Citigroup Management Argument to SEC, December 22, 1999




Citigroup Inc., a Delaware corporation ("Citigroup" or the "Company"), intends to omit the stockholder proposal and supporting statement (the "Proposal," a copy of which is annexed hereto as Exhibit A) submitted by Mark Latham, Ph.D. (the "Proponent") for inclusion in its proxy statement and form of proxy (together, the "2000 Proxy Materials") to be distributed to stockholders in connection with the Annual Meeting of Stockholders to be held on April 18, 2000.

The Proposal requests the Company to conduct a bidding process at the 2001 Annual Meeting in order to retain a proxy advisory firm selected by a vote of the Company’s stockholders at the Annual Meeting.

It is Citigroup’s belief that the Proposal may be omitted pursuant to Rule 14a-8(i)(7), Rule 14a-8(i)(4), and Rule 14a-8(i)(3). Rule 14a-8(i)(7) provides that a proposal may be omitted if it "deals with a matter relating to the company’s ordinary business operations." Rule 14a-8(i)(4) provides that a proposal may be omitted if it is "designed to result in a personal benefit to the proponent, or to further a personal interest, which is not shared by the other shareholders at large." Rule 14a-8(i)(3) provides that a proposal may be omitted if it or the accompanying supporting statement "is contrary to any of the Commission’s proxy rules, including Section 240.a-9, which prohibits materially false or misleading statements in proxy soliciting materials."



The Proposal, insofar as it requests the Company to retain the services of a proxy advisory firm selected by a vote of the stockholders at the Company’s Annual Meeting in 200l, would infringe upon management’s decision-making functions concerning (i) disclosure in the Company's proxy statement and (ii) retention of consultants. It is well settled that decisions on such matters relate to the Company’s ordinary business operations, and therefore, may be omitted pursuant to Rule 14a-8(i)(7).

Implementation of the Proposal would require Citigroup to provide supplementary disclosures in the proxy statement that are not required by applicable laws or regulations and relate to ordinary business operations. The Staff of the Division of Corporate Finance ("Staff") has consistently declined to recommend enforcement action against companies that omitted stockholder proposals, which, if implemented, would require additional disclosures in the companies’ proxy materials. See Johnson Controls, Inc. (October 26, 1999) (additional reporting in SEC-required disclosure materials that is related to ordinary business operations may be excluded under Rule 14a-8(i)(7)); RJR Nabisco Holdings Corp. (Feb. 22, 1999) and International Business Machines Corporation (Jan. 19, 1999) (both proposals request disclosure of company’s relationships with compensation consultants in proxy statement): ConAgra, Inc. (June 10, 1998) (proposal to establish a political contributions program and to provide comprehensive disclosure on the recipients in the annual report: the Staff noted, "while the subject matter of political contributions does not necessarily involve matters relating to the company’s ordinary business operations, we note in particular that the proposal would, if implemented, require the company to supplement the disclosures made in its annual report on form 10-K and other periodic reports").

The need for exclusion of this type of proposal is further crystallized when one considers how confusing the proxy statement and form of proxy would be to stockholders if the Proposal were implemented. By conducting a bid and selection process in the suggested forum, the Company’s Proxy Statement, the Proposal would implicitly require the Company to explain in the proxy statement the circumstances and rationale for the vote. In addition, under the terms of the Proposal, "any proxy advisory firm can put itself on the ballot by paying an entry fee and declaring the price for its service," which could result in an unlimited number of candidates bidding for this business, each of whom must be disclosed in the proxy statement and listed on the proxy card. Citigroup submits that conducting a bid process through proxy disclosure and in the course of an annual meeting would confuse stockholders, and therefore, is inappropriate.

In Release No. 34-40018 (May 21, 1998), the Securities and Exchange Commission ("Commission") cited a number of examples of matters that fall within the purview of "ordinary business operations" and should not be subject to shareholder oversight, including decisions related to hiring and retention of suppliers. By recommending that the Company hire a proxy advisory firm — essentially, as a consultant/supplier to the Company’s stockholders — the examples cited by the Commission are broadly implicated. There is ample support to exclude the Proposal based on Rule l4a-8(i(7), as the Staff has consistently declined to recommend enforcement action against companies that omitted stockholder proposals requesting the Board of Directors to hire or not to hire consultants, vendors, or suppliers.

In J.C. Penney Company, Inc. (March 8, 1999), citing the proposal's implication of the company’s hiring practices, the Staff did not recommend enforcement action against a company that omitted a proposal, pursuant to Rule 14a-8(i)(7), prohibiting the company from entering into "personal service agreements" with retired employees.

In Bob Evans Farms, Inc. (June 23, 1997), the Staff did not recommend enforcement action against a company that omitted a proposal, pursuant to Rule 14a-8(c)(7) (predecessor to Rule 14a-8(i)(7)), calling for the corporation’s board of directors to consider and select a consulting firm to advise the board and management in order to make recommendations for improved financial performance.

In Release No. 34-40018 (May 21, 1998) the Commission cited "the degree to which a proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment," as a second consideration for determining whether a proposal relates to a company's ordinary business operations." The Proposal aims to micro-manage the process through which the Company will retain a proxy advisory firm by specifying (i) selection through stockholder vote, (ii) a time frame for implementation and (iii) a ceiling ($10,000) on the amount the proxy advisory firm could charge the Company.



The Proposal may be omitted under Rule 14a-8(i)(4), as it is intended as a springboard to launch the Proponent’s business of advising stockholders, corporations and anyone else interested in visiting the Proponent’s website for information pertaining to corporate governance. Under the guise of recommending that stockholders select proxy advisory firms to be paid by companies, the Proponent’s supporting statement concludes with information on his website and the various articles that one might find there. This is, essentially, a free advertisement to the Company’s many stockholders. Indeed, although it appears that the Proponent is not himself a "proxy advisory firm," his business of monitoring and advising investors on corporate governance issues is clearly linked to the business he champions in his Proposal.

Although one might consider the Proposal facially-neutral (except for the free advertisement at the conclusion of the supporting statement) and beneficial to other shareholders, the benefit to be gained by the Proponent in advertising his website in Citigroup’s proxy statement is disproportionate to the possible benefit other shareholders may derive. Accordingly, Citigroup submits that this Proposal subverts the shareholder communications process and may be omitted.

The Commission has determined that it will continue reviewing arguments predicated on Rule 14a-8(i)(4) on a case-by-case basis (Rel. No. 34-40018). In USLIFE Income Fund, Inc. (October 29, 1999), the Staff reviewed an original proposal, an amended proposal, and a 13D filing by the proponent and concluded that the proponent’s motive in submitting a proposal was to benefit itself and not the company’s shareholders at large.

Citigroup submits that the Staff need not read any further than the Proposal and supporting statement to conclude that the intent of the Proposal is to benefit the Proponent by maximizing stockholder exposure to the proxy advisory business, a business in which the Proponent, as an advisor on corporate governance issues, is a participant.



The framework for the Proposal is built on unsupported assumptions, conclusory statements, and ambiguous assertions that raise numerous questions as to (i) its underlying rationale, (ii) what the Company would be required to do should it be adopted and (iii) what thc stockholders would be asked to vote on.

First, the various clauses in the preamble are conclusory statements without any factual basis. The first clause makes the unsupported assumption that many shareowners lack time and expertise to examine proxy issues and are reluctant to follow management recommendations because of "possible contlicts of interest." No studies, reports, articles, surveys or any other form of evidentiary support is provided.

The second clause, again unsupported and conclusory, claims that "proxy advisory firms have established reputations for giving sound independent advice to many institutional investors on how to vote their shares," This suggests that every candidate willing to pay "an entry fee" and offer its services for "no more than $10,000" has established a reputation for giving sound independent advice, a conclusion nowhere supported. It does not set forth criteria which stockholders could apply to distinguish among the candidates and make their vote informative. Moreover, this assertion requires one to infer that individual investors share the same interests as institutional investors and, therefore, proxy advisory firms are equally qualified to serve the investment interests of both.

Similarly, the Proposal is overly vague as to what costs the Company might incur. The Proposal is silent as to (i) whether the Company or the proxy advisory firm would bear the mailing costs of providing the proxy advice to the Company’s stockholders, (ii) how frequently communications to stockholders would be made, and (iii) whether the Company would also bear the cost of printing the materials mailed to stockholders. These are important concerns that stockholders would need to evaluate in order to determine the merits of the Proposal.

Lacking any factual basis or evidentiary support, the following assertions in the supporting statement are conclusory and misleading and should not be included in the Company’s proxy statement under Rule 14a-9: "The Proposal can be expected to improve the return of Citigroup stock by: enhancing management accountability to shareowners by making professionally researched advice available to all; effectively enfranchising individual investors for the first time, ensuring that a majority of shares can be voted independently of management’s recommendations; and encouraging greater competition among advisory firms to serve shareowner interests."

Citigroup submits that in view of the prevalence of unsupported assumptions, conclusory statements and ambiguous assertions, the Proposal and supporting statement are materially misleading and should be omitted in their entirety in accordance with Rule 14a-8(i)(3).



For the foregoing reasons, Citigroup respectfully submits that the Proposal may be omitted pursuant to Rule 14a-8(i)(7), Rule 14a8(i)(4), and Rule 14a-8(i)(3).