By Bill Flook
The House on July 31, 2020, passed a budget bill funding the SEC and other regulators that would stifle a trio of the commission’s rulemakings, two of them proposed, one recently completed. The budget measure, which gives the market regulator $1.92 billion for the fiscal year beginning in October, is another sign of dissatisfaction among Democratic lawmakers with the direction of the SEC under Chairman Jay Clayton.
The $1.3 trillion minibus package of six bills passed on a 217 to 197 vote.
The provisions undercutting SEC rulemakings are unlikely to survive budget negotiations between the House and Senate. Instead, they serve to outline the major targets for Democrats who want to halt the deregulatory march of the commission.
Prior to the bill’s passage, House Republicans unsuccessfully attempted to shoot down the three provisions, calling the package harmful.
The three SEC rulemakings that would be defunded under the budget are:
- Release No. 34-89372, Exemptions from the Proxy Rules for Proxy Voting Advice, which the SEC issued earlier this month following a 3-1 vote. The rules place new constraints on the proxy advisory industry, which is today dominated by two firms: Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co.The firms provide recommendations to asset managers on how to vote on a range of topics, including director elections, executive compensation, and environmental, social, and governance (ESG) issues such as climate risk disclosure.
Critics of the firms say they wield tremendous power to sway shareholder votes, with little oversight or transparency around potential conflicts. The SEC’s majority under Chairman Jay Clayton has largely sided with those critics.
Institutional investors, and some Democratic lawmakers, say the firms play an integral role in researching and providing recommendations on thousands of votes.
The SEC’s rules in Release No. 34-89372 revolve around the exemption proxy advisory firms rely on when they provide voting recommendations under Rule 14a-2(b) of the Securities Exchange Act of 1934.
Proxy advisory firms are subject to the federal proxy rules when they engage in a solicitation, and the commission has stated furnishing proxy advice constitutes a solicitation subject to the information and filing requirements of the federal proxy rules.
Rule 14a-2(b)(1) provides an exemption from the SEC’s information and filing requirements for “any solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another’s behalf, the power to act as a proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization.”
The rule amendment codifies the commission’s view that voting advice provided in response to an unprompted request would not constitute a solicitation.
To rely on the exemption, the rule not only allows companies to review the proxy advice, but proxy advisory firms must also provide a way for clients to access any response that the company provides to the voting advice in a timely manner before the vote. Proxy advisory firms must also disclose material conflicts of interest in their proxy advice or in an electronic medium used to deliver the proxy voting advice.
(See SEC Issues Rule Increasing Regulation of Proxy Advisers in the July 23, 2020, edition of Accounting & Compliance Alert.)
ISS, in a statement, said it supports the amendment blocking the proxy rules. The Chamber of Commerce had warned lawmakers against supporting it, saying it would consider on its congressional scorecard how they voted on the budget bill.
The amendment to defund the proxy voting advice rulemaking was introduced by Reps. Maxine Waters and Brad Sherman. Waters, from California, is chair of the Financial Services Committee. Sherman, also from California, chairs the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.
- The SEC’s November 2019 proposal in Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, which would make it harder for shareholders to both submit and resubmit proposals at annual meetings.The SEC, following a split vote, issued the proposal in Release No. 34-87458 tandem with Release No. 34-89372.
(See Divided SEC Proposes to Make it More Difficult for Shareholders to Bring Proposals for Vote at Company Annual Meetings in the November 6, 2019, edition of ACA.)
Rule 14a-8, as written today, allows an investor to put forth a proposal if they have owned at least $2,000, or 1 percent, of a public company’s voting shares for at least one year.
Release No. 34-87458 would scrap that 1 percent threshold. In its place would be a new regime in which a shareholder with $2,000 of a company’s securities must hold them for three years to be eligible, falling to two years for a shareholder with $15,000 of a company’s securities, and one year for $25,000.
Release No. 34-87458 also squeezes the resubmission thresholds under Rule 14a-8(i)(12). Today, a company to exclude a proposal from its proxy statement for a vote at the annual meeting if it failed to receive the support of 3 percent of shareholders if voted on once in the last five years, 6 percent if voted on twice in the last five years, and 10 percent if voted on three or more times in the last five years.Release No. 34-87458 steps up that vote requirement to 5 percent, 15 percent, and 25 percent, respectively, among other changes.
Rep. Bryan Steil, a Wisconsin Republican, introduced an amendment to remove the provision from the budget bill, but was unsuccessful.
- The March proposal in Release No. 33-10763, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets.Release No. 33-10763 is designed to streamline the current patchwork of exempt offerings that allow companies to raise capital without registering with the commission. Today, companies can use a range of exemptions when raising capital, including those in Regulation A, Regulation D, and Regulation Crowdfunding (CF), all of which carry different requirements for accounting, investor accreditation, and disclosure. The proposal in Release No. 33-10763 would raise the dollar ceilings for some of those exemptions, among other changes. (See SEC Proposes Broad Reforms for Exempt Offerings, Commissioner Lee Dissents Citing Erosion of Investor Protection in the March 6, 2020, edition of Accounting & Compliance Alert.)
Under the proposed Democratic budget, the SEC would be barred from using any of the funds to “finalize, issue, or implement any rule, regulation, or order regarding the exempt offering framework” unless it completes a 2013 proposal strengthening filing requirements around exempt offerings, in order to enhance the agency’s “ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation.”
The SEC in 2013 proposed Release No. 33-0416, Amendments to Regulation D, Form D and Rule 156, which would have beefed up Form D filing requirements under Rule 506 of Regulation D under the Securities Act of 1933, among other changes. House Democrats want the SEC to finalize those rules before it finishes up its work on the exempt offering framework.
Rep. Bill Huizenga, a Michigan Republican, unsuccessfully introduced an amendment to strike the provision blocking the exempt offering reforms.
This article originally appeared in the August 3, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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