commenter also suggested that dissidents in a traditional proxy contest
be precluded from including Rule 14a-11 nominees on their proxy card.
Acknowledging the possibility of collusion, shareholder confusion, and
change in control, one commenter expressed support for reasonable
limitations on a Rule 14a-11 nomination if there is a simultaneous
proxy contest.\119\
---------------------------------------------------------------------------

    \117\ See letters from BRT; Verizon.
    \118\ See letter from ABA.
    \119\ See letter from P. Neuhauser.
---------------------------------------------------------------------------

    While we appreciate commenters' concerns, we do not believe that
our efforts to facilitate the exercise of shareholders' State law right
to nominate directors should be limited by the activities of other
persons engaged in a traditional proxy contest. We also believe that,
as described below, Rule 14a-11 and the related rule amendments,
together with our staff review process, can adequately address concerns
about investor confusion and potential abuse of the process by those
seeking a change in control. Therefore, we are adopting the rule as
proposed, without an exception for companies that are subject to or
anticipate being subject to a concurrent proxy contest. In this regard,
we agree with those commenters that opposed including a limitation
because to do so would be inconsistent with the goals of our
rulemaking, which are not limited by the nomination activities of other
persons. In addition, we note that there is no current limitation in
the Federal proxy rules on the number of proxy contests that can take
place simultaneously and we do not believe that there is sufficient
reason to provide such a limitation in this circumstance. Companies and
shareholders have been able, to date, to successfully navigate multiple
slates on those occasions when more than one person undertakes a proxy
contest. In addition, we believe that a company can address commenters'
concerns through disclosure in its proxy materials. For example, the
company may disclose in its proxy statement potential effects of
electing non-management nominees (whether those nominees are included
in the company's materials or in other soliciting persons' materials),
such as the potential to cause the company to violate law or the
independence requirements of the exchange listing standards, and allow
shareholders to consider that information when making their voting
decisions. Similarly, we believe that appropriate disclosure in the
company's proxy materials, as well as the dissident's proxy materials,
could serve to potentially avoid shareholder confusion about how many
nominees a shareholder may vote for and how to mark the card.
    We also have not revised Rule 14a-11, as suggested by commenters,
to count nominees put forth by persons outside of Rule 14a-11 for
purposes of the calculation of the maximum number of nominees required
to be included in the company's proxy materials pursuant to Rule 14a-
11. We believe that to do so would, like an outright exception, be
inconsistent with the goal of our rulemaking--to change the proxy
process to better reflect the rights shareholders would have at a
shareholder meeting, which are not limited by the nomination activities
of other persons.
    While we are not adopting an exception from the rule for companies
that are, or anticipate being, subject to a concurrent proxy contest,
we do understand concerns about the possibility of confusion and abuse
in this area absent clear guidance.\120\ Accordingly, we have made
clear in our discussion, in Section II.B.10. below, that a nominating
shareholder or group relying on new Rule 14a-2(b)(7) or (8) to engage
in an exempt solicitation to form a nominating shareholder group or in
connection with a nomination included in the company's proxy materials
pursuant to Rule 14a-11 would lose the exemption if they engage in a
non-Rule 14a-11 solicitation for directors or another person's
solicitation with regard to the election of directors. In addition, we
are adopting an instruction to Rule 14a-11 \121\ to make clear that, in
order to rely on Rule 14a-11 to have a nominee or nominees included in
a company's proxy materials, a nominating shareholder or group or any
member of the nominating shareholder or group may not be a member of
any other group with persons engaged in solicitations or other
nominating activities in connection with the subject election of
directors; may not separately conduct a solicitation in connection with
the subject election of directors other than a Rule 14a-2(b)(8) exempt
solicitation in relation to those nominees it has nominated pursuant to
Rule 14a-11 or for or against the company's nominees; and may not act
as a participant in another person's solicitation in connection with
the subject election of directors.
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    \120\ See, e.g., letters from ABA; Seven Law Firms.
    \121\ See Instruction to Rule 14a-11(b).
---------------------------------------------------------------------------

3. Which Companies Are Subject to Rule 14a-11
a. General
    In this section, we discuss which companies will be subject to new
Rule 14a-11, including the rule's application to investment companies,
controlled companies, ``debt-only'' companies, voluntary registrants,
and smaller reporting companies.
    New Rule 14a-11 will apply to companies that are subject to the
Exchange Act proxy rules, including

investment companies registered under Section 8 of the Investment
Company Act of 1940.\122\ The rule also will apply to controlled
companies and those companies that choose to voluntarily register a
class of securities under Section 12(g). Smaller reporting companies
will be subject to the rule, but on a delayed basis. Consistent with
the Proposal, we have excepted from the rule's application companies
that are subject to the proxy rules solely because they have a class of
debt registered under Section 12 of the Exchange Act. In addition,
foreign private issuers are exempt from the Commission's proxy rules
with respect to solicitations of their shareholders, so the rule will
not apply to these issuers.\123\
---------------------------------------------------------------------------

    \122\ 15 U.S.C. 80a et seq. Registered investment companies
currently are required to comply with the proxy rules under the
Exchange Act when soliciting proxies, including proxies relating to
the election of directors. See Investment Company Act Rule 20a-1 [17
CFR 270.20a-1] (requiring registered investment companies to comply
with regulations adopted pursuant to Section 14(a) of the Exchange
Act 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).
    \123\ Exchange Act Rule 3a12-3 [17 CFR 240.3a12-3] exempts
securities of certain foreign issuers from Section 14(a) of the
Exchange Act.
---------------------------------------------------------------------------

b. Investment Companies
    Under the Proposal, Rule 14a-11 would apply to registered
investment companies. We sought comment on whether Rule 14a-11 should
apply to these companies.\124\
---------------------------------------------------------------------------

    \124\ The Commission has considered the impact of this issue on
investment companies on prior occasions. See, e.g., 2003 Proposal.
---------------------------------------------------------------------------

    Several commenters supported including registered investment
companies in the rule.\125\ Commenters noted that investment company
boards, like other boards, must be responsive and accountable to their
shareholders; \126\ that some investment company boards are ``too
cozy'' with the company's investment adviser; \127\ and that the
proposed rule will add competition to the board nomination process,
which may create some traction in board negotiations with the company's
investment adviser.\128\ A number of commenters did not believe that
the rule would result in unreasonable cost or an excessive number of
contested elections.\129\ One commenter suggested that investment
company shareholders would use the rule infrequently and then only if
the investment company is experiencing a real governance or other
failure.\130\
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    \125\ See, e.g., letters from AFSCME; CalPERS; CII; Mutual Fund
Directors Forum (``MFDF''); Julian Reid (``J. Reid''); Jennifer S.
Taub (``J. Taub''); TIAA-CREF.
    \126\ See letter from MFDF.
    \127\ Letter from J. Reid.
    \128\ See letter from J. Taub.
    \129\ See, e.g., letters from AFSCME; J. Taub.
    \130\ See letter from J. Taub.
---------------------------------------------------------------------------

    On the other hand, a number of commenters, largely from the
investment company industry, opposed the inclusion of registered
investment companies in the rule.\131\ Commenters asserted that the
Commission had not presented any empirical evidence of governance
problems with respect to investment companies that would support
extending the rule to them and that the trend for investment company
boards is to have strong governance practices.\132\ Commenters also
argued that investment companies are subject to a unique regulatory
regime under the Investment Company Act that provides additional
protection to investors, such as the requirement to obtain shareholder
approval to engage in certain transactions or activities,\133\ and that
investment companies and their boards have very different functions
from non-investment companies and their boards.\134\ One commenter
noted that the Proposal would be inappropriate and not particularly
useful for most open-end management investment companies, because open-
end management investment company shares are held on a short-term basis
and open-end management investment companies are not typically required
to hold annual meetings under State law.\135\
---------------------------------------------------------------------------

    \131\ See, e.g., letters from ABA; American Bar Association
(September 18, 2009) (``ABA II''); Barclays; ICI; Investment Company
Institute and Independent Directors Counsel (``ICI/IDC'');
Independent Directors Council (``IDC''); S&C T. Rowe Price
Associates, Inc. (``T. Rowe Price''); The Vanguard Group, Inc.
(``Vanguard''). One commenter opposed the inclusion of business
development companies in the rule for the same reasons that it
opposed including registered investment companies in the rule. See
letter from ICI. Business development companies are a category of
closed-end investment companies 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]. We are including
business development companies in the rule for the same reasons
provided below with respect to registered investment companies.
    \132\ See letters from ICI; ICI/IDC; IDC; T. Rowe Price; S&C.
Among other things, commenters noted that 90% of fund complexes have
boards that are 75% or more comprised of independent directors and
the vast majority of fund boards have an independent director
serving as chairman or as lead independent director. See letters
from ICI/IDC; IDC. Two letters also cited a 1992 report by
Commission staff that observed that the governance model embodied by
the Investment Company Act is sound and should be retained with
limited modifications. See letters from ICI; ICI/IDC.
    \133\ One joint comment letter noted that the Investment Company
Act requires investment companies to obtain shareholder approval of
contracts with the company's investment adviser and distributor and
to change from an open-end, closed-end, or diversified company; to
borrow money; to issue senior securities; to underwrite securities
issued by other persons; to purchase or sell real estate or
commodities; to make loans to other persons, except in accordance
with the policy in the company's registration statement; to change
the nature of its business so as to cease to be an investment
company; or to deviate from a stated policy with respect to
concentration of investments in an industry or industries, from any
investment policy which is changeable only by shareholder vote, or
from any stated fundamental policy. The commenters also noted that
investment company shareholders have the right to bring an action
against the company's investment adviser for breach of fiduciary
duty with respect to receipt of compensation. See letter from ICI/
IDC.
    \134\ See letters from ABA; Barclays; ICI; ICI/IDC; IDC; T. Rowe
Price; S&C Vanguard. However, we note that, in response to the 2003
Proposal, ABA and ICI indicated that there were no reasons to treat
investment companies differently from non-investment companies. See
letter from Investment Company Institute (December 22, 2003) on File
No. S7-19-03; letter from American Bar Association (January 7, 2004)
on File No. S7-19-03.
    \135\ See letter from ABA. See also letter from S&C (urging that
at a minimum Rule 14a-11 should not apply to open-end investment
companies, ``which do not generally hold regular meetings and for
which compliance would be particularly burdensome''). An open-end
management investment company is an investment company, other than a
unit investment trust or face-amount certificate company, that
offers for sale or has outstanding any redeemable security of which
it is the issuer. See Sections 4 and 5(a)(1) of the Investment
Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)].
---------------------------------------------------------------------------

    Commenters also were concerned about the costs of the Proposal,
particularly for fund complexes that utilize a ``unitary'' board
consisting of one group of individuals who serve on the board of every
fund in the complex, or ``cluster'' boards consisting of two or more
groups of individuals that each oversee a different set of funds in the
complex.\136\ Commenters noted that if a

shareholder-nominated director were to be elected to a unitary or
cluster board, the investment companies in the fund complex would incur
significant additional administrative costs and burdens (e.g., the
shareholder-nominated director would have to leave during discussions
that pertain to the other investment companies in the complex, board
materials would have to be customized for the director, and the fund
complex would face challenges in preserving the status of privileged
information) and the benefits of the unitary or cluster board that
result in the increased effectiveness of such boards would be
lost.\137\ One commenter also stated that if a shareholder nomination
causes an election to be ``contested'' under rules of the New York
Stock Exchange, brokers would not be able to vote client shares on a
discretionary basis, making it difficult and more expensive for
investment companies to achieve a quorum for a meeting.\138\
---------------------------------------------------------------------------

    \136\ See letters from ABA; ICI; ICI/IDC; IDC; MFDF; S&C T.
Rowe Price; Vanguard. Commenters noted that a recent survey of fund
complexes representing 93% of the industry's total net assets
indicated that 83% of fund complexes had a unitary board structure
and 17% of fund complexes had a cluster board structure. See letters
from ICI/IDC; IDC. However, one comment letter included materials
noting that, while the average number of registered investment
companies per fund complex is five, the median number of registered
investment companies per fund complex is one. See letter from ICI/
IDC. In cases where the fund complex consists of only one company,
commenters' concerns about the loss of the unitary board would not
be present.
    Commenters also noted that among fund complexes that use unitary
or cluster boards there are other aspects of board organization that
vary from complex to complex. See letter from ICI/IDC. For example,
one board may oversee all of the open-end funds in the complex and
all but three of its closed-end funds, while a second board oversees
the other closed-end funds. Alternatively, one board may oversee the
open-end and closed-end fixed income funds advised by one particular
adviser, while a second board oversees the open-end and closed-end
equity and international funds advised by a second adviser, etc.
However, the commenters did not note any specific issues that would
be raised by the use of different structures among fund complexes
using unitary or cluster boards if the Proposal were to be adopted.
    \137\ Commenters noted that unitary and cluster boards can
result in enhanced board efficiency and greater board knowledge of
the many aspects of fund operations that are complex-wide in nature.
See, e.g., letters from ABA; ICI; ICI/IDC; IDC; MFDF; S&C T. Rowe
Price; Vanguard. For instance, commenters noted that many of the
same regulatory, valuation, compliance, disclosure, accounting, and
business issues may arise for all of the funds that the unitary or
cluster board oversees and that consistency among funds in the
complex greatly enhances both board efficiency and shareholder
protection. See, e.g., letter from ICI/IDC. One joint comment letter
also suggested that ``[b]ecause they are negotiating on behalf of
multiple funds, unitary and cluster boards have a greater ability
than single fund boards to negotiate with management over matters
such as fund expenses; the level of resources devoted to technology;
and compliance and audit functions.'' See id.
    \138\ See letter from S&C.
---------------------------------------------------------------------------

    After considering these comments, we agree with the commenters who
believe that Rule 14a-11 should apply to registered investment
companies, as was proposed. The purpose of Rule 14a-11 is to facilitate
the exercise of shareholders' traditional State law rights to nominate
and elect directors to boards of directors and thereby enable
shareholders to participate more meaningfully in the nomination and
election of directors at the companies in which they invest. These
State law rights apply to the shareholders of investment companies,
including each investment company in a fund complex, regardless of
whether or not the fund complex utilizes a unitary or cluster
board.\139\ Moreover, although investment companies and their boards
may have different functions from non-investment companies and their
boards, investment company boards, like the boards of other companies,
have significant responsibilities in protecting shareholder interests,
such as the approval of advisory contracts and fees.\140\ Therefore, we
are not persuaded that exempting registered investment companies would
be consistent with our goals. We also do not believe that the
regulatory protections offered by the Investment Company Act (including
requirements to obtain shareholder approval to engage in certain
transactions and activities), the trend asserted by commenters for
investment companies to have good governance practices, or the fact
that open-end management investment companies are not required by State
law to hold annual meetings serves to decrease the importance of the
rights that are granted to shareholders under State law.\141\ In fact,
the separate regulatory regime to which investment companies are
subject emphasizes the importance of investment company directors in
dealing with the conflicts of interest created by the external
management structure of most investment companies.\142\ We also note
that some commenters have raised governance concerns regarding the
relationship between boards and investment advisers.\143\
---------------------------------------------------------------------------

    \139\ We note that ``unitary'' or ``cluster'' boards are not
required by State law.
    \140\ See Jones v. Harris Assocs., 130 S.Ct. 1418, 1423, 176 L.
Ed. 2d 265, 273-274 (2010). See also S. Rep. No. 91-184; 91st
Congress 1st Session; S. 2224 (1969) (``This section is not intended
to authorize a court to substitute its business judgment for that of
the mutual fund's board of directors in the area of management fees.
* * * The directors of a mutual fund, like directors of any other
corporation will continue to have * * * overall fiduciary duties as
directors for the supervision of all of the affairs of the fund.'');
letter from ICI/IDC (``The Investment Company Act of 1940 and the
rules under it impose significant responsibilities on fund directors
in addition to the duties of loyalty and care to which directors are
typically bound under State law.'').
    \141\ In the 1992 report cited by two comment letters in
footnote 132 above, the Commission staff also observed that the
Investment Company Act ``establishes a comprehensive regulatory
framework predicated upon principles of corporate democracy'' and
was intended to provide an additional safeguard for investors by
according ``voting powers to investment company shareholders beyond
those required by State corporate law.'' Division of Investment
Management, U.S. Securities and Exchange Commission, Protecting
Investors: A Half Century of Investment Company Regulation, at pp.
251-52, 260 (May 1992) (emphasis added).
    \142\ See, e.g., Commission Guidance Regarding the Duties and
Responsibilities of Investment Company Boards of Directors with
Respect to Investment Adviser Portfolio Trading Practices, Release
No. IC-28345 (July 30, 2008) [73 FR 45646, 45649 (August 6, 2008)]
(``In addition to statutory and common law obligations, fund
directors are also subject to specific fiduciary obligations
relating to the special nature of funds under the Investment Company
Act. * * * A fund board has the responsibility, among other duties,
to monitor the conflicts of interest facing the fund's investment
adviser and determine how the conflicts should be managed to help
ensure that the fund is being operated in the best interest of the
fund's shareholders.'') (footnotes omitted); Interpretive Matters
Concerning Independent Directors of Investment Companies, Release
No. IC-24083 (October 14, 1999) [64 FR 59877, 59877-78 (November 3,
1999)] (listing various duties and responsibilities of the
independent directors of an investment company and noting that
``Each of these duties and responsibilities is vital to the proper
functioning of fund operations and, ultimately, the protection of
fund shareholders.'').
    \143\ See letters from J. Reid; J. Taub.
---------------------------------------------------------------------------

    We are cognizant of the fact that the rule will impose some costs
on investment companies. We believe, however, that policy goals and the
benefits of the rule justify these costs. As discussed above, we
believe that facilitating the exercise of traditional State law rights
to nominate and elect directors is as much of a concern for investment
company shareholders as it is for shareholders of non-investment
companies. We continue to believe that parts of the proxy process may
frustrate the exercise of shareholders' rights to nominate and elect
directors arising under State law, and thereby fail to provide fair
corporate suffrage. The new rules seek to facilitate shareholders'
effective exercise of their rights under State law to both nominate and
elect directors. In this regard, we note that commenters have stated
that interest in mutual fund governance has increased in recent
years.\144\
---------------------------------------------------------------------------

    \144\ See letters from AFSCME; J. Taub.
---------------------------------------------------------------------------

    We recognize that it may be more costly for investment companies to
achieve a quorum at shareholder meetings if a shareholder director
nomination causes an election to be ``contested'' under rules of the
New York Stock Exchange and brokers cannot vote customer shares on a
discretionary basis. Furthermore, for fund complexes that utilize
unitary or cluster boards, the election of a shareholder director
nominee may, in some circumstances, increase costs and potentially
decrease the efficiency of the boards.
    We note, however, that these costs are associated with the State
law right to nominate and elect directors, and are not costs incurred
for including shareholder nominees in the company's proxy statement.
With respect to fund complexes utilizing unitary or cluster boards, we
note that any increased costs and decreased efficiency of an investment
company's board as a result of the fund complex no longer having a
unitary or cluster board would occur, if at all, only in the event that
investment company shareholders elect the shareholder nominee.
Investment companies may include information in the proxy materials
making investors aware of the company's views on the perceived benefits
of a unitary or cluster board and the potential for increased

costs and decreased efficiency if the shareholder nominees are elected.
Moreover, we note that a fund complex can take steps to minimize the
cost and burden of a shareholder-nominated director by, for example,
entering into a confidentiality agreement in order to preserve the
status of confidential information regarding the fund complex.\145\
---------------------------------------------------------------------------

    \145\ Two commenters argued in a joint comment letter that there
are a number of practical and legal issues that prevent
confidentiality agreements from being sufficient to address the
issues that arise when a shareholder-nominated director is elected
to the board of an investment company in a fund complex using a
unitary or cluster board. See letter from ICI/IDC. We emphasize that
entering into a confidentiality agreement is only one method of
preserving the confidentiality of information revealed in board
meetings attended by the shareholder-nominated director. The fund
complex can have separate meetings and board materials for the board
with the shareholder-nominated director, especially if particularly
sensitive legal or other matters will be discussed or to protect
attorney-client privilege. For a further discussion of this comment,
see Section IV.E.1.
---------------------------------------------------------------------------

    We believe that the costs imposed on investment companies will be
less significant than the costs imposed on other companies for three
reasons. First, to the extent investment companies do not hold annual
meetings as permitted by State law, investment company shareholders
will have less opportunity to use the rule.\146\ Second, even when
investment company shareholders do have the opportunity to use the
rule, the disproportionately large and generally passive retail
shareholder base of investment companies will probably mean that the
rule will be used less frequently than will be the case with non-
investment companies.\147\ Third, because we have sought to limit the
cost and burden on all companies, including investment companies, by
limiting use of Rule 14a-11 to shareholders who have maintained
significant continuous holdings in the company for at least three
years, and because many funds, such as money market funds, are held by
shareholders on a short-term basis,\148\ we believe that the situations
where shareholders will meet the eligibility requirements will be
limited.
---------------------------------------------------------------------------

    \146\ See letters from ABA; MFDF.
    \147\ See letter from J. Taub.
    \148\ See letter from ABA.
---------------------------------------------------------------------------

    Although commenters argued that the election of a shareholder-
nominated director to a unitary or cluster board will necessarily
result in decreased effectiveness of the board, we disagree. In this
regard, one commenter argued that competition in the board nomination
process may improve efficiency by providing additional leverage for
boards in negotiations with the investment adviser.\149\ In any event,
we believe that investment company shareholders should have a more
meaningful opportunity to exercise their traditional State law rights
to elect a non-unitary or non-cluster board if they so choose.
---------------------------------------------------------------------------

    \149\ See letter from J. Taub.
---------------------------------------------------------------------------

c. Controlled Companies
    As proposed, Rule 14a-11 would allow eligible shareholders to
submit director nominees at all companies subject to the Exchange Act
proxy rules other than companies that are subject to the proxy rules
solely because they have a class of debt registered under Section 12 of
the Exchange Act. We sought comment on whether Rule 14a-11 also should
provide an exception for controlled companies.
    In response to our request for comment, one commenter argued that
controlled companies should not be excluded from Rule 14a-11,\150\
acknowledging that while there may be no mathematical possibility of a
shareholder nominee submitted pursuant to Rule 14a-11 being elected at
a controlled company, in a controlled company there could be an even
greater need for non-controlling shareholders to express their
concerns. The commenter noted that a large--even if not a majority--
vote by non-controlling shareholders could send an important message to
the board. Other commenters noted that controlled companies are
commonly structured with dual classes of stock, which allows
shareholders of the non-controlling class of stock to elect a set
number of directors that is less than the full board.\151\ Another
commenter noted that dual-class companies with supervoting stock often
can benefit the most from having the interests of non-controlling
shareholders better represented in the boardroom.\152\ This commenter
encouraged the Commission to include some means by which minority
shareholders of dual-class and parent-controlled companies could
meaningfully avail themselves of the rule, even if a different set of
eligibility or disclosure requirements is determined to be more
appropriate in these cases.
---------------------------------------------------------------------------

    \150\ See letter from P. Neuhauser.
    \151\ See letters from ABA; Duane Morris; Media General, Inc.
(``Media General''); The New York Times Company (``New York
Times'').
    \152\ See letter from T. Rowe Price.
---------------------------------------------------------------------------

    On the other hand, several commenters argued that controlled
companies should be excluded from Rule 14a-11.\153\ According to these
commenters, providing shareholders the ability to include nominees in
company proxy materials in this context would be ineffective and
needlessly disruptive and costly because there is no prospect that a
shareholder nominee would be elected.\154\ Two of these commenters also
noted that subjecting these companies to Rule 14a-11 would possibly
cause investor confusion.\155\ These commenters remarked that
shareholders would continue to have other avenues to express their
views to the company, such as through the Rule 14a-8 process.
Commenters who supported an exclusion for controlled companies
suggested that for purposes of the exclusion the definition of
``controlled company'' should be similar to the definition used by the
national securities exchanges in connection with director independence
requirements.\156\ Some commenters suggested that if Rule 14a-11
excluded controlled companies using the same definition as the national
securities exchanges in connection with director independence
requirements, then the rule should contain an instruction providing
that whether more than 50% of the voting power of a company is held by
an individual, group, or other company would be determined by any
schedules filed under Section 13(d) of the Exchange Act.\157\
---------------------------------------------------------------------------

    \153\ See letters from ABA; AllianceBernstein; Cleary; Seven Law
Firms; Duane Morris LLP (``Duane Morris''); Sidley Austin.
    \154\ See letters from ABA; AllianceBernstein; Cleary; Seven Law
Firms; Duane Morris; Sidley Austin.
    \155\ See letters from ABA; Seven Law Firms.
    \156\ See letters from ABA; AllianceBernstein; Cleary; Seven Law
Firms; Duane Morris; Sidley Austin. See, e.g., New York Stock
Exchange Rule 303A.00 and NASDAQ Stock Market LLC Rule 5615(c)
(defining ``controlled companies'' as a company of which more than
50% of the voting power for the election of directors is held by an
individual, group or another company).
    \157\ See letters from AllianceBernstein; Duane Morris.
---------------------------------------------------------------------------

    After considering the issue further, we are persuaded that Rule
14a-11 should apply to controlled companies, as we proposed. As
commenters noted, it is common for companies structured with dual
classes of stock to allow shareholders of the non-controlling class to
elect a set number of directors that is less than the full board. In
that situation, it may be useful for non-controlling shareholders to be
able to include shareholder nominations in company proxy materials with
respect to the directors the non-controlling class is entitled to
elect. In addition, though applying Rule 14a-11 to controlled companies
would be unlikely to result in the election of shareholder-nominated
directors in cases in which these are not directors elected exclusively
by the non-controlling shareholders, we appreciate that shareholders at
controlled companies

may have other reasons for nominating candidates for director.\158\
---------------------------------------------------------------------------

    \158\ We note that controlled companies are not excluded from
Rule 14a-8 despite the same improbability that a shareholder
proposal will receive the approval of the majority of the votes cast
at a controlled company. Shareholders may use Rule 14a-8 to submit a
proposal to the board even though controlling shareholders may vote
against the proposal and prevent it from being approved.
---------------------------------------------------------------------------

d. ``Debt Only'' Companies
    As proposed, Rule 14a-11 would allow eligible shareholders to
submit director nominees at all companies subject to the Exchange Act
proxy rules other than companies that are subject to the proxy rules
solely because they have a class of debt securities registered under
Section 12 of the Exchange Act. We sought comment on whether this
exclusion from Rule 14a-11 was appropriate.
    Commenters that specifically addressed this question agreed with
our approach and stated generally that Rule 14a-11 should not apply to
companies subject to the Federal proxy rules solely because they have a
class of debt securities registered under Exchange Act Section 12.\159\
Most of these commenters stated that the ability to submit nominees for
inclusion in a company's proxy materials should be limited to holders
of equity securities registered under the Exchange Act.\160\ One
commenter warned that subjecting companies with a registered class of
debt securities to Rule 14a-11 would deter private companies from
accessing the public debt market and, in any case, private companies
typically have shareholder agreements and other arrangements in place
that address the election of directors.\161\
---------------------------------------------------------------------------

    \159\ See letters from ABA; CII; Cleary; S&C.
    \160\ See letters from ABA; Cleary; S&C.
    \161\ See letter from S&C. This commenter also stated that Rule
14a-11 should not apply to those reporting companies who voluntarily
continue to file Exchange Act reports while they are not required to
do so under Exchange Act Section 13(a) or Section 15(d). It argued
that these voluntary filers should be treated the same as companies
with Exchange Act reporting obligations relating solely to debt
securities. We note that Rule 14a-11 will not apply to a company
filing Exchange Act reports when neither Exchange Act Section 13(a)
nor Section 15(d) requires that it do so (for example, to comply
with a covenant contained in an indenture relating to outstanding
debt securities).
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    We are adopting this exclusion as proposed. We note that this
approach was supported by investor and corporate commenters. We believe
that Rule 14a-11 should not apply to companies that are subject to the
Federal proxy rules solely because they have a class of debt securities
registered under Section 12 of the Exchange Act.
e. Application of Exchange Act Rule 14a-11 to Companies That
Voluntarily Register a Class of Securities Under Exchange Act Section
12(g)
    In the Proposing Release, we noted that Rule 14a-11 would apply to
companies that have voluntarily registered a class of equity securities
pursuant to Exchange Act Section 12(g); however, we solicited comment
on whether Rule 14a-11 should apply to these companies.\162\ We also
asked whether nominating shareholders of these companies should be
subject to the same ownership eligibility thresholds as those
shareholders of companies that were required to register a class of
equity securities pursuant to Section 12, or whether we should adjust
any other aspects of Rule 14a-11 for these companies.
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    \162\ A company must register a class of equity securities under
Section 12(g) if, on the last day of its fiscal year, the class of
equity securities is held by 500 or more record holders and the
company has total assets of more than $10 million. An issuer may,
however, register any class of equity securities under Section 12(g)
even if these thresholds have not been met. Reporting after this
form of voluntary registration is distinguished from a company that
continues to file Exchange Act reports when neither Exchange Act
Section 13(a) nor Section 15(d) requires that it do so. See footnote
161 above.
---------------------------------------------------------------------------

    Three commenters stated that Rule 14a-11 should apply to companies
that voluntarily register a class of equity securities under Exchange
Act Section 12(g).\163\ One explained that investors in securities
registered under Section 12 should be provided some assurance that the
company is subject to various rules safeguarding their interests, such
as the proposed rule, and expressed concern that less than uniform
application could lead to investor confusion.\164\ One commenter stated
that nominating shareholders of voluntarily-registered companies should
be subject to the same ownership thresholds as shareholders of
companies that were required to register a class of securities under
Exchange Act Section 12.\165\
---------------------------------------------------------------------------

    \163\ See letters from ABA; CII; USPE.
    \164\ See letter from USPE.
    \165\ See letter from ABA.
---------------------------------------------------------------------------

    We agree with the commenters that Rule 14a-11 generally should
apply to those companies that choose to avail themselves of the
obligations and benefits of Section 12(g) registration. As Section 12
registrants, these companies are subject to the full panoply of the
Exchange Act, including Section 14(a), and their shareholders receive
proxy materials in connection with annual and special meetings of
shareholders in accordance with the proxy rules. We believe disparate
treatment among these Section 12 registrants is unwarranted and
shareholders of these companies should enjoy the same protections
generally available to shareholders of other companies with a class of
equity securities registered pursuant to Section 12. Accordingly, Rule
14a-11 will apply to companies that have voluntarily registered a class
of equity securities pursuant to Exchange Act Section 12(g), with the
same ownership eligibility thresholds as those of companies that were
required to register a class of equity securities pursuant to Section
12.
f. Smaller Reporting Companies
    Under the Proposal, Rule 14a-11 would apply to all companies
subject to the proxy rules, other than companies that are subject to
the proxy rules solely because they have a class of debt registered
under Exchange Act Section 12. Thus, Rule 14a-11, as proposed, would
apply to smaller reporting companies. We sought comment in the Proposal
on what effect, if any, the application of Rule 14a-11 would have on
any particular group of companies, and in particular, smaller reporting
companies.\166\
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    \166\ The Commission has considered this issue on prior
occasions. See, e.g., 2003 Proposal; Division of Corporation
Finance, Briefing Paper for Roundtable Discussion on the Proposed
Security Holder Director Nominations Rules, February 25, 2004,
available at http://www.sec.gov/spotlight/dir-nominations/dir-nom-
briefing.htm.
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    A number of commenters stated generally that Rule 14a-11 should not
apply to small businesses.\167\ One commenter argued that Rule 14a-11
should be limited to accelerated filers and that there should possibly
be a transition period where the rule was only applicable to large
accelerated filers.\168\ That commenter believed that

smaller companies would have trouble recruiting directors because the
pool of qualified directors is already small for smaller companies, and
directors would not want to risk the exposure to a proxy contest.
Another commenter argued that we should implement Rule 14a-11 on a
pilot basis for large accelerated filers for two years and then revisit
whether application of the rule would be appropriate for smaller
companies.\169\
---------------------------------------------------------------------------

    \167\ See letters from ABA; American Mailing; All Cast; Always N
Bloom; American Carpets; J. Arquilla; B. Armburst; Artistic Land
Designs; C. Atkins; Book Celler; K. Bostwick; Brighter Day Painting;
Colletti; Commercial Concepts; Complete Home Inspection; D.
Courtney; S. Crawford; Crespin; Don's; T. Ebreo; M. Eng; eWareness;
Evans; Fluharty; Flutterby; Fortuna Italian Restaurant; Future Form;
Glaspell; C. Gregory; Healthcare Practice; B. Henderson; S. Henning;
J. Herren; A. Iriarte; J. Jones; Juz Kidz; Kernan; LMS Wine; T.
Luna; Mansfield Children's Center; D. McDonald; Meister; Merchants
Terminal; Middendorf; Mingo; Moore Brothers; Mouton; D. Mozack; Ms.
Dee; G. Napolitano; NK; H. Olson; PESC; Pioneer Heating & Air
Conditioning; RC; RTW; D. Sapp; SBB; SGIA; P. Sicilia; Slycers
Sandwich Shop; Southern Services; Steele Group; Sylvron;
Theragenics; E. Tremaine; Wagner; Wagner Industries; Wellness; West
End; Y.M.; J. Young.
    \168\ See letter from ABA. A large accelerated filer is an
issuer that, as of the end of its fiscal year, had an aggregate
worldwide market value of voting and non-voting common equity held
by its non-affiliates of $700 million or more, as of the last
business day of the issuer's most recently completed second fiscal
quarter; has been subject to the reporting requirements of Section
13(a) or 15(d) of the Exchange Act for at least 12 calendar months;
has filed at least one annual report pursuant to Section 13(a) or
15(d) of the Act; and is not eligible to use the requirements for
smaller reporting companies for its annual and quarterly reports.
See Exchange Act Rule 12b-2(2).
    \169\ See letter from Theragenics. See also letter from Alston &
Bird, recommending that we consider adopting a phase-in approach,
whereby companies would be permitted to follow a phase-in schedule
for mandatory compliance based on their size, similar to the
Commission's rules regarding internal controls reporting and XBRL.
See Management's Report on Internal Control Over Financial Reporting
and Certification of Disclosure in Exchange Act Periodic Reports,
Release No. 33-8238; 34-47968 [69 FR 9722] (June 5, 2003) and
Interactive Data to Improve Financial Reporting, Release No. 33-
9002; 34-59324 [74 FR 6776] (Jan. 30, 2009).
---------------------------------------------------------------------------

    Other commenters stated that smaller reporting companies should not
be excluded from the application of Rule 14a-11.\170\ One commenter
agreed with the Commission that exempting small entities would be
inconsistent with the stated goals of the Proposal and the costs and
burden for such entities would be minimal.\171\ Other commenters
believed that small companies are ``just as likely'' to have poorly
functioning boards as their larger counterparts.\172\ Another commenter
argued that Rule 14a-11 would not impose a material burden on any
company subject to the proxy rules because companies already have to
distribute proxy cards and it would not be an imposition if they were
required to add additional nominees to those cards.\173\
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    \170\ See letters from AFSCME; CII; D. Nappier.
    \171\ See letter from CII.
    \172\ See letters from AFSCME; D. Nappier.
    \173\ See letter from USPE.
---------------------------------------------------------------------------

    In the recently enacted Dodd-Frank Act, Congress confirmed our
authority to require inclusion of shareholder nominees for director in
company proxy materials.\174\ In addition, in Section 971(c) of the
Dodd-Frank Act Congress specifically provided the Commission with the
authority to exempt an issuer or class of issuers from requirements
adopted for the inclusion of shareholder director nominations in
company proxy materials. In doing so, this provision instructs the
Commission to take into account whether such requirement for the
inclusion of shareholder nominees for director in company proxy
materials disproportionately burdens small issuers.\175\
---------------------------------------------------------------------------

    \174\ Dodd-Frank Act Sec. Sec.  971(a) and (b).
    \175\ Dodd-Frank Act Sec.  971(c). A comment letter on July 28,
2010 from the Society of Corporate Secretaries & Governance
Professionals invoked this new legislation in support of a request
to re-open the period for comment on the Proposal as it relates to
small companies. As noted, we did specifically request comment in
the Proposal on the rule's effect on smaller reporting companies,
and we received and have considered numerous comments on this topic.
Accordingly, we believe we have substantially achieved the objective
stated in that letter, namely to identify and evaluate any ``unique
and significant challenges that access to the proxy will create for
small and mid-sized companies.'' Moreover, our determination to
delay implementation of Rule 14a-11 in respect of smaller companies
will further allow us to evaluate the implementation of Rule 14a-11
by larger companies and provide us with the additional opportunity
to consider whether adjustments to the rule would be appropriate for
smaller reporting companies.
---------------------------------------------------------------------------

    After considering the comments, amended Section 14(a), and Section
971(c) of the Dodd-Frank Act, we continue to believe that Rule 14a-11
should apply regardless of company size, as was proposed. As noted
above, the purpose of Rule 14a-11 is to facilitate the exercise of
shareholders' traditional State law rights to nominate and elect
directors to company boards of directors and thereby enable
shareholders to participate more meaningfully in the nomination and
election of directors at the companies in which they invest. We are not
persuaded that exempting smaller reporting companies would be
consistent with these goals. As stated above, we expect the rule
changes will further investor protection by facilitating shareholder
rights to nominate and elect directors and providing shareholders a
greater voice in the governance of the companies in which they invest.
We believe shareholders of smaller reporting companies should be
afforded these same protections.
    Nonetheless, we recognize that smaller reporting companies may have
had less experience with existing forms of shareholder involvement in
the proxy process (e.g., Rule 14a-8 proposals), and thus may have less
developed infrastructures for managing these matters. We believe that a
delayed effective date for smaller reporting companies should allow
those companies to observe how the rule operates for other companies
and should allow them to better prepare for implementation of the
rules. We also believe that delayed implementation for these companies
will allow us to evaluate the implementation of Rule 14a-11 by larger
companies and provide us with the additional opportunity to consider
whether adjustments to the rule would be appropriate for smaller
reporting companies before the rule becomes applicable to them.
Therefore, we are delaying implementation for companies that meet the
definition of smaller reporting company in Exchange Act Rule 12b-
2.\176\ New Rule 14a-11 will become effective for these companies three
years after the date that the rules become effective for companies
other than smaller reporting companies. In addition, as discussed
below, in an effort to limit the cost and burden on all companies
subject to the rule, including smaller reporting companies, we have
limited use of Rule 14a-11 to nominations by shareholders who have
maintained significant continuous holdings in the company for an
extended period of time. As discussed further below, we have extended
the required holding period to at least three years at the time the
notice of nomination is filed with the Commission and transmitted to
the company. In addition, we have made modifications to the ownership
threshold that, in combination with the three-year holding period, we
believe should facilitate shareholders' ability to exercise their State
law rights to nominate and elect directors without unduly burdening
companies, including smaller reporting companies. We proposed a tiered
ownership threshold that included a 5% ownership threshold for non-
accelerated filers; however, we are adopting a 3% ownership threshold
for all companies subject to the rule. In adopting the uniform 3%
ownership threshold, we carefully considered, among other factors, the
potential that

the rule would have a disproportionate impact on small issuers. Despite
identifying that concern in the Proposal, however, the comments we
received did not substantiate that concern, and comments from companies
overwhelmingly supported uniform ownership thresholds for all public
companies. Moreover, the data we examined did not indicate any
substantial difference in share ownership concentrations between large
accelerated filers and non-accelerated filers. Thus, we expect that the
eligibility requirements will help achieve the stated objectives of the
rule without disproportionately burdening any particular group of
companies.
---------------------------------------------------------------------------

    \176\ See Exchange Act Rule 12b-2. A smaller reporting company
is defined as ``an issuer that is not an investment company, an
asset-backed issuer, or a majority-owned subsidiary of a parent that
is not a smaller reporting company and that: had a public float of
less than $75 million as of the last business day of its most
recently completed second fiscal quarter, computed by multiplying
the aggregate worldwide number of shares of its voting and non-
voting common equity held by non-affiliates by the price at which
the common equity was last sold, or the average of the bid and asked
prices of common equity, in the principal market for the common
equity; or in the case of an initial registration statement under
the Securities Act or Exchange Act for shares of its common equity,
had a public float of less than $75 million as of a date within 30
days of the date of the filing of the registration statement,
computed by multiplying the aggregate worldwide number of such
shares held by non-affiliates before the registration plus, in the
case of a Securities Act registration statement, the number of such
shares included in the registration statement by the estimated
public offering price of the shares; or in the case of an issuer
whose public float as calculated under paragraph (1) or (2) of this
definition was zero, had annual revenues of less than $50 million
during the most recently completed fiscal year for which audited
financial statements are available.'' Whether or not an issuer is a
smaller reporting company is determined on an annual basis.
---------------------------------------------------------------------------

4. Who Can Use Exchange Act Rule 14a-11
a. General
    In an effort to facilitate fair corporate suffrage, we could have
proposed and adopted a rule pursuant to which the ability to use Rule
14a-11 would be conditioned solely on whether the shareholder lawfully
could nominate a director, and not include any ownership thresholds or
holding period. However, we believe it is appropriate to take a
measured approach that balances competing interests and seeks to ensure
investor protection. Accordingly, Rule 14a-11 will be available to
shareholders that hold a significant, long-term interest in the
company, have provided timely notice of their intent to include a
nominee in the company's proxy materials, and provide specified
disclosure concerning themselves and their nominees. More specifically,
as described in detail in this section, a company will be required to
include a shareholder nominee or nominees if the nominating shareholder
or group: \177\
---------------------------------------------------------------------------

    \177\ In some circumstances, the requirements of Rule 14a-11
applicable to a nominating shareholder group must be satisfied by
each member of the group individually (e.g., no member of the group
may be holding the company's securities with the purpose of, or with
the effect, of changing control of the company or to gain more than
the maximum number of nominees that the registrant would be required
to include under the rule). See also Section II.B.4.
---------------------------------------------------------------------------

     Holds, as of the date of the shareholder notice on
Schedule 14N,\178\ either individually or in the aggregate,\179\ at
least 3% of the voting power (calculated as required under the rule)
\180\ of the company's securities that are entitled to be voted on the
election of directors at the annual meeting of shareholders (or, in
lieu of such an annual meeting, a special meeting of shareholders) or
on a written consent in lieu of a meeting; \181\
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    \178\ Throughout this release, when we say ``as of the date of
the notice on Schedule 14N'' we mean the date the nominating
shareholder or group files the Schedule 14N with the Commission and
transmits the notice to the company. See Section II.B.8.c.ii. below
for a further discussion of the timing requirements for filing a
Schedule 14N.
    \179\ The manner in which a nominating shareholder or group
would establish its eligibility to use new Rule 14a-11 is discussed
further in Section II.B.4.b.iv. below.
    \180\ See Instruction 3 to new Rule 14a-11(b)(1).
    \181\ See new Rule 14a-11(b)(1).
---------------------------------------------------------------------------

     Has held the qualifying amount of securities used to
satisfy the minimum ownership threshold continuously for at least three
years as of the date of the shareholder notice on Schedule 14N (in the
case of a shareholder group, each member of the group must have held
the amount of securities that are used to satisfy the ownership
threshold continuously for at least three years as of the date of the
shareholder notice on Schedule 14N); \182\
---------------------------------------------------------------------------

    \182\ See new Rule 14a-11(b)(2). The three-year holding period
requirement applies only to the amount of securities that are used
for purposes of determining the ownership threshold.
---------------------------------------------------------------------------

     Continues to hold the required amount of securities used
to satisfy the ownership threshold through the date of the shareholder
meeting; \183\
---------------------------------------------------------------------------

    \183\ See new Rule 14a-11(b)(2).
---------------------------------------------------------------------------

     Is not holding any of the company's securities with the
purpose, or with the effect, of changing control of the company or to
gain a number of seats on the board of directors that exceeds the
maximum number of nominees that the company could be required to
include under Rule 14a-11; \184\
---------------------------------------------------------------------------

    \184\ See new Rule 14a-11(b)(6).
---------------------------------------------------------------------------

     Does not have an agreement with the company regarding the
nomination; \185\
---------------------------------------------------------------------------

    \185\ See new Rule 14a-11(b)(7).
---------------------------------------------------------------------------

     Provides a notice to the company on Schedule 14N, and
files the notice with the Commission,\186\ of the nominating
shareholder's or group's intent to require that the company include
that nominating shareholder's or group's nominee in the company's proxy
materials no earlier than 150 calendar days, and no later than 120
calendar days, before the anniversary of the date that the company
mailed its proxy materials for the prior year's annual meeting; \187\
and
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    \186\ See Section II.B.8. for a discussion of new Schedule 14N
and the disclosures required to be filed. The Schedule 14N may be
filed by an individual shareholder that meets the ownership
threshold, an individual shareholder that is a member of a
nominating shareholder group that is aggregating the individual
members' securities to meet the ownership threshold but is choosing
to file the notice on Schedule 14N individually, or a nominating
shareholder group through their authorized representative, as
provided for in Rule 14n-1(b)(1).
    \187\ The dates would be calculated by determining the release
date disclosed in the previous year's proxy statement, increasing
the year by one, and counting back 150 calendar days and 120
calendar days for the beginning and end of the window period,
respectively. In this regard, we note that the deadline could fall
on a Saturday, Sunday or holiday. In such cases, the deadline should
be treated as the first business day following the Saturday, Sunday
or holiday, similar to the treatment filing deadlines receive under
Exchange Act Rule 0-3. See Instruction 1 to Rule 14a-11(b)(10). If
the company did not hold an annual meeting during the prior year, or
if the date of the meeting has changed by more than 30 days from the
prior year, then the nominating shareholder or group must provide
notice pursuant to new Item 5.08 a reasonable time before the
company mails its proxy materials, as specified by the company in a
Form 8-K filed within four business days after the company
determines the anticipated meeting date. See new Rule 14a-11(b)(10)
and Instruction 2 to that paragraph. See further discussion in
Section II.B.8.c.ii.
---------------------------------------------------------------------------

     Includes the certifications required in the shareholder
notice on Schedule 14N.\188\
---------------------------------------------------------------------------

    \188\ See new Rule 14a-11(b)(11) and Item 8 of new Schedule 14N.
Pursuant to new Schedule 14N, the nominating shareholder or group
would be required to include in its notice to the company a
certification that the nominating shareholder or group satisfies the
requirements in Rule 14a-11.
---------------------------------------------------------------------------

b. Ownership Threshold
    As proposed, a nominating shareholder or group would have been
required to beneficially own 1%, 3%, or 5% of the company's securities
entitled to be voted on the election of directors at the shareholder
meeting, depending on the company's accelerated filer status or, in the
case of registered investment companies, depending on the net assets of
the company. We received significant comment on this topic, which we
discuss further below, and have made alterations to the final rule to
reflect the concerns expressed by commenters.
    As adopted, to rely on Rule 14a-11, a nominating shareholder or
group will be required to hold, as of the date of the shareholder
notice on Schedule 14N, either individually or in the aggregate, at
least 3% of the voting power of the company's securities that are
entitled to be voted on the election of directors at the annual (or a
special meeting in lieu of the annual) meeting of shareholders or on a
written consent in lieu of a meeting. The nominating shareholder or
group or member of a nominating shareholder group will be required to
hold both the power to dispose of and the power to vote the securities,
as discussed below. The nominating shareholder or member of a
nominating shareholder group also will be required to have held the
qualifying amount of securities for at least three years as of the date
of the notice on Schedule 14N, and to hold that amount through the date
of the election of directors. Each aspect of the ownership requirement
is discussed further below.

i. Percentage of Securities
    We proposed tiered ownership thresholds for large accelerated,
accelerated, and non-accelerated filers in an effort to address the
possibility that certain companies could be affected disproportionately
based on their size.\189\ Many commenters criticized the proposed
ownership thresholds or recommended generally higher thresholds.\190\
Of these, most commenters criticized the tiered ownership thresholds
and recommended a uniform ownership threshold generally higher than the
proposed thresholds.\191\ Many of these commenters questioned whether
the data on shareholdings discussed in the Proposal in relation to the
proposed thresholds took into account the fact that shareholders could
aggregate their holdings in order to use Rule 14a-11.\192\ One of these
commenters described formation of a nominating group as ``the most
likely scenario'' to qualify for use of Rule 14a-11,\193\ and another
commenter submitted that with a significant ownership threshold an
``inability to aggregate shareholders to reach the ownership threshold
is unreasonable.'' \194\
---------------------------------------------------------------------------

    \189\ Similarly, we proposed tiered ownership thresholds for
registered investment companies with the tiers based on net assets.
    \190\ See letters from 26 Corporate Secretaries; ABA; Australian
Council of Superannuation Investors (``ACSI''); ADP; Advance Auto
Parts; Aetna; Alaska Air; Alcoa Inc. (``Alcoa''); Allstate; American
Express; Anadarko; Applied Materials; Association of Corporate
Counsel; AT&T Avis Budget; Barclays; Best Buy; J. Blanchard;
Boeing; BorgWarner; BRT; Burlington Northern; R. Burt; Calvert
Group, Ltd. (``Calvert''); Caterpillar; CFA Institute; Chevron; J.
Chico; Committee on Investment of Employee Benefit Assets
(``CIEBA''); CIGNA; Peter Clapman (``P. Clapman''); Cleary; CNH
Global; Comcast; Con Edison; Capital Research and Management Company
(``CRMC''); CSX; Cummins; Darden Restaurants; Davis Polk; Deere;
Dewey; W. Brinkley Dickerson, Jr. (``W. B. Dickerson''); J. Dillon;
DTE Energy; DuPont; Craig Dwight (``C. Dwight''); Eaton; Edison
Electric Institute; Eli Lilly; Emerson Electric; eWareness;
ExxonMobil; FedEx; Financial Services Roundtable; FMC Corp.; FPL
Group; GE; General Mills; A. Goolsby; Home Depot; Honeywell; IBM;
ICI; Intel; ITT; JPMorgan Chase; J. Kilts; Koppers; E.J. Kullman; N.
Lautenbach; Leggett; Lionbridge Technologies, Inc. (``Lionbridge
Technologies''); Lorsch et al.; M. Metz; McDonald's; MeadWestvaco;
J. Miller; Motorola; Norfolk Southern; Northrop Grumman Corporation
(``Northrop''); Office Depot; PepsiCo; Pfizer; P&G Praxair, Inc.
(``Praxair''); Protective; Stephen Lange Ranzini (``S. Ranzini'');
Rosen; Ryder; Sara Lee; S&C Seven Law Firms; Shearman & Sterling;
Sherwin-Williams; SIFMA; Society of Corporate Secretaries; Southern
Company; Tenet; Tesoro; Textron; TI; TIAA-CREF; Tidewater Inc.
(``Tidewater''); Tompkins Financial Corporation (``Tompkins''); G.
Tooker; T. Rowe Price; tw telecom; L. Tyson; UnitedHealth; U.S.
Bancorp; ValueAct Capital; Vanguard; Verizon Communications Inc.
(``Verizon''); Bruno de la Villarmois (``B. Villarmois''); Wachtell;
Wells Fargo; Weyerhaeuser; Xerox.
    \191\ See letters from ACSI; ADP; Advance Auto Parts; Allstate;
American Express; Applied Materials; Association of Corporate
Counsel; AT&T Avis Budget; Barclays; Best Buy; J. Blanchard;
Boeing; BRT; Burlington Northern; R. Burt; Calvert; Caterpillar; CFA
Institute; J. Chico; CIGNA; CNH Global; Comcast; Con Edison; CSX;
Darden Restaurants; Davis Polk; Deere; Dewey; W. B. Dickerson; J.
Dillon; DTE Energy; DuPont; Eaton; Edison Electric Institute; Eli
Lilly; Emerson Electric; ExxonMobil; FedEx; Financial Services
Roundtable; FMC Corp.; FPL Group; General Mills; Home Depot; IBM;
Intel; ITT; JPMorgan Chase; J. Kilts; E.J. Kullman; Lorsch et al.;
McDonald's; M. Metz; Motorola; N. Lautenbach; Office Depot; PepsiCo;
Praxair; Protective; S. Ranzini; Sara Lee; S&C Seven Law Firms;
Shearman & Sterling; Sherwin-Williams; Society of Corporate
Secretaries; Southern Company; Tesoro; Textron; TI; TIAA-CREF;
Tompkins; G. Tooker; T. Rowe Price; tw telecom; L. Tyson;
UnitedHealth; U.S. Bancorp; ValueAct Capital; Vanguard; Verizon;
Weyerhaeuser; Xerox.
    \192\ See letters from ABA; ABA II; BRT; Business Roundtable
(January 19, 2010) (``BRT II''); Cleary; Davis Polk; Honeywell;
SIFMA.
    \193\ Letter from BRT II.
    \194\ Letter from California State Teachers' Retirement System
(Nov. 18, 2009)(``CalSTRS II'').
---------------------------------------------------------------------------

    A few commenters criticized generally the proposed thresholds as
too high and recommended lower thresholds.\195\ One commenter opposed
the tiered ownership thresholds because a number of companies regularly
move from one category of filer to another as the aggregate worldwide
market value of their voting and non-voting common equity changes from
fiscal year to fiscal year, which the commenter believed would lead to
uncertainty under the Commission's tiered approach.\196\ Commenters
from the investment company industry noted that the proposed
eligibility thresholds were based on data for non-investment companies
and were not supported by empirical data analysis for investment
companies.\197\
---------------------------------------------------------------------------

    \195\ See letters from Committee of Concerned Shareholders
(``Concerned Shareholders''); L. Dallas; USPE.
    \196\ See letter from Shearman & Sterling.
    \197\ See, e.g., letters from ICI; S&C T. Rowe Price.
---------------------------------------------------------------------------

    On the other hand, we also received comment generally supporting
the proposed tiered ownership thresholds.\198\ One commenter expressed
general support for the proposed thresholds and stated that the
proposed thresholds would achieve the Commission's and commenter's
shared objective of facilitating the exercise of shareholders'
nomination rights.\199\ Another commenter explained that the thresholds
would ``ensure[ ] that only those long-term shareholders who are
seriously concerned about the governance of portfolio companies will
have a seat at the table.'' \200\
---------------------------------------------------------------------------

    \198\ See letters from AFL-CIO; AFSCME; British Insurers;
CalPERS; CalSTRS; COPERA; CRMC; Florida State Board of
Administration; Glass Lewis; IAM; ICGN; LACERA; Marco Consulting; D.
Nappier; Nathan Cummings Foundation; P. Neuhauser; Norges Bank;
OPERS; Pax World; RiskMetrics; David E. Romine (``D. Romine'');
Shamrock; Sodali; Teamsters; WSIB.
    \199\ See letter from CII.
    \200\ Letter from AFL-CIO.
---------------------------------------------------------------------------

    With regard to an appropriate uniform ownership threshold,
commenters recommended a number of different possibilities, including:
     At least 1% of the company's outstanding shares for an
individual shareholder and 5% for a group of shareholders; \201\
---------------------------------------------------------------------------

    \201\ See letter from Deere.
---------------------------------------------------------------------------

     At least 2% of a company's voting securities; \202\
---------------------------------------------------------------------------

    \202\ See letter from ADP.
---------------------------------------------------------------------------

     3% of a company's shares; \203\
---------------------------------------------------------------------------

    \203\ See letters from CSI; Calvert; CFA Institute; Labour Union
Co-operative Retirement Fund (``LUCRF''); S. Ranzini.
---------------------------------------------------------------------------

     5% of the company's voting securities for an individual
shareholder and 10% for a group of shareholders; \204\
---------------------------------------------------------------------------

    \204\ See letters from Advance Auto Parts; Alaska Air; American
Express; Association of Corporate Counsel; Avis Budget; Best Buy; J.
Blanchard; Boeing; BRT; Burlington Northern; Callaway; CIGNA; CNH
Global; Comcast; Con Edison; Darden Restaurants; Dewey; J. Dillon;
DTE Energy; DuPont; Eaton; Edison Electric Institute; Eli Lilly;
Emerson Electric; ExxonMobil; FedEx; FMC Corp.; FPL Group; General
Mills; Home Depot; Intel Corporation (``Intel''); JPMorgan Chase;
E.J. Kullman; McDonald's; N. Lautenbach; PepsiCo; Praxair;
Protective (recommending this threshold if its proposed 35% withhold
vote triggering event is not included; if included, it recommended a
3% threshold); Sara Lee; Seven Law Firms; Sherwin-Williams; Society
of Corporate Secretaries; Textron; Tompkins; G. Tooker;
Weyerhaeuser; Xerox.
---------------------------------------------------------------------------

     5% of a company's outstanding shares; \205\
---------------------------------------------------------------------------

    \205\ See letters from Applied Materials; R. Burt; CSX;
Financial Services Roundtable; IBM (recommending 5% as one of the
two acceptable thresholds); ITT; J. Kilts; Shearman & Sterling;
Southern Company; Tesoro; TIAA-CREF; T. Rowe Price; tw telecom;
UnitedHealth; U.S. Bancorp; Verizon.
---------------------------------------------------------------------------

     5% of a company's outstanding shares for an individual
shareholder and a higher but unspecified threshold for a group of
shareholders; \206\
---------------------------------------------------------------------------

    \206\ See letters from Applied Materials; U.S. Bancorp.
---------------------------------------------------------------------------

     With regard to investment companies, a 5% threshold; \207\
---------------------------------------------------------------------------

    \207\ See letters from S&C TIAA-CREF.
---------------------------------------------------------------------------

     From 5% to 10% of a company's shares; \208\
---------------------------------------------------------------------------

    \208\ See letters from Davis Polk; Lorsch et al.
---------------------------------------------------------------------------

     10% of the company's shares; \209\
---------------------------------------------------------------------------

    \209\ See letters from Allstate; Caterpillar; J. Chico; W. B.
Dickerson; IBM (recommending 10% as one of the two acceptable
thresholds); ICI; M. Metz; Office Depot; L. Tyson; ValueAct Capital;
Vanguard.
---------------------------------------------------------------------------

     10% of the company's outstanding shares for an individual
shareholder and 15% of the outstanding shares for a group of
shareholders; \210\
---------------------------------------------------------------------------

    \210\ See letter from Motorola.
---------------------------------------------------------------------------

     5% to 15% of the company's outstanding shares; \211\
---------------------------------------------------------------------------

    \211\ See letter from Barclays.

---------------------------------------------------------------------------

     15% of the company's shares; \212\ and
---------------------------------------------------------------------------

    \212\ See letter from TI.
---------------------------------------------------------------------------

     20% of a company's shares.\213\
---------------------------------------------------------------------------

    \213\ See letter from AT&T.
---------------------------------------------------------------------------

    Two of the commenters that criticized the proposed threshold as too
high recommended that Rule 14a-11 have the same ownership threshold as
Rule 14a-8,\214\ with one of these commenters expressing the belief
that the proposal, with its ownership thresholds, would enable only
institutional shareholders to access the corporate ballot.\215\ Another
of the commenters opposing the proposed thresholds asserted that the
threshold for non-accelerated filers is too high and cited figures
indicating that a significant number of such filers do not have any
shareholders that would satisfy the proposed threshold.\216\ This
commenter suggested that for an individual shareholder or a group of
shareholders, the threshold should be based on the dollar value of the
shares held (e.g., $250,000) or a lower percentage of shares (e.g.,
0.25%).
---------------------------------------------------------------------------

    \214\ See letters from Concerned Shareholders; USPE.
    \215\ See letter from Concerned Shareholders.
    \216\ See letter from L. Dallas.
---------------------------------------------------------------------------

    After considering the comments, we believe that it is appropriate
to apply a uniform 3% ownership threshold to all companies subject to
the rule, regardless of whether they are classified as large
accelerated, accelerated, or non-accelerated filers under the Federal
securities laws. As an initial matter, as we did at the time we issued
the Proposing Release, we considered whether and why Rule 14a-11 should
include any ownership threshold. Because the Commission's proxy rules
seek to enable the corporate proxy process to function, as nearly as
possible, as a replacement for in-person participation at a meeting of
shareholders, some may argue that once a shareholder has satisfied any
procedural requirements to a director nomination that a company is
allowed to impose under State law, then that nomination should be
included in the company's proxy materials. Each time we consider and
adopt amendments to our rules, however, we balance competing interests.
    Based on our consideration of these competing interests, including
balancing and facilitating shareholders' ability to participate more
fully in the nomination and election process against the potential cost
and disruption of the amendments, we have determined that requiring a
significant ownership threshold is appropriate to use Rule 14a-11.
Indeed, we believe that the 3% ownership threshold--combined with the
other requirements of the rule--properly addresses the potential
practical difficulties of requiring inclusion of shareholder director
nominations in a company's proxy materials, and some concerns that both
company management and other shareholders may have about the
application of Rule 14a-11. Providing this balanced, practical, and
measured limitation in Rule 14a-11 is consistent with the approach we
have taken in many of our other proxy rules \217\ and reflects our
desire to proceed cautiously with these new amendments to our rules.
---------------------------------------------------------------------------

    \217\ See, e.g., Exchange Act Rule 14a-8(b) (requiring
shareholders to have ``continuously held at least $2,000 in market
value, or 1%, of the company's securities entitled to be voted on
the proposal at the meeting for at least one year by the date'' they
submit a shareholder proposal); Exchange Act Rule 14a-6(g)
(requiring a soliciting person that ``owns beneficially securities
of the class which is the subject of the solicitation with a market
value of over $5 million'' to file a notice with the Commission);
Regulation S-K, Item 404(a) (requiring disclosure of transactions
with related parties that exceed $120,000).
---------------------------------------------------------------------------

    We also considered whether the ownership threshold we adopt for
Rule 14a-11 should be tiered based on the size and related filing
status (or net assets) of the company, or uniform for all companies,
and what percentage of ownership would be most appropriate. We have
decided to adopt a uniform standard for all companies for several
reasons. First, we determined that a uniform standard would reduce the
complexities of Rule 14a-11. As noted by one commenter,\218\ the
potential for the filing status of a company to change would result in
uncertainty about the availability of the provisions of Rule 14a-11 as
a result of market fluctuations in share prices, acquisitions, or
divestitures. A uniform standard avoids that uncertainty and the
resulting potential for the costs and burdens of disputes over the
selection of the appropriate tier. Elimination of that uncertainty,
moreover, would make the availability of Rule 14a-11 more predictable
and therefore more useful for shareholders in planning nominations in
reliance on the rule. A uniform standard also will avoid any ability on
the part of management to structure corporate actions to modify the
impact of Rule 14a-11 by placing the company in a different tier. The
concern we expressed in the Proposal--that companies could be
disproportionately affected by adoption of the rule based on their
size--was not supported by comments of potentially affected companies;
to the contrary, comments from companies overwhelmingly supported
uniform ownership thresholds.\219\ In addition, as discussed below, we
are deferring implementation of Rule 14a-11 for smaller reporting
companies.\220\
---------------------------------------------------------------------------

    \218\ See letter from Shearman & Sterling.
    \219\ See letters from General Mills; Tesoro; T. Rowe Price;
ValueAct Capital; Verizon (explicitly opposing variation in
percentage ownership requirement based on issuer size); and letters
identified in footnotes 199-211 above (commenters supporting various
uniform ownership thresholds).
    \220\ As noted in Section II.B.3.f., we have adopted a three-
year delay in implementation for smaller reporting companies.
---------------------------------------------------------------------------

    A comparison of the share ownership concentrations in large
accelerated filers and non-accelerated filers produced relatively minor
observable difference. The results, adjusted to give effect to a three-
year holding period requirement, are summarized in the table below:
\221\
---------------------------------------------------------------------------

    \221\ The percentages in the table are derived from the data set
described in the Proposing Release involving companies that have
held meetings between January 1, 2008 and April 15, 2009 (the
``Proposing Release data''). See Section III.B.3. of the Proposing
Release. The percentages have been adjusted, however, because the
Proposing Release data did not give effect to any holding period
requirement, and we have attempted to estimate what those
percentages would have been had they given effect to the three-year
holding period we are adopting. By the calculation described below,
we have estimated a reasonable adjustment to the reported
percentages in the Proposing Release data by using the data
presented in a November 24, 2009 memorandum based on the analysis of
Schedule 13F filings, data which did give effect to holding period
requirements. See Memorandum from the Division of Risk, Strategy,
and Financial Innovation regarding the Share Ownership and Holding
Period Patterns in 13F data (November 24, 2009), available at http:/
/www.sec.gov/comments/s7-10-09/s71009-576.pdf (the ``November 2009
Memorandum''). The two data sets have overlapping statistics that
can be used for comparison and adjustment: Both sets report
percentages of a broad sample of public companies and identify
percentages of companies having (i) at least one shareholder with
holdings of 3% of more, (ii) at least two shareholders with holdings
of 3% or more, (iii) at least one shareholder with holdings of 1% or
more, and (iv) at least two shareholders with holdings of 1% or
more. Comparing the percentages reflected in the November 2009
Memorandum (giving effect to a three-year holding period
requirement) with the percentages in the Proposing Release data (not
reflecting any holding period requirement), we observe that the
percentages reported in the Proposing Release data exceed the
percentages reported in the November 2009 memorandum by amounts
ranging from 56% to 69%. In order to derive the approximate
percentages in the table, we adjusted downward by 62.5% the
percentages reported in the Proposing Release data, to account at
least approximately for the application of the three-year holding
period requirement.

------------------------------------------------------------------------
                                     Non-accelerated   Large accelerated
                                          filers             filers
                                       (approximate       (approximate
                                       percentages)       percentages)
------------------------------------------------------------------------
Companies with at least one 1%                     37                 37
 shareholder......................
Companies with at least one 3%                     33                 32
 shareholder......................
Companies with at least one 5%                     22                 16
 shareholder......................
Companies with at least two 1%                     36                 37
 shareholders.....................
Companies with at least two 1.5%                   33                 33
 shareholders.....................
Companies with at least two 2.5%                   27                 25
 shareholders.....................
------------------------------------------------------------------------

Our further review of relevant data has persuaded us that applying
different ownership thresholds to large accelerated filers and non-
accelerated filers is not justified.\222\
---------------------------------------------------------------------------

    \222\ See letter from P. Neuhauser (suggesting only two
ownership eligibility tiers because data show ``almost no difference
in ownership characteristics between smaller accelerated filers and
non-accelerated filers.'').
---------------------------------------------------------------------------

    As noted above, we have decided to adopt a uniform ownership
threshold for all categories of public companies. We determined that a
3% ownership threshold is an appropriate standard for all such
companies--not just accelerated filers. We believe that the 3%
threshold, while higher for many companies and lower for others than
the thresholds advanced in the Proposal, properly balances our belief
that Rule 14a-11 should facilitate shareholders' traditional State law
rights to nominate and elect directors with the potential costs and
impact of the amendments on companies. The ownership threshold we are
establishing should not expose issuers to excessively frequent and
costly election contests conducted through use of Rule 14a-11, but it
is also not so high as to make use of the rule unduly inaccessible as a
practical matter.
    We selected the uniform 3% threshold based upon comments received,
our analysis of the data available to us, and the fact that the rule
allows for shareholders to form groups to aggregate their holdings to
meet the threshold. We also considered that our amendments to Rule 14a-
8 remove barriers to the ability of shareholders to have proposals
included in company proxy materials to establish a procedure under a
company's governing documents for the inclusion of one or more nominees
in the company's proxy materials. Because of these amendments,
shareholders who believe the 3% threshold is too high can take steps to
seek to establish a lower ownership threshold.\223\
---------------------------------------------------------------------------

    \223\ As noted in Section II.C., we are adopting an amendment to
Rule 14a-8(i)(8) to preclude companies from relying on that basis to
exclude from their proxy materials shareholder proposals that seek
to establish a procedure under a company's governing documents for
the inclusion of one or more shareholder director nominees in the
company's proxy materials. Such a shareholder proposal would, of
course, have to satisfy the other requirements of the rule, like
other Rule 14a-8 shareholder proposals.
---------------------------------------------------------------------------

    We note that we considered a lower threshold, such as 1%, and a
higher threshold, such as 5%, both of which were thresholds in the
proposed tiers. Quite a few commenters, including a number who
generally supported the adoption of Rule 14a-11, advocated for an
ownership threshold higher than the 1% level we proposed for large
accelerated filers.\224\ One large institutional investor, for example,
``strongly urg[ed] the adoption of proposed Rule 14a-11'' and argued
that ``existing reforms are incomplete as long as boards retain the
exclusive control of the proxy card and sole discretion over the
mechanisms that govern their own elections,'' but also stated the
belief that ``in order to use company resources to nominate a director,
a significant amount of capital must be represented and 5% is an
acceptable threshold.'' \225\ Similarly, the manager of a large family
of investment companies stated its ``support [for] the Commission's
intent to facilitate shareholders' rights to participate in the
governance process,'' yet commented that ``a 1% threshold is too low,
in our opinion, to maintain the critical balance between serving the
interests of eligible nominating shareholders and serving the interests
of a company's shareholder base at large.'' \226\ That commenter
recommended a ``flat 5% threshold for all companies'' because it
``represents significant economic stake.'' Other commenters recommended
a uniform 3% ownership threshold in the interest of avoiding
``frivolous or vexatious nominations,'' \227\ or because it ``is not so
small that it would allow a board nomination for only a de minimis
investment in [a non-accelerated filer],'' but ``would not be so large
as to prevent all but the largest institutional shareowners to submit
nominees for [large accelerated filers].'' \228\
---------------------------------------------------------------------------

    \224\ See letters from ACSI (advocating a uniform 3% threshold);
Calvert (same); LUCRF (same); S. Ranzini (same); TIAA-CREF
(advocating a uniform 5% threshold); T. Rowe Price (same).
    \225\ Letter from TIAA-CREF.
    \226\ Letter from T. Rowe Price.
    \227\ Letters from SCSI and LUCRF.
    \228\ Letter from CFA Institute.
---------------------------------------------------------------------------

    In light of such comments we have determined not to adopt the 1%
threshold we had proposed with respect to large accelerated filers. We
also have determined not to adopt, as the uniform standard, the 5%
threshold we had proposed for non-accelerated filers. Several
commenters from the investor community explicitly opposed a 5% uniform
threshold, maintaining that it would as a practical matter exclude all
but the largest institutional investors.\229\ On the other hand,
although some companies supported a uniform 5% threshold,\230\ most
other companies urged the adoption of a substantially higher threshold,
either for individual shareholders or for shareholder groups, or both.
For example, companies and their counsel generally believed a higher
threshold should apply to group nominations and overwhelmingly
recommended a 10% minimum ownership requirement for nominations by
shareholder groups.\231\ We note, however, that at a 10% threshold for
groups, the likelihood of forming a group sufficient to meet the
minimum ownership requirement would likely be significantly reduced
compared to a 3% threshold. Given a three-year holding period, the data
in the November 2009 Memorandum identify combinations

totaling 10% or more but involving five or fewer shareholders as
achievable in as little as 7% of public companies, compared to at least
21% of public companies at a 5% threshold and at least 31% of public
companies at a 3% threshold. In addition, the data suggest that it
would be even more unlikely that a company would have an individual
shareholder that would meet a 10% ownership threshold.\232\ While some
commenters suggested a 5% threshold was appropriate because that amount
is consistent with other filing requirements such as Schedule 13D and
13G,\233\ we ultimately were not persuaded because the underlying
principles of such filing requirements \234\ are quite different from
those underlying the ownership condition to Rule 14a-11. After
considering the comments and available data, we have decided that a 3%
ownership threshold--including where shareholders form groups to
satisfy the threshold--is an appropriate and workable approach for the
rule.
---------------------------------------------------------------------------

    \229\ See letters from CFA Institute; P. Neuhauser; RiskMetrics.
    \230\ See letters from CSX; ITT; Southern Company; Tesoro; tw
telecom; UnitedHealth; Verizon.
    \231\ See letters from Advance Auto Parts; Alaska Air; American
Express; Association of Corporate Counsel; Avis Budget; Best Buy; J.
Blanchard; Boeing; BRT; Burlington Northern; Callaway; CIGNA; CNH
Global; Comcast; Con Edison; Darden Restaurants; Dewey; J. Dillon;
DTE Energy; DuPont; Eaton; Edison Electric Institute; Eli Lilly;
Emerson Electric; ExxonMobil; FedEx; FMC Corp.; FPL Group; General
Mills; Home Depot; Intel; JPMorgan Chase; E.J. Kullman; McDonald's;
N. Lautenbach; PepsiCo; Praxair; Protective (recommending this
threshold if its proposed 35% withhold vote triggering event is not
included; if included, it recommended a 3% threshold); Sara Lee;
Seven Law Firms; Sherwin-Williams; Society of Corporate Secretaries;
Textron; Tompkins; G. Tooker; Weyerhaeuser; Xerox.
    \232\ The data in the November 2009 Memorandum suggest that just
4% of companies would have at least one shareholder with 10%.
    \233\ See, e.g., letters from CSX; ITT; Shearman & Sterling;
Tesoro; T. Rowe Price; tw telecom.
    \234\ See, e.g., Release No. 34-26598, Reporting of Beneficial
Ownership in Publicly-Held Companies (March 6, 1989) (``The
beneficial ownership reporting requirements embodied in Sections
13(d) and 13(g) of the [Exchange Act] and the regulations adopted
thereunder are intended to provide to investors and to the subject
issuer information about accumulations of securities that may have
the ability to change or influence control of the issuer.''). See
also Release No. 34-50699 (proposing to require disclosure of
persons holding 5% of an ownership interest in a securities exchange
because the principles underlying such disclosure were similar to
those underlying other filing requirements: ``The 5% reporting
threshold and the information proposed to be required to be
disclosed about such ownership is modeled on the beneficial
ownership reporting requirements of the Williams Act, embodied in
Sections 13(d) and 13(g) of the Exchange Act and the rules and
regulations thereunder. These Exchange Act provisions are intended
to provide information to the issuer and the marketplace about
accumulations of securities that may have the potential to change or
influence control of an issuer.'' (footnotes omitted)).
---------------------------------------------------------------------------

    In adopting a uniform 3% threshold for all companies, as opposed to
a lower ownership threshold for all companies, we are mindful that the
rule will allow shareholders to form a group by aggregating their
holdings to meet the ownership threshold.\235\ Indeed, as we assumed in
the Proposing Release and as some commenters told us, in many cases
shareholders will need to form groups to meet the ownership threshold
for the purpose of submitting director nominations pursuant to Rule
14a-11.\236\ Commenters also pointed to instances of coordinated
shareholder activity in recent ``vote no'' campaigns as support for the
ability of shareholders to form groups.\237\ We have adopted a number
of amendments to our rules that will facilitate the formation of groups
for this purpose.\238\ We understand the result of our ownership
threshold determination may be that shareholders will need to convince
other shareholders to support their attempt to use Rule 14a-11. We
believe this outcome reduces the potential for excessive costs to be
incurred by companies and their shareholders.
---------------------------------------------------------------------------

    \235\ Some commenters suggested that the data on share ownership
dispersion referred to in the Proposing Release were insufficient
because we did not focus on the possibility that shareholders could
form groups to satisfy the minimum ownership requirement. See
letters from American Bar Association (January 19, 2010) (``ABA
III''); BRT II.
    \236\ See letters from AFL-CIO (``[I]t will be necessary to
permit aggregation of holdings to prevent the Proposed Access Rule
from being usable only by hedge funds.''); Florida Board of
Administration (``Public funds would need to form a nominating group
in order to meet the hurdle in nearly all cases.'').
    \237\ See letter from BRT II.
    \238\ See, e.g., Rule 14a-2(b)(7).
---------------------------------------------------------------------------

    The data available to us also suggest that reaching the 3%
ownership threshold we are adopting is possible for a significant
number of shareholders either individually or by a number of
shareholders aggregating their holdings in order to satisfy the
ownership requirement. In particular, the data presented in the
November 2009 Memorandum indicate that a sizeable percentage (33%) of
public companies have at least one institutional investor owning at
least 3% of their securities for at least three years, and thus
potentially qualified to meet the Rule 14a-11 ownership threshold
individually. As noted, however, the data are based on Form 13F
filings, which include holders that are custodians and may not be
likely users of the rule. The data in the November 2009 Memorandum also
suggest that forming nominating shareholder groups with holdings
aggregating 3% is achievable at many companies by a relatively small
number of shareholders. Even factoring in the requirement of continuous
ownership for three years, 31% of public companies have three or more
holders with at least 1% share ownership each; and 29% have two or more
holders with at least 2% share ownership each.\239\ Moreover, neither
of these categories includes companies with one holder of 2% and
another holder of at least 1%, and none of these percentages includes
companies having a relatively small number (e.g. four to ten) of
holders whose aggregate holdings exceed 3% but whose individual
holdings do not bring the company within any of the categories
identified in the data.
---------------------------------------------------------------------------

    \239\ We note that it is unlikely that the ownership test used
in calculating the data tracks the definition that we are adopting
for Rule 14a-11. As a result, the percentages in the data may be
over- or under-inclusive.
---------------------------------------------------------------------------

    We are concerned, however, that use of Rule 14a-ndash;11 may not be
consistently and realistically viable, even by shareholder groups, if
the uniform ownership threshold were set at 5% or higher. At the 5%
minimum ownership requirement for individuals as advocated by many of
those same commenters, only 20% of public companies had even one
shareholder satisfying that requirement. Finally, even applying a 5%
threshold for shareholder groups, the data identify combinations
involving five or fewer shareholders that add up to 5% or more as
theoretically achievable in as few as 21% of public companies--at least
25% fewer than with a 3% threshold.\240\
---------------------------------------------------------------------------

    \240\ At the 10% threshold for groups urged by many commenters,
for example, the likelihood of forming a group sufficient to meet
the minimum ownership requirement would be more sharply constrained:
the data in the November 2009 Memorandum identify combinations
totaling 10% or more but involving five or fewer shareholders as
theoretically achievable in as little as 7% of public companies.
---------------------------------------------------------------------------

    All of these data thus suggest that a uniform 5% ownership
requirement would be substantially more difficult to satisfy than the
3% requirement we are adopting. Moreover, our resulting concern about
the viability of a 5% ownership threshold is exacerbated by several
limitations on the data reported in the November 2009 Memorandum. While
those data do account for the application of a three-year holding
period requirement, they may overstate in several ways the potential to
meet the ownership threshold. First, they may include controlling
shareholders that may be unlikely to rely on Rule 14a-11. Second, the
data are based on filings on Form 13F, in which ownership is defined
differently than under Rule 14a-11, and thus may yield a higher number
of larger shareholdings. Finally, the data include large shareholdings
by institutions which report aggregated holdings of securities held for
multiple beneficial owners.\241\
---------------------------------------------------------------------------

    \241\ On the other hand, the data in the November 2009
Memorandum may understate the number of large shareholdings, because
the data may exclude smaller holdings in multiple institutions that
are subject to common voting control, and in any event, do not
include holdings of less than 1% at all, even though such holdings
could contribute to the formation of a group eligible to use Rule
14a-11. Likewise, those data do not include securities held by
institutions holding less than $100 million in securities because
Exchange Act Section 13(f) does not require such institutions to
report their holdings. See letters from ABA III; BRT II.
---------------------------------------------------------------------------

    Nevertheless, and principally because they give effect to holding
period requirements, we considered the data in

the November 2009 Memorandum to be the most pertinent to our selection
of a uniform minimum ownership percentage. We received additional data
relating to large companies, however, that offer some additional
indication about the number of shareholders potentially available to
form a group to meet the 3% ownership threshold. One study indicated
that in the top 50 companies by market capitalization as of March 31,
2009, the five largest institutional investors held from 9.1% to 33.5%
of the shares, and an average of 18.4% of the shares.\242\ That same
study found that among a sample of 50 large accelerated filers, the
median number of shareholders holding at least 1% of the shares for at
least one year was 10.5, with 45 of the 50 companies in the sample
having at least seven such shareholders.\243\ Another study that was
reported to us \244\ similarly suggests relatively high concentration
of share ownership. According to that analysis of S&P 500 companies, 14
institutional investors could satisfy a 1% threshold at more than 100
companies, eight could meet that threshold at over 200 companies, five
could meet it at over 300 companies, and three could meet it at 499 of
the 500. Information from specific large issuers likewise suggests the
achievability of shareholder groups aggregating 3%.\245\
---------------------------------------------------------------------------

    \242\ See ``Report on Effects of Proposed SEC Rule 14a-11 on
Efficiency, Competitiveness and Capital Formation, in Support of
Comments by Business Roundtable'' by NERA Economic Consulting
(``NERA Report''), Appendix Table 1, submitted with the letter from
BRT.
    \243\ Id. at 13-14, Figure 2.
    \244\ See letter from JPMorgan Chase.
    \245\ See letters from AT&T (eight shareholders owning 1% or
more, although holding periods not identified); AGL Resources
(same); CIGNA (20 1%+ shareholders, although holding periods not
identified); Cummins (36 1+% shareholders, although holding periods
not identified); General Mills (one 5%+ shareholder holding for at
least 6 years, over 12 1%+ shareholders, and over 25 0.5%+
shareholders, although holding periods not identified); ITT (14 1%+
shareholders, although holding periods not identified); McDonald's
(10 holders owning 1% or more, one shareholder owning 5%, although
holding periods not identified); UnitedHealth (four 3%+
shareholders, six 2%+ shareholders, nine 1%+ shareholders, 20 0.5%+
shareholders, 32 0.25% shareholders, applying a 2-year holding
period); Weyerhaeuser (three 5%+ shareholders, 20 1%+ shareholders,
although holding periods not identified).
---------------------------------------------------------------------------

    We realize these data likely overstate the number of eligible
shareholders or shareholders whose holdings could be grouped to meet
the ownership threshold, as these data generally do not appear to
reflect any continuous holding requirement.
    In any event, our assessment of the percentage of companies with
various share ownership concentrations cannot be taken as an assurance
that shareholder nominating groups will or will not be formed at any
particular combination of percentage ownership and holding period
requirements or of the likelihood that persons with large securities
holdings would be inclined or disinclined to use Rule 14a-11.\246\
Taking all of this information into account, overall we believe that
our selection of a 3% ownership threshold strikes an appropriate
balance between the benefits of facilitating shareholder participation
in the process of electing directors of public companies and the costs
and disruption associated with contested elections of directors
conducted pursuant to new Rule 14a-11. We also believe, and as noted,
many commenters supported, that a threshold tied to a significant
commitment to the company is an important feature of our amendments. Of
course, to the extent that shareholders believe the 3% threshold is too
high our amendments to Rule 14a-8 will facilitate their ability to
adopt a lower ownership percentage.\247\
---------------------------------------------------------------------------

    \246\ See letter from Council of Institutional Investors
(January 14, 2010) (``CII II''). This comment refers to research
indicating that in a small sample of accelerated and non-accelerated
filers, the holdings of the ten largest public pension funds, if
aggregated, would not exceed 5% and would also be unlikely to meet a
3% threshold, while a 1% threshold could be met. Apart from the
sample size, however, this research itself appears limited in that
it apparently does not include other types of shareholders and is
not adjusted for any holding period.
    \247\ See footnote 223 above.
---------------------------------------------------------------------------

    We proposed to apply the same thresholds for registered investment
companies and business development companies as for non-investment
companies, except that the applicability of the particular thresholds
for registered investment companies would have depended on the net
assets of the company, rather than the company's accelerated filer
status. No commenters recommended a higher threshold for investment
companies than for non-investment companies. While some commenters
noted the absence of data specifically relating to the impact of
various ownership thresholds on investment companies,\248\ no commenter
supplied any data suggesting the need for an ownership threshold for
investment companies different from that applicable to non-investment
companies.\249\ Although two commenters suggested a 5% ownership
threshold for investment companies, both of these commenters also
suggested a 5% threshold for non-investment companies.\250\
---------------------------------------------------------------------------

    \248\ See, e.g., letters from ICI; S&C T. Rowe Price.
    \249\ One joint comment letter provided data regarding the net
assets of investment companies and the dollar value of the shares
that would be necessary to meet the proposed 1%, 3%, or 5%
thresholds. See letter from ICI/IDC. The data provided by the
commenters suggest that there are a limited number of small
investment companies with net assets ranging from $50,000 to
$351,000, where the 3% threshold could be met by an investment
ranging from $1,500 to $10,530. However, the data also indicate that
the vast majority of funds are significantly larger, and would
therefore require a significantly larger investment to meet the 3%
threshold (e.g., 90% of long-term mutual funds, money market funds,
and closed-end funds have total net assets greater than $19 million,
$100 million, and $57 million, respectively; the median long-term
mutual fund, money market fund, and closed-end fund have total net
assets of $216 million, $844 million, and $216 million,
respectively).
    \250\ See letters from S&C (recommending ``with respect to the
ownership thresholds applicable to shareholders of [registered
investment companies], a minimum percentage of no less than the 5%
threshold recommended in the Seven Law Firm Letter'' (to which
Sullivan & Cromwell was a party and which recommended that ownership
thresholds of non-investment companies be adjusted upwards to 5% for
individual shareholders and higher for groups of shareholders));
TIAA-CREF (recommending ``that the Commission adopt a 5% ownership
requirement across the board regardless of the company's size'' and
``[w]ith respect to investment companies, * * * that the 5%
requirement be applied at the fund complex level rather than at the
individual fund level'').
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    We believe that it is appropriate to apply to registered investment
companies and business development companies the same 3% ownership
threshold that we are applying to other companies. We also believe
that, similar to non-investment companies, our selection of a 3%
ownership threshold strikes an appropriate balance between the benefits
of facilitating shareholder participation in the process of electing
directors of investment companies and the costs and disruption
associated with contested elections of directors conducted pursuant to
Rule 14a-11.
    We are not adopting the suggestion of commenters that the
eligibility thresholds for investment companies be based on the
holdings for the fund complex in the case of unitary boards or the
cluster in the case of cluster boards.\251\ We believe that eligibility
should be based on holdings for the investment company, not the entire
fund complex or cluster, because under State law, shareholder voting is
determined based on the holdings in the investment company. Fund
complexes have flexibility to organize their funds into one or more
investment companies. Thereafter, State law governs which shareholders
vote as a group for directors. Because Rule 14a-11 is intended to
facilitate the exercise of traditional State law rights to nominate and
elect directors, we believe that the rule should follow State law.
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    \251\ See letters from Barclays; T. Rowe Price; TIAA-CREF.

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ii. Voting Power
    We proposed that the ownership threshold be determined as a
percentage of the securities entitled to be voted on the election of
directors. Some commenters sought clarification of how the ownership
threshold would be calculated where companies have multiple classes of
stock with varying voting rights.\252\ These commenters observed that
the proposed rule did not adequately address voting regimes where the
voting rights have been separated from the economic rights of
ownership.\253\ One commenter explained that in situations where
ownership of securities does not correlate with voting power,\254\
shares will have voting rights disproportionate to the number of shares
held, and that creates a disparity between the two classes in terms of
the economic value of a single vote.\255\ One commenter advised that
further clarification was needed for companies with two or more
outstanding classes of voting securities with disparate voting rights,
including those companies with classes of voting securities and non-
voting securities, so that those companies would be treated in a manner
consistent with companies that have one class of voting
securities.\256\
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    \252\ See letters from ABA; Duane Morris; Media General; P.
Neuhauser; New York Times. These letters illustrated a scenario
where one publicly-issued class of stock is entitled to one vote per
share, while the privately-held controlling class of stock is
entitled to 10 votes per share and both classes vote together on the
election of directors.
    \253\ See letters from ABA; P. Neuhauser; Duane Morris; Media
General.
    \254\ See, e.g., discussion in footnote 252 of common ten-to-one
voting provisions of a structure with Class A and Class B
securities.
    \255\ See letter from ABA.
    \256\ See letter from Duane Morris.
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    In proposing that the ownership threshold be determined as a
percentage of securities entitled to be voted on the election of
directors, our goal was to have the requirement tie to the percentage
of votes that could be cast for the director nominees. In response to
these commenters, we have revised the rule text to clarify that the
ownership threshold will be determined as a percentage of voting power
of the securities entitled to be voted on the election of directors at
the meeting, rather than as a percentage of securities entitled to be
voted on the election of directors, as was proposed. Accordingly, where
a company has multiple classes of stock with unequal voting rights and
the classes vote together on the election of directors, then voting
power would be calculated based on the collective voting power.\257\ If
a company has multiple classes of stock that do not vote together in
the election of all directors (where, for example, each class elects a
subset of directors), then voting power would be determined only on the
basis of the voting power of the class or classes of stock that would
be voting together on the election of the person or persons sought to
be nominated by the nominating shareholder or group, rather than the
voting power of all classes of stock.\258\ We believe this approach
properly bases the availability of Rule 14a-11 on the right to vote for
the nominees that may be included in the company's proxy materials,
which is both consistent with the intent of the provisions of a
company's governing documents and in accord with the principle that
class directors are elected by the votes of the holders of the class.
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    \257\ See Rule 14a-11(b)(1) and Instruction 3 and the discussion
below.
    \258\ See Instruction 3 to Rule 14a-11(b)(1).
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iii. Ownership Position
    In the Proposing Release, we solicited comment about whether
beneficial ownership is the appropriate standard of ownership to use
for purposes of the minimum ownership threshold in the rule or whether
another standard would be more appropriate. In this regard, we
requested comment about whether a net long requirement should be used
and, if so, what other modifications would be required. We received a
number of comments addressing the appropriate standard of ownership and
supporting the inclusion of a net long requirement.\259\ Commenters
suggested that we adopt an ``ultimate'' beneficial owner definition
that included, among other things, a requirement that the nominating
shareholder or group hold the entire bundle of voting and economic
rights to any securities used to determine eligibility under the
rule.\260\ At least one of these commenters thought the ownership
definition should be adopted this way in order to remove the
possibility that multiple parties may count the same securities toward
their individual securities ownership totals.\261\ Moreover, many
commenters were concerned that without requiring net long ownership,
shareholders could engage in hedging strategies to obtain the requisite
amount of ownership while eliminating or reducing their economic
exposure.\262\ Some commenters expressed the view that shares loaned to
a third party should be taken into account when determining whether the
nominating shareholder or group satisfies the relevant ownership
threshold.\263\ Commenters explained that institutional investors who
hold shares for the long-term may lend their shares to others
periodically while retaining the right to recall those shares to cast
votes.\264\ Commenters suggested several conditions for counting these
shares: the shareholder has a legal right to recall the shares and cast
votes; \265\ the shareholder discloses in the Schedule 14N an intention
to vote the shares; \266\ the shareholder holds the shares through the
date of the meeting; \267\ and the shares are held past the date of the
election.\268\
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    \259\ See letters from 26 Corporate Secretaries; Advance Auto
Parts; Aetna; Alaska Air; Alcoa; Alston & Bird; American Express;
BorgWarner; BRT; Burlington Northern; CSX; L. Dallas; Dewey; DuPont;
FPL Group; Florida State Board of Administration; GE; Honeywell;
ICI; JPMorgan Chase; Kirkland & Ellis LLP (``Kirkland & Ellis'');
Leggett; P. Neuhauser; PepsiCo; Protective; Seven Law Firms; SIFMA:
Society of Corporate Secretaries; T. Rowe Price; tw telecom;
UnitedHealth; ValueAct Capital; Xerox.
    \260\ See letters from BRT; Devon; IBM; P. Neuhauser; Society of
Corporate Secretaries.
    \261\ See letter from ABA.
    \262\ See letters from 26 Corporate Secretaries; ABA; Advance
Auto Parts; Alaska Air; Allstate; Applied Materials; Association of
Corporate Counsel; AT&T J. Blanchard; Biogen; BRT; CIEBA; Cleary;
Devon; Dewey; Headwaters; IBM; JPMorgan Chase; PepsiCo; Sara Lee;
Seven Law Firms; Shearman & Sterling; Sidley Austin; Society of
Corporate Secretaries; Verizon.
    \263\ See letters from AFL-CIO; CalPERS; CII; COPERA; IAM,
LIUNA; Marco Consulting; P. Neuhauser; D. Nappier; Sheet Metal
Workers National Pension Fund (``Sheet Metal Workers''); SWIB.
    \264\ See letters from AFL-CIO; Marco Consulting; Sheet Metal
Workers; SWIB.
    \265\ See letters from CalPERS; CII; COPERA; IAM; LIUNA; D.
Nappier.
    \266\ See letters from AFL-CIO; CalPERS; CII; IAM; D. Nappier.
    \267\ See letters from CalPERS; CII; IAM; D. Nappier.
    \268\ See letters from COPERA.
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    After considering the comments, we have modified in several
respects the ownership requirement of Rule 14a-11 so that it is
consistent with our intent to limit use of Rule 14a-11 to long-term
shareholders with significant ownership interests. First, in order to
satisfy the ownership requirement, the nominating shareholder or member
of the nominating shareholder group must hold a class of securities
subject to the proxy solicitation rules.\269\ Limiting Rule 14a-11
nominations to holders of securities that are subject to the proxy
rules appropriately excludes from the calculation private classes of
voting securities held by persons that would have no expectation that
our proxy rules would be available to facilitate their State law
nomination rights. Further, if we included securities not covered by

the proxy rules in the calculation, those securities could dilute the
relative holdings of shareholders holding securities that our rules are
designed to protect. Second, the nominating shareholder or member of
the nominating shareholder group must hold both investment and voting
power, either directly or through any person acting on their behalf, of
the securities. By requiring that a nominating shareholder or member of
a nominating shareholder group hold investment and voting power of the
securities that are used for purposes of determining whether the
ownership requirement has been met, we are addressing the concerns
raised by certain commenters that the provisions of Rule 14a-11 should
only be available to shareholders that possess ultimate ownership
rights over the shares.
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    \269\ This would include securities registered pursuant to
Section 12 of the Exchange Act or subject to Investment Company Act
Rule 20a-1.
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    Similar to the provisions in Exchange Act Rule 13d-3,\270\ the
definition of voting power for purposes of Rule 14a-11 includes the
power to vote, or to direct the voting of, such securities and
investment power for purposes of Rule 14a-11 includes the power to
dispose, or to direct the disposition of, such securities.\271\ Unlike
the provisions in Rule 13d-3, however, the ownership requirement of
Rule 14a-11 includes both voting and investment power--as opposed to
just one or the other--and voting and investment power for purposes of
Rule 14a-11 does not exist over securities that a nominating
shareholder or member of a nominating shareholder group merely has the
right to acquire. For example, a nominating shareholder or member of a
nominating shareholder group will not be able to count securities that
could be acquired, such as securities underlying options that are
currently exercisable but have not yet been exercised.
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    \270\ 17 CFR Sec.  240.13d-3. Like the approach under Rule 13d-
3, we are including and excluding certain securities from the
determination of who has voting power for policy reasons. Those
inclusions and exceptions and the policy reasons underlying them are
discussed throughout this section.
    \271\ See Instruction 3.c. to Rule 14a-11(b)(1).
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    For purposes of meeting the ownership threshold in Rule 14a-11, a
nominating shareholder or group will include investment and voting
power of the company's securities that is held ``either directly or
through any person acting on their behalf.'' We are adopting the
ownership provisions with this language to account for the common
situation when financial intermediaries, such as banks or brokers, hold
securities on behalf of their clients.\272\ This additional language
also covers relationships, such as parent and subsidiary, when for
organizational or tax reasons, among others, investment and voting
power is held by an entity that is controlled by another entity. This
provision, however, would not include securities that are held in a
pooled investment vehicle in which the nominating shareholder or member
of a nominating shareholder group does not have voting and investment
power over the securities held in the pooled investment vehicle.
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    \272\ The rule also clarifies that financial intermediaries,
such as banks or brokers, that may hold securities on behalf of
their clients could not use the provisions of Rule 14a-11. See
Instruction 3.c. to Rule 14a-11(b)(1).
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    Third, we have adopted a provision in the ownership requirement in
Rule 14a-11 that, subject to specific conditions, allows for securities
that have been loaned to a third party by or on behalf of the
nominating shareholder or member of a nominating shareholder group to
be considered in the calculation. We recognize that share lending is a
common practice, and we believe that loaning securities to a third
party is not inconsistent with a long-term investment in a
company.\273\ To capture only securities where voting power can
ultimately be exercised by the nominating shareholder or member of a
nominating shareholder group in the election of directors, however,
securities that have been loaned by or on behalf of the nominating
shareholder or any member of the nominating shareholder group to
another person may be counted toward the ownership requirement only if
the nominating shareholder or member of the nominating shareholder
group:
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    \273\ See letters from AFL-CIO; CalPERS; CII; COPERA; IAM;
LIUNA; Marco Consulting; P. Neuhauser; D. Nappier; Sheet Metal
Workers; SWIB.
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     Has the right to recall the loaned securities; and
     will recall the loaned securities upon being notified that
any of the nominees will be included in the company's proxy materials.

Absent satisfaction of these conditions--in addition to holding the
requisite investment power over the loaned securities--we believe it is
appropriate to exclude securities that have been loaned to another
person from the calculation of voting power because, generally, the
person to whom the securities have been loaned has the ability to vote
those securities.\274\ If the rule were to allow loaned securities that
either will not or cannot be recalled to be included for purposes of
the ownership calculation, then the voting power of a nominating
shareholder or member of a nominating shareholder group may potentially
be inflated because the calculation could include votes that the
nominating shareholder or member of a nominating shareholder group
cannot actually cast.
---------------------------------------------------------------------------

    \274\ See letter from P. Neuhauser.
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    In determining the total voting power of the company's securities
held by or on behalf of the nominating shareholder or any member of the
nominating shareholder group, the voting power would be reduced by the
voting power of any of the company's securities that the nominating
shareholder or any member of a nominating shareholder group has sold in
a short sale during the relevant periods.\275\ In addition, the rule
text explicitly excludes borrowed shares because the rule is intended
to be used by holders with a significant long-term commitment to the
company, and including shares that are merely borrowed is inconsistent
with that purpose. The instruction makes clear that to the extent
borrowed securities are not already excluded through the subtraction of
securities sold short, borrowed securities would be subtracted in
computing the relevant amount. We recognize that by requiring the
voting power of securities sold short or borrowed for purposes other
than a short sale to be subtracted from the ownership calculation, we
are potentially reducing the eligibility of certain shareholders to
rely on Rule 14a-11.\276\ Nevertheless, as noted above,

we believe that eligibility for Rule 14a-11 should be limited to those
shareholders that have a significant interest in the company.\277\ We
agree with commenters who suggested that selling a company's securities
short may divest that shareholder of the economic risks of
ownership.\278\
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    \275\ See Instruction 3.b.3 to Rule 14a-11(b)(1). We note that