US SIF Statement on Securities and Exchange Commission (SEC) Approval of Shareholder Rights Rule Changes

• By: admin
• On: 09/23/2020 15:23:04
• In: Policy

The SEC's actions make fundamental changes to Rule 14a-8 of the Securities and Exchange Act of 1934.  The most significant changes are the increases in the holding requirements necessary to qualify for submission from $2,000 held for one year to a tiered approach requiring $25,000 held for 1 year, $15,000 held for 2 years and $2,000 held for 3 years.

The thresholds to resubmit a proposal increased from 3, 6 and 10 percent to 5, 15 and 25 percent for the first, second and third years, respectively. It also places the burden of engagement solely on the proponent and eliminates the ability to aggregate shares in order to meet the eligibility thresholds.

Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, made the following statement:

“The SEC has made these changes even though they are entrusted with protecting investors. This would seem to warrant allowing the filing of shareholder proposals without unnecessary roadblocks.

The new ownership and resubmission thresholds are intended to restrict shareholders from holding companies accountable on issues like climate, diversity and worker rights which impact long-term share value. The changes to Rule 14a-8 will disenfranchise investors and shift power to company CEOs and management.

Compounding the more than 1,000% percent increase in the ownership thresholds are significant increases in resubmission thresholds and scrapping the ability of shareholders to aggregate their shares. This will largely erase a retail investor's ability to file proposals.  

The engagement provision mandates that proponents make themselves available to companies for dialogue within a specific time frame-- the onus is entirely on the investor. The Rule does not impose any obligation whatsoever on the company to engage, even if proponents provide requisite information. The SEC should not be managing these engagements.

We are also troubled by the Final Rule's limitation on the ability of representatives to act on behalf of investor clients who have designated them to do so. The SEC has not articulated what problem this is intended to solve, particularly if the representative has a fiduciary relationship with the investor, such as a registered investment adviser or an attorney.

Additionally, there were serious process questions in the way this rule came about.  SEC data about the impact of these new thresholds on investors revealed that 75% of retail investors would not qualify to file a shareholder proposal. However, while the original proposal was released on November 5, 2019, and comments were due on February 5, 2020, the SEC's Division of Economic and Risk Analysis (DERA) made this information public on August 14, 2020.

Shareholder proposals play an invaluable role by providing a low-cost method for shareholders to talk to management and to each other about the future of their company and important policy issues affecting the company. The votes on shareholder proposals provide more precise information about shareholders' views of the given topic. In our view, the Commission should not be in the business of reducing these lines of communication. Such reductions will likely be unavoidable now.”