

[Federal Register: December 11, 2007 (Volume 72, Number 237)]
[Rules and Regulations]               
[Page 70449-70456]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11de07-8]                         


[[Page 70449]]

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Part III





Securities and Exchange Commission





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17 CFR Part 240



Shareholder Proposals Relating to the Election of Directors; Final Rule


[[Page 70450]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-56914; IC-28075; File No. S7-17-07]
RIN 3235-AJ95

 
Shareholder Proposals Relating to the Election of Directors

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is publishing this 
adopting release to codify the meaning of Rule 14a-8(i)(8) under the 
Securities Exchange Act of 1934. Rule 14a-8 provides shareholders with 
an opportunity to place certain proposals in a company's proxy 
materials for a vote at an annual or special meeting of shareholders. 
Subsection (i)(8) of the Rule permits exclusion of certain shareholder 
proposals related to the election of directors. The Commission is 
adopting an amendment to Rule 14a-8(i)(8) to provide certainty 
regarding the meaning of this provision in response to a recent court 
decision.

DATES: Effective Date: January 10, 2008.

FOR FURTHER INFORMATION CONTACT: Lillian Brown or Tamara Brightwell, at 
(202) 551-3700, in the Division of Corporation Finance, U.S. Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3010.

SUPPLEMENTARY INFORMATION: We are adopting an amendment to Rule 14a-
8(i)(8) \1\ under the Securities Exchange Act of 1934.\2\
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    \1\ 17 CFR 240.14a-8(i)(8).
    \2\ 15 U.S.C. 78a et seq.
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I. Background

A. Purpose of the Rule 14a-8(i)(8) Exclusion

    On July 27, 2007, the Commission published for comment the proposed 
amendment to Rule 14a-8(i)(8) that we are adopting today to address the 
uncertainty resulting from a recent decision of the U.S. Court of 
Appeals for the Second Circuit that did not defer to the agency's 
longstanding interpretation of the Rule.\3\
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    \3\ Release No. 34-56161 (July 27, 2007) [72 FR 43488] (the 
``Proposing Release'').
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    Rule 14a-8, which creates a procedure under which shareholders \4\ 
may present certain proposals \5\ in the company's proxy materials, 
does not require the inclusion of any proposal that ``relates to an 
election for membership on the company's board of directors or 
analogous governing body.'' \6\ The proper functioning of Rule 14a-
8(i)(8) is particularly critical to assuring that investors receive 
adequate disclosure in election contests, and that they benefit from 
the full protection of the antifraud provisions of the securities laws. 
Because the inclusion of shareholder nominees for director in a 
company's proxy materials normally would create a contested election of 
directors, the protections of the proxy solicitation rules designed to 
provide investors with full and accurate disclosure are of vital 
importance in this context. An interpretation of Rule 14a-8(i)(8) that 
resulted in the Rule being used as a means to include shareholder 
nominees in company proxy materials would, in effect, circumvent the 
other proxy rules designed to assure the integrity of director 
elections.
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    \4\ To be eligible to submit a proposal, Exchange Act Rule 14a-
8(b)(1) (17 CFR 240.14a-8(b)(1)) requires the shareholder 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 for at 
least one year. The Rule also contains other eligibility and 
procedural requirements for shareholders who wish to include a 
proposal in the company's proxy materials.
    \5\ With respect to subjects and procedures for shareholder 
votes, most state corporation laws provide that a corporation's 
charter or bylaws can specify the types of proposals that are 
permitted to be brought before the shareholders for a vote at an 
annual or special meeting. Rule 14a-8(i)(1) supports these 
determinations by providing that a proposal that is not a proper 
subject for action by shareholders under the laws of the 
jurisdiction of the corporation's organization may be excluded from 
the corporation's proxy materials.
    \6\ Exchange Act Rule 14a-8(i)(8).
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    Several Commission rules, including Exchange Act Rule 14a-12,\7\ 
regulate contested proxy solicitations so that investors receive 
adequate disclosure to enable them to make informed voting decisions in 
elections. The requirements to provide these disclosures to 
shareholders from whom proxy authority is sought are grounded in Rule 
14a-3,\8\ which requires that any party conducting a proxy solicitation 
file with the Commission, and furnish to each person solicited, a proxy 
statement containing the information specified in Schedule 14A.\9\ 
Items 4(b) and 5(b) of Schedule 14A require numerous specified 
disclosures if the solicitation is subject to Rule 14a-12(c).\10\ A 
solicitation is subject to Rule 14a-12(c) if it is made ``for the 
purpose of opposing'' a solicitation by any other person ``with respect 
to the election or removal of directors. * * *'' \11\ Thus, the result 
of Schedule 14A's cross-referencing of Rule 14a-12(c) is to trigger, 
when a solicitation with respect to the election of directors is 
conducted in opposition to another solicitation, a number of 
disclosures relevant in proxy contests.\12\ In addition, Item 7 of 
Schedule 14A \13\ requires the furnishing of additional information as 
to nominees for director, including nominees of ``persons other than 
the

[[Page 70451]]

[company]'' (e.g., shareholders), including:
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    \7\ 17 CFR 240.14a-12.
    \8\ 17 CFR 240.14a-3.
    \9\ Rule 14a-3 provides, in pertinent part, that ``[n]o 
solicitation subject to this regulation shall be made unless each 
person solicited is concurrently furnished or has previously been 
furnished with a publicly-filed preliminary or definitive written 
proxy statement containing the information specified in Schedule 
14A. * * *''
    \10\ 17 CFR 240.14a-101, Items 4 and 5. Items 4 and 5 require 
disclosures made by participants in a solicitation. For purposes of 
Items 4 and 5, a ``participant'' in the solicitation includes:
     Any person who solicits proxies;
     Any director nominee for whose election proxies are 
being solicited; and
     Any committee or group, any member of a committee or 
group, and other persons involved in specified ways in the financing 
of the solicitation.
    See Item 4, Instruction 3. Thus, for each of the numerous 
disclosures required as to a ``participant,'' the information must 
be disclosed as to all of such persons.
    \11\ Because numerous protections of the federal proxy rules are 
triggered only by the presence of a solicitation made in opposition 
to another solicitation, the requirements regarding disclosures and 
procedures in contested elections do not contemplate the presence of 
competing nominees in the same proxy materials.
    \12\ See 17 CFR 240.14a-101, Items 4(b) and 5(b). These 
disclosures include:
     By whom the solicitation is made;
     The methods to be employed to solicit;
     Total expenditures to date and anticipated in 
connection with the solicitation;
     By whom the cost of the solicitation will be borne;
     Any substantial interest of each participant in the 
solicitation;
     The name, address, and principal occupation or 
principal business of each participant;
     Whether any participant has been convicted in a 
criminal proceeding within the past 10 years;
     The amount of each class of securities of the company 
owned by the participant and the participant's associates;
     Information concerning purchases and sales of the 
company's securities by each participant within the past two years;
     Whether any part of the purchase price or market value 
of such securities is represented by funds borrowed;
     Whether a participant is a party to any contract, 
arrangements or understandings with any person with respect to 
securities of the company;
     Certain related party transactions between the 
participant or its associates and the company;
     Whether the participant or any of its associates have 
any arrangement or understanding with any person with respect to any 
future employment with the company or its affiliates, or with 
respect to any future transactions to which the company or its 
affiliates will or may be a party; and
     With respect to any person who is a party to an 
arrangement or understanding pursuant to which a nominee is proposed 
to be elected, any substantial interest that such person has in any 
matter to be acted upon at the meeting.
    \13\ 17 CFR 240.14a-101, Item 7.
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     Any arrangement or understanding between the nominee and 
any other person(s) (naming such person(s)) pursuant to which the 
nominee was or is selected as a nominee; \14\
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    \14\ See Item 401(a) of Regulation S-K [17 CFR 229.401(a)], 
which is referenced in Item 7 of Schedule 14A.
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     Business experience of the nominee; \15\
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    \15\ See Item 401(e)(1) of Regulation S-K [17 CFR 
229.401(e)(1)], which is referenced in Item 7 of Schedule 14A.
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     Any other directorships held by the nominee in an Exchange 
Act reporting company; \16\
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    \16\ See Item 401(e)(2) of Regulation S-K [17 CFR 
229.401(e)(2)], which is referenced in Item 7 of Schedule 14A.
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     The nominee's involvement in certain legal proceedings; 
\17\
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    \17\ See Items 103 and 401(f) of Regulation S-K [17 CFR 229.103 
and 17 CFR 229.401(f)], which are referenced in Item 7 of Schedule 
14A.
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     Certain transactions between the nominee and the company; 
\18\ and
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    \18\ See Item 404 of Regulation S-K [17 CFR 229.404], which is 
referenced in Item 7 of Schedule 14A.
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     Whether the nominee complies with independence 
requirements.\19\
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    \19\ See Item 407(a) of Regulation S-K [17 CFR 229.407(a)], 
which is referenced in Item 7 of Schedule 14A.

Finally, and of critical importance, all of these disclosures are 
covered by the prohibition contained in Rule 14a-9 on the making of a 
solicitation containing false or misleading statements or 
omissions.\20\
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    \20\ See 17 CFR 240.14a-9.
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    These numerous protections of the federal proxy rules are triggered 
only by the presence of a solicitation made in opposition to another 
solicitation. Accordingly, were the election exclusion not available 
for proposals that would establish a process for the election of 
directors that circumvents the proxy disclosure rules, it would be 
possible for a person to wage an election contest without providing the 
disclosures required by the Commission's present rules governing such 
contests. Additionally, false and misleading disclosure in connection 
with such an election contest could potentially occur without liability 
under Exchange Act Rule 14a-9 for material misrepresentations made in a 
proxy solicitation. The Commission stated this rationale for the 
exclusion at the time it was proposed in 1976:

    [T]he principal purpose of [Rule 14a-8(i)(8)] is to make clear, 
with respect to corporate elections, that Rule 14a-8 is not the 
proper means for conducting campaigns or effecting reforms in 
elections of that nature, since other proxy rules, including Rule 
14a-11, are applicable thereto.\21\ (Emphasis added.)

    \21\ Release No. 34-12598 (July 7, 1976) [41 FR 29982]. The 
Commission's reference in its 1976 statement to ``other proxy rules, 
including Rule 14a-11,'' reflects the fact that, in 1976, Rule 14a-
11 was the Commission proxy rule governing election contests. As 
part of a series of rule changes in 1999, the Commission rescinded 
Rule 14a-11 and moved many of the requirements of prior Rule 14a-11 
to the current Rule 14a-12. [17 CFR 240.14a-12] See Release No. 33-
7760 (October 22, 1999) [64 FR 61408]. Accordingly, the Commission's 
reference to Rule 14a-11 in 1976 was to the rules governing election 
contests, which now may be found generally elsewhere in the proxy 
rules and, in particular, in Rule 14a-12.
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Accordingly, the staff has determined that shareholder proposals that 
may result in a contested election--including those which establish a 
procedure to list shareholder-nominated director candidates in the 
company's proxy materials--fall within the election exclusion. We agree 
with this position and believe it is consistent with the explanation 
that the Commission gave in 1976.
    As explained in the Proposing Release, except for a few brief 
references to the Rule, the Commission did not discuss the meaning of 
Rule 14a-8(i)(8) from the time of its 1976 statement until its 
shareholder access proposal in October 2003,\22\ and the two proposing 
releases \23\ in July 2007. Between 1976 and the time of the AFSCME v. 
AIG litigation, the staff of the Commission took ``no-action'' 
positions on the application of the Rule. Between 1976 and 1990, in 
applying the Rule to proposals that would have established procedures 
for shareholders to nominate candidates to the board, in the limited 
number of cases that presented the question, the staff did not concur 
with companies that the proposals could be excluded under the election 
exclusion.\24\ In 1990, however, without mentioning the pre-1990 
decisions, the staff clearly stated its position that the Rule 
permitted exclusion of a proposal that ``would establish a procedure 
that may result in contested elections to the board'' in a response to 
a request for no-action relief from Amoco.\25\ In doing so, the staff 
aligned its interpretation with the Commission's 1976 statement. 
Between 1990 and 1998, the staff granted no-action relief under the 
election exclusion nine times \26\ and denied relief twice \27\ to 
operating companies seeking to exclude shareholder proposals to adopt 
procedures that would give shareholders the ability to nominate 
director candidates in the company's proxy materials. For the past 
decade, since 1998, the Commission staff has repeatedly taken the 
position that shareholder proposals that may result in a contested 
election fall within the election exclusion. On several occasions after 
1990, the Commission itself declined to review these ``no-action'' 
positions.\28\
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    \22\ Release No. 34-48626 (October 14, 2003) [68 FR 60784].
    \23\ See Proposing Release and Release No. 34-56160 (July 27, 
2007) [72 FR 43466].
    \24\ The proposals submitted between 1976 and 1990 typically 
presented similar, but not identical, procedures as those presented 
in the direct access proposals generally submitted in recent years. 
See, e.g., Pan Am Corp. (March 22, 1985); Union Oil Company 
(February 24, 1983); and Mobil Corp. (March 3, 1981). Cf. Tylan 
Corporation (September 25, 1987) (allowing exclusion under the prior 
version of Rule 14a-8(i)(8) of a shareholder proposal to reduce the 
number of directors and nominate a new slate of directors meeting 
certain criteria).
    \25\ Amoco Corporation (February 14, 1990). See also Thermo 
Electron (March 22, 1990); Unocal Corp. (February 6, 1990); and Bank 
of Boston (January 26, 1990).
    \26\ See Storage Technology Corporation (March 11, 1998); 
BellSouth Corp. (February 4, 1998); Unocal Corporation (February 8, 
1991); AT&T (January 11, 1991); Flow International (July 16, 1990); 
Thermo Electron (March 22, 1990); Amoco Corporation (February 14, 
1990); Unocal Corporation (February 6, 1990) and Bank of Boston 
(January 26, 1990). See also International Business Machine 
Corporation (March 4, 1992), in which the staff noted that the 
proposal would be excludable unless modified as specified in the 
staff's response letter.
    \27\ See Dravo Corporation (February 21, 1995) and Pinnacle West 
Capital Corporation (March 26, 1993). See also, TCW/DW Term Trust 
2003 (July 15, 1997), in which the Division of Investment Management 
denied no-action relief.
    \28\ See, e.g., Storage Technology Corporation, letter of 
Jonathan Katz, Secretary of the Commission, to Dr. Seymour Licht 
P.E. (April 6, 1998).
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B. Background Relating to Rule Amendment

    In American Federation of State, County & Municipal Employees, 
Employees Pension Plan v. American International Group, Inc.,\29\ the 
U.S. Court of Appeals for the Second Circuit held that AIG could not 
rely on Rule 14a-8(i)(8) to exclude a shareholder proposal seeking to 
amend the company's bylaws to establish a procedure under which the 
company would be required, in specified circumstances, to include 
shareholder nominees for director in the company's proxy materials.\30\ 
The Second Circuit described the Commission's statement in 1976 as 
limiting the election exclusion ``to shareholder proposals used to 
oppose solicitations dealing with an identified board seat in an

[[Page 70452]]

upcoming election and reject[ing] the somewhat broader interpretation 
that the election exclusion applies to shareholder proposals that would 
institute procedures making such election contests more likely.'' \31\ 
After 1976, in the Second Circuit's view, the Commission gradually 
shifted away from this interpretation, and came to its present 
interpretation in 1990. The court then held ``that an agency's 
interpretation of an ambiguous regulation made at the time the 
regulation was implemented or revised should control unless that agency 
has offered sufficient reasons for its changed interpretation.'' \32\ 
Finding no such sufficient reason, the court declined to defer to what 
it viewed as the 1990 interpretation and deemed it ``appropriate'' 
instead to defer to its own reading of the meaning of the 1976 
interpretation.\33\ It is the Commission's position that the election 
exclusion should not be, and was not originally intended to be, limited 
in this way.\34\
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    \29\ 462 F.3d 121 (2d Cir. 2006) (AFSCME v. AIG).
    \30\ Consistent with the longstanding interpretation, the 
Commission staff had issued to AIG a letter stating that ``[t]here 
appears to be some basis for your view that AIG may exclude the 
proposal under rule 14a-8(i)(8) * * * we will not recommend 
enforcement action to the Commission if AIG omits the proposal from 
its proxy materials * * *.'' American International Group (February 
14, 2005).
    \31\ AFSCME v. AIG, 432 F.3d at 128.
    \32\ Id. at 123.
    \33\ Id. at 129.
    \34\ In this regard, we note that the Second Circuit decision 
stated that ``if the SEC determines that the interpretation of the 
election exclusion embodied in its 1976 Statement would result in a 
decrease in necessary disclosures or any other undesirable outcome, 
it can certainly change its interpretation of the election 
exclusion, provided that it explains its reasons for doing so.'' Id. 
at 130.
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    This decision was issued on September 5, 2006, as companies and 
shareholders prepared for the 2007 proxy season. Although the decision 
is binding only within the Second Circuit, it created uncertainty in 
the rest of the nation about the continuing validity of the 
longstanding interpretation of Rule 14a-8(i)(8). While the Commission 
began the process that led to the current rulemaking to clarify the 
Rule's application, the staff of the Division of Corporation Finance 
received three no-action requests seeking to exclude similar proposals 
under Rule 14a-8(i)(8). The staff took a position of ``no view'' on the 
one request for no-action relief under the Rule that it received and 
that was not withdrawn.\35\ This request for no-action relief was 
submitted by Hewlett-Packard Company, which asserted that any 
litigation related to the proposal would be handled by the U.S. Court 
of Appeals for the Ninth Circuit and that the staff therefore should 
grant no-action relief under Rule 14a-8(i)(8) on the basis that it was 
consistent with the agency's interpretation of the Rule and the Ninth 
Circuit was not bound by the decisions of the Second Circuit. Hewlett-
Packard ultimately included the proposal in its proxy materials, but 
the proposal did not receive a majority of shareholder votes. A second 
request for no-action relief was submitted by Reliant Energy. 
Subsequent to the staff of the Division of Corporation Finance taking a 
``no view'' position on Hewlett-Packard's request, Reliant Energy filed 
a complaint in the U.S. District Court for the Southern District of 
Texas seeking a declaratory judgment that the company could properly 
omit a similar proposal that it had received for inclusion in its proxy 
materials.\36\ During the pendency of this litigation and prior to the 
staff's response to Reliant's no-action request, the shareholder 
withdrew the proposal and the company therefore withdrew its no-action 
request.\37\ A third request for no-action relief was withdrawn after 
the company agreed to include the proposal in its proxy materials.\38\ 
These events demonstrate the uncertainty the Second Circuit decision 
created.
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    \35\ Hewlett-Packard Company (January 22, 2007), available at 
http://www.sec.gov/divisions/corpfin/cf-noaction/2007/hp012207-14a-8.htm
.

    \36\ The Reliant complaint may be found at http://www.sec.gov/divisions/corpfin/cf-noaction/2007/reliantenergy011607-14a-8-incoming.pdf
.

    \37\ Reliant Energy, Inc. (February 23, 2007), available at 
http://www.sec.gov/divisions/corpfin/cf-noaction/2007/reliantenergy011607-14a-8-incoming.pdf
.

    \38\ UnitedHealth Group Inc. (March 29, 2007), available at 
http://www.sec.gov/divisions/corpfin/cf-noaction/2007/uhg032907-14a-8.htm
.

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    Compounding this uncertainty created by the Second Circuit's 
decision is the U.S. Supreme Court's recent unanimous reversal of 
another Second Circuit decision involving an agency's interpretation of 
its rules. In Long Island Care at Home, Ltd. v. Coke,\39\ the Supreme 
Court addressed the validity of the Department of Labor's changed 
interpretation of its rules. As in AFSCME v. AIG, the Second Circuit 
declined to follow the agency's more recent interpretation. In 
rejecting the Second Circuit's view, the Supreme Court held that an 
agency's interpretation of its own regulations is controlling unless 
plainly erroneous or inconsistent with the regulations being 
interpreted. The Supreme Court noted that the Department of Labor ``may 
have interpreted these regulations differently at different times in 
their history.''\40\ Nonetheless, ``as long as interpretive changes 
create no unfair surprise * * * the change in interpretation alone 
presents no separate ground for disregarding the Department's present 
interpretation.''\41\ Indeed, whereas the Second Circuit required the 
Commission to provide ``sufficient reason'' for what it regarded as a 
changed interpretation in order to merit deference, the Supreme Court, 
in reversing the Second Circuit's decision in another administrative 
law case, held that a department's change in interpretation alone 
presents no separate ground for disregarding the department's present 
interpretation. As a result of this post-AFSCME v. AIG decision, which 
binds all U.S. Courts of Appeals and other federal courts, it is more 
likely that a court would uphold this agency's interpretation of Rule 
14a-8(i)(8). If a lower court were to apply the reasoning in Long 
Island Care at Home and reach a result contrary to the AFSCME v. AIG 
court, further litigation and confusion about the Commission's rules 
could follow.
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    \39\ 127 S.Ct. 2339 (2007).
    \40\ Long Island Care at Home, 127 S.Ct at 2349.
    \41\ Id.
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    To permit this escalating state of confusion to continue for the 
2008 proxy season and beyond would effectively require shareholders and 
companies to go to court to determine the meaning of the Commission's 
proxy rules, and it could take years before the U.S. Supreme Court 
resolved any resulting conflicts between the circuits. Inaction by the 
Commission would thus promote further uncertainty and leave both 
shareholders and companies in a position of ``every litigant for 
himself.'' This would benefit neither shareholders nor companies. If 
the current environment was permitted to continue, and these types of 
proposals were included in proxy statements and subsequently approved, 
shareholders would be exposed to the risk that the disclosure 
provisions of the securities laws could be circumvented. And by 
furthering legal uncertainty about the meaning and application of the 
Commission's rules, it would impose needless costs on shareholders and 
companies alike, and undermine the Commission's statutory mission to 
protect investors, promote fair and orderly markets and facilitate 
capital formation.
    The Commission has a fundamental responsibility to make sure that 
the rules and regulations it adopts have clear meaning so that the 
regulated community can conform its conduct accordingly. To that end, 
we previously reiterated the Commission's interpretation in the 
Proposing Release, and today we are adopting a clear and concise 
amendment to the text of Rule 14a-8 that codifies the agency's 
longstanding interpretation of Rule 14a-8(i)(8). It is our intention 
that this will enable shareholders and companies to know with certainty 
whether a proposal may or may not be excluded under Rule 14a-8(i)(8). 
It also will facilitate the staff's efforts in reviewing no-action 
requests and in interpreting Rule 14a-8 with certainty in responding to 
requests

[[Page 70453]]

for no-action letters during the 2008 proxy season. We believe it is 
important to adopt a rule change to eliminate any uncertainty, 
particularly in light of Long Island Care at Home and its implications. 
Thus, today's release codifies the agency's longstanding interpretation 
of Rule 14a-8(i)(8) and the modifications to the rule we adopt today do 
not affect or address any other aspect of the staff's prior 
determinations under the election exclusion.

II. Commission Interpretation of Rule 14a-8(i)(8)

    Rule 14a-8(i)(8) permits exclusion of a proposal that would result 
in an immediate election contest (e.g., by making or opposing a 
director nomination for a particular meeting) or would set up a process 
for shareholders to conduct an election contest in the future by 
requiring the company to include shareholders' director nominees in the 
company's proxy materials for subsequent meetings.
    In the AFSCME v. AIG opinion, the Second Circuit took the view that 
a shareholder proposal may be excluded under Rule 14a-8(i)(8) if it 
would result in an immediate election contest, but that a proposal may 
not be excluded under Rule 14a-8(i)(8) if it ``establish[es] a process 
for shareholders to wage a future election contest.'' \42\ As the 
Commission stated in 1976, however, the express purpose of the election 
exclusion is to make clear that Rule 14a-8 is not a proper ``means'' to 
achieve election contests because ``other proxy rules'' are applicable 
to such contests. We are acting today to state clearly that the phrase 
``relates to an election'' in the election exclusion cannot be read so 
narrowly as to refer only to a proposal that relates to the current 
election, or a particular election, but rather must be read to refer to 
a proposal that ``relates to an election'' in subsequent years as well. 
In this regard, if one looked only to what a proposal accomplished in 
the current year, and not to its effect in subsequent years, the 
purpose of the exclusion could be evaded easily. For example, such a 
reading might permit a company to exclude a shareholder proposal that 
nominated a candidate for election as director for the upcoming meeting 
of shareholders, but not exclude a proposal that resulted in the 
company being required to include the same shareholder-nominated 
candidate in the company's proxy materials for the following year's 
meeting.
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    \42\ AFSCME v. AIG, 462 F.3d at 128.
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    Our interpretation of Rule 14a-8(i)(8) is fully consistent with the 
Commission's statement in 1976, that the Rule was not intended ``to 
cover proposals dealing with matters previously held not excludable by 
the Commission, such as cumulative voting rights, general 
qualifications for directors * * *.'' The Commission's references in 
1976 to proposals relating to ``cumulative voting rights'' and 
``general qualifications for directors'' simply reflect the long-held 
belief that these proposals generally do not trigger the contested 
elections proxy rules and therefore are not excludable under Rule 14a-
8(i)(8). Accordingly, the Commission's 1976 statement should not be 
interpreted to mean that Rule 14a-8(i)(8) permits exclusion of 
proposals establishing nomination or election procedures other than 
those that would result in a contested election. It also is consistent 
with the Commission's statement in 1976 that Rule 14a-8 is not the 
proper means for conducting campaigns or effecting reforms in corporate 
elections. As explained in the Proposing Release and above, the 
analysis under Rule 14a-8(i)(8) does not focus on whether the proposal 
would make election contests more likely, but whether the resulting 
contests would be governed by the Commission's proxy rules for 
contested elections.
    We received numerous public comments regarding the Proposing 
Release, and have carefully considered them. Commenters supporting the 
agency's longstanding interpretation noted that, notwithstanding the 
court decision, no new facts or circumstances exist that warrant the 
Commission deviating from that interpretation.\43\ Commenters believed 
that the court decision did not invalidate the agency's position, but 
rather required the Commission to state its position and its reasoning 
in a formal way.\44\ Other commenters disagreed with the Commission's 
position entirely and therefore opposed the longstanding interpretation 
and the proposed Rule text amendment.\45\ Some commenters opposing the 
interpretation and Rule proposal believed that the Commission should 
withhold action until it has the opportunity to assess the impact of 
the AFSCME v. AIG decision.\46\
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    \43\ See comment letters from U.S. Chamber of Commerce 
(``Chamber'') and Society of Corporate Governance Professionals 
(``SCSGP'').
    \44\ See comment letter from Citigroup Inc. (``Citigroup''). 
See, e.g., comment letters from The Adams Express Company 
(``Adams'') and Chamber.
    \45\ See, e.g., comment letters from AFL-CIO; American 
Federation of State, County and Municipal Employees, AFL-CIO 
(``AFSCME''); State Board of Administration of Florida (``FL 
Board''); Amalgamated Bank LongView Funds (``Amalgamated Bank''); 
Board of Fire and Police Pension Commissioners of the City of Los 
Angeles (``LA Fire & Police''); and Comptroller of the City of New 
York (``NYC Comptroller'').
    \46\ See Form Letter B.
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    Many of the comments we received on the amendment that we are 
adopting today went beyond the limited issue the Proposing Release 
sought to address--namely, the Commission's interpretation of existing 
Rule 14a-8(i)(8) and proposed rule amendment--and instead focused on 
the broader range of matters implicated by a separate companion release 
(the ``Companion Release'') that proposed a comprehensive package of 
amendments to the proxy rules and related disclosure requirements.\47\ 
We separately proposed the amendment that we are adopting today so that 
we could eliminate the uncertainty created by AFSCME v. AIG. As 
discussed throughout the Proposing Release, and in this release, we 
believe that a definitive codification of our longstanding 
interpretation is both needed and appropriate. We appreciate the 
thoughtful comments regarding the questions raised in the Companion 
Release but, because they go beyond the scope of the Proposing Release, 
they are more appropriately addressed in connection with the Companion 
Release. In this release, we are acting only on the matters that were 
the subject of the Proposing Release.
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    \47\ We received approximately 8800 comment letters addressing 
the rule proposal and accompanying interpretation. Approximately 
8400 of these letters were form letters opposing both this release 
and the Companion Release published for comment on July 25. Of the 
8800, approximately 400 were not form letters.
    As discussed in more detail in the Companion Release, those 
proposals followed a long history of prior Commission consideration 
and examination of possible regulatory approaches to shareholder 
nominations of directors, including several prior proposals, 
hearings, and roundtables. See Release No. 34-56160 (July 27, 2007) 
[72 FR 43466].
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III. Amendment to Rule 14a-8(i)(8)

    The amendment that we are adopting today is intended to clarify the 
meaning of Rule 14a-8(i)(8) by codifying the agency's longstanding 
interpretation of the Rule. The text of Rule 14a-8(i)(8) currently 
specifies that a proposal may be excluded ``[i]f the proposal relates 
to an election for membership on the company's board of directors or 
analogous governing body.'' To clarify the meaning of this provision, 
consistent with the Commission's longstanding interpretation, we 
proposed to amend the language of the rule to read:

    If the proposal relates to a nomination or an election for 
membership on the company's board of directors or analogous 
governing body or a procedure for such nomination or election.


[[Page 70454]]


The term ``procedures'' in the election exclusion relates to procedures 
that would result in a contested election either in the year in which 
the proposal is submitted or in any subsequent year.
    Commenters that addressed whether further clarification of the 
meaning of the election exclusion was necessary thought an amendment to 
Rule 14a-8(i)(8) was appropriate.\48\ Commenters that supported the 
amendment believed that it would eliminate the uncertainty caused by 
the decision in AFSCME v. AIG.\49\ Many commenters opposing the 
amendments addressed the matters that are the subject of the Companion 
Release. Some, for example, argued that the Commission's proxy rules 
should facilitate shareholders' ability to nominate directors.\50\ 
Several commenters, some opposing the interpretation and rule amendment 
altogether and others supporting the interpretation and rule amendment, 
believed that the proposed language was too broad.\51\ They asserted 
that under the proxy rules shareholders have been allowed to include 
proposals that may make contested elections more likely, such as 
proposals to de-stagger the board or introduce cumulative voting.\52\ 
One commenter stated that any final rule should not inadvertently 
overrule other positions on shareholder proposals that the staff has 
taken.\53\ Several commenters recommended that the rule define the term 
``procedure'' or contain a note that provides a list of circumstances 
that would constitute a proposal that may result in an election 
contest.\54\ Other commenters believed that listing the procedures that 
the staff historically has found to fall under the exclusion is 
unnecessary and may result in confusion because it would be difficult 
to draft a comprehensive list that includes every possible 
permutation.\55\
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    \48\ See, e.g., comment letters from Business Roundtable 
(``BRT'') and SCSGP.
    \49\ See, e.g., comment letters from American Bar Association 
(``ABA''); Adams; Bank of America (``BOA''); The Boeing Company 
(``Boeing''); BRT; Burlington Northern Santa Fe Corporation 
(``Burlington Northern''); Caterpillar Inc. (``Caterpillar''); 
Chevron Corporation (``Chevron''); Peabody Energy Corporation 
(``Peabody''); and SCSGP.
    \50\ See, e.g., Form Letter B and comment letters from Stephen 
R. Van Winthrop (``Van Winthrop'') and Group of Thirty-Nine Law 
Professors (``Thirty-Nine Law Professors'').
    \51\ See, e.g., comment letters from ABA; Corporate Governance; 
theRacetotheBottom.org (``Race''); and Sullivan & Cromwell 
(``Sullivan'').
    \52\ See, e.g., comment letters from Race and Sullivan.
    \53\ See comment letter from Amalgamated Bank.
    \54\ See, e.g., comment letters from BRT and Peabody.
    \55\ See, e.g., comment letters from ABA and SCSGP.
---------------------------------------------------------------------------

    As discussed above, we agree with those commenters that support 
amending Rule 14a-8(i)(8) in order to provide greater clarity to both 
shareholders and companies, and believe that the comments that address 
the broader issues in the Companion Release go beyond the scope of this 
release. We believe that the clarifying rule amendment is consistent 
with the agency's longstanding interpretation of the election exclusion 
and that the references to ``nomination'' and ``procedure'' in the rule 
text appropriately reflect the purpose of the exclusion. We have not 
included in the amended rule text a list of the specific types of 
proposals that may be excluded, as was suggested by some commenters, as 
we agree with commenters who asserted that inclusion of such a list is 
unnecessary and could be confusing. We therefore are adopting the 
change to the rule text as proposed. To meet some of the concerns 
expressed by commenters, however, we emphasize that the changes to the 
rule text relate only to procedures that would result in a contested 
election, either in the year in which the proposal is submitted or in 
subsequent years. The changes to the rule text do not affect or address 
any other aspect of the agency's prior interpretation of the 
exclusion.\56\ Thus, under the Rule as amended, a shareholder proposal 
that would allow for shareholder use of the company's proxy materials 
to nominate director candidates, such as the proposal at issue in 
AFSCME v. AIG, would be excludable. We believe the actions we are 
taking today will provide certainty in the application of Rule 14a-
8(i)(8) and will preserve our longstanding interpretation of the Rule.
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    \56\ For example, we note that, as stated in the Proposing 
Release, the staff has taken the position that a proposal relates to 
``an election for membership on the company's board of directors or 
analogous governing body'' and, as such, is subject to exclusion 
under Rule 14a-8(i)(8) if it could have the effect of, or proposes a 
procedure that could have the effect of, any of the following:
     Disqualifying board nominees who are standing for 
election;
     Removing a director from office before his or her term 
expired;
     Questioning the competence or business judgment of one 
or more directors; or
     Requiring companies to include shareholder nominees for 
director in the companies' proxy materials or otherwise resulting in 
a solicitation on behalf of shareholder nominees in opposition to 
management-chosen nominees.
    Conversely, the staff has taken the position that a proposal may 
not be excluded under Rule 14a-8(i)(8) if it relates to any of the 
following:
     Qualifications of directors or board structure (as long 
as the proposal will not remove current directors or disqualify 
current nominees);
     Voting procedures (such as majority or plurality voting 
standards or cumulative voting);
     Nominating procedures (other than those that would 
result in the inclusion of a shareholder nominee in company proxy 
materials); or
     Reimbursement of shareholder expenses in contested 
elections.
    These lists represent non-exclusive examples of types of 
proposals that the staff has found to be excludable and non-
excludable under the election exclusion.
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    We believe that the amendment we are adopting today, as well as the 
definitive interpretive guidance provided in this release, will provide 
certainty to shareholders and companies regarding the application of 
Rule 14a-8(i)(8).\57\ The clarification provided will enable 
shareholders and companies to better understand the shareholder 
proposal process, and will facilitate the efforts of the Commission's 
staff in its review of future no-action requests.
---------------------------------------------------------------------------

    \57\ The approach we are taking today is similar to the 
Commission's response to the decision of the Third Circuit in Levy 
v. Sterling Holding Co., 314 F.3d 106 (3d Cir. 2002), which also 
resulted in uncertainty and confusion about the interpretation of 
Commission rules. See 69 FR 35982 (June 25, 2004) (proposing 
release), 70 FR 46080 (August 9, 2005) (adopting release); Bruh v. 
Bessemer Venture Partners III L.P., 464 F.3d 202 (2d Cir. 2006) 
(accepting Commission interpretation of rule before amendment based 
on Commission's amicus brief in the case and the rule amendments and 
observing that the amended rule was valid); Levy v. Sterling Holding 
Co., 475 F. Supp. 2d 463 (D. Del. 2007) (upholding Commission's 
amended rules and applying them retroactively); Tinney v. Geneseo 
Communications, Inc., 457 F. Supp. 2d 495 (D. Del. 2006) (same).
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    The proxy rules constitute a ``collection of information'' 
requirement within the meaning of the Paperwork Reduction Act of 1995, 
the PRA.\58\ The amendment to Rule 14a-8(i)(8) described in this 
release relates to a previously approved collection of information, the 
title of which is ``Proxy Statements--Regulation 14A (Commission Rules 
14a-1 through 14a-16 and Schedule 14A)'' (OMB Control No. 3235-0059). 
This regulation was adopted pursuant to the Exchange Act and sets forth 
the disclosure requirements for proxy statements filed by companies to 
help investors make informed voting decisions.
---------------------------------------------------------------------------

    \58\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Rule 14a-8(i)(8) amendment merely revises the text of Rule 14a-
8(i)(8) in a manner that is consistent with the agency's longstanding 
interpretation of the rule. As such, the amendment does not affect the 
Schedule 14A collection of information for purposes of the PRA. 
Therefore, we are not submitting the amendment for OMB approval.

V. Cost-Benefit Analysis

    The amendment to Rule 14a-8(i)(8) clarifies the Commission's 
existing

[[Page 70455]]

proxy rules. The opinion in AFSCME v. AIG created uncertainty regarding 
the agency's longstanding interpretation of Rule 14a-8(i)(8), making it 
difficult for shareholders and companies to assess the operation of 
that rule. The amendment is intended to clarify the meaning of the 
exclusion in Rule 14a-8(i)(8), consistent with the agency's unwavering 
interpretation of the rule for the last decade. Without such 
clarification, shareholders and companies may need to resort to 
litigation to determine the range of shareholder proposals that are 
required to be included in company proxy materials. They may be 
uncertain as to the proper range of proposals that shareholders may 
submit to companies for inclusion in those proxy materials. For 
example, without clarification of the exclusion in Rule 14a-8(i)(8), 
shareholders may incur costs in preparing and submitting proposals that 
a company may properly exclude from its proxy materials.
    The Commission solicited public comment on the benefits and costs 
of the proposed amendment to Rule 14a-8(i)(8). While not directly 
addressing the cost-benefit analysis, commenters that addressed whether 
further clarification of the meaning of the election exclusion was 
necessary generally thought that an amendment to Rule 14a-8(i)(8) was 
appropriate.\59\ Commenters supporting the amendment agreed that it 
would eliminate the uncertainty caused by the decision in AFSCME v. 
AIG.\60\ Several commenters opposing the amendment \61\ argued that the 
Commission's proxy rules should facilitate a shareholder's ability to 
nominate directors.\62\
---------------------------------------------------------------------------

    \59\ See, e.g., comment letters from BRT and SCSGP.
    \60\ See, e.g., comment letters from ABA; Adams; BOA; Boeing; 
BRT; Burlington Northern; Caterpillar; Chevron; Peabody; and SCSGP.
    \61\ As discussed above, this release addresses the limited 
issue of the Commission's interpretation of existing Rule 14a-
8(i)(8) and corresponding rule amendment, and does not address the 
broader range of matters contemplated by the Companion Release. 
Accordingly, this release does not address the benefits and costs, 
and effects on efficiency, competition and capital formation, of the 
proposals in the Companion Release.
    \62\ See, e.g., Form Letter B and comment letters from Van 
Winthrop and Thirty-Nine Law Professors.
---------------------------------------------------------------------------

    The amendment should assist shareholders in determining the precise 
meaning of Rule 14a-8(i)(8) in connection with their preparation and 
submission of proposals for inclusion in a company's proxy materials. 
To the extent that proposals are properly excluded from proxy materials 
in reliance on the amended rule, companies and their shareholders will 
not incur additional costs that would otherwise be incurred if the 
proposals were included. Without the clarification of the proper scope 
of the Rule 14a-8(i)(8) exclusion that will be provided by the 
amendment, shareholders and companies may incur substantial expense in 
litigating disputes regarding that basis for exclusion. Thus, the 
clarification of Rule 14a-8(i)(8) will save both shareholders and 
companies potentially substantial expense in litigating disputes 
regarding its application.
    In addition, the amendment will prevent circumvention of provisions 
of the proxy rules outside of Rule 14a-8, such as Rules 14a-9 and 14a-
12, which are designed to assure the integrity of director elections. 
Finally, the amendment will facilitate the ability of staff in the 
Division of Corporation Finance to respond to no-action requests by 
clarifying the scope of the Rule 14a-8(i)(8) exclusion.
    As we stated in the Proposing Release, because the proposed 
amendment would clarify that the scope of the exclusion in Rule 14a-
8(i)(8) is consistent with the Commission's longstanding interpretation 
of that exclusion, shareholders and companies would not incur 
additional costs to determine the appropriate scope of the exclusion.
    The Second Circuit decision may have altered the expectations of 
some shareholders, both within and outside of the Second Circuit, 
regarding their ability to require a company to include in its proxy 
statement a shareholder proposal under Rule 14a-8 to amend the bylaws 
to establish procedures for shareholder-nominated candidates for 
director to be included in a company's proxy materials. Despite the 
fact that, since 1998, the Commission staff repeatedly has taken the 
position that shareholder proposals that may result in a contested 
election fall within an exclusion from the rule, some uncertainty 
regarding this position was created by the AFSCME v. AIG decision. In 
this regard, the Commission's restatement of the longstanding 
interpretation of Rule 14a-8(i)(8) could impose a cost on shareholders 
that may have already incurred expenses in connection with preparations 
for bylaw amendments in the upcoming proxy season. Because the 
Commission is persuaded that the unanimous decision of the U.S. Supreme 
Court in Long Island Care at Home has called the continuing validity of 
the Second Circuit's decision into question even within that judicial 
circuit, however, it is not clear that the reassertion of the agency's 
longstanding view of the scope of the election exclusion would itself 
be the sole reason that such costs would occur.

VI. Consideration of Burden on Competition and Promotion of Efficiency, 
Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \63\ requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. In addition, Section 23(a)(2) 
prohibits us from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. Section 3(f) of the Exchange Act \64\ and Section 
2(c) of the Investment Company Act of 1940 \65\ require us, when 
engaging in rulemaking that requires us to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition and capital formation.
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78w(a)(2).
    \64\ 15 U.S.C. 78c(f).
    \65\ 15 U.S.C. 80a-2(c).
---------------------------------------------------------------------------

    The AFSCME v. AIG opinion has created uncertainty regarding the 
Commission's longstanding interpretation of Rule 14a-8(i)(8), making it 
difficult for shareholders and companies to assess the operation of 
that rule. This has resulted in uncertainty regarding whether Rule 14a-
8 requires companies to include in their proxy materials shareholder 
proposals that would establish procedures whereby shareholders could 
submit nominations for director to be included in the company's proxy 
materials, despite the exclusion provided by Rule 14a-8(i)(8). This 
uncertainty has made it difficult for shareholders and companies to 
assess the proper operation of the shareholder proposal rule and has 
generated economic inefficiency by introducing potential litigation 
costs and potential costs of preparing and responding to otherwise 
excludable shareholder proposals.
    The amendment is intended to clarify the scope of the exclusion in 
Rule 14a-8(i)(8), consistent with the agency's longstanding 
interpretation of the Rule. This should improve shareholders' and 
companies' ability to assess shareholder proposals with a clear 
understanding whether Rule 14a-8 will require inclusion of the 
proposal. Informed decisions in this regard generally promote market 
efficiency and capital formation, but should not affect competition. We 
believe the amendment

[[Page 70456]]

to Rule 14a-8(i)(8), and the attendant clarity and reduction of 
litigation risk, expense, and uncertainty for all parties will not 
impose a burden on competition, but will promote efficiency and capital 
formation.

VII. Final Regulatory Flexibility Act Analysis

    This Final Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603. It relates to an amendment to Rule 14a-8 
that clarifies the application of the exclusion provided by paragraph 
(i)(8) of that Rule.

A. Need for the Rules and Rule Amendments

    The purpose of the amendment is to clarify the scope of Rule 14a-
8(i)(8), which permits the exclusion from a company's proxy materials 
of certain bylaw proposals relating to procedures for the election of 
directors. The final rule should improve shareholders' and companies' 
ability to assess such shareholder proposals with a clear understanding 
of whether Rule 14a-8 will require inclusion or permit exclusion of the 
proposal.

B. Significant Issues Raised by Public Comment

    We did not receive comments specifically on the application of the 
interpretation to small entities. Several commenters supported the 
agency's longstanding interpretation of Rule 14a-8(i)(8). Some believed 
that the AFSCME v. AIG opinion did not invalidate the interpretation, 
but rather required the Commission to state its position and its 
reasoning in a formal way.\66\ Other commenters disagreed with the 
Commission's position entirely and therefore opposed the longstanding 
interpretation and the related proposed rule text amendment.\67\ Some 
commenters opposing the interpretation and rule proposal believed that 
the Commission should withhold action until it has the opportunity to 
assess the impact of the AFSCME v. AIG decision.\68\
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    \66\ See comment letter from Citigroup. See, e.g., comment 
letters from Adams and Chamber.
    \67\ See, e.g., comment letters from AFL-CIO; AFSCME; FL Board; 
Amalgamated Bank; LA Fire & Police; and NYC Comptroller.
    \68\ See Form Letter B.
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C. Small Entities Subject to the Rule

    The Regulatory Flexibility Act defines ``small entity'' to mean 
``small business,'' ``small organization,'' or ``small governmental 
jurisdiction.'' \69\ The Commission's rules define ``small business'' 
and ``small organization'' for purposes of the Regulatory Flexibility 
Act for each of the types of entities regulated by the Commission.\70\ 
A ``small business'' and ``small organization,'' when used with 
reference to a company other than an investment company, generally 
means a company with total assets of $5 million or less on the last day 
of its most recent fiscal year. We estimate that there are 
approximately 1,100 companies, other than investment companies, that 
may be considered reporting small entities.\71\ The final rules may 
affect each of the approximately 1,315 small entities that are subject 
to the Exchange Act reporting requirements.
---------------------------------------------------------------------------

    \69\ 5 U.S.C. 601(6).
    \70\ Securities Act Rule 157 [17 CFR 230.157], Exchange Act Rule 
0-10 [17 CFR 240.0-10], and Investment Company Act Rule 0-10 [17 CFR 
270.0-10] contain the applicable definitions.
    \71\ The estimated number of reporting small entities is based 
on 2007 data, including the Commission's EDGAR database and Thomson 
Financial's Worldscope database. Approximately 215 investment 
companies meet this definition.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The amendment imposes no new reporting, recordkeeping, or 
compliance requirements. The impact of the amendment relates to 
clarifying the scope of Rule 14a-8(i)(8), which permits companies to 
omit certain shareholder proposals from their proxy materials.

E. Agency Action To Minimize Effect on Small Entities

    The amendment to Rule 14a-8(i)(8) is intended to provide certainty 
and consistency to shareholders and companies of all sizes regarding 
the application of the Rule. It would be contrary to this objective if 
we minimized the effect of the amendment on small entities.

VIII. Statutory Basis and Text of Amendment

    We are adopting an amendment to the Rule pursuant to Sections 14 
and 23(a) of the Exchange Act, as amended, and Sections 20(a) and 38 of 
the Investment Company Act of 1940, as amended.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

0
In accordance with the foregoing, the Securities and Exchange 
Commission proposes to amend Title 17, chapter II of the Code of 
Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *

0
2. Amend Sec.  240.14a-8 by revising paragraph (i)(8) to read as 
follows:


Sec.  240.14a-8  Shareholder proposals.

* * * * *
    (i) * * *
    (8) Relates to election: If the proposal relates to a nomination or 
an election for membership on the company's board of directors or 
analogous governing body or a procedure for such nomination or 
election;
* * * * *

    Dated: December 6, 2007.

    By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E7-23951 Filed 12-10-07; 8:45 am]

BILLING CODE 8011-01-P
