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April 16, 2010
SEC Decision to Disallow Proposals on Net Neutrality Perplexes Shareowners
    by Robert Kropp

The proposals would prohibit Internet service providers from exercising preferential treatment and unfair competitive advantage, but are disallowed on the grounds of ordinary business.

In the year since President Obama appointed Mary Schapiro as Chairman of the Securities and Exchange Commission (SEC), shareowner activists and social investors have applauded what has been seen as a refocused attention on the Commission's primary mandate, to protect investors. The Commission has reached out to members of the Social Investment Forum (SIF), for feedback on what they believe are important aspects of corporate reporting on environmental, social, and governance (ESG) issues.

The Commission has formed an
Investor Advisory Committee (IAC) as well, to provide advice on matters of importance to investors and recommendations regarding regulatory action. The Committee, which represents a broad range of investor perspectives, includes three members of SIF.

Perhaps of most importance to shareowner activists was the Commission's publication of guidance for companies that may be required to report on the impacts of climate change on their business operations. Under the Bush administration, shareowner proposals were routinely disallowed by the Commission's Corporation Finance division on the basis of ordinary business. However belatedly, the fact that the Commission now considers climate change to transcend ordinary business has been an encouraging development in the quest by investors for improved corporate transparency.

For some shareowner activists, however, the recent history of the Commission makes its decision on shareowner proposals relating to the issue of net neutrality all the more perplexing. Advocates of net neutrality, who include President Obama among their numbers, argue that actions by Internet companies such as interfering with peer-to-peer file transfers and deep packet inspections of files amount to a significant competitive and social policy issue.

Yet, despite the Commission's recent trend toward allowing shareowner resolutions on the basis of their significance as social issues, and despite widespread support for the principles of net neutrality, proposals addressing the issue filed at AT&T and Verizon by
Trillium Asset Management and Open Media and Information Companies Initiative (Open MIC) were disallowed by the Commission's Corporation Finance division on the grounds of ordinary business.

Proposals submitted at Comcast and Sprint Nextel by the New York City Pension Funds, requesting that the companies prepare reports on the merits of publicly adopting a set of guiding principles for the promotion of a free and open Internet, were disallowed as well. spoke with Jonas Kron, Deputy Director of ESG Research & Shareholder Advocacy at Trillium, about the Commission's decision.

"Net neutrality is a textbook example of a significant policy issue confronting a company," Kron said. "The SEC itself has said that the presence of a widespread public debate regarding an issue is among the factors considered when determining whether the proposal transcends the day-to-day business matters of the company."

"The question is how the staffers in the Corporation Finance division concluded that the AT&T and Verizon proposals did not represent a significant policy issue," Kron continued. "I found it troubling, and rather embarrassing for the SEC, that it reached this conclusion. President Obama has said that net neutrality is a huge issue. The FCC Chairman has said that net neutrality is a huge issue. Hillary Clinton has said that net neutrality is a significant policy issue. The legislation pending in Congress on this issue has a long list of co-sponsors."

"AT&T itself, in its letter to the SEC, said that net neutrality has received extensive comment from a wide range of interested parties," Kron said. "It's a troubling decision, inconsistent with common sense and inconsistent with the rule as it has been interpreted by SEC staff."

Trillium and Open MIC submitted similar proposals last year, which were also disallowed on the grounds of ordinary business. However, those proposals addressed Internet privacy issues as well as net neutrality, and their exclusion by the SEC was on the basis of privacy issues. In response, Trillium and Open MIC narrowed their proposals to the issue of net neutrality this year, only to have them suffer the same fate.

Another blow was dealt to net neutrality by a recent US Court of Appeals decision that the Federal Communications Commission (FCC) lacked the authority to require Comcast to respect the principle. According to the Court, because the FCC categorized Internet service providers as information services rather than telecommunications services, it lacked the authority to regulate them.

testimony this week before the Senate Commerce Committee, Julius Genachowski, Chairman of the FCC, described the Commission's plans for a nationwide broadband strategy. While not addressing the issue of net neutrality directly, Genachowski said that implementation of the proposed strategy would require an "essential role of private investment in extending broadband networks across our nation."

Kron said of the FCC effort, "Trillium and Open MIC have been involved in the rulemaking proceedings. We weighed in on a request for comment from the FCC, stating that the health and well-being of the Internet is an important concern for universal owners and their investments. According to an NYU study, an open and free Internet presents an opportunity for trillions of dollars of economic value for the US economy."

"From an investor perspective, telecoms need to be transparent about how they are managing their networks," Kron continued.

Two proposals addressing net neutrality will be voted on by shareowners this year. The Internet Service Provider (ISP) CenturyLink chose not to oppose the shareowner proposal submitted by Open MIC, and it will be voted on at the company's annual meeting. Last year, the proposal won more than 30% of the vote.

Asked if, on the basis of an impressive vote in favor of the proposal, CenturyLink indicated an inclination to engage with shareowners on the issue, Kron said, "The company has made no indication that it wants to address the concerns of shareholders on this issue. The company has not responded to any of our communications."

A resolution submitted at Earthlink by the New York City Pension Funds, requesting a set of guiding principles for a free Internet, will also be voted on, at the company's May 4 annual meeting.


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