The SEC will move ahead with plans to further curtail shareholders and proxy advisory firms from voting on corporate issues ranging from executive compensation to climate change and gun safety issues.

Commissioners Tuesday voted three to two in favor of imposing stricter ownership requirements and levels of support for the shareholder proxy voting process.

Critics of the SEC’s actions believe they are biased towards companies and lobby groups such as the U.S. Chamber of Commerce, which has been trying to curtail the influence of proxy advisory firms.

Supporters believe proxy advisory firms such as Institutional Shareholder Services Inc. and Glass Lewis & Co. increasingly have been exerting excessive influence over shareholder voting even regarding contentious issues that aren’t part of the main businesses of a company.

“Today’s proposed amendments … recognize the significant changes that have taken place in our markets in the decades since these regulatory requirements were last revised, including, in particular, the types and use of communications, the types and frequency of shareholder-company engagement and the substantial shift to investing through mutual funds and ETFs, rather than directly by Main Street investors, ” SEC Chairman Jay Clayton says in a statement.

Clayton says the proposed changes would “facilitate constructive engagement by long-term shareholders in a manner that would benefit all shareholders and our public capital markets.”

The proposed changes “will facilitate and encourage meaningful company-shareholder engagement and make changes that can help prevent misuse of the process,” according to SEC Commissioner Elad Roisman.

“The SEC is effectively locking out many long-term investors from engaging with corporate management.”
Will Martindale
Principles for Responsible Investment

The American Securities Association — a lobby group for middle-market financial services firms including broker-dealers and investment advisory firms — welcomes the SEC’s actions.

“Shareholders want businesses to spend money in a way that increases their return on capital, not waste valuable resources defending against politically-motivated shareholder proposals pushed by conflicted proxy advisors,” ASA CEO Chris Iacovella says in a statement.

SEC Commissioner Robert Jackson, who voted against the proposed changes, says the changes would “limit public-company investors’ ability to hold corporate insiders accountable.”

While Jackson agrees that the proxy voting rules need updating, he says he would have preferred a careful study of what needs to be changed.

“Today’s proposal simply shields CEOs from accountability to investors. Whatever problems plague corporate America today, too much accountability is not one of them, so I respectfully dissent,” Jackson says.

Will Martindale, director of policy and research at Principles for Responsible Investment, says the shareholder proposal process has been one of the most important factors in putting ESG at the top of the agenda at U.S. companies, but the SEC's actions will set that back.

“Today the SEC took steps that would greatly undermine corporate democracy and diminish shareholder rights, which remain a defining characteristic of shareholder capitalism,” says Martindale. His group describes itself as the world’s largest responsible investment body, representing investors with more than $86.3 trillion in AUM.

“The SEC is effectively locking out many long-term investors from engaging with corporate management. We strongly condemn these proposals, which are unnecessary, cumbersome and contrary to the SEC’s stated purpose — to protect investors,” Martindale adds.

The SEC’s latest actions follow its three to two vote in August in favor of publishing guidance on the proxy voting responsibilities of investment advisors under the Investment Advisers Act of 1940. The guidance covers the ability of advisors to establish various voting arrangements with their clients and what they should consider when they use the services of a proxy advisory firm.

ISS is suing the SEC for issuing the proxy voting guidance. ISS CEO Gary Retelny says in an opinion piece published in the Financial Times this week that the SEC’s actions “will tilt the scales in favor of company management and degrade the important gains in corporate governance achieved since the days of Enron, WorldCom, and the financial crisis.”

What will change?

If approved, the proposed changes — the first since 1954 — would update the criteria that a shareholder must satisfy to be eligible to require a company to include a proposal in its proxy statement. The proposed changes are subject to a 60-day public comment period.

The SEC previously had a “long-standing” minimum ownership threshold of $2,000 worth of shares held for at least one year.

The proposed changes would increase the ownership threshold to $25,000 worth of shares held for at least one year, $15,000 worth held for at least two years, and $2,000 worth held for at least three years.

Jay Clayton

The proposed changes would also update the “one proposal” rule to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting on behalf of different shareholders.

The required levels of shareholder support for shareholder proposals would also be increased from the current resubmission thresholds of 3%, 6% and 10% for matters voted on once, twice or three or more times in the last five years, respectively, to thresholds of 5%, 15% and 25%, respectively.

The proposed changes would also require a shareholder-proponent using a representative to submit a shareholder proposal to provide documentation that the representative is authorized to act on the shareholder-proponent’s behalf. That shareholder-proponent must also provide a meaningful degree of assurance of identity, role and interest in the proposal submitted for inclusion in a company’s proxy statement.

The proposed changes would also require each shareholder-proponent to state the ability to meet with the company, either in person or via teleconference, between 10 to 30 calendar days after the shareholder proposal submission. The shareholder-proponent is also required to provide contact information and business days and specific times of availability.