Investors to SEC: "Rescind New No-Action Policy"

We recommend that the Division rescind the policy and retain the process that has worked reasonably well for decades. The number of no action requests processed by the Staff has not increased, and thus this change does not seem merited. In the event that the SEC does not rescind the new policy, we offer the following suggestions to reduce the level of uncertainty and conflict resulting from the new approaches….

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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.

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Rights at Risk

The Securities and Exchange Commission  has placed investors on alert with its May 2019 announcement that the Commission is considering conducting a rulemaking to alter the thresholds for filing or resubmission of shareholder proposals.

For over half a century,  the shareholder proposal process has aided investors of all sizes to convey key concerns to company directors and managers as well as fellow shareholders.  The shareholder proposal process often sheds light on issues neglected by boards, leading to better-considered strategic decisions and more transparency.

A few companies and their lobby groups are seeking to curtail these shareholder rights, and are calling on the SEC to make substantial changes to the rule. 

POTENTIAL SEC RULEMAKING

Proposal Filing Thresholds

Current rules require an investor, as a precondition to filing a proposal, to hold at least $2,000 in shares of a company for at least a year.  This holding timeframe and amount was established to ensure that retail investors would have access to the important right to place issues significant to the company before fellow shareholders.

Some potential rule changes floated in recent years would limit this right to the few largest investors, and to small shareholders that have held onto their shares for an extended number of years.

Some of the proposed changes would block proposals by many current proponents, even though their proposals are winning broad support. The votes in favor of their proposals, often 30-60% or higher, demonstrate that shareholders of all sizes value the opportunity to weigh in on these proposals.

Other rulemaking proposals for “reform” of the Shareholder Proposal Rule seek to extend the length of time one must hold shares beyond the current one year holding period.   When the rule was originally enacted in the 1960s, the average time an investor held a share of  stock was eight years; today the average is between four and eight months.[1]  Therefore, extending the holding time is out of step with today’s  high-frequency trading and index funds in which fewer shareholders are exercising “buy-and-hold” investment strategies.

Resubmission Thresholds

Once a proposal is voted upon at a company, SEC rules limit the circumstances in which the proposal can be resubmitted. In order to resubmit a particular proposal at a company in a subsequent year, the proposal must have obtained at least 3% shareholder support in the first year,  6% in the second and 10% in the third year at the company’s annual shareholder meeting.  These thresholds allow time for the introduction of a proposal on an emerging concern to prompt ongoing consideration, education, research and dialogue among the shareholders and companies.  Support levels for proposals also increase over time in the face of emerging information on risks, technical innovation, and shifts in investing strategies. The potential for resubmission sometimes is sufficient to stimulate a company to address the underlying concern.  Vote levels for novel proposal topics grow over time. Many of the largest shareholders only support a proposal after establishing a voting policy relevant to the newly emerging issue.

Despite these functional realities, corporate trade associations have been asserting since the late 1990’s that these thresholds should be increased, arguing that growing levels of support for proposals by investors render the resubmission levels too low to exclude proposals of little interest to a firm’s investors.

The data do not support the trade associations' claims.  An examination of  proposal resubmissions and voting records during 2018 and 2019 demonstrates that the 3% threshold for a first-time proposal remains relevant -- a number of proposals were rejected by shareholders,   receiving votes less than 3% and preventing them from being resubmitted in a subsequent year. The existing resubmission thresholds thus effectively screen out proposals considered irrelevant or ill-advised by most shareholders.     

In addition,  the record shows that proposals are seldom resubmitted by proponents if they achieve votes that only narrowly exceed the existing thresholds. Thus, the concern about too many resubmitted proposals is misplaced.

Changing the resubmission threshold in a way that would make it harder for such proposals to persist would ultimately disadvantage all investors, large and small, by depriving them of the opportunity for ongoing deliberation on issues believed by many to be consequential for portfolio companies.

ADDITIONAL THREATS TO SHAREHOLDER RIGHTS

In addition to the impending rulemaking, other current developments at the SEC are also threatening shareholder rights. 

Advisory Proposals Do Not Micromanage

 A further controversy relates to whether proposals may be excluded as “micromanaging” company decision-making. In 2018 and 2019,  the SEC Staff found[2] that proposals requesting companies to disclose greenhouse gas targets would “require” the company to substitute “specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.”[3]  As such, the staff allowed exclusion.

In fact, there was no such requirement  in any of the excluded proposals, because they are advisory in nature.   Because most proposals “request” rather than “require” action, by their nature they respect and ultimately defer to the discretion of the board and management to operate the company. Most shareholder proposals provide suggestions and offer input from company shareholders, while also  providing an opportunity for management to  determine how widely a view is shared among the investors.  The Staff’s broadened definition of micromanagement is depriving shareholders the opportunity to vote on clear, effective proposals on urgent risks such as climate change.

Read More: Council of Institutional Investors letter on micromanagement 

Selective Issuance of No Action Letters Could Hurt Both Companies and Shareholders

The SEC is has indicated that it may halt the practice of issuing written replies to all company no action requests, and in some instances to give their reply orally instead of in writing. it seems clear that any instances of informally granting a no action request without written justification would lack the safeguards of transparency and accountability provided by a written no action process, and deny all parties the benefits of the staff's deliberative process and thinking. Denial of a no action request without a written justification will certainly be problematic to issuers, and similarly deny proponents the benefits of the Staff’s thinking.

Read more - Shareholder Rights Group letter to Director of Corporation Finance William Hinman

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[1]https://www.politifact.com/virginia/statements/2016/jul/06/mark-warner/mark-warner-says-average-holding-time-stocks-has-f/ see also Jake Zamansky, The Death of the "Buy and Hold" Investor, Forbes, Jul 5, 2012, http://forbes.com/sites/jakezamansky/2012/07/05/the-death-of-the-buy-and-hold-investor/#45702d5a30b9

[2] Examples:  Exxon Mobil, JB Hunt Transportation  and  Devon Energy.

 [3] The decision stated: “In our view, the Proposal would require the Company to adopt targets aligned with the goals established by the Paris Climate Agreement. By imposing this requirement, the Proposal would micromanage the Company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors.” [emphasis added]