New SEC Rule Undermines Rights Of Retail Investors
September 23, 2020
Sanford Lewis 413 549-7333
The Securities and Exchange Commission today adopted new rules making it more difficult for investors to file and resubmit shareholder proposals. In response, Sanford Lewis, director of the Shareholder Rights Group, said, “This is a sad day for investor rights and corporate governance. The new shareholder proposal rules deprecate the rights of small shareholders and undermine American shareholder democracy that has been a model for the world in allowing ordinary retail investors to weigh in with their companies. Instead, it silences many of these investors and skews the process toward only allowing the wealthiest investors to participate.
The new rules, announced today, will significantly limit investors’ ability to submit these proposals by raising the thresholds of ownership both in terms of the number of shares and length of time they must be held. Before the new rule, a shareholder who has held shares in a company for at least a year needed to hold at least $2,000 in shares. Under the new rule, new purchasers of stock must hold $25,000 in shares for at least a year, or hold $2000 in shares for at least three years.
In addition, the new rules make it much more difficult to refile a proposal that has been voted on. The prior rule required 3% support on a first year vote, 6% on a second vote, and 10% on a third vote to keep a proposal before a company’s shareholders. Now resubmission will require 5% on a first vote, 15% on a second vote and 25% on a third vote. This will stifle deliberation by shareholders on emerging issues.
“The new rule has the perverse effect of allowing insiders at dual class companies to block resubmission of proposals, even though the benefit of the shareholder proposal process is to provide input from outsider investors.”
Analysis by the Shareholder Rights Group also identified several instances in which the adopted revisions to resubmission thresholds, if applied in the past, would have blocked proposals addressing issues that are pivotal to large companies’ future success. These examples epitomize the challenging issues of corporate fiscal and social responsibility:
• Chevron’s efforts to come into alignment with the demands of climate change;
• Wells Fargo’s failure to establish a culture, set of values, and ethics that consistently respect its consumers and protects them from widespread fraud;
• Boeing’s experience with the 737 MAX jet and related lobbying efforts, which led to a dangerous environment of self-regulation.
In the comment period that followed the release of the proposed rule last November, an overwhelming number of investors wrote in opposition to the proposed rule changes. It appears based on the rulemaking record that the changes were made on behalf of a few large companies, particularly Exxon Mobil, which was one of the few individual companies to write to the SEC in support of these amendments.