Washington, DC.—Sept. 9, 2019—On Sept. 6, the U.S. Securities and Exchange Commission (SEC) 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 SEC 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.
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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.
This new policy raises significant concerns for all investors, especially those that file shareholder proposals. According to its website, “The SEC protects investors, promotes fairness in the securities markets, and shares information about companies and investment professionals to help investors make informed decisions and invest with confidence.” This new proposal does none of those things.
New Policy Issues
“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,” said Sanford Lewis, director of the Shareholder Rights Group.
It also raises the prospect that companies receiving proposals may decide not to put a proposal on the proxy, specifically because the staff declined to say whether or not it views the proposal as complying with the shareholder proposal rules. As such, the staff may in effect be ruling in favor of the company without having to agree that the proposal conflicts with the prescriptive rules governing the process.
“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,” said Danielle Fugere, president of As You Sow, a shareholder advocacy group and member of the Shareholder Rights Group. “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.”
According to Jonas Kron, Senior Vice President at 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.”
Shareholder Rights Group is an association of investors formed in 2016 to defend share owners' rights to file shareholder proposals. The members are some of the leading proponents of shareholder proposals, and file proposals to improve corporate governance, highlight unaddressed risks, and identify opportunities for long-term value creation.