New Securities and Exchange Commission Policy Signaling Selective Enforcement Threatens Rights of Retail Investors 

Washington, DC. On September 6, the Securities and Exchange Commission issued a new policy that could significantly reduce transparency and accountability in the process of enforcement of the rules on shareholder proposals. According to a group of leading investors who utilize this process, the new policy undermines the rights of shareholders and increase uncertainty.

Under the decades-long process deployed by the SEC to review shareholder proposals, companies that wish to exclude a proposal from the proxy statement are required to file a request for a “no-action decision” from the Securities and Exchange Commission describing their reasons for excluding the proposal. The staff issues an informal ruling, in each instance clarifying whether or not the staff agrees with the company’s reasons for exclusion, or would recommend enforcement if the company follows through on its intention to exclude the proposal. 

Under the new policy, the staff will not necessarily respond in writing to every no-action request that is submitted. In some instances, the staff may issue a written decision that they are choosing not to decide for or against the proposal. In other instances, the staff may only respond orally to the parties.

Comments from Investors and Others

Josh Zinner, CEO, Interfaith Center on Corporate Responsibility

“For many years, the shareholder proposal process has served as a cost effective way for corporate management and boards to gain a better understanding of shareholder priorities and concerns. This new SEC policy will make the process far less transparent, and will create confusion and litigation.  Without the agency’s routine written guidance, investors and companies will be in the position of having to guess the SEC’s position, with negative consequences for the entire process.”

Sanford Lewis, Director, Shareholder Rights Group:

“The new policy lacks the earmarks of good government and transparency because it takes a process that is currently clear to investors and companies and replaces it with one in which informal communications, or even agency silence, may take the place of routine, written decisions.”

Jonas Kron, Senior Vice President, Trillium Asset Management:

“It is hard to see how this decision is consistent with SEC Chairman Jay Clayton’s recent focus on protecting Main Street investors. It is the smaller shareholders that most need to use shareholder proposals to engage with their companies and bring their insights to the marketplace of ideas. Yet, depending on how it is implemented, this new practice could limit the viability of the shareholder proposal process to only the largest investors, who can afford to take a company to court if the staff fails to take any position on a proposal.”

Danielle Fugere, President , As You Sow, a shareholder advocacy group:

“Companies may interpret the SEC’s failure to act as a signal that it will not enforce the law even where companies have illegally failed to print the proposal on their proxy. This could deny shareholders the opportunity to vote on important issues, and in particular, disadvantage the smaller shareholders who lack the resources to take the company to court over such an issue.”

Mindy Lubber, CEO and President of Ceres, a sustainability nonprofit organization:

“The current shareholder proposal process is clear and transparent. While investors and companies may disagree about certain elements, they should be in agreement that the proposed new approach announced by the SEC would be bad for investors and companies. Without clear written guidance from the SEC, investors and companies will face uncertainty, increased costs, and companies could even face increased lawsuits from shareholders.”

Michael Kramer, Natural Investments:

“It is incumbent on the SEC to ensure that companies are sufficiently engaged with their shareholders, and are addressing salient risks to the company in order to protect share value. Given the distaste some companies have for responding to shareholder concerns and proposals, if the SEC reduces this important intermediary role it may only heighten investor concerns about their companies.”

Timothy Smith, Director of ESG Shareowner Engagement, Boston Trust Walden:

“The SEC ‘s recent decision to selectively decide to refrain from offering opinions on certain shareholder proposals leaves both shareholders and companies in an awkward limbo with no guidance on whether a resolution needs to be included in a proxy statement. Unfortunately it forces shareholders to consider more aggressive responses such as suing to ensure the resolution is brought to a vote, voting No on certain board members, filing floor resolutions allowed under company bylaws for votes at annual meetings, or filing “Books and Records” requests seeking legal action to require companies to disclose information . The shareholder resolution is a fair and “civil” process which if limited may result in much more aggressive shareholder actions in response.”

Gibson Dunn, a corporate law firm:

“Although the shareholder proposal landscape is constantly evolving, the Staff's announcement heralds a more significant shift in the landscape. Combined with the implications of the SEC's recent guidance for proxy advisory firms and investment advisers engaged in the proxy voting process, it means that the 2019-2020 shareholder proposal season could be particularly tumultuous.”

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