Let's Fix the Rules of Enforcement

This article is part of an ongoing series about the Shareholder Bill of Rights currently in Congress. Together, we can ensure that this bill truly represents our interests as shareholders and individual investors.

The Shareholder Bill of Rights is just an 11-page document, written in the quirky wide-margin, double-spaced format that all laws favor, perhaps to increase the page count so it looks like lawmakers are getting more work done (a favorite trick for those writing last-minute term papers, too).

There are plenty of details to be worked out if this becomes law. Who will work out many of those details? The U.S. Securities and Exchange Commission (SEC).

If the Shareholder Bill of Rights gets enacted, the SEC will have one year to clarify the rules about the issuance of proxies and the establishment of risk committees and decide which companies might be exempted.

That may not fill you with confidence. The SEC's reputation has been tarnished since the beginning of the "Great Recession," starting with the agency's failure to notice Bernie Madoff's Ponzi scheme, and continuing right up to last month's rebuke from Judge Jed Rakoff, who rejected the agency's settlement with Bank of America (NYSE: BAC  ) because, in his words, it "does not comport with the most elementary notions of justice and morality."

The current situation
Not that the SEC doesn't have enough on its plate already. The agency is wrestling with derivatives regulation, high-frequency trading, flash orders, hedge fund disclosure, increased oversight of credit ratings agencies, requiring brokers to act as fiduciaries, an AIG (NYSE: AIG  ) derivatives probe, and prosecution of Countrywide Financial co-founder Angelo Mozilo, among many other projects (including more run-of-the-mill options backdating probes, such as the ones we've seen in recent years at Apple (Nasdaq: AAPL  ) , Take-Two (Nasdaq: TTWO  ) , and IBM (NYSE: IBM  ) ).

But the SEC has already begun grappling with some provisions of the Shareholder Bill of Rights. Last May, the agency voted to propose rule amendments that would make it easier for shareholders to nominate directors to corporate boards. Under the proposed rules, shareholders would be eligible to have their nominees added to the proxy materials if:

  • They own at least 1% of the voting securities of a company worth $700 million. 
  • They own at least 3% of the voting securities of a company worth between $75 million and $700 million.
  • They own at least 5% of the voting securities of a company worth less than $75 million.

Shareholders must have held the shares for at least a year, and can band together to aggregate their holdings.

This has a good deal in common with the provisions in the Shareholder Bill of Rights that deal with board elections. Thus, the SEC already has a leg up on the implementation of that aspect of the bill, and it is also familiar with many of its other features.

Lots of work ahead
By living in the Washington, D.C., area and attending far too many financial conferences, I've had the opportunity to meet several current and former employees of the SEC. I also gave a speech at the agency's main headquarters last September. My experience is that these folks are smart, well-qualified, and well-meaning. While a draft proposal went out yesterday that would beef up SEC resources, for now the organization is understaffed, and -- like all agencies -- subject to the whims of political pressures. And it has plenty of other issues to confront.

So is the SEC up to the task? Do you have a better idea for making Wall Street more shareholder-friendly? We want the Shareholder Bill of Rights to come from all of us. So post your comments at the bottom of this article (or any other in this series). Cast your vote in our online polls. Or send us an email at ShareholderRights@fool.com. Let’s all tell Wall Street and Washington what rights we shareholders really need.

Once you’re done, remember to check out "It's Time for a Shareholder Revolution" for more on the Shareholder Bill of Rights.

Robert Brokamp doesn't own shares of any companies mentioned. Apple is a Motley Fool Stock Advisor recommendation. Take-Two is a Rule Breakers selection. The Fool is investors writing for investors.


Read/Post Comments (8) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 03, 2009, at 9:31 AM, jtortorelli wrote:

    I have learned over many years, and perhaps you have as well Mr. Brokamp, that there is no substitute for digging into things yourself. Hearing things second hand and passing them along as fact is unwise and compounds many problems. Could at least ONE auditor of Madoff's books have checked ONE bank balance or share balance in the portfolio? I applaud you for attending conferences, speaking to people first hand, reading judge's rulings yourself, because there is no substitute digging up that data on your own.

  • Report this Comment On October 07, 2009, at 5:25 PM, gspaxis wrote:

    I think the SEC and other government level regulators make the exercise political and perhaps even confusing. Some administrations are interested in enforcing the rules, and governing by empowering and supervising the most effective employees they can find, some not so much. Some don't even believe in regulation.

    So another mechanism should be developed, and transparency on all these matters to shareholders and the financial media should be assured. It is true BTW THat if the financial media had been more inquisitive, maybe this mess would have been averted.

    I don't see a question about separating the Chairman and the CEO, and I don't see a question about insisting that board members have some of their own wealth at risk.

  • Report this Comment On October 07, 2009, at 5:34 PM, stephen77 wrote:

    The major problem with all of the proposals is potentially the same: There have to be serious consequences for getting it wrong, and if these consequences don't exist or are meaningless, no system will work. For example, if the risk committee allows excessive risk, they loose everything. If the board members fail to ensure the company is governed correctly, they loose everything. Any system which fails to levy major penalties on those at the top who do wrong will never work very well except by accident. All of the proposals should be based on an adverserial concept, not jobs for the boys.

  • Report this Comment On October 09, 2009, at 6:22 PM, jreas wrote:

    The SEC is the agency that should oversee and enforce the new legislation. Further, House and Senate commitees should monitor the SEC to help ensure enforcement of the rules and regulations.

  • Report this Comment On October 09, 2009, at 10:27 PM, fromunder wrote:

    like i said in an earlier post, the sec is not capable of handling any more tasks. frist lets look into why the sec considers themselves above the law as written. it is there job to handle the enforcement of failure to deliver shares, instead they grandfather relief from complience for brokers, what about the shareholders. so you see i have a real problem with the sec looking out for my interests

  • Report this Comment On October 09, 2009, at 11:10 PM, canadaandre wrote:

    The SEC should oversee the new legislation and the legislators should monitor SEC activities concerning shareholders rights.

  • Report this Comment On October 10, 2009, at 11:36 PM, MBLacey wrote:

    The SEC should oversee the new legislation and legislators should monitor SEC activities, BUT the new law should mandate that each year, enough of the budget approriations should be given to the SEC for them to do their jobs on all fronts. If Congress forces cuts in enforcement funds, they should be forced to either make new provisions for enforcement by another agency or take a portion of their staff budgets and/or their salaries to pay the enforcers.

  • Report this Comment On October 12, 2009, at 3:21 PM, Zhire wrote:

    A second agency should be formed to double check the first. If these agencies are kept separate, then they can check each other's ethics as they are checking the company's.

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