What regulatory changes is the SEC considering?

The SEC released a list of general topics for discussion at the roundtable, which have been summarized below. A more detailed version of this list can be found here.

Voting process

• the likelihood that broker-dealers are voting more shares or less shares than authorized (”over voting” and “under voting”) and ways to remedy the issue;
• challenges ensuring that an investor fs shares are voted as directed; and 
• challenges providing investor communications to securities owners who hold their shares through a brokerage account (in “street name”).

Retail shareholder participation

• ways to encourage retail shareholders to participate in the proxy process.

Shareholder proposals

• whether changes are appropriate with regard to the current eligibility requirements for investors to submit shareholder proposals including minimum length of time and amount of shares held; and
• whether the SEC should revise the rules that allow companies to omit shareholder proposals that received less than 3 percent, 6 percent, or 10 percent of the vote, based on the number of times a proposal on that topic has come up for a vote at the company in recent years.

Proxy advisory firms

• the extent to which investors are excessively reliant on proxy advisory firms for voting recommendations;
• whether public corporations are being given a sufficient opportunity to raise concerns if they disagree with a proxy advisory firm’s recommendation;
• whether proxy advisory firms should be required to provide more public information about their voting policies and procedures;
• whether proxy advisory firms appropriately manage, mitigate and disclose potential conflicts of interest, such as those that arise from consulting services provided by proxy advisory firms; and
• the appropriate regulatory regime for proxy advisory firms.

Technology and innovation

• whether technology can be used to make improve the proxy process.

More on efforts to change shareholder proposal rules 

While the SEC has listed the above general topics for discussion at the November roundtable, it is possible that its efforts to change shareholder proposal rules will be similar to efforts in Congress on this topic. In 2017, Congress tried but failed to pass language into law that was originally in their comprehensive financial reform bill, the Financial CHOICE Act. The final legislative package excluded the shareholder provisions due to insufficient support in the Senate.

The Financial CHOICE Act attempted to adjust the eligibility requirements to submit a shareholder proposal. Current SEC regulations permit shareholders to submit a proposal if they hold shares for one year and own $2,000 in stock. The Act lengthened the time required to own shares to three years and required at least 1 percent ownership of the company’s stock.

Additionally, the legislation raised the thresholds for a corporation to exclude a resubmitted proposal from its proxy if it fails to receive the support of: 6 percent of shareholders the last time it was voted on (currently 3 percent); 15 percent if it had been voted on twice in the last five years (currently 6 percent); and 30 percent if it was voted on three or more times in the last five years (currently 10 percent).

The SEC states it will consider whether minimum ownership thresholds need to change and whether resubmission thresholds are fair. Additionally, while the shareholder proposal provisions did not become law, new legislation in the House of Representatives revives the same resubmission threshold provisions of the Financial CHOICE Act.

What are the implications?

Shareholder proposals are an important tool to help companies manage new and emerging risks, especially regarding ESG factors. They have increasingly driven ESG engagement, with a growing number of proposals being withdrawn due to corporate management developing workable solutions with investors. Requiring at least 1 percent ownership of the entire company’s stock and limiting resubmission rules will greatly limit shareholder proposals submitted, particularly those that include ESG factors.