SEC New Rules

Summary Courtesy of US SIF: Overview 

The first proposal makes changes to Rule 14a-8 of the Securities and Exchange Act, which sets the parameters for the shareholder proposal process. The second proposal aims to further regulate proxy advisory firms and their ability to provide research, data and voting services to their clients. Below are summaries of the key elements of the two proposals. 

Resubmission Thresholds 

The support that shareholder proposals must receive—based on the percentage of the shares voted—to be eligible for resubmission historically has been set at modest levels to allow for emerging issues to build support over time from other investors. The proposal changes these support thresholds from 3 percent of the shares voted the first year, 6 percent the second year and 10 percent the third year and beyond to 5 percent, 15 percent and 25 percent respectively. 

More troubling is a new provision that attacks proposals that reach the 25-50 percent range after three years. If such a proposal’s support decreases by 10 percent from the previous year’s vote, a company can omit it from the proxy. This sets up a bizarre scenario where a proposal that loses support from 49 percent to 44 percent in the fourth year (a 10 percent decline from 49 percent) can be omitted, but a proposal that remains steady at 27 percent on the fourth year’s vote can be resubmitted. This would imply that vote of 44 percent is a weaker outcome than a vote of 27 percent. 

One-Proposal Limit 

The proposed rule would constrain an investor or a representative to offer one shareholder proposal per meeting. A shareholder-proponent would not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder's behalf for consideration at the same meeting. 

Forced Engagement 

The proposed rule adds a new provision to Rule 14a-8 mandating that the proponents make themselves available to the company for dialogue in person or by phone. For asset owner proponents who have hired asset managers or other representatives for their professional guidance and advocacy services, this represents an interference with the client/manager relationship. The SEC proposed rule also contemplates the possibility of banning asset owners from hiring representatives and managers to conduct shareholder advocacy on their behalf. This portion of the proposed rule represents a radical departure. 

Proxy Advisor Rule 

Issuer Pre-review of Proxy Advice 

This rule mandates that proxy advisory firms give issuers (companies) an opportunity to review and provide feedback on proxy voting advice before proxy advisory firm clients get to see it. It also requires proxy advisory firms to include a link to an issuer’s position paper if the issuer disagrees with the proxy advisory firm’s conclusions. This is an unprecedented interference and is the opposite of what is required by regulation of stock analyst reports. Current rules prohibit analysts from sharing draft research reports with target companies, other than to check facts after approval from the firm’s legal or compliance department. 

Therefore, if the SEC adopts its proxy advisor regulation, an analyst and a proxy advisor could write a report on the same company and the analyst would violate securities laws by showing it to the company in advance, while the proxy adviser would violate the law if it did not show it to the company in advance. 

Currently, the two predominant proxy advisory firms, ISS and Glass-Lewis, have an informal process to allow issuers to correct any factual inaccuracies in their reports. 

Disclosure of Conflicts 

The proposed rule includes a largely non-controversial provision that mandates that proxy advisors disclose material conflicts of interest in their voting advice.