Dive Brief:
- Following the Securities and Exchange Commission’s proposal to rescind the rule governing the shareholder proposal process, three Democratic state finance officials called last week for an extended comment period and warned of the impacts eliminating the rule would have on investors.
- Illinois State Treasurer Michael Frerichs called the proposal to rescind Rule 14a-8 and return regulation over shareholder proposal to states “a direct threat to the rights of long-term investors,” in a call Thursday with reporters, organized by nonprofit For the Long Term.
- After sending the proposed rule to the White House at the end of August, last month the SEC officially proposed rescinding the rule and making amendments to the rule governing proxy solicitation, Rule 14a-4.
Dive Insight:
Under the current system, Rule 14a-8 governs when companies must include shareholder proposals in their proxy materials. Under the SEC’s proposal, that decision would be governed by state laws and companies’ governing documents. The change is part of SEC Chair Paul Atkins’ broader push to alter securities regulations with a stated aim of making being a public company more attractive.
The SEC’s plan would also eliminate the requirement for companies to deliver an annual report to shareholders, remove the deadline for when documents must be incorporated by reference in a proxy statement and axe the requirement and ability to submit notices of exempt solicitation.
The SEC’s comment period will run until Nov. 20, according to the Federal Register.
The state finance officials called on the SEC to double the 60-day period for comments on the proposal to rescind Rule 14a-8. They also warned of potential impacts on shareholder rights and investor engagement.
The Illinois state treasurer said that he is “concerned that it will curtail [investors’] ability to hold public companies accountable” if the shareholder proposal rule is rescinded and “a proposal this sweeping must not be rushed.”
“Weakening the federal shareholder proposal process is not going to make the sustainability risks for companies go away,” Frerichs said on the press call. “It's just going to make it harder for shareholders to raise them.”
The SEC utilized a 120-day comment period in 2013 for a rule on the duties on brokers, dealers, and investment advisers, For the Long Term Executive Director Dave Wallach noted on the call, adding that an extended comment period would be “unusual, but definitely not unprecedented” for a proposal “of this magnitude.”
The Oct. 1 call also featured Minnesota State Auditor Julie Blaha and Massachusetts State Treasurer Deb Goldberg. There’s an expectation that the changes will lead to a “flood of proposals” next year from filers trying to get them in before the change, according to Blaha.
“We're not entirely sure what all the unintended and intended consequences will be,” Blaha said on the call. “All these changes that you see from the Trump administration are causing a general chaos that makes it really hard to predict what the real effects of any individual issue will be.”
Goldberg said that shareholder proposals are “the least costly way” for shareholders to engage with companies and eliminating it will lead to a “patchwork” of laws that will cost public pension funds.
“It's just one more element of volatility that we've been dealing with, and volatility long term is not good for the markets,” Goldberg said. “It's not good for long-term investors, which pension funds are, and I think it really robs our investments of long-term profitability.”
At a corporate governance conference this summer, Atkins announced that the agency was “holistically evaluating the rule.” Following that proclamation, a group of investor advocates filed a regulatory petition this summer urging the agency to “largely retain the rule.”
“The right to file a shareholder proposal that appears on the corporate proxy statement is not a courtesy extended by management. It is a foundational aspect of corporate ownership,” the July 23 petition said. “This voice is also a source of market efficiency. … Curtailing that voice weakens one of the few mechanisms through which dispersed owners can hold management to account.”
The proposal to rescind Rule 14a-8 led to criticism from shareholder advocates across the political spectrum. Legal experts previously told ESG Dive that removing the rule would likely lead to shareholder pressure changing venues to places like director elections or direct engagement rather than entirely disappearing.
While they may not see it now, the current shareholder proposal process “is to the benefit of companies, and without a standardized approach corporations are “going to have their heads spinning” due to all the changes, according to Goldberg.
“At least with this approach, [companies] have a standardized approach and how they respond, and they even have certain people within their companies to be watching for these issues and working with them on how they're going to address them,” the Massachusetts treasurer said on the call.
Shareholder resolutions are not the first place investors go to engage with companies, Frerichs said on last week’s call, and there are often successful shareholder engagements through phone calls, letters or other forms of communication. However, the Illinois treasurer said the process gives investors “leverage” when companies don’t respond.
“We don't start [with shareholder proposals], and many of our engagements won't change. But it is important to have this tool in order to work with those recalcitrant companies out there that don't want to listen to us,” Frerichs said. “It has brought people to the table and resulted in better conversations and better decisions as a result. If you take this away, I fear that we are going to miss out on constructive engagement with some companies.”
