Investment Management
AUGUST 2003
SEC Proposes New Disclosure Regarding Nominating
Committee Functions and Communications Between
Security Holders and Boards of Directors
On Thursday, August 14, 2003, the Securities and
Exchange Commission published a rule proposal
(“Proposed Rule”) in the Federal Register that would
require new proxy disclosure regarding nominating
committee functions and communications between
security holders and boards of directors. The
Proposed Rule would apply to proxy statements of
both operating companies and investment
companies.1 The comment period ends September
15, 2003.
NOMINATING COMMITTEES
Companies currently must disclose through their
proxy materials, when electing directors, whether
they have a nominating committee and, if so, whether
the committee considers nominees recommended by
security holders and how such recommendations may
be submitted. The Proposed Rule would
substantially expand this disclosure, although it
would not mandate any particular action by a
company or its board of directors.
In addition, under the Proposed Rule, the following
disclosure must be made in the proxy statement
regarding the Committee function:
The Proposed Rule would also require proxy
statement disclosure regarding whether there is a
process for security holder communication to the
board of directors.
The following is a brief overview of the Proposed
Rule. A copy of the Proposed Rule may be found at
http://www.sec.gov/rules/proposed/34-48301.htm.
The Proposed Rule would require disclosure in the
proxy statement as to whether or not the company
has a standing nominating committee or a committee
performing similar functions (each, a “Committee”)
and if not, 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 Committee and
the identity of each director who participates in the
consideration of director nominees.
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Whether or not the Committee has a charter,
and if it does, a description of the material
terms of the charter and where the charter is
available;
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Whether or not each of the members of the
Committee is independent; 2
n
Whether or not the Committee has a policy
regarding the consideration of any director
candidates recommended by security holders
and if it does, a description of the material
elements of that policy;
Investment companies are currently required to comply with Schedule 14A under the Exchange Act of 1934 when
soliciting proxies, including proxies relating to the election of directors.
1
2
In the case of investment companies, the Proposed Rules would require disclosure as to whether or not the members
of the investment company’s Committee are “interested persons” as defined in Section 2(a)(19) of the Investment
Company Act of 1940.
Kirkpatrick & Lockhart LLP
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If the Committee will consider director
candidates recommended by security holders, a
description of the procedures to be followed by
security holders in submitting
recommendations;
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Descriptions of the following:
o
o
o
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n
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than 3% of the company’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, and if the Committee chooses not to
nominate that recommended nominee:
Any specific minimum qualifications that
the Committee believes must be met by a
Committee-recommended nominee for a
position on the board;
Any specific qualities or skills that the
Committee believes are necessary for one or
more of the company’s directors to possess;
and
Any specific standards for the overall
structure and composition of the company’s
board;
Descriptions of the 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 Committee evaluates
nominees for director based on whether or not
the nominee is recommended by a security
holder;
The specific source, such as the name of an
executive officer, director, or other individual,
of each nominee (other than nominees who are
executive officers or directors standing for reelection) approved by the Committee for
inclusion as a nominee;
If the company pays a fee to any third party or
parties to identify or assist in identifying or
evaluating potential nominees, disclosure of
the function performed by each such third
party; and
If the Committee receives a recommended
nominee from a security holder who
beneficially owned more than 3% 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
who beneficially owned, in the aggregate, more
o
The name or names of the security holders
who recommended the candidate; and
o
The specific reasons for the Committee’s
determination not to include the candidate
as a nominee.
SECURITY HOLDER COMMUNICATION
WITH THE BOARD
The Proposed Rule would also impose a new
requirement for proxy statement disclosure of
whether the company provides a process for security
holders to send communications to the board, and if
not, the specific basis for the board’s determination
that it is appropriate for the company not to have
such a process.
In addition, if the company has a process for security
holders to send communications to the board, the
Proposed Rule would require disclosure of the
following:
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The manner in which security holders can send
communications to the board;
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The identity of those board members to whom
security holders can send communications;
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If all security holder communication is not sent
directly to the board, the process for
determining which communication is
forwarded to the directors, as well as which
department or group within the company is
responsible for making the determination; and
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Any material action taken by the board during
the preceding fiscal year as a result of
communication from security holders.
DIANE E. AMBLER
202.778.9886
dambler@kl.com
ANDRÁS P. TELEKI
202.778.9477
ateleki@kl.com
Kirkpatrick & Lockhart LLP
2
Kirkpatrick & Lockhart LLP maintains one of the leading investment management practices in the United States,
with more than 60 lawyers devoting all or a substantial portion of their practice to this area and its related
specialties. The American Lawyer Corporate Scorecard, published in April 2003, lists K&L as a primary legal
counsel to the investment companies, board members or advisory firms for 15 of the 25 largest mutual fund
complexes. No law firm was mentioned more frequently in the Scorecard.
We represent mutual funds, closed-end funds, insurance companies, broker-dealers, investment advisers, retirement
plans, banks and trust companies, hedge funds, offshore funds and other financial institutions. We also regularly
represent mutual fund distributors, independent directors of investment companies and service providers to the
investment management industry. In addition, we frequently serve as outside counsel to industry associations on a
variety of projects, including legislative and policy matters.
We work with clients in connection with the full range of investment company industry products and activities,
including all types of open-end and closed-end investment companies, funds of hedge funds, variable insurance
products, private and offshore investment funds and unit investment trusts. Our practice involves all aspects of the
investment company business.
We invite you to contact one of the members of the practice, listed below, for additional assistance. You may also
visit our website at www.kl.com for more information, or send general inquiries via email to
investmentmanagement@kl.com.
BOSTON
Michael S. Caccese
Philip J. Fina
Mark P. Goshko
Thomas Hickey III
Nicholas S. Hodge
617.261.3133
617.261.3156
617.261.3163
617.261.3208
617.261.3210
mcaccese@kl.com
pfina@kl.com
mgoshko@kl.com
thickey@kl.com
nhodge@kl.com
LOS ANGELES
William P. Wade
310.552.5071
wwade@kl.com
NEW YORK
Beth R. Kramer
Richard D. Marshall
Robert M. McLaughlin
Loren Schechter
212.536.4024
212.536.3941
212.536.3924
212.536.4008
bkramer@kl.com
rmarshall@kl.com
rmclaughlin@kl.com
lschechter@kl.com
SAN FRANCISCO
Eilleen M. Clavere
Jonathan D. Joseph
David Mishel
Mark D. Perlow
Richard M. Phillips
415.249.1047
415.249.1012
415.249.1015
415.249.1070
415.249.1010
eclavere@kl.com
jjoseph@kl.com
dmishel@kl.com
mperlow@kl.com
rphillips@kl.com
WASHINGTON
Clifford J. Alexander
Diane E. Ambler
Catherine S. Bardsley
Arthur J. Brown
Arthur C. Delibert
Robert C. Hacker
Benjamin J. Haskin
Kathy Kresch Ingber
Rebecca H. Laird
Thomas M. Leahey
Cary J. Meer
R. Charles Miller
Dean E. Miller
R. Darrell Mounts
C. Dirk Peterson
Alan C. Porter
Theodore L. Press
Robert H. Rosenblum
William A. Schmidt
Lynn A. Schweinfurth
Donald W. Smith
Robert A. Wittie
Robert J. Zutz
202.778.9068
202.778.9886
202.778.9289
202.778.9046
202.778.9042
202.778.9016
202.778.9369
202.778.9015
202.778.9038
202.778.9082
202.778.9107
202.778.9372
202.778.9371
202.778.9298
202.778.9324
202.778.9186
202.778.9025
202.778.9464
202.778.9373
202.778.9876
202.778.9079
202.778.9066
202.778.9059
calexander@kl.com
dambler@kl.com
cbardsley@kl.com
abrown@kl.com
adelibert@kl.com
rhacker@kl.com
bhaskin@kl.com
kingber@kl.com
rlaird@kl.com
tleahey@kl.com
cmeer@kl.com
cmiller@kl.com
dmiller@kl.com
dmounts@kl.com
dpeterson@kl.com
aporter@kl.com
tpress@kl.com
rrosenblum@kl.com
william.schmidt@kl.com
lschweinfurth@kl.com
dsmith@kl.com
rwittie@kl.com
rzutz@kl.com
Kirkpatrick & Lockhart LLP
Challenge us.
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SAN FRANCISCO
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WASHINGTON
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This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein
should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
© 2003 KIRKPATRICK & LOCKHART LLP.
ALL RIGHTS RESERVED.