SEC Brings Proxies Online
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Shareholders will soon be able to find proxy statements and annual reports online, according to new voluntary rules approved this week by the Securities and Exchange Commission (SEC). In addition to cost savings for public companies, the SEC hopes the new rules will offer persons other than company officials a more efficient way to make proxy solicitations.
The SEC also voted to simplify certain provisions of the Sarbanes-Oxley law to make compliance easier for smaller companies. The agency hopes to have the changes in place by next year after a public comment period.
The Internet "notice and access" model approved on a 5-0 vote has a compliance date of July 1, 2007. The SEC also approved proposed rules that would make the model mandatory beginning on a yet-to-be-determined date.
"This is good news for corporate America," Tom Taulli, the author of two investment books and the founder of the site DealProfiles.com, told internetnews.com. "It's really inevitable. A lot of people use the Internet and certainly investors are using the Internet."
Taulli also said the new electronic rules are good thing for small investors.
"In proxy fights, the people launching them are seeking out major shareholders. The small investors don't think their vote counts," he said, noting the new rules will allow all investors to participate and be informed about publicly held companies.
Under the new rules, any investor who wants to receive paper proxy materials may continue to do so without charge even if the company has chosen to follow the voluntary notice and access model.
"A shareholder needs only to tell his broker or the company by whatever means is convenient -- a toll free call, by e-mail or on the proxy website," John W. White, director of the Division of Corporation Finance at the SEC, said in a statement. "And once the request for paper proxy materials is made, that preference continues with respect to subsequent solicitations in later years without any further action by the shareholder."
A company choosing to follow the model must post its proxy materials on an Internet site and send a Notice of Internet Availability of Proxy Materials to shareholders at least 40 days before the meeting date.
A proxy card does not have to accompany the notice, but a company may send a paper proxy card accompanied by another copy of the notice 10 days or more after sending the initial notice.
The SEC is also making it easier on companies to comply with Sarbanes-Oxley. The commission has approved a series of "interpretative" guidelines designed to give companies more latitude in complying with Section 404 of the law, which requires a publicly traded company to set up and maintain internal controls and documentation for financial reporting.
The SEC, which enforces Sarbanes-Oxley, has not provided any guidance on what those controls should be, leaving companies to depend on their auditors for compliance. The auditors, in turn, have been criticized for imposing excessive and costly controls.
According to the proposed rules, the SEC guidance allows for companies to evaluate the design of their accounting controls to determine whether there is a "reasonable" possibility that a material misstatement in the financial statements would not be prevented or detected in a timely manner.
The rules would also allow management to gather and analyze evidence about the operation of the controls being evaluated based on its assessment of the risk associated with those controls.
SEC Chairman Christopher Cox said that the absence of this guidance has forced management to look at Public Company Accounting Oversight Board's auditing standard to conduct their evaluations, which was not intended. "We are proposing this interpretative guidance to help management make their evaluation process more efficient and cost-effective," he added in a statement.
Even though the action is designed to help all public companies, Cox said, smaller companies should particularly benefit from the proposed rules because of their scalability and flexibility.
And Taulli considers it a balancing act. "If you're a big company, you can get it done [under current Section 404 rules]. For smaller companies, it's really costly. You don't want onerous regulations. The SEC wants to loosen up [the regulations] a little to make sure companies can make money."
White said that the proposed interpretive guidance should reduce uncertainty about what constitutes a reasonable approach to management's evaluation while maintaining flexibility for companies that have already developed their own assessment procedures and tools that serve the company and its investors well.
TechNet, a political network of tech CEOs, praised the SEC action, calling it a "great step forward."
"While we believe the general thrust of Sarbanes-Oxley has been positive, the costs associated with compliance impose substantial burdens on smaller companies that are disproportionate to the benefits for investors," TechNet President and CEO Lezlee Westine said in a statement.