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SECURITIES AND EXCHANGE COMMISSION

Veterans Affairs Department

CFR Citation: 17 CFR Parts 228, 229, 240, 249, 270 and 274

RIN ID: RIN 3235-AI90

DOCUMENT ID: [Release Nos. 33-8340; 34-48825; IC-26262; File No. S7-14-03]

NOTICE: Part IV

DOCUMENT ACTION: Final rule.

SUBJECT CATEGORY: Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors; Republication

DATES: Effective Date: January 1, 2004.

Compliance Dates: Registrants must comply with these disclosure requirements in proxy or information statements that are first sent or given to security holders on or after January 1, 2004, and in Forms 10 Q, 10QSB, 10K, 10KSB, and NCSR for the first reporting period ending after January 1, 2004. Registrants may comply voluntarily with these disclosure requirements before the compliance date.

Comments: Comments regarding the ``collection of information'' requirements, within the meaning of the Paperwork Reduction Act of 1995, of Regulations SB and SK, and Forms 10Q, 10QSB, 10K, 10KSB, and NCSR should be received by January 1, 2004.

DOCUMENT SUMMARY: We are adopting new disclosure requirements and amendments to existing disclosure requirements to enhance the transparency of the operations of boards of directors. Specifically, we are adopting enhancements to existing disclosure requirements regarding the operations of board nominating committees and a new disclosure requirement concerning the means, if any, by which security holders may communicate with directors. These rules require disclosure but do not mandate any particular action by a company or its board of directors; rather, the new disclosure requirements are intended to make more transparent to security holders the operation of the boards of directors of the companies in which they invest.

SUMMARY: Securities and Exchange Commission,

DOCUMENT BODY 2:

Editorial Note: Federal Register Rule document 0329723 was originally published at page 66991 in the issue of Friday, November 28, 2003. In that publication text was left out. The corrected document is republished below in its entirety.

SUPPLEMENTAL INFORMATION

We are adopting amendments to Item 401\1\ of Regulation SB \2\ and Item 401\3\ of Regulation SK \4\ under the Securities Act of 1933,\5\ Items 7 and 22 of Schedule 14A \6\ under the Securities Exchange Act of 1934,\7\ Rule 30a2\8\ under the Investment Company Act of 1940,\9\ Forms 10Q \10\ and 10QSB \11\ under the Exchange Act, and Form NCSR \12\ under the Exchange Act and the Investment Company Act. Although we are not adopting amendments to Schedule 14C \13\ under the Exchange Act, the amendments will affect the disclosure provided in Schedule 14C, as Schedule 14C requires disclosure of some items of Schedule 14A. Similarly, although we are not adopting amendments to Forms 10K \14\ and 10KSB \15\ under the Exchange Act, the amendments to Item 401 of Regulations SB and SK will affect the disclosure under Forms 10K and 10KSB, as those forms require disclosure of the information required by Item 401 of Regulations SK and SB.
\1\ 17 CFR 228.401.
\2\ 17 CFR 228.10 et seq.
\3\ 17 CFR 229.401.
\4\ 17 CFR 229.10 et seq.
\5\ 15 U.S.C. 77a et seq.
\6\ 17 CFR 240.14a101.
\7\ 15 U.S.C. 78a et seq.
\8\ 17 CFR 270.30a2.
\9\ 15 U.S.C. 80a1 et seq.
\10\ 17 CFR 249.308a.
\11\ 17 CFR 249.308b.
\12\ 17 CFR 249.331 and 17 CFR 274.128.
\13\ 17 CFR 240.14c101.
\14\ 17 CFR 249.310.
\15\ 17 CFR 249.310b.

I. Background

On August 8, 2003, we proposed new disclosure standards intended to increase the transparency of nominating committee functions and the processes by which security holders may communicate with boards of directors of the companies in which they invest.\16\ The disclosure standards that we adopt today are, in most respects, those proposed on August 8, 2003. Overall, most commenters supported new disclosure standards relating to nominating committee functions and security holder communications with directors;\17\ however, as noted below, we received a number of comments and suggestions with regard to specific components of the proposed disclosure standards.\18\ We have revised some elements of the proposed disclosure standards in response to these comments and suggestions.
\16\ See Release No. 3448301 (August 8, 2003) [68 FR 48724]. Comments received in response to the proposals, as well as a summary of these comments (``Summary of Comments'') may be found in File No. S71403 and on our Web site at http://www.sec.gov. \17\ See Summary of CommentsFile No. S71403.

\18\ See id.

The requirements we proposed on August 8, 2003,\19\ and are adopting today, follow in many respects the recommendations made by the Division of Corporation Finance in a report provided to the Commission on July 15, 2003.\20\ This report resulted from our April 14, 2003 directive to the Division to review the proxy rules relating to the election of corporate directors.\21\ In preparing the report and developing its recommendations, the Division considered the input of members of the investing, business, legal, and academic
[[Page 69205]]
communities.\22\ The majority of these commenters supported our decision to direct the review and, reflecting concern over corporate director accountability and recent corporate scandals, generally urged us to adopt rules that would grant security holders greater access to the nomination process and greater ability to exercise their rights and responsibilities as owners of their companies.\23\ Many of the comments received in connection with the Division's review evidenced a growing concern among security holders that they lack sufficient input into decisions made by the boards of directors of the companies in which they invest.\24\ Two particular areas of concern related to the nomination of candidates for election as director and the ability of security holders to communicate effectively with members of boards of directors.\25\ We seek to address these concerns with the new disclosure standards we are adopting today.
\19\ See Release No. 3448301 (August 8, 2003).
\20\ The Division also recommended that we propose amendments to the proxy rules regarding the inclusion in company proxy materials of security holder nominees for election as directors. Our proposals regarding this issue were included in a separate release. See Release No. 3448626 (October 14, 2003) [68 FR 60784]. As such, this adopting release does not address that issue directly. The Division's Staff Report to the Commission, detailing the results of its review of the proxy process related to the nomination and election of directors, can be found on our Web site at http://www.sec.gov. Staff Report: Review of the Proxy Process Regarding the
Nomination and Election of Directors, Division of Corporation Finance (July 15, 2003).
\21\ See Press Release No. 200346 (April 14, 2003).
\22\ On May 1, 2003, we solicited public views on the Division's review of the proxy rules relating to the nomination and election of directors. See Release No. 3447778 (May 1, 2003) [68 FR 24530]. In addition to receiving written comments, the Division spoke with a number of interested parties representing security holders, the business community, and the legal community. Each of the comment letters received, memoranda documenting the Division's meetings, and a summary of the comments (``Summary of Comments'') may be found in File No. S71003 and on our Web site, http://www.sec.gov. Summary of Comments in Response to the Commission's Solicitation of Public Views Regarding Possible Changes to the Proxy Rules (July 15, 2003). \23\ See Summary of CommentsFile No. S71003.
\24\ See id.
\25\ See id.
II. New Disclosure Requirements
A. Disclosure Regarding Nominating Committee Processes

1. Discussion

We are adopting new proxy statement disclosure requirements that will provide greater transparency regarding the nominating committee and the nomination process.\26\ This enhanced disclosure is intended to provide security holders with additional, specific information upon which to evaluate the boards of directors and nominating committees of the companies in which they invest. Further, we intend that increased transparency of the nomination process will make that process more understandable to security holders. In particular, we are adopting a number of specific and detailed disclosure requirements because we believe that disclosure in response to each of these requirements will assist security holders in understanding each of the processes and policies of nominating committees and boards of directors regarding the nomination of candidates for director.
\26\ Prior to the effectiveness of these amendments, companies must disclose whether they have a nominating committee and, if so, whether that committee considers nominees recommended by security holders and how any such recommendations may be submitted. See Paragraphs (d)(1) and (d)(2) of Item 7 of Exchange Act Schedule 14A. See also Release No. 3415384 (December 6, 1978) [43 FR 58522], in which the Commission adopted these disclosure standards. In the 1978 release proposing these disclosure requirements, the Commission stated generally its belief that the new disclosure requirements would facilitate improved accountability and, more specifically, that:
[I]nformation relating to nominating committees would be important to security holders because a nominating committee can, over time, have a significant impact on the composition of the board and also can improve the director selection process by increasing the range of candidates under consideration and intensifying the scrutiny given to their qualifications. Additionally, the Commission believes that the institution of nominating committees can represent a significant step in increasing security holder participation in the corporate electoral process, a subject which the Commission will consider further in connection with its continuing proxy rule re examination.

Release No. 3414970 (July 18, 1978) [43 FR 31945].

Detailed disclosure regarding nomination processes will provide security holders with important information regarding the management and oversight of the companies in which they invest. The specific disclosure requirements we are adopting today will cause companies to provide security holders with that information. We believe that specific, detailed disclosure requirements are necessary and appropriate to assure that investors are provided with disclosure that presents the desired degree of clarity and transparency. In the absence of these specific disclosure requirements, we believe that disclosure could be at a level of generality that would not be sufficiently useful to security holders.

Each of the requirements we are adopting today furthers the goal of providing the transparency that is necessary for security holders to understand the nomination process. For example, the rules we are adopting requiring disclosure of the following matters are necessary to give security holders a more complete overview of the nomination process for directors of the companies in which they invest: [sbull] A company's determination whether to have a nominating committee;
[sbull] The nominating committee's charter, if any;
[sbull] The nominating committee's processes for identifying and evaluating candidates; and
[sbull] The minimum qualifications for a nominating committee recommended nominee and any qualities and skills that the nominating committee believes are necessary or desirable for board members to possess.

In addition, as noted in the proposing release,\27\ we believe that information as to whether nominating committee members are independent within the requirements of listing standards applicable to a company is meaningful to security holders in evaluating the nomination process of a company, how that process works, and the seriousness with which the nomination process is considered by a company. Further, information regarding the persons who recommended each nominee and disclosure as to whether there are third parties that receive compensation related to identifying and evaluating candidates will provide important information as to the process followed by a company.

\27\ See Release No. 3448301 (August 8, 2003).

The ability to participate in the nomination process is an important matter for security holders.\28\ Accordingly, we believe that it is important for security holders to understand the specific application of the nomination processes to candidates put forward by security holders. Disclosure as to whether and how they may participate in a company's nomination process, and the manner in which their candidates are evaluated, including differences between how their candidates and how other candidates are evaluated, therefore, represents important information for security holders. Finally, an additional, specific disclosure requirement regarding the treatment of candidates put forward by large security holders or groups of security holders that have a longterm investment interest is appropriate, as it will provide investors with information that is useful in assessing the actions of the nominating committee.
\28\ See Release No. 3414970 (July 18, 1978). See also Summary of Comments `` File No. S71003 and Summary of Comments `` File No. S71403.

2. Disclosure Requirements

The amendments we are adopting today will expand the current proxy statement disclosure regarding a company's nominating or similar committee to include:
[sbull] A statement as to whether the company has a standing nominating committee or a committee performing similar functions \29\ and, if the company
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does not have a standing nominating committee or committee performing similar functions, a statement of the basis for the view of the board of directors that it is appropriate for the company not to have such a committee and identification of each director who participates in the consideration of director nominees;\30\
\29\ As noted earlier in this release, this disclosure currently is required under Paragraph (d)(1) of Item 7 of Exchange Act Schedule 14A.
\30\ See new Paragraph (d)(2)(i) of Item 7 of Exchange Act Schedule 14A.
[sbull] The following information regarding the company's director nomination process:\31\
\31\ For the remainder of our discussion of this disclosure requirement, the term ``nominating committee'' refers to a nominating committee or similar committee or group of directors fulfilling the role of a nominating committee. That group may comprise the full board. See the Instruction to new Paragraph (d)(2)(ii) of Item 7 of Exchange Act Schedule 14A. If the company has a standing nominating committee or a committee fulfilling the role of a nominating committee, Item 7(d)(1) of Exchange Act Schedule 14A requires identification of the members of that committee. If the company does not have such a standing committee, new Paragraph (d)(2)(i) of Item 7 of Exchange Act Schedule 14A will require identification of each director who participates in the consideration of director nominees.
[sbull] If the nominating committee has a charter, disclosure of whether a current copy of the charter is available to security holders on the company's Web site. If the nominating committee has a charter and a current copy of the charter is available to security holders on the company's Web site, disclosure of the company's Web site address. If the nominating committee has a charter and a current copy of the charter is not available to security holders on the company's Web site, inclusion of a copy of the charter as an appendix to the company's proxy statement at least once every three fiscal years. If a current copy of the charter is not available to security holders on the company's Web site, and is not included as an appendix to the company's proxy statement, identification of the prior fiscal year in which the charter was so included in satisfaction of the requirement;\32\ \32\ See new Paragraph (d)(2)(ii)(A) of Item 7 of Exchange Act Schedule 14A.
[sbull] If the nominating committee does not have a charter, a statement of that fact;\33\
\33\ See new Paragraph (d)(2)(ii)(B) of Item 7 of Exchange Act Schedule 14A.
[sbull] If the company is a listed issuer \34\ whose securities are listed on a national securities exchange registered pursuant to section 6(a) of the Exchange Act \35\ or in an automated interdealer quotation system of a national securities association registered pursuant to section 15A(a) of the Exchange Act \36\ that has independence requirements for nominating committee members, disclosure as to whether the members of the nominating committee are independent, as independence for nominating committee members is defined in the listing standards applicable to the listed issuer;\37\
\34\ As defined in Exchange Act Rule 10A3 [17 CFR 240.10A3]. \35\ 15 U.S.C. 78f(a).
\36\ 15 U.S.C. 78o3(a).
\37\ See new Paragraph (d)(2)(ii)(C) of Item 7 of Exchange Act Schedule 14A.
[sbull] If the company is not a listed issuer,\38\ disclosure as to whether each of the members of the nominating committee is independent. In determining whether a member is independent, the company must use a definition of independence of a national securities exchange registered pursuant to section 6(a) of the Exchange Act or a national securities association registered pursuant to section 15A(a) of the Exchange Act that has been approved by the Commission (as that definition may be modified or supplemented), and state which definition it used. Whatever definition the company chooses, it must apply that definition consistently to all members of the nominating committee and use the independence standards of the same national securities exchange or national securities association for purposes of nominating committee disclosure under this requirement and audit committee disclosure required under Item 7(d)(3)(iv) of Exchange Act Schedule 14A;\39\ \38\ As defined in Exchange Act Rule 10A3.
\39\ See new Paragraph (d)(2)(ii)(D) of Item 7 of Exchange Act Schedule 14A.
[sbull] If the nominating committee has a policy with regard to the consideration of any director candidates recommended by security holders, a description of the material elements of that policy, which shall include, but need not be limited to, a statement as to whether the committee will consider director candidates recommended by security holders;\40\
\40\ See new Paragraph (d)(2)(ii)(E) of Item 7 of Exchange Act Schedule 14A. As adopted, this disclosure requirement specifies that the company's description of the material elements of its policy with regard to consideration of security holder candidates ``need not'' be limited to a statement as to whether the nominating committee will consider security holderrecommended candidates. This revision was made in response to a commenter's concern that the proposed requirement (that the disclosure ``shall not'' be limited to a statement as to whether the committee will consider security holder recommended candidates) implied that a company could not merely have a policy of considering security holder recommended candidates, but instead was required to put in place a more detailed policy with respect to consideration of such candidates. See Committee on Federal Regulation of Securities of the American Bar Association's section of Business Law (``ABA'').
[sbull] If the nominating committee does not have a policy with regard to the consideration of any director candidates recommended by security holders, a statement of that fact and a statement of the basis for the view of the board of directors that it is appropriate for the company not to have such a policy;\41\
\41\ See new Paragraph (d)(2)(ii)(F) of Item 7 of Exchange Act Schedule 14A.
[sbull] If the nominating committee will consider candidates recommended by security holders, a description of the procedures to be followed by security holders in submitting such recommendations;\42\ \42\ Prior to the effectiveness of these amendments, this disclosure is required under Paragraph (d)(2) of Item 7 of Exchange Act Schedule 14A. As a result of the amendments to Item 7 of Exchange Act Schedule 14A that we are adopting today, this requirement will be moved to new Paragraph (d)(2)(ii)(G) of Item 7 of Exchange Act Schedule 14A. In addition, we are adopting a new requirement in Regulations SB and SK, and a new reference to that requirement in Exchange Act Forms 10Q and 10QSB, that will require companies to disclose any material changes to the procedures that were previously disclosed pursuant to this item. See new Paragraph (b) of Item 5 of Part II to Exchange Act Forms 10Q and 10QSB, new Paragraph (g) of Item 401 of Exchange Act Regulation SB, and new Paragraph (j) of Item 401 of Exchange Act Regulation SK. In those instances where a material change is implemented during the last quarter of a company's fiscal year, companies will be required to include disclosure of such change in their Exchange Act Form 10K or 10KSB. See Item 10 of Part III of Exchange Act Form 10K, Item 9 of Part III of Exchange Act Form 10KSB, new Paragraph (g) of Item 401 of Exchange Act Regulation SB, and new Paragraph (j) of Item 401 of Exchange Act Regulation SK.
[sbull] A description of any specific, minimum qualifications that the nominating committee believes must be met by a nominating committeerecommended nominee for a position on the company's board of directors, and a description of any specific qualities or skills that the nominating committee believes are necessary for one or more of the company's directors to possess;\43\
\43\ See new Paragraph (d)(2)(ii)(H) of Item 7 of Exchange Act Schedule 14A.
[sbull] A description of the nominating committee's process for identifying and evaluating nominees for director, including nominees recommended by security holders, and any differences in the manner in which the nominating committee evaluates nominees for director based on whether the nominee is recommended by a security holder;\44\ \44\ See new Paragraph (d)(2)(ii)(I) of Item 7 of Exchange Act Schedule 14A.
[sbull] With regard to each nominee approved by the nominating committee for inclusion on the company's proxy card (other than nominees who are executive officers or who are directors standing for reelection), a statement as to which one or more of the following categories of persons or entities recommended that nominee: security holder, nonmanagement director, chief executive officer, other executive
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officer, thirdparty search firm, or other, specified source;\45\ \45\ See new Paragraph (d)(2)(ii)(J) of Item 7 of Exchange Act Schedule 14A.
[sbull] If the company pays a fee to any third party or parties to identify or evaluate or assist in identifying or evaluating potential nominees, disclosure of the function performed by each such third party;\46\ and
\46\ See new Paragraph (d)(2)(ii)(K) of Item 7 of Exchange Act Schedule 14A.
[sbull] If the company's nominating committee received, by a date not later than the 120th calendar day before the date of the company's proxy statement released to security holders in connection with the previous year's annual meeting, a recommended nominee from a security holder that beneficially owned more than 5% of the company's voting common stock for at least one year as of the date the recommendation was made, or from a group of security holders that beneficially owned, in the aggregate, more than 5% of the company's voting common stock,\47\ with each of the securities used to calculate that ownership held for at least one year as of the date the recommendation was made,\48\ identification of the candidate and the security holder or security holder group that recommended the candidate and disclosure as to whether the nominating committee chose to nominate the candidate, provided, however, that no such identification or disclosure is required without the written consent of both the security holder or security holder group and the candidate to be so identified.\49\ \47\ Our use of a more than 5% beneficial ownership threshold to trigger this additional disclosure obligation means that
recommendations generally will be made by security holders or groups that have a reporting obligation under Exchange Act Regulation 13D [17 CFR 240.13d240.13d102]. Recommending security holders, like other beneficial owners, will continue to report on Exchange Act Schedule 13G [17 CFR 240.13d102] or Exchange Act Schedule 13D [17 CFR 240.13d101] based on their purpose or effect in acquiring or holding the company's securities. That determination is not intended to be affected by our adoption of this new disclosure obligation. In addition, we anticipate that security holders may communicate with each other in an effort to aggregate more than 5% of a company's securities before submitting a recommended candidate to a company's nominating committee. The determination as to what communications may be deemed solicitations, either subject to or exempt from the proxy rules, is based on facts and circumstances and is not intended to be affected by our adoption of this new disclosure obligation. \48\ Similar to the method used in Exchange Act Rule 14a8 [17 CFR 240.14a8] with regard to security holder proponents, the percentage of securities held by a recommending security holder, as well as the holding period of those securities may be determined by the company, on its own, if the security holder is the registered holder of the securities. If not, the security holder can submit one of the following to the company to evidence the required ownership and holding period:
(1) a written statement from the ``record'' holder of the securities (usually a broker or bank) verifying that, at the time the security holder made the recommendation, he or she had held the required securities for at least one year; or
(2) if the security holder has filed a Schedule 13D, Schedule 13G, Form 3 [17 CFR 249.103], Form 4 [17 CFR 249.104], and/or Form 5 [17 CFR 249.105], or amendments to those documents or updated forms, reflecting ownership of the securities as of or before the date of the recommendation, a copy of the schedule and/or form, and any subsequent amendments reporting a change in ownership level, as well as a written statement that the security holder continuously held the required securities for the oneyear period as of the date of the recommendation.

See Instruction 3 to new Paragraph (d)(2)(ii)(L) of Item 7 of Item 7 of Exchange Act Schedule 14A.
\49\ See new Paragraph (d)(2)(ii)(L) of Item 7 of Exchange Act Schedule 14A.
3. Comments Regarding, and Revisions to, the Proposed Disclosure Requirements

In response to our request for comment on the proposed nominating committee disclosure requirements, a majority of commenters who supported the proposed rules believed that increased disclosure about nominating committee processes would be effective in increasing security holder understanding of the nomination process,\50\ board accountability,\51\ board responsiveness,\52\ and a company's corporate governance policies.\53\ With regard to the particular components of the proposed disclosure standards, commenters provided more specific input, which we considered carefully in revising certain of the disclosure standards that we are adopting today.
\50\ See, e.g., American Federation of State, County, and Municipal Employees (``AFSCME''); Council of Institutional Investors (``CII''); Creative Investment Research, Inc. (``CIR''); Andrew Randall; Pennsylvania State Employees' Retirement System (``SERS''). \51\ See, e.g., J.A. Glynn & Co. (``J.A. Glynn''); Robert Schneeweiss.
\52\ See, e.g., CII; CIR.
\53\ See, e.g., American Community Bankers (``ACB''); California Public Employees' Retirement System (``CalPERS''); CIR; United Brotherhood of Carpenters and Joiners of America (``UBC''). a. Nominating Committee Charter

Commenters generally were of the view that summary disclosure of the material terms of the nominating committee's charter within a company's proxy statement was unnecessary and would lead to excessively lengthy proxy statements.\54\ These commenters suggested that it would be adequate to identify where the charter could be found, provide the charter to security holders upon request, and/or attach the charter to the proxy statement once every three years (as is the case for audit committee charters).\55\
\54\ See, e.g., The Business Roundtable (``BRT''); Foley & Lardner (``Foley''); Independent Community Bankers Association (``ICBA''); International Paper Company (``Int'l Paper''); Jenkens & Gilchrist (``Jenkens''); McGuireWoods LLP (``McGuireWoods''); Committee on Securities Regulation of the Business Section of the New York State Bar Association (``NYSBAR''); Sullivan & Cromwell, LLP (``Sullivan''); Wells Fargo & Company (``Wells Fargo''). \55\ See, e.g., ICBA; Int'l Paper; McGuireWoods; NYSBAR.

The disclosure standard that we are adopting today does not include the proposed requirement that companies describe the material terms of the nominating committee charter. Companies will, instead, be required to disclose whether a current copy of the charter is available to security holders on the company's Web site. Where a company does not make the charter available on its Web site, the company would be required to include a copy of the charter as an appendix to its proxy statement at least once every three fiscal years and, in those proxy statements that do not include the charter as an appendix, the company would be required to identify in which of the prior years the charter was so included. We believe that this disclosure standard will provide security holders with the information regarding a company's nominating committee that was sought in the proposal, without unduly burdening companies.

b. Independence of Nominating Committee Members

In response to the proposed disclosure requirement that listed issuers disclose any instance during the prior fiscal year in which any member of the nominating committee did not satisfy the definition of independence included in the listing standards to which the company is subject, a number of commenters suggested that we revise or delete this requirement.\56\ At least one of these commenters believed that independence determinations are interpretive matters and that board members could be unaware of developments that would impact independence.\57\ Another commenter suggested that we revise the disclosure requirement to conform to the recently adopted provision that requires companies to state whether members of their audit committees are independent, as defined in applicable listing standards.\58\ We believe that it is appropriate to use an approach consistent with the audit committee disclosure standards. Accordingly, the disclosure standard we are adopting
[[Page 69208]]
will require companies to disclose whether each member of the nominating committee is independent, as independence for nominating committee members is defined in the listing standards applicable to the listed issuer.
\56\ See, e.g., ABA; Sullivan.
\57\ See ABA.
\58\ See Sullivan. This disclosure requirement is set forth in Paragraph (d)(3)(iv) of Item 7 of Exchange Act Schedule 14A. c. Qualifications and Skills of Candidates and Overall Board Composition

Commenters provided input with regard to the proposed requirement that companies describe the qualifications, qualities, skills, and overall composition that companies are seeking with regard to board membership. In this regard, some commenters noted that nominating committees' selection processes do not tend to be precise, and that the characteristics a nominating committee looks for may change as the composition of the board changes.\59\ In consideration of these comments, the disclosure requirements we are adopting today do not include the proposed requirement that companies describe ``any specific standards for the overall structure and composition of the company's board of directors.''\60\ We are adopting the remaining disclosure items substantially as proposed, as we believe that they will provide valuable information to security holders regarding the nomination process, without resulting in boilerplate disclosures.
\59\ See, e.g., Foley; Jenkens; McGuireWoods; NYSBAR; Wells Fargo.

\60\ Release No. 3448301 (August 8, 2003).

Many commenters that supported the disclosure requirements suggested that we expand the requirements to require companies to disclose the extent to which they take into consideration diversity, in particular race and gender, in nominating candidates.\61\ We have not included such a requirement in the standards we are adopting today, as we believe this particular consideration, as well as other considerations made by a company, will likely be addressed adequately by the new disclosure item requiring companies to disclose their criteria for considering board candidates. Further, we do not view it as appropriate to identify any specific criteria that a company must address in describing the qualities it looks for in board candidates. \61\ See, e.g., Boston Common Asset Management (``Boston''); Calvert Group Ltd. (``Calvert''); Christian Brothers Investment Services (``CBIS''); Nathan Cummings Foundation (``Cummings''); Domini Social Investments LLC (``Domini''); ISIS Asset Management (``ISIS''); J.A. Glynn; James McRitchie, Editor, CorpGov.net and PERSWatch.net, Letter dated September 13, 2003 (``McRitchie2''); Mehri & Skalet PLLC (``Mehri &Skalet''); Denise L. Nappier, Connecticut State Treasurer (``Nappier''); Social Investment Forum Ltd. (``SIF''); Socially Responsible Investment Coalition
(``SRIC''); William C. Thompson, Jr., Controller of the City of New York (``Thompson''); The General Board of Pension and Health Benefits of the United Methodist Church (``UMC''); Walden Asset Management (``Walden''). See also Jesse Smith Noyes Foundation (``Noyes''). We also received a number of letters that are substantially similar in content that supported additional disclosure describing board consideration of diversity. See Letter Type A (``Letter A''); Letter Type B (``Letter B'').

d. Sources of Nominees

Some of the most extensive comment, particularly from the business and legal communities, arose from the proposal to require companies to identify the source of all director nominees, other than incumbent directors and executive officers.\62\ Generally speaking, these commenters were of the view that, as proposed, the required disclosure would be difficult to make in a clear and accurate manner because there are multiple ``sources'' for most nominees.\63\ In addition, these commenters objected to naming the specific source on the basis that this disclosure could have a ``chilling effect on the search process,''\64\ would be immaterial,\65\ and could imply that a nominee was unqualified to serve on the board based solely on the position held by the individual (e.g., the chief executive officer) who originally recommended the nominee.\66\ While some commenters recommended that we delete this provision, others recommended that we instead require disclosure of the general category of persons who recommended the nominee (e.g., management or security holders).\67\ Another commenter recommended that we, instead, require companies to disclose whether nominees are independent from the company and, in the case of nominees proposed by security holders, from the recommending security holders.\68\
\62\ See, e.g., ABA; BRT; Intel Corporation (``Intel''); Leggett & Platt Inc. (``Leggett''); NYSBAR; Valero Energy Corporation (``Valero''); Wells Fargo.
\63\ See id.
\64\ American Society of Corporate Secretaries. See also, American Corporate Counsel Association (``ACCA''); Valero.
\65\ See, e.g., BRT.
\66\ See Sullivan.
\67\ See Boston; Intel; Walden.

\68\ See ABA.

We continue to believe that information regarding the sources of company nominees is important for security holders; however, we have revised the disclosure standard to require companies to identify the category or categories of persons or entities that recommended each nominee. In this regard, we have retained the requirement that companies specifically note those instances where a nominee was recommended by the chief executive officer of the company. In providing the required disclosure, companies should consider what category of person initially recommended, or otherwise brought to the attention of the nominating committee, each candidate. In disclosing the category of persons or entities that initially recommended a candidate to the nominating committee, companies should ensure that they identify also any person or entity that caused a particular candidate to be recommended. For example, if the chief executive officer asks a third party to evaluate a potential candidate, and that third party ultimately recommends the candidate to the nominating committee, both the chief executive officer and the third party should be identified as recommending parties in the company's disclosure. We have provided for disclosure of more than one type of source for a nominee to address the possibility of multiple sources.
e. Additional Disclosure Regarding Nominees of Large, LongTerm Security Holders

The additional disclosure requirement with regard to nominees recommended by large, longterm security holders elicited a great deal of comment from most categories of commenters. Generally, commenters from the business and legal communities recommended either deleting the disclosure requirement related to security holder recommendations altogether or increasing the beneficial ownership requirement to 5% or 10% and/or increasing the holding period to two or more years.\69\ With regard to the 5% and 10% recommendations, at least one commenter noted that those recommending security holders would be required to report their beneficial ownership under Exchange Act Regulation 13D.\70\ \69\ See, e.g., ACB; ACCA; Compass Bancshares, Inc.
(``Compass''); Foley; ICBA; Intel; Int'l Paper; Jenkens; Leggett; NYSBAR; Sullivan; Wells Fargo.

\70\ See Sullivan.

Some of the reasons given by commenters for deleting the requirement were:
[sbull] The requirement would give special status to larger security holders; \71\
\71\ See id.
[sbull] 3% security holders could use the disclosure requirement for their own ``special interests''; \72\
\72\ Id. See also ABA.
[sbull] There could be more than one triggering nomination, thus resulting in complex and confusing disclosure; \73\
\73\ See ABA.
[[Page 69209]]
[sbull] The requirement would create a bias to accept marginal director candidates; \74\
\74\ See Sullivan.
[sbull] The requirements, specifically those regarding giving the reasons for rejecting nominees, would ``chill'' nominating committee discussions; \75\
\75\ See, e.g., id.
[sbull] The disclosure would not be material to security holders; \76\ and
\76\ See id.
[sbull] The disclosure would raise privacy issues for the nominating security holder and candidate.\77\

\77\ See id.

Conversely, this disclosure item also received strong support from security holders, many of whom recommended that we use a lower ownership percentage trigger or a trigger no more stringent than that proposed.\78\
\78\ See, e.g., American Federation of Labor and Congress of Industrial Organizations (``AFLCIO''); CII; International
Brotherhood of Teamsters (``IBT''); ISIS; McRitchie2; Nappier; SERS; Trillium Asset Management (``Trillium''); UBC. See also AFSCME; Association of the Bar of the City of New York's Special Committee on Mergers, Acquisitions and Corporate Control Contests

(``NYCBAR'').

With regard to the requirement that the reasons for not nominating a candidate be given, many commenters believed that this requirement would be difficult to satisfy, as:
[sbull] Nominating committee determinations are not always precise in nature;
[sbull] The disclosure would expose candidates to ridicule; and/or [sbull] The disclosure would be an invasion of privacy for all parties involved in the process, including the nominating committee members, whose deliberations would be made public as a result of the disclosure requirement.\79\
\79\ See, e.g., ABA; BRT; Foley; Jenkens; NYSBAR; Sullivan; Valero.

Some commenters also expressed the view that this requirement would expose the company and nominating committee members to risk of litigation and would allow security holders to ``second guess'' the nominating committee's determinations.\80\ On the other hand, some commenters were of the view that we should retain the proposed disclosure standard and expand it to require companies to disclose the identity of rejected candidates, provided that the candidates consent to be so identified.\81\
\80\ See, e.g., Compass; Foley; Jenkens.

\81\ See CII; CIR; Cummings; SERS.

After considering the comments, we continue to believe that disclosure of director recommendations made by large, longterm security holders would provide valuable information that would enable security holders to better understand the nomination process. We have reevaluated the 3% threshold to trigger the additional disclosure requirement, however, and have determined that ownership of more than 5% is a more appropriate threshold at which to require companies to provide additional disclosure.\82\ In this regard, we agree with commenters that a more than 5% ownership threshold has a significant advantage over a lesser ownership threshold, in that recommending security holders would be subject to the beneficial ownership reporting requirements of Exchange Act Regulation 13D. We anticipate that a more than 5% ownership threshold will, in many cases, simplify the process by which a company and the recommending security holder determine that the recommending security holder satisfies the ownership threshold to trigger the additional disclosure requirement and, where a security holder or group has reported its beneficial ownership prior to making a recommendation, will help to ensure that the company and its security holders have basic information about the recommending security holder. This will benefit the company by providing the nominating committee with additional information regarding the recommending security holder and, possibly, the recommended candidate. Further, security holders will benefit through having additional information upon which they can evaluate the nominating committee's response to the security holder recommendation.\83\
\82\ On October 14, 2003, we proposed new rules regarding the inclusion of security holder nominees for director in company proxy materials. See Release No. 3448626 (October 14, 2003). The issue of the appropriate ownership threshold, if any, for any such inclusion of security holder nominees for director is a separate issue from the appropriate ownership threshold for the disclosure we are adopting today and is not addressed in this release.
\83\ In this regard, information available to our Office of Economic Analysis indicates that, of the companies listed on the New York Stock Exchange, Nasdaq Stock Market and American Stock Exchange as of December 31, 2002, 57% had at least one institutional security holder that beneficially owned 5% of the common equity or similar securities and 1.4% had five or more such security holders. This information was derived from filings on Exchange Act Form 13F [17 CFR 249.325] that indicated that the filing security holder had held its securities for at least one year.

In addition, the new disclosure standard will require that companies make the specified disclosures, including identifying both the nominating security holder or security holder group and candidate, only in those instances where both parties have provided to the company their consent to be identified and, where the security holder or group members are not registered holders, the security holder or group members have provided proof of the required ownership and holding period to the company. A security holder or group that seeks to require a company to provide disclosure related to a recommendation would provide their written consent and proof of ownership to the company at the time of the recommendation. The company would not be obligated to request such materials where a security holder or group does not otherwise provide their consent and proof of ownership.\84\ \84\ See Instruction 4 to new Paragraph (d)(2)(ii)(L) of Item 7 of Exchange Act Schedule 14A.

In consideration of the concerns expressed by commenters, including those with regard to boilerplate disclosure and privacy issues, the disclosure standard that we are adopting today does not include the proposed requirement that companies disclose the specific reasons for not nominating a candidate. The requirement will, however, require that companies identify the candidate in addition to the recommending security holder or group. While not required, a company could, of course, choose to explain why it did not nominate one or all of the security holderrecommended candidates.

We also have added language to the disclosure requirement to clarify the date by which a security holder must submit a recommended nominee in order to trigger the additional disclosure requirement by the companya security holder's recommendation would have to be received by a company's nominating committee by a date not later than the 120th calendar day before the date the company's proxy statement was released to security holders in connection with the previous year's annual meeting.\85\ We have added a new instruction clarifying that, where a company has changed its meeting date by more than 30 days, a security holder must make its recommendation by a date that is a reasonable time before the company begins to print and mail its proxy statement in order to trigger the additional disclosures.\86\ \85\ As is currently required in Exchange Act Rule 14a8, this date would be calculated by determining the release date disclosed in the previous year's proxy statement, increasing the year by one, and counting back 120 calendar days.
\86\ See Instruction 2 to new Paragraph (d)(2)(ii)(L) of Item 7 of Exchange Act Schedule 14A. The new instruction is modeled after the approach used with regard to Exchange Act Rule 14a8 security holder proposals, as set forth in Exchange Act Rule 14a8(e)(2) [17 CFR 240.14a8(e)(2)].

In addition, we have added a new instruction that responds to commenters' suggestion that we address how the percentage of securities owned by a nominating security holder would
[[Page 69210]]
be calculated.\87\ In this regard we have clarified that the percentage of securities held by a recommending security holder may be determined by reference to the company's most recently filed quarterly or annual report (or any subsequent current report), unless the party relying on such report knows or has reason to believe that the information included in the report is inaccurate.\88\
\87\ See, e.g., ABA.
\88\ See Instruction 1 to new Paragraph (d)(2)(ii)(L) of Item 7 of Exchange Act Schedule 14A. The new instruction is modeled after Exchange Act Rule 13d1(j) [17 CFR 240.13d1(j)], which specifies on what basis beneficial holders may calculate the percentage of subject securities they hold for purposes of Exchange Act Regulation 13D.
4. Interaction of the Disclosure Requirements With Recently Revised Market Listing Standards

The New York Stock Exchange and the Nasdaq Stock Market have adopted revised listing standards that, among other requirements, require listed companies to have independent nominating committees.\89\ While these listing standard changes demonstrate the importance of the nomination process and the nominating committee, and represent a strengthening of the role and independence of the nominating committee, they do not require nominating committees to consider security holder nominees or companies to make the disclosures described in this release. The disclosure requirements we are adopting today will provide useful information to security holders regarding the nomination process, the manner of evaluating nominees, and the extent to which the boards of directors of the companies in which they invest have a process for considering, and do in fact consider, security holder recommendations. Accordingly, the disclosure requirements we are adopting today will operate in conjunction with the revised listing standards regarding nominating committees.
\89\ See Release No. 3448745 (November 4, 2003) [68 FR 64154]. While the NYSE standards include a requirement that listed companies have an independent nominating committee (NYSE section 303A(4)(a)), the Nasdaq standards provide that the nomination of directors may, alternatively, be determined by a majority of the independent directors (NASD Rule 4350(c)). In discussing the NYSE and Nasdaq standards, our references to independent nominating committees encompass this alternative under the Nasdaq standards.

A number of commenters from the business and legal communities recommended that we delay adoption of the proposed disclosure standards in order to allow the new listing standards regarding nominating committees to take effect.\90\ We agree with these commenters that the new listing standards represent a significant strengthening of the nomination process; however, we believe that the disclosure standards that we adopt today are a necessary complement to those listing standards and, accordingly, do not believe such a delay is necessary or appropriate.
\90\ See, e.g., ABA; ACB; ACCA; BRT; CSX Corporation; Foley; ICBA; Jenkens; Valero.
B. Disclosure Regarding the Ability of Security Holders To Communicate With Boards of Directors

1. Discussion

We are adopting new disclosure standards with regard to security holder communications with board members. These disclosure standards are intended to improve the transparency of board operations, as well as security holder understanding of the companies in which they invest.\91\
\91\ In Exchange Act Release No. 3448745 (November 4, 2003), the Commission approved a new NYSE listing standard that addresses security holder communications with board members. This standard provides that: ``In order that interested parties may be able to make their concerns known to nonmanagement directors, a company must disclose a method for such parties to communicate directly and confidentially with the presiding director [of the nonmanagement directors] or with nonmanagement directors as a group.'' See NYSE Section 303A(3). This method could be analogous to the method in the NYSE listing standards required by Exchange Act Rule 10A3 regarding audit committees. See Commentary to NYSE Section 303A(3). Exchange Act Rule 10A3(b)(2) requires listing standards relating to audit committees to require that ``[e]ach audit committee * * * establish procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.''

In response to our May 1, 2003 solicitation of input into the proxy process review by the Division of Corporation Finance, representatives of the business community commented that disclosure regarding the means by which security holders may communicate directly with the board of directors would address issues of accountability and responsiveness without extensive disruption or costs.\92\ Comments from investors and investor advocacy groups also indicated the view that this disclosure would be helpful;\93\ however, these commenters also noted that disclosure alone would not address all issues related to accountability and responsiveness.\94\
\92\ See Summary of CommentsFile No. S71003.
\93\ See id.

\94\ See id.

We received similar comment with regard to the proposed disclosure requirements, with no clear consensus as to whether the proposed rules would be an effective means to improve board accountability, board responsiveness, and corporate governance policies.\95\ Some commenters believed the disclosure would be useful to security holders, including one commenter who expressed the view that the proposed disclosure would provide security holders with important information that provides an understanding of a company's process for communications with the board.\96\ Conversely, other commenters did not believe that the proposed rules would be an effective means to improve board accountability, board responsiveness, and corporate governance policies and expressed the view that the disclosure would not be useful to security holders.\97\ Overall, we continue to believe that the disclosure will provide security holders with useful information about their ability to communicate with board members. Accordingly, we are adopting, substantially as proposed, the disclosure standards related to security holder communications with board members.
\95\ See Summary of CommentsFile No. S71403.
\96\ See CIR.
\97\ See, e.g., ABA; BRT; Les Greenberg, Chairman, Committee of Concerned Shareholders, Letter dated August 9, 2003 (``CCS1''); Valero.

2. Disclosure Requirements

We are adopting a number of specific and detailed disclosure requirements regarding communications by security holders with boards of directors because we believe that these requirements will provide security holders with a better understanding of the manner in which security holders can engage in these communications. In particular, we believe that the disclosure requirements, including whether a board has a process by which security holders can communicate with it, are necessary to give security holders a better picture of a critical component of the board's interaction with security holders. Detailed disclosure regarding that process at a company, if it exists, will be important to security holders in evaluating the nature and quality of the communications process. Further, we believe that the level of specificity in the new disclosure standards will discourage boilerplate disclosure.

Companies will be required to provide the following disclosure with regard to their processes for security holder communications with board members:
[sbull] A statement as to whether or not the company's board of directors provides a process for security holders to send
communications to the board of directors and, if the company does not [[Page 69211]]
have such a process for security holders to send communications to the board of directors, a statement of the basis for the view of the board of directors that it is appropriate for the company not to have such a process; \98\
\98\ See new Paragraph (h)(1) of Item 7 of Exchange Act Schedule 14A.
[sbull] If the company has a process for security holders to send communications to the board of directors:
[sbull] a description of the manner in which security holders can send communications to the board and, if applicable, to specified individual directors; \99\ and
\99\ See new Paragraph (h)(2)(i) of Item 7 of Exchange Act Schedule 14A.
[sbull] If all security holder communications are not sent directly to board members, a description of the company's process for determining which communications will be relayed to board members; \100\ and
\100\ See new Paragraph (h)(2)(ii) of Item 7 of Exchange Act Schedule 14A.
[sbull] A description of the company's policy, if any, with regard to board members' attendance at annual meetings and a statement of the number of board members who attended the prior year's annual meeting.\101\
\101\ See new Paragraph (h)(3) of Item 7 of Exchange Act Schedule 14A.
3. Comments Regarding, and Revisions to, the Proposed Disclosure Requirements

a. Scope of the Disclosure Requirement

We received a number of comments suggesting that we clarify the application of the disclosure requirements to communications with the board by officers, directors, employees, and agents of the company who also own company securities.\102\ We do not believe that all communications from officers, directors, employees, and agents of the company are the types of communications that the disclosure standards should capture. We have, therefore, added a general instruction to the new disclosure requirements clarifying that:
\102\ See, e.g., Wells Fargo.
[sbull] Communications from an officer or director of the company will not be viewed as security holder communications for purposes of the disclosure requirement; \103\ and
\103\ See Instruction 1 to new Paragraph (h) of Item 7 of Exchange Act Schedule 14A.
[sbull] Communications from an employee or agent of the company will be viewed as security holder communications for purposes of the disclosure requirement only if those communications are made solely in such employee's or agent's capacity as a security holder.\104\ \104\ See id.

In response to our request for comment as to whether the new disclosure standard should apply to communications made in connection with security holder proposals submitted pursuant to Exchange Act Rule 14a8, one commenter suggested that it would be ``inappropriate'' to exclude Exchange Act Rule 14a8 proposals from the new disclosure standard; \105\ however, other commenters suggested that Exchange Act Rule 14a8 communications should be expressly excluded.\106\ In particular, one commenter noted that, ``[b]oth the security holder proponent and the company are subject to specific, detailed requirements, conditions and deadlines, including regulation of the content of statements about the proposal * * * There is no need to impose another disclosure requirement on this process.'' \107\ We agree that the current disclosure requirements with regard to security holder proposals are adequate to inform security holders of how they may communicate with boards via that mechanism. Accordingly, we have expressly excluded security holder proposals submitted pursuant to Exchange Act Rule 14a8, and communications made in connection with such proposals, from the definition of ``security holder
communications'' for purposes of the new disclosure standard.\108\ \105\ AFSCME.
\106\ See NYSBAR; Valero.
\107\ NYSBAR.
\108\ See Instruction 2 to new Paragraph (h) of Item 7 of Exchange Act Schedule 14A.

b. Process for Communicating With Board Members

We proposed a standard that would have required companies to identify those directors to whom security holders could send communications. Commenters noted that they did not believe that it would be appropriate to include such a requirement on the basis that named directors could then be targeted for inappropriate correspondence and that some companies may not include specified recipients of security holder communications in their communications procedures.\109\ \109\ See NYSBAR.

In consideration of these concerns, we have revised the disclosure requirement to specify that companies should describe how security holders can send communications to the board and, if applicable, to specified individual directors.\110\ We also have added a new instruction providing that, in lieu of describing in the proxy statement the manner in which security holders may communicate with board members, the manner in which the company determines those communications that will be forwarded to board members, the company's policy regarding director attendance at annual meetings, and the number of directors who attended the prior year's annual meeting, such information may instead be placed on the company's Web site, provided that the company discloses in its proxy statement the Web site address where such information may be found.\111\
\110\ See new Paragraph (h)(2)(i) of Item 7 of Exchange Act Schedule 14A.
\111\ See the Instruction to new Paragraphs (h)(2) and (h)(3) of Item 7 of Exchange Act Schedule 14A.

Commenters also expressed concern about the proposed disclosure item related to companies' policies with regard to ``filtering'' communications.\112\ Some commenters suggested that extensive disclosure of a company's process for determining which communications are forwarded to board members would imply that a company was improperly blocking communications from security holders.\113\ Such a filtering process is necessary, in the opinion of these commenters, because many security holder communications are related to company products and services, are solicitations, or otherwise relate to improper or irrelevant topics.\114\ At least one commenter posited that the proposed disclosure item does not relate directly to company processes to facilitate communications with directors and should be deleted as unnecessary.\115\ Another commenter suggested that we revise the disclosure requirement to clarify that purely ministerial activities, such as organizing and collating security holder communications, need not be disclosed.\116\ Other commenters noted that, should we retain the disclosure requirement, we should not expand it to include the identity of the party that is responsible for filtering communications.\117\
\112\ See, e.g., ABA; BRT; Intel; NYSBAR; Sullivan.
\113\ See Sullivan. See also ABA.
\114\ See, e.g., Wells Fargo.
\115\ See ABA.
\116\ See Sullivan.

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

In consideration of these comments, the disclosure item we are adopting today does not include the requirement that companies identify the department or other group within the company that is responsible for determining which communications are forwarded to
[[Page 69212]]
directors. We also have added an instruction to clarify that a company's process for collecting and organizing security holder communications, as well as similar or related activities, need not be disclosed, provided that the company's process is approved by a majority of the independent directors.\118\
\118\ See the Instruction to new Paragraph (h)(2)(ii) of Item 7 of Exchange Act Schedule 14A.
c. Material Actions Taken by the Board of Directors as a Result of Security Holder Communications

Many commenters expressed concern with regard to the proposal that would have required companies to describe any material action taken by the board of directors during the preceding fiscal year as a result of security holder communications.\119\ Most of these commenters suggested deleting this disclosure requirement on the basis that it would be too difficult to tie board actions to specific security holder recommendations.\120\ One commenter suggested that the disclosure requirement was too vague and companies would be unsure as to what actions must be disclosed.\121\ In consideration of these concerns, the disclosure requirements we are adopting today do not include the proposed requirement related to material actions taken in response to security holder communications.
\119\ See, e.g., ABA; ACB; ACCA; Warren J. Archer (``Archer''); BRT; DKW Law Group; Domini; Foley; Intel; Int'l Paper; Jenkens; NYCBAR; NYSBAR.
\120\ See, e.g., ABA; BRT; Domini; Foley; Intel; Int'l Paper; Jenkens; NYCBAR; NYSBAR.
\121\ See NYSBAR.

d. Director Attendance at Annual Meetings

In the proposing release, we asked whether there were alternative ways to achieve our objectives. We further solicited comment on whether we should provide guidance to companies or otherwise address appropriate procedures for companies to implement with regard to security holder communications with board members. We also noted that the term ``communications'' was meant to be broadly construed. Several commenters suggested that we require companies to disclose whether they have a policy regarding attendance by directors at annual meetings and provide information about annual meeting attendance by directors.\122\ We believe that such a disclosure requirement would further our broad objective to provide investors with information about a company's communications policies and general responsiveness to investors' concerns.
\122\ See Amalgamated Bank and its Long View Funds
(``Amalgamated''); Boston; CBIS; CII; Granary Foundation
(``Granary''); Letter B; Maine Retirement System; McRitchie2; SERS; SIF; Walden. See also Connie Hansen.

Directors' attendance at annual meetings can provide investors with an opportunity to communicate with directors about issues affecting the company. We are adopting a requirement that companies disclose their policy with regard to director attendance at annual meetings and the number of directors who attend the annual meetings, as that disclosure will give security holders a more complete picture of a company's policies related to opportunities for communicating with directors. C. Related Disclosure in Quarterly and Annual Reports

In response to our request for comment regarding whether material changes to a company's process for security holders to submit nominees for election as director to the company should be disclosed in periodic or current reports, a number of commenters indicated the need to provide security holders with more current information regarding that process.\123\ These commenters expressed the concern that the procedures described in a company's proxy statement could change during the course of a fiscal year, and the absence of information regarding those changes could impair significantly security holders' opportunities to submit recommended nominees.\124\ In response to these comments, we are adopting new disclosure standards that will require companies to report any material changes to the procedures for security holder nominations in

FOR FURTHER INFORMATION CONTACT Lillian C. Brown, at (202) 942-2920, Andrew Thorpe, at (202) 9422910, or Andrew Brady, at (202) 9422900, in the Division of Corporation Finance, or with respect to investment companies, Christian L. Broadbent, at (202) 9420721, in the Division of Investment Management, U.S. Securities and Exchange Commission, 450 Fifth Street, NW., Washington DC 20549.