On November 5, 2019, the Securities and Exchange Commission (the "SEC") in a 3-2 vote proposed amendments to its proxy rules related to (1) the regulation of proxy advisers1 and (2) shareholder proposals.2
Proposed Rule Amendments Related to the Regulation of Proxy Advisers
In its proposing release, the SEC states that the proposed rule amendments are "to help ensure that investors who use proxy voting advice receive more accurate, transparent, and complete information on which to make voting decisions." The proposed amendments would revise existing rules impacting proxy advisory firms as follows:
- Codify the SEC's August guidance that voting advice provided by proxy voting advisers generally constitutes a solicitation and is subject to the proxy rules.
- Require that proxy advisers provide disclosure of material conflicts of interest in their proxy voting advice, methodology used to formulate voting advice and sources of information relied upon.
- Provide registrants and other soliciting persons with an opportunity to review and submit feedback on the proxy voting advice before it is issued.
- Allow registrants to request that proxy advisers include a hyperlink in their voting advice directing the recipient of the advice to a written statement setting forth the registrant's views on the proxy voting advice.
The proposed amendments are likely to receive a lot of commentary, especially in light of the lawsuit filed on October 31 against the SEC by Institutional Shareholder Services (ISS), the largest proxy advisory firm, challenging the SEC's August guidance. In its complaint, ISS contends that the SEC's finding that proxy voting advice is a solicitation is contrary to law.
Proposed Amendments Related to the Regulation of Shareholder Proposals
In addition to the proposed amendments related to the regulation of proxy advisers, the SEC also proposed amendments to Rule 14a-8, which governs shareholder proposals. The proposed amendments:
- Set forth a tiered approach to the amount of securities owned and time held for a shareholder to be eligible to submit a shareholder proposal. The current $2,000 minimum ownership threshold remains, but the current one-year holding period is increased to three years. A shareholder would also be eligible by owning at least $15,000 of company securities for at least two years or $25,000 for at least one year.
- Increase the thresholds of voting support for a proposal to be resubmitted at future meetings to 5% in year one after submission (currently 3%), 15% in year two (currently 6%) and 25% in year three (currently 10%). In addition, proposals that have been submitted three or more times within a five-year period and that received less than 50% support and experienced a decline of support of at least 10% in a subsequent vote could be excluded.
- Require shareholder proponents to make themselves available to meet with the company to discuss the proposal with the company.
- Clarify that a single person may not submit multiple proposals directly or indirectly.
The SEC stated in its press release that it believes these proposed amendments modernize the regulations by recognizing changes in the nature of shareholder communications, including the overall increase in engagement between issuers and shareholders, and the use of alternative avenues, such as social media, for shareholders to communicate their concerns. The SEC believes that the proposed changes will encourage constructive engagement by long-term shareholders and help prevent misuse of the shareholder proposal process.
Both proposals are subject to a 60-day public comment period. To submit comments, use the SEC's online submission form or send an email to rule-comments@sec.gov.
Footnotes
1 The proposed rule is available at https://www.sec.gov/rules/proposed/2019/34-87457.pdf.
2 The proposed rule is available at https://www.sec.gov/rules/proposed/2019/34-87458.pdf.
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