SEC Open Meeting
Securities and Exchange Commission
Open Meeting
Wednesday, July 13, 2022
Topline
- Commissioners voted 3-2 to propose amendments to the 2020 rules governing proxy voting advice and to propose amendments to Exchange Act Rule 14a-8, the shareholder proposal rule.
- Both proposals’ comment periods will remain open for 60 days following publication on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer.
ITEM 1: Proxy Voting Advice
The Commission voted 3-2 to the proposed amendments to the 2020 proxy rules governing proxy voting advice as proposed in 2021. Amendments to the rules rescind specific conditions from the proxy rule exemptions for proxy voting advice and related guidance to investment advisors and rescinds a note which provided examples of situations that may be considered misleading by failing to disclose certain information in proxy voting advice.
Staff Discussion
Renee Jones discussed how important it is for investors to receive independent and timely advice. She stated that the 2020 proxy voting rules imposed burdens on proxy voting advice businesses and that the amendments to such rules will better alleviate concerns about receiving timely independent advice from proxy advisory firms. Jones said that the amendments would rescind only certain aspects of the 2020 rules and address concerns expressly stated by proxy voting businesses.
Valian Afshar stated the amendments to the proxy rules governing proxy voting advice would amend Rule 14a-2(b)(9)(ii) to rescind 14a-2(b)(9)(ii) for two provisions. The first provision required proxy advisory business to make their advice available to companies subject to their advice before informing clients about that advice. The second provision required proxy advisory firms to have mechanisms for those subject to their advice to receive proxy voting advise in a timely manner. Afshar also said that other amendments to Rule 14a-9 would delete Note (e) to establish clarity towards the applicability of proxy voting advice liability.
Commissioner Discussion
Commissioner Hester M. Pierce discussed how the amendments to the proxy rules would alter the exemption qualification requirements for proxy voting advice and related guidance to investment advisors. She expressed her hesitation towards adopting this amendment without having any data on its economic impact and its likely unintended establishment of a precedent that would impact regulation going forward. Pierce emphasized that proxy voting advice is important in helping individuals make decisions about companies they invest in. Pierce discussed how the Commission adopted a tailored framework for its 2020 rule and subsequent amendments to those rules and stated that there are comments that favor the Commission leaving 2019 and 2020 rules intact. She said the Commission’s adoption of recommendations would change courses dramatically with little justification, ultimately hurting the Commission’s credibility. Pierce concluded by emphasizing regulations can’t drastically “swerve” every year because it leads to uncertainty as to whether changes derive from a political nature rather than market signals.
Commissioner Allison Herren Lee stated it was important that the Commission’s regulation of proxy advisors does not interfere with timely and independent proxy voting advice or create undue burdens for shareholder voting. Lee also said the Commission’s amendments governing proxy voting advice rescinded two elements of the 2020 proxy advisor rules, which enhanced management’s influence over proxy voting and created uncertainty for the scope of liability for proxy voting advice by its note to the proxy-related anti-fraud provisions. She stated that the amendments are responsive to feedback and data the Commission has received regarding proxy voting advice and believes such amendments will better balance the needs of investors and other market participants. Lee also discussed how the Commission’s action in re-evaluating its proxy voting system rules is appropriate, as it improves transparency, accuracy, and efficiency.
Commissioner Caroline A. Crenshaw discussed the background of the proxy voting system and its opportunities for investors to exercise their own voices in a corporation. She stated that the proxy voting process is much more complex due to the growth of index funds, intermediation of equity holdings, and thousands of institutional investors. She said the Commission must reassess whether democracy is properly balancing the rights of shareholder and corporate directors and the realities of today’s world. She believes the amendments governing proxy voting advice would ensure the independence and accessibility of proxy voting advice, which was developed in response to feedback from a rule promulgated in 2020 that impeded the timeliness and independence of proxy voting advice. She discussed how the 2020 rule sought to ensure the accuracy of proxy voting advice but that data demonstrated the amendments to achieve that goal were unnecessary.
Commissioner Mark T. Uyeda expressed uncertainty as to why the Commission is amending the rules governing practices of business proxy voting advice. He said he was concerned that the “regulatory sea-saw” does not reflect administrative best practice and long-term reliance and confidence in the market. Uyeda said there is no regulatory clarity with the deletion of Note (e) and its replacement in the preamble because this that means Note (e) applies, doesn’t apply, or neither. He said the Commission needs to establish a more transparent and straightforward regulatory standard and stated that Note (e) should be placed in the plain text of the rule. Additionally, he mentioned that the 30-day comment rule was insufficient, especially due to the deadline falling near public companies’ audits of financial statements.
Commissioner Chair Gary Gensler stated that the amendments governing proxy voting advice addresses issues concerning the independence and timeliness of proxy voting advice, which helps facilitate shareholder democracy. He mentioned the Commission adopted a rule in 2020 that was designed to improve the disclosure of conflicts of interest in proxy advisory firms and to provide advice for the definition of proxy solicitation. He said the amendments would address the concerns regarding the 2020 rule, specifically the issue of the rule retracting independent proxy voting advice. According to Gensler, the rule would repeal those conditions and other amendments would also address the application of liability to proxy voting advice.
ITEM 2: Shareholder Proposals
The Commission voted 3-2 to propose amendments to Rule 14a-8 which would revise the bases of substantial implementation exclusion, duplication exclusion, and resubmission exclusion, while also providing greater certainty and transparency to shareholders and companies as they evaluate whether these bases for exclusion would apply to particular proposals and facilitating communication between shareholders and the companies they own, as well as among a company’s shareholders, on important issues.
Staff Discussion
Renee Jones discussed Exchange Act Rule 14a-8 and stated that the proposed amendments are designed to improve the transparency and consistency of the shareholder proposal process. She noted that the proposed amendments would revise three exclusions of the rule: the substantial implementation exclusion, the duplication exclusion, and the resubmission exclusion. She acknowledged the efforts of the Division of Corporate Finance and many others to bring these proposals to the Commission today.
Kasey Robinson expressed the Division of Corporate Finance’s recommendation that the Commission amend Rule 14a-8 to revise three of the thirteen substantive bases in which companies may exclude shareholder proposals from their proxy materials. She discussed each of the proposed amendments and noted the goal of improving the shareholder proposal process and promoting consistency.
Jessica Wachter offered statistics relevant to the complexity of the shareholder proposal process, highlighting that on average there are seven hundred proposals a year, and only two thirds reach a vote, noting that of the third that do not, one third are withdrawn. She expanded upon this point by saying that this proposal would provide a clearer framework for the process of substantially implementing the elements of a shareholder proposal. She stressed the importance of ensuring the transparency and efficiency of the shareholder proposal process and stated that the more expectations can be aligned, the less time will be spent on no action requests. She concluded by saying that if the proposed amendments lead to more proposals reaching a vote, there may be more costs associated with this process.
Commission Discussion
Commissioner Hester M. Pierce began her remarks by mentioning that the Commission recently modified this rule in September of 2020. She said she cannot support the proposed amendments today and that a better approach would be to allow the Commission a full proxy season to realize the effects of the calibrations made to the rule less than two years ago. She did however express her eagerness to reduce subjectivity in the shareholder proposal process, which the proposed amendments seek to accomplish. She referenced the Shareholder Proposal Rule of 1983 and said the Commission has seemingly forgotten the lessons that motivated said rule. She noted that if these proposals were passed, the shareholder proposal agenda would look much like the packed SEC rulemaking agenda. She concluded by urging the Commission to allow more time for public comment to ensure the feedback received on this issue is complete.
Commissioner Pierce asked specifically about what those proposing these amendments would like the Commission to reaffirm. Jones said she and her colleagues wish for the Commission to reaffirm the language in the Amendments to the Rules on Shareholder Proposals release of 1998. Commissioner Pierce asked what specific standards are being reaffirmed. Jones said there is a footnote in the release that recited the language being reaffirmed. Commissioner Pierce asked what it means to reaffirm the Commission’s private statements. Jones deferred to her colleagues, and Dan Berkovitz said it is a restatement of previous views. Commissioner Pierce said that she does not understand. Berkovitz clarified that it is to confirm that the previous language is still applicable. Commissioner Pierce asked if it is intended to codify or give weight to any staff guidance or no action decision. Jones said the intention was to reaffirm standards set forth in the 1998 release and ensure that its guidance continues to apply today. Commissioner Pierce asked if reaffirmation is effective immediately. Berkovitz said it is a statement of previously expressed views so it is merely reaffirming them as of the time that the proposal was issued. Commissioner Pierce asked what led them to believe that a reaffirmation is necessary. Jones said it is for the purpose of clarity and that while it may not be necessary, it is appropriate to reaffirm those standards.
Commissioner Allisson Herren Lee said the proposed amendments represent key mechanisms for shareholders to engage with management, put their concerns on the agenda, and enhance oversight and accountability. She stressed the act of ensuring a shareholder can engage with management and put issues of importance on the proxy ballot. She discussed the improvements these amendments will have on Rule 14a-8 and stated that it is imperative that the substantive basis for excluding shareholder proposals are not overbroad and are fully transparent. She added that these modifications are necessary for establishing a specific standard to ensure accountability for shareholders. She concluded by saying that these adjustments are carefully informed and that she is pleased to support the recommendations.
Commissioner Caroline A. Crenshaw declared that shareholder proposals are paramount to the foundational arrangement of corporations. She also said the process itself allows for the separation between ownership and control, explaining that shareholders can put proposals to shareholder vote and include them in company proxy materials. She said Rule 14a-8 is critical to the balance of corporate democracy and that today’s proposed amendments seek to clarify the framework of the shareholder proposal process while also facilitating shareholder sufferance and their communication with their companies. She concluded by saying that this proposal will ensure that all proposals that should be put to vote will be.
Commissioner Mark T. Uyeda said Rule 14a-8 was so recently amended that the Commission has not yet had the opportunity to realize if it must be amended again. He added that there is not a clear reason for the rule to be modified given the fact that the information informing current practices is incomplete until the current proxy season ends. He stated that had the Commission waited, it would find that the number of shareholder proposals has increased 8% over the last year with a 38% success rate in 2022, compared to a 71% success rate in 2021. He declared the Commission’s commitment to seeking full transparency while allowing non-disclosure of private benefits. He continued by saying the proposed amendments do not ensure that there will be value-enhancing effects for investors. He expressed his uncertainty about whether this proposal is value enhancing and demonstrated the way in which it creates an uneven playing field for U.S. public companies.
Commission Chair Gary Gensler noted that the Commission addressed separate aspects of Rule 14a-8 in 2020 and that the proposed amendments would address three different bases for exclusion. He mentioned that the Commission received numerous questions from management teams and issuers about if the shareholder proposal meets one of the following substantive bases: A shareholder proposal can be excluded if a proposal has been substantial implemented, if a proposal substantially duplicates another proposal, or if a proposal is a resubmission of a prior proposal that failed to meet voting thresholds. He said the proposed amendment would rectify the issues with these three elements and that they would provide a clearer framework for the application of these rules. He concluded by expressing his support for the amendments and his eagerness to gain feedback of the public.
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