The Securities and Exchange Commission has proposed changes to its proxy rules to "remove impediments to the exercise of shareholders' rights to nominate and elect directors to company boards of directors," including the boards of investment companies registered under the Investment Company Act of 1940. The SEC's proposal, discussed at length in a 250 page Release dated June 10, 2009, would significantly change Rule 14a-8(i)(8) under the Securities Exchange Act of 1934, which now permits a company to exclude from its proxy soliciting material any shareholder proposal "if the proposal relates to an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election." The SEC's changes would, instead, allow, under certain conditions, shareholder proposals for amendments to provisions of a company's governing documents relating to director nomination procedures and disclosures not in conflict with the SEC's proxy solicitation disclosure rules, including its proposed rules, and provisions of state law.

The Release cites "serious concerns about the accountability and responsiveness of some companies and boards of directors to the interests of shareholders" and "loss of investor confidence." In light of current economic conditions, the SEC states, it has determined to "revisit whether and how the federal proxy rules may be impeding the ability of shareholders to hold boards accountable through the exercise of their fundamental right to nominate and elect members to company boards of directors." The regulation of the proxy process, the Release continues, is a "core function of the Commission."

Proposed new Rule 14a-11 would, under specified conditions, require companies to include the names of shareholder nominees, together with required background and experience information, in their proxy statements. But a company would not be required to include a shareholder nominee if the nominating shareholder is, or is part of a group, seeking to change control of an issuer. Those activities trigger compliance with other existing proxy rules applicable to proxy contests. Also, the proposed Rule could not be relied upon if state law or a company's charter or other governing documents, as in effect, prohibit shareholder nominations for election as a director, or rules of a national securities exchange or association, as applicable, would be violated. Presumably, if a charter prohibition existed, a shareholder could formulate a two-part proposal, first to amend the charter to permit shareholder nominees, and second, if the charter amendment is approved, a shareholder nominee could be voted upon. Nominating shareholders would be required to file with the SEC a proposed Schedule 14N, among other eligibility requirements.

The SEC states that its proposals will provide shareholders two ways to "more fully exercise their rights to nominate directors." First, through proposed new proxy Rule 14a-11 requiring inclusion of a nominee, subject to the Rule's requirements. Second, by proposing an amendment to Rule 14a-8(i)(8), the election exclusion, to preclude companies from relying on the Rule to exclude shareholder amendments that would conflict with proposed Rule 14a-11.

Proposed Rule 14a-11 would require that only holders of minimum ownership thresholds be allowed to submit nominees for director that an issuer would be required to include in its proxy soliciting materials and form of proxy. For example, in the case of 1940 Act registered investment companies, with total net assets of $700 million or more, the investment company shareholder must beneficially own at least 1% of the issuer's voting securities, with scaled requirements for investment companies with lower amounts of assets. An issuer's shares must have been owned for at least one year, and other such conditions apply. A new Form 8-K filing requirement would apply to an investment company that is a "series company" disclosing the company's net assets and certain voting share information.

The SEC's Release includes a helpful Table of Contents that facilitates consideration of the proposed changes. The Release includes a request for comments covering over 25 areas in which the SEC seeks guidance. The due date for submitting comments is August 17, 2009 (60 days from publication in the Federal Register).

SEC Release Nos. 33-9046, 34-60089, and IC-28765 is attached here.