On November 5, 2019, the Securities and Exchange Commission voted 3-2 to propose changes to the proxy rules that reduce the accountability of company CEOs and boards of directors to shareholders and the public. The combined effect of the two proposed rule changes (on proxy advisors and on shareholder proposals) would make it far more difficult for shareholders to vote independently of management. It would do so by rigging the rules to make it more difficult to file shareholder proposals or issue proxy advice on a wide array of issues from excessive executive pay to climate risk or to board and staff diversity.
The SEC estimates that the changes to the shareholder proposal rule alone would reduce the number of shareholder proposals considered at annual meetings by 37%, but the SEC has failed to take into account the likely losses in investor protection. These changes could risk trillions of dollars of negative impact on investments and impose added costs by diverting the underlying concerns into more costly procedures: litigation, books and records requests, and regulatory standards. The proposals would have the effect of disrupting a functioning and dynamic ecosystem of investor engagement that includes proxy advisors, passive and active institutional investors, and individual investors.
1. The proxy advisors proposal would treat proxy advisors’ recommendations as ”solicitations” subjecting them to increased liability exposure and allowing issuers, but not shareholder proponents, the right to review and comment on final proxy advisor recommendations prior to publication.
• The effect is to offer a one-sided opportunity for issuers and their attorneys to threaten litigation in order to block proxy advisors’ favorable recommendations on shareholder proposals.
2. The filing thresholds for shareholder proposals would steeply increase the level of shareholding required to file a proposal from the current $2,000 for one year to $25,000 if held for one year, $15,000 if held for two years, and $2,000 if held for three years.
• These expanded thresholds are clearly intended to reduce the role of the smallest investors, whose proposals have often been pivotal in corporate reform efforts.
• The SEC estimates that these thresholds will cut proposal filings by 28%. There is no good economic justification for cutting these proposals.
• The proposal also arbitrarily blocks shareholders from aggregating their shares to meet the thresholds.
3. The resubmissions thresholds for shareholder proposals would be changed steeply. To resubmit a proposal would require a 5% vote the first year, 15% the second year, and 25% a third year. This is in contrast to the current resubmission levels of 3%, 6%, and 10%, respectively. In addition, a new requirement would impose a “momentum” exclusion if a proposal experienced a 10% drop in voting support after the third year, even if that proposal still received nearly majority support.
• Based on recent voting history such rules would have excluded many past proposals that ultimately succeeded in producing votes or company action on proxy access, diversity, climate, and other ESG issues. Had those proposals been excluded, shareholders’ ability to have successful engagements would have been dramatically limited without the leverage of potential proposal resubmission.
4. Obstructing representation of investors. The proposal would disallow investors from hiring an advisor to speak on their behalf in dialogues with a company and make the filing and annual meeting process far more onerous and expensive. It would require any individuals filing proposals, regardless of their representation, to meet directly with companies. It would prevent impact investing firms from filing multiple proposals on behalf of different clients at a given company. It may prevent an individual from introducing more than one proposal at the company’s annual meeting, even if on behalf of other investors.
• There is no good justification under the securities laws for disrupting these representative relationships, which are a matter of state agency and contract law, not federal securities law. This set of proposals regarding representation represents a harmful infringement on financial firms as small businesses.
5. Rushing to decide. The SEC is rushing to make a decision on the proposed rule changes, allowing only a 60-day comment period. The Council of Institutional Investors and the Shareholder Rights Group have requested that the SEC extend the comment period from 60 to at least 120 days
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How to Comment
The SEC is accepting comments on the proposed rules until February 3, 2020.
Write to: Vanessa A. Countryman, Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File No. S7-23-19.
Email to: firstname.lastname@example.org, subject line include reference to File No. S7-23-19