the requirements of Item 

7(d)(2)(ii)(G) of Schedule 14A 

(§ 240.14a–101), or this Item.

Instructions to paragraph (j) of Item 401:

1. The disclosure required in paragraph (j) 

need only be provided in a registrant’s 

quarterly or annual reports. 

2. For purposes of paragraph (j), adoption 

of procedures by which security holders may 

recommend nominees to the registrant’s 

board of directors, where the registrant’s 

most recent disclosure in response to the 

requirements of Item 7(d)(2)(ii)(G) of 

Schedule 14A (§ 240.14a–101), or this Item, 

indicated that the registrant did not have in 

place such procedures, will constitute a 

material change.

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934

■ 5. The general authority citation for 

part 240 is revised to read as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 79q, 

79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 

80b–4, 80b–11, and 7201 et seq.; and 18 

U.S.C. 1350, unless otherwise noted.

* * * * *

■ 6. Amend § 240.14a–101 by:

■ a. Revising paragraph (d)(2) of Item 7;

■ b. Revising the reference ‘‘paragraphs 

(a) through (d)(2)’’ in paragraph (e) of 

Item 7 to read ‘‘paragraphs (a) through 

(d)(1) and (d)(2)(ii)(D)’’;

■ c. Adding paragraph (h) to Item 7;

■ d. Revising the reference ‘‘paragraphs 

(d)(3), (f) and (g)’’ in the introductory text 

of paragraph (b) of Item 22 to read 

‘‘paragraphs (d)(2) (other than 

(d)(2)(ii)(D)), (d)(3), (f), (g), and (h)’’;

■ e. Revising the last sentence of the 

introductory text of paragraph (b)(14) of 

Item 22;

■ f. Revising paragraph (b)(14)(ii) of Item 

22;

■ g. Removing the semi-colon and ‘‘and’’

from the end of paragraph (b)(14)(iii) of 

Item 22 and in their place adding a 

period;

■ h. Removing paragraph (b)(14)(iv) of 

Item 22; and

■ i. Adding an Instruction directly after 

paragraph (b)(14)(iii) of Item 22. 

The additions and revisions read as 

follows:

§ 240.14a–101 Schedule 14A. Information 

required in proxy statement.

Schedule 14A Information

* * * * *

Item 7. Directors and executive officers.

* * * * *

(d)(1) * * *

(2)(i) If the registrant does not have a 

standing nominating committee or committee 

performing similar functions, state the basis 

for the view of the board of directors that it 

is appropriate for the registrant not to have 

such a committee and identify each director 

who participates in the consideration of 

director nominees; 

(ii) Provide the following information 

regarding the registrant’s director nomination 

process: 

(A) If the nominating committee has a 

charter, disclose whether a current copy of 

the charter is available to security holders on 

the registrant’s Web site. If the nominating 

committee has a charter and a current copy 

of the charter is available to security holders 

on the registrant’s Web site, provide the 

registrant’s Web site address. If the 

nominating committee has a charter and a 

current copy of the charter is not available to 

security holders on the registrant’s Web site, 

include a copy of the charter as an appendix 

to the registrant’s proxy statement at least 

once every three fiscal years. If a current 

copy of the charter is not available to security 

holders on the registrant’s Web site, and is 

not included as an appendix to the 

registrant’s proxy statement, identify in 

which of the prior fiscal years the charter was 

so included in satisfaction of this 

requirement; 

(B) If the nominating committee does not 

have a charter, state that fact; 

(C) If the registrant is a listed issuer (as 

defined in § 240.10A–3) whose securities are 

listed on a national securities exchange 

registered pursuant to section 6(a) of the Act 

(15 U.S.C. 78f(a)) or in an automated interdealer quotation system of a national 

securities association registered pursuant to 

section 15A(a) of the Act (15 U.S.C. 78o–3(a)) 

that has independence requirements for 

nominating committee members, disclose 

whether the members of the nominating 

committee are independent, as independence 

for nominating committee members is 

defined in the listing standards applicable to 

the listed issuer; 

(D) If the registrant is not a listed issuer (as 

defined in § 240.10A–3), disclose whether 

each of the members of the nominating 

committee is independent. In determining 

whether a member is independent, the 

registrant must use a definition of 

independence of a national securities 

exchange registered pursuant to section 6(a) 

of the Act (15 U.S.C. 78f(a)) or a national 

securities association registered pursuant to 

section 15A(a) of the Act (15 U.S.C. 78o–3(a)) 

that has been approved by the Commission 

(as that definition may be modified or 

supplemented), and state which definition it 

used. Whatever definition the registrant 

chooses, it must apply that definition 

consistently to all members of the 

nominating committee and use the 

independence standards of the same national 

securities exchange or national securities 

association for purposes of nominating 

committee disclosure under this requirement 

and audit committee disclosure required 

under paragraph (d)(3)(iv) of Item 7 of 

Schedule 14A (§ 240.14a–101); 

(E) If the nominating committee has a 

policy with regard to the consideration of any 

director candidates recommended by security 

holders, provide a description of the material 

elements of that policy, which shall include, 

but need not be limited to, a statement as to 

whether the committee will consider director 

candidates recommended by security 

holders; 

(F) If the nominating committee does not 

have a policy with regard to the 

consideration of any director candidates 

recommended by security holders, state that 

fact and state the basis for the view of the 

board of directors that it is appropriate for 

the registrant not to have such a policy; 

(G) If the nominating committee will 

consider candidates recommended by 

security holders, describe the procedures to 

be followed by security holders in submitting 

such recommendations; 

(H) Describe any specific, minimum 

qualifications that the nominating committee 

believes must be met by a nominating 

committee-recommended nominee for a 

position on the registrant’s board of directors, 

and describe any specific qualities or skills 

that the nominating committee believes are 

necessary for one or more of the registrant’s 

directors to possess; 

(I) Describe the nominating committee’s 

process for identifying and evaluating 

nominees for director, including nominees 

recommended by security holders, and any 

differences in the manner in which the 

nominating committee evaluates nominees 

for director based on whether the nominee is 

recommended by a security holder; 

(J) With regard to each nominee approved 

by the nominating committee for inclusion 

on the registrant’s proxy card (other than 

nominees who are executive officers or who 

are directors standing for re-election), state 

which one or more of the following 

categories of persons or entities 

recommended that nominee: security holder, 

69222 Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 

non-management director, chief executive 

officer, other executive officer, third-party 

search firm, or other, specified source. With 

regard to each such nominee approved by a 

nominating committee of an investment 

company, state which one or more of the 

following additional categories of persons or 

entities recommended that nominee: security 

holder, director, chief executive officer, other 

executive officer, or employee of the 

investment company’s investment adviser, 

principal underwriter, or any affiliated 

person of the investment adviser or principal 

underwriter; 

(K) If the registrant pays a fee to any third 

party or parties to identify or evaluate or 

assist in identifying or evaluating potential 

nominees, disclose the function performed 

by each such third party; and 

(L) If the registrant’s nominating committee 

received, by a date not later than the 120th 

calendar day before the date of the 

registrant’s proxy statement released to 

security holders in connection with the 

previous year’s annual meeting, a 

recommended nominee from a security 

holder that beneficially owned more than 5% 

of the registrant’s voting common stock for at 

least one year as of the date the 

recommendation was made, or from a group 

of security holders that beneficially owned, 

in the aggregate, more than 5% of the 

registrant’s voting common stock, with each 

of the securities used to calculate that 

ownership held for at least one year as of the 

date the recommendation was made, identify 

the candidate and the security holder or 

security holder group that recommended the 

candidate and disclose whether the 

nominating committee chose to nominate the 

candidate, provided, however, that no such 

identification or disclosure is required 

without the written consent of both the 

security holder or security holder group and 

the candidate to be so identified. 

Instructions to paragraph (d)(2)(ii)(L):

1. For purposes of Item 7(d)(2)(ii)(L), the 

percentage of securities held by a nominating 

security holder may be determined using 

information set forth in the registrant’s most 

recent quarterly or annual report, and any 

current report subsequent thereto, filed with 

the Commission pursuant to this Act (or, in 

the case of a registrant that is an investment 

company registered under the Investment 

Company Act of 1940, the registrant’s most 

recent report on Form N–CSR (§§ 249.331 

and 274.128)), unless the party relying on 

such report knows or has reason to believe 

that the information contained therein is 

inaccurate. 

2. For purposes of the registrant’s 

obligation to provide the disclosure specified 

in Item 7(d)(2)(ii)(L), where the date of the 

annual meeting has been changed by more 

than 30 days from the date of the previous 

year’s meeting, the obligation under that Item 

will arise where the registrant receives the 

security holder recommendation a reasonable 

time before the registrant begins to print and 

mail its proxy materials.

3. For purposes of Item 7(d)(2)(ii)(L), the 

percentage of securities held by a 

recommending security holder, as well as the 

holding period of those securities, may be 

determined by the registrant if the security 

holder is the registered holder of the 

securities. If the security holder is not the 

registered owner of the securities, he or she 

can submit one of the following to the 

registrant to evidence the required ownership 

percentage and holding period: 

A. A written statement from the ‘‘record’’

holder of the securities (usually a broker or 

bank) verifying that, at the time the security 

holder made the recommendation, he or she 

had held the required securities for at least 

one year; or 

B. If the security holder has filed a 

Schedule 13D (§ 240.13d–101), Schedule 13G 

(§ 240.13d–102), Form 3 (§ 249.103), Form 4 

(§ 249.104), and/or Form 5 (§ 249.105), or 

amendments to those documents or updated 

forms, reflecting ownership of the securities 

as of or before the date of the 

recommendation, a copy of the schedule and/

or form, and any subsequent amendments 

reporting a change in ownership level, as 

well as a written statement that the security 

holder continuously held the securities for 

the one-year period as of the date of the 

recommendation. 

4. For purposes of the registrant’s 

obligation to provide the disclosure specified 

in Item 7(d)(2)(ii)(L), the security holder or 

group must have provided to the registrant, 

at the time of the recommendation, the 

written consent of all parties to be identified 

and, where the security holder or group 

members are not registered holders, proof 

that the security holder or group satisfied the 

required ownership percentage and holding 

period as of the date of the recommendation. 

Instruction to paragraph (d)(2)(ii): For 

purposes of Item 7(d)(2)(ii), the term 

‘‘nominating committee’’ refers not only to 

nominating committees and committees 

performing similar functions, but also to 

groups of directors fulfilling the role of a 

nominating committee, including the entire 

board of directors.

* * * * *

(h)(1) State whether or not the registrant’s 

board of directors provides a process for 

security holders to send communications to 

the board of directors and, if the registrant 

does not have such a process for security 

holders to send communications to the board 

of directors, state the basis for the view of the 

board of directors that it is appropriate for 

the registrant not to have such a process; 

(2) If the registrant has a process for 

security holders to send communications to 

the board of directors: 

(i) Describe the manner in which security 

holders can send communications to the 

board and, if applicable, to specified 

individual directors; and 

(ii) If all security holder communications 

are not sent directly to board members, 

describe the registrant’s process for 

determining which communications will be 

relayed to board members; and 

Instruction to paragraph (h)(2)(ii): For 

purposes of the disclosure required by this 

paragraph, a registrant’s process for 

collecting and organizing security holder 

communications, as well as similar or related 

activities, need not be disclosed provided 

that the registrant’s process is approved by a 

majority of the independent directors or, in 

the case of a registrant that is an investment 

company, a majority of the directors who are 

not ‘‘interested persons’’ of the investment 

company as defined in section 2(a)(19) of the 

Investment Company Act of 1940 (15 U.S.C. 

80a–2(a)(19)). 

(3) Describe the registrant’s policy, if any, 

with regard to board members’ attendance at 

annual meetings and state the number of 

board members who attended the prior year’s 

annual meeting. 

Instruction to paragraphs (h)(2) and (h)(3):

In lieu of providing the information required 

by paragraphs (h)(2) and (h)(3) in the proxy 

statement, the registrant may instead provide 

the registrant’s Website address where such 

information appears. 

Instructions to paragraph (h):

1. For purposes of this paragraph, 

communications from an officer or director of 

the registrant will not be viewed as ‘‘security 

holder communications.’’ Communications 

from an employee or agent of the registrant 

will be viewed as ‘‘security holder 

communications’’ for purposes of this 

paragraph only if those communications are 

made solely in such employee’s or agent’s 

capacity as a security holder. 

2. For purposes of this paragraph, security 

holder proposals submitted pursuant to 

§ 240.14a–8, and communications made in 

connection with such proposals, will not be 

viewed as ‘‘security holder 

communications.’’

* * * * *

Item 22. Information required in 

investment company proxy statement.

* * * * *

(b) * * *

(14) * * * Identify the other standing 

committees of the Fund’s board of directors, 

and provide the following information about 

each committee, including any separately 

designated audit committee and any 

nominating committee:

* * * * *

(ii) The members of the committee and, in 

the case of a nominating committee, whether 

or not the members of the committee are 

‘‘interested persons’’ of the Fund as defined 

in section 2(a)(19) of the Investment 

Company Act of 1940 (15 U.S.C. 80a–

2(a)(19)); and

* * * * *

Instruction to paragraph (b)(14): For 

purposes of Item 22(b)(14), the term 

‘‘nominating committee’’ refers not only to 

nominating committees and committees 

performing similar functions, but also to 

groups of directors fulfilling the role of a 

nominating committee, including the entire 

board of directors.

* * * * *

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934

■ 7. The general authority citation for 

Part 249 is revised to read as follows:

Authority: 15 U.S.C. 78a et seq. and 7201 

et seq.; and 18 U.S.C. 1350, unless otherwise 

noted.

* * * * *

Federal Register / Vol. 68, No. 238 / Thursday, December 11, 2003 / Rules and Regulations 69223

■ 8. Amend Form 10–Q (referenced in 

§ 249.308a), Item 5 of Part II—Other 

Information by:

■ a. Designating the existing text in Item 

5 as paragraph (a);

■ b. Removing the period at the end of 

newly designated paragraph (a) and in its 

place adding ‘‘; and’’; and

■ c. Adding paragraph (b).

The addition reads as follows:

Note: The text of Form 10–Q does not, and 

this amendment will not, appear in the Code 

of Federal Regulations.

Form 10–Q

* * * * *

Part II—Other Information

* * * * *

Item 5. Other Information.

* * * * *

(b) Furnish the information required by 

Item 401(j) of Regulation S–K (§ 229.401).

* * * * *

■ 9. Amend Form 10–QSB (referenced in 

§ 249.308b), Item 5 to Part II—Other 

Information by:

■ a. Designating the existing text in Item 

5 as paragraph (a);

■ b. Removing the period at the end of 

newly designated paragraph (a) and in its 

place adding ‘‘; and’’; and

■ c. Adding paragraph (b).

The addition reads as follows:

Note: The text of Form 10–QSB does not, 

and this amendment will not, appear in the 

Code of Federal Regulations.

Form 10–QSB

* * * * *

Part II—Other Information

* * * * *

Item 5. Other Information.

* * * * *

(b) Furnish the information required by 

Item 401(g) of Regulation S–B (§ 228.401).

* * * * *

PART 270—RULES AND 

REGULATIONS, INVESTMENT 

COMPANY ACT OF 1940

■ 10. The authority citation for part 270 

continues to read in part as follows:

Authority: 15 U.S.C. 80a–1 et seq., 80a–

34(d), 80a–37, and 80a–39, unless otherwise 

noted.

* * * * *

■ 11. Amend § 270.30a–2 by:

■ a. Revising the reference ‘‘Item 

10(a)(2)’’ in paragraph (a) to read ‘‘Item 

11(a)(2)’’; and

■ b. Revising the reference ‘‘Item 10(b)’’

in paragraph (b) to read ‘‘Item 11(b).’’

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934

PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940

■ 12. The authority citation for Part 274 

continues to read, in part, as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 

80a–26, and 80a–29, unless otherwise noted.

* * * * *

■ 13. Amend Form N–CSR (referenced in 

§§ 249.331 and 274.128) by:

■ a. Revising the reference ‘‘10(a)(1)’’ in 

General Instruction D and paragraphs (c) 

and (f)(1) of Item 2 to read ‘‘11(a)(1)’’;

■ b. Redesignating Items 9 and 10 as 

Items 10 and 11;

■ c. Adding new Item 9; and

■ d. Revising the reference ‘‘Item 10’’ in 

the heading of the Instruction to newly 

redesignated Item 11 to read ‘‘Item 11.’’

The addition reads as follows:

Note: The text of Form N–CSR does not, 

and these amendments will not, appear in 

the Code of Federal Regulations.

Form N–CSR

* * * * *

Item 9. Submission of Matters to a Vote of 

Security Holders. 

Describe any material changes to the 

procedures by which shareholders may 

recommend nominees to the registrant’s 

board of directors, where those changes were 

implemented after the registrant last 

provided disclosure in response to the 

requirements of Item 7(d)(2)(ii)(G) of 

Schedule 14A (17 CFR 240.14a–101), or this 

Item. 

Instruction: For purposes of this Item, 

adoption of procedures by which 

shareholders may recommend nominees to 

the registrant’s board of directors, where the 

registrant’s most recent disclosure in 

response to the requirements of Item 

7(d)(2)(ii)(G) of Schedule 14A (17 CFR 

240.14a–101), or this Item, indicated that the 

registrant did not have in place such 

procedures, will constitute a material change.

* * * * *

By the Commission.

Dated: November 24, 2003. 

Jill M. Peterson, 

Assistant Secretary.

[FR Doc. 03–29723 Filed 11–26–03; 8:45 am]

Editorial Note: Federal Register Rule 

document 03–29723 was originally published 

at page 66991 in the issue of Friday, 

November 28, 2003. In that publication text 

was left out. The corrected document is 

republished in its entirety.

[FR Doc. R3–29723 Filed 12–10–03; 8:45 am] 

BILLING CODE 1505–01–P