House Republicans Push SEC to Overhaul Shareholder Proposal Rules
Commentary by Steven Lofchie
House Republicans urged the SEC to reform current rules on shareholder proposals, warning that "the politicization of the proxy process continues to place a substantial burden on public companies[.]"
In a letter to SEC Acting Chair Mark T. Uyeda, members of the House Financial Services Committee asked the SEC to take action, beyond the rescission of Staff Legal Bulletin No. 14L, and to reform Rule 14a-8 ("Shareholder proposals"). Previously, the SEC Division of Corporation Finance issued Staff Legal Bulletin No. 14M to make it easier for corporate issuers to exclude shareholder proposals under the "ordinary business" exception. (See prior coverage.)
The lawmakers urged the SEC to amend Rule 14a-8 to:
- clarify that proposals unrelated to core business operations or financial performance can be excluded from proxy statements;
- eliminate the "significant policy exception" under Rule 14a-8(i)(7). They argued that the exception has become a "loophole" used to push shareholder proposals on divisive political and social issues. They said that this exception, created through guidance and staff interpretation rather than statutory authority, allows activists to circumvent the rule's intent and force companies to consider proposals that have little to do with shareholder value);
- to raise resubmission thresholds for shareholder proposals;
- ensure more robust oversight of proxy advisory firms like ISS and Glass Lewis; and
- end "robovoting" practices by institutional investors. Lawmakers stated that proxy advisors "distort voting outcomes with little transparency or accountability" and often issue "blanket recommendations" that ignore company-specific context and fail to serve shareholders' economic interests. The lawmakers urged the SEC to defend its interpretation that proxy voting advice constitutes a "solicitation" and to reassert its authority over proxy advisory firms, especially amid ongoing litigation and conflicting court rulings on the issue.
Commentary
Under the last administration, the SEC used its rulemaking authority to push political ends that were unrelated to the financial prospects of issuers. Perhaps the most blatant example of this was the climate disclosure requirements. The proxy rules adopted by the SEC assumed that politically favored interest groups would be able to pressure issuers to adopt politically favored positions, even where those positions were largely irrelevant to the business of the issuer, and in some cases where the position was actually adverse to the economic interests of the issuer's shareholders.
Ideally, the Securities Exchange Act would be amended so that its authority to require disclosures would be limited to matters of material financial concern to investors and its authority to mandate proxy contests would be likewise limited. Such amendments would simply return the agency to its prior limited authority, consistent with the purposes of the statute.
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