The SEC issued the formal release describing rule and form amendments adopted at its open meeting on December 16, 2009 that (a) expand compensation disclosure requirements for operating companies, (b) impose new corporate governance disclosure requirements on operating companies and registered management investment companies (“funds”) and (c) modify the manner and timing of disclosure of shareholder voting results for operating companies. This article focuses on changes specific to funds, which will require additional disclosure regarding (i) director and nominee qualifications; (ii) past directorships held by directors and nominees; (iii) legal proceedings involving directors, nominees, and executive officers to funds; (iv) board leadership structure and the board’s role in the oversight of risk; and (v) nominating committee consideration of diversity in selecting nominees. The SEC deferred action on amendments to its proxy solicitation rules proposed in connection with the adopted amendments, pending consideration of its proposal regarding shareholder nomination of directors. (On December 14, 2009, the SEC reopened comment on its shareholder nomination proposal (as discussed in the December 15, 2009 Alert).)
Goodwin Procter’s Securities & Corporate Finance and ERISA & Executive Compensation Practices have issued a Public Company Advisory that discusses how these new disclosure requirements apply to public companies. The SEC staff has provided subsequent guidance on how the new requirements become effective for public companies.
Director and Nominee Disclosure. Under the amendments, a fund must disclose for each director and any nominee for director the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director for the company, in light of the fund’s business and structure, as of the time that the filing containing this disclosure is made with the SEC. The amendments do not specify the particular information that should be disclosed but do indicate that, if material, this disclosure should cover more than the past five years, including information about the person’s particular areas of expertise or other relevant qualifications. These same requirements will apply to any nominees put forward by other proponents. The new disclosure will be required for all nominees and for all directors, including those not up for reelection in a particular year. Also, under the amendments, a fund must disclose for each director and any director nominee any directorships at public companies (including registered investment companies) held during the past five years, even if the position is no longer held. In proxy and information statements, the period examined to determine whether a director, executive officer or director nominee was involved in specified legal proceedings will be expanded from 5 to 10 years, and disclosure regarding additional types of proceedings required. Except for the disclosure requirement regarding legal proceedings, the foregoing disclosure requirements will apply to funds in proxy and information statements regarding director elections and in SAIs for registration statements on Forms N-1A, N-2 and N-3.
Leadership Structure and Board Role in Risk Management. A fund will be required to describe its leadership structure, including the board’s responsibilities with respect to the fund’s management. It must also identify whether the chairman of its board is an interested person, and if so, whether the fund has a lead independent director and what specific role the lead independent director plays in the fund’s leadership. This disclosure must indicate why the fund has determined that its leadership structure is appropriate given the fund’s specific characteristics or circumstances. Finally, a fund must disclose the extent of the board’s role in risk oversight, such as how the board administers its oversight function and its effect on the board’s leadership structure. The SEC release describing the new disclosure requirements notes that “[f]unds face a number of risks, including investment risk, compliance, and valuation,” and that “this disclosure should provide important information to investors about how a fund perceives the role of its board and the relationship between the board and its advisor in managing material risks facing the fund.” The foregoing disclosure requirements will apply to funds in proxy and information statements regarding director elections and in statements of additional information for registration statements on Forms N-1A, N-2 and N-3.
Nominating Committee Consideration of Diversity. Currently, proxy and information statements relating to director elections must describe a nominating committee’s process for identifying and evaluating director nominees. Under the amendments, a fund must also disclose whether, and if so how, its nominating committee considers diversity in identifying nominees for director. If the nominating committee has a policy regarding the consideration of diversity in identifying director nominees, the proxy or information statement must describe how this policy is implemented, as well as how the nominating committee assesses the effectiveness of its policy. The amendments do not define “diversity.” In the release describing the amendments, the SEC states that it recognizes that issuers “may define diversity in various ways, reflecting different perspectives. For instance, some [issuers] may conceptualize diversity expansively to include differences of viewpoint, professional experience, education, skill and other individual qualities and attributes that contribute to board heterogeneity, while others may focus on diversity concepts such as race, gender and national origin. We believe that for purposes of this disclosure requirement, [issuers] should be allowed to define diversity in ways that they consider appropriate.”
Effective Date. The effective date for the disclosure amendments is February 28, 2010.