Wednesday, January 7, 2009

New SEC chairmwoman was activist backer

Activist hedge fund managers may like Mary Schapiro.

The soon-to-be Securities and Exchange Commission chairwoman was a solid shareholder activist during her stint as a commissioner at the agency. So much so that governance fund manager Ralph Whitworth said "She has been a stanch and long-time supporter of shareholder rights."

RiskMetrics Inc. Director Patrick McGurn said: "You have to put [Schapiro] on the progressive side of the scale when it came to initiatives for shareholders.”

President-Elect Barack Obama chose Schapiro in December to run the controversial and embattled agency, which is likely to be restructured in response to the financial crisis.

Between 1988 and 1994, Schapiro was an independent commissioner at the SEC. During that period, the agency was headed by GOP chairmen David Ruder and Richard Breeden, and later by Democratic commissioner Arthur Levitt.

In my book I talk about how that period was critical for shareholder empowerment. Breeden, who now runs an activist hedge fund, pushed through a number of investor-empowering rules with Schapiro's critical backing. Schapiro's support for shareholder initiatives at the time indicates that she may be supportive of some major pro-investor proposals as chairwoman.

In the early 1990s, Schapiro voted to have the SEC adopt a number of rules expanding the amount of communications investors could have with each other. It also freed up communications between investors and reporters. The rules allowed investors to vote against a management proposal or director candidates as long as they didn't try to nominate their own director candidates.

She also endorsed a provision introduced by Breeden known as the short-slate rule that allowed investors to split their vote between management-nominated directors and candidates put up by dissident activist investors.

"More than a decade later, this measure was critical in establishing the world of activist hedge funds and other insurgent investors," McGurn said. "She [Schapiro] was critical to the effort to keep that controversial provision in the final shareholder communications reform package."

While at the SEC, she also backed a measure that expanded the amount of disclosure executives were required to provide about their compensation plans. Those disclosure rules were expanded in July 2006.

1 comment: said...

By Lawrence J. Goldstein, President, Santa Monica Partners investment partnerships

The long standing SEC definition of “shareholder” as a “holder of record” has allowed hundreds and hundreds of companies with hundreds and even thousands of “beneficial holders” to claim because they have fewer than 300 “registered shareholders” that they are private companies and no longer are required to comply with all the SEC rules and regulations requiring disclosure of information; no annual or quarterly reports, no proxies, no insider Form 4 or 13-D filings, no financial P R releases, no conference calls, etc. and once they “go dark” this works to the detriment of shareholders who are then completely in the dark as to what is going on in the company and therefore the marketplace and share prices which suffer decline. All this damage resulting from information no longer being made public simply because of how the SEC defines shareholder is bad public policy which has had and continues to have a very damaging effect on public investors and stock prices.

As the situation has continued to persist, and in fact worsen since the advent of digital shareholder records, and brokers refuse to register or hold stock in their clients names -- only brokers are allowed to be counted as the registered holders of stock they hold for clients, and this is done by looking through the brokers sole nominee, Cede, which does not in turn allow the clients who are in fact the real or beneficial shareholders to be counted -- with the result that the number of holders called or recorded as beneficial holders has substantially declined and the number of record holders has declined even further.

What has resulted from the SEC rule allowing de-registration if a company certifies it has fewer than 300 registered shareholders and especially in combination with the Depository Trust Company nominee Cede not counting the beneficial shareholders whom their broker members represent, is an unintended consequences, namely corporate opaqueness, non-disclosure and a complete lack of transparency or accountability to shareholders of de-registered issuers.

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