Council of Institutional Investors

New York State Fund Appeals to SEC for Reconsideration of No-Action Rulings
Thursday, February 27, 2014
by: Rosemary Lally

Section: CII Governance Alert




The New York State Common Retirement Fund is asking the SEC to review two previous no-action rulings that give Bank of America and Wells Fargo the green light to omit the fund’s proposals from their proxy statements.

The proposals ask the banks to disclose whether they have identified employees who have the ability to expose them to material financial risk, and, if they have done so, to disclose:
  • The methodology and criteria used to identify those employees;
  • The number of those employees, broken down by division;
  • The aggregate percentage of compensation, broken down by division, paid to those employees that constitutes incentive compensation; and
  • The aggregate percentage of such incentive-based compensation that is dependent on long-term and short-term performance metrics.
In their no-action requests to the SEC, the banks argued that the proposals should be excluded because they relate to the companies’ ordinary business. Specifically, the requests said that because the resolutions call for the banks to report on employees who may expose the financial firms to material losses and liabilities, as determined in accordance with generally accepted accounting principles, they relate to the banks’ management of their workforces.
 
The letters also argued that the proposals call for the disclosure of possible losses and liabilities from all employees’ activities throughout the company, not just the risks arising from incentive-based compensation plans. “As such, the proposal intrudes upon the scope of general management responsibilities,” said Wells Fargo’s letter to the SEC.
 
The banks’ no-action arguments also acknowledged that while the proposals do deal with risk assessments that may touch upon significant policy considerations, the SEC staff in the past has concurred that a proposal that touches upon or includes significant policy issues, but that also encompasses ordinary business matters, may be excluded under to Rule 14a-8(i)(7).
 
In its rulings on both banks’ proposals the SEC acknowledged “the incentive compensation paid by a major financial institution to its personnel who are in a position to cause the institution to take inappropriate risks that could lead to a material financial loss to the institution is a significant policy issue.” But, the commission said the proposals relate to the compensation paid to any employee who has the ability to expose the banks to possible material losses without regard to whether the employee receives incentive compensation and, therefore, does not focus on the significant policy issue. As a result, the ruling said the banks may exclude the proposals based on the ordinary business rule.
 
In its February 20 appeal to the SEC, the New York State Common Retirement Fund pointed out that “there is nothing in the proposal that seeks disclosure of any employee’s individual compensation that is not expressly incentive-based, and the proposal does not seek disclosure of any employee’s individual compensation.” Instead, it said, the proposal asks for disclosure of only aggregate data relating to incentive-based compensation. The correspondence also strongly emphasized that the proposal deals with precisely what the SEC called a “significant policy issue” in its ruling. The fund said the commission misread or misinterpreted the proposal, and it requested that either the staff reconsider its ruling or the director of the Division of Corporation Finance intervene and reverse the staff’s ruling.
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