By Soyoung Ho
In the latest attempt by investor advocate groups to get the SEC to back off from its business-friendly plans to make it more difficult for shareholders to bring resolutions up for vote during public companies’ annual meetings, the groups asked the commission to reopen the comment period for the rule proposal because of new information that has come to light recently.
“We write now because we are troubled by the 11th-hour submission by the Chief Economist of the Commission’s Division of Economic and Risk Analysis (“DERA”), on August 14, long after the February 3, 2020, public comment deadline, of the staff’s analysis of previously undisclosed data that is material to the public’s understanding of their predicted impact,” seven groups wrote in a joint letter to the SEC on September 4, 2020.
The DERA memo indicates that the commission has had the data since at least August 2019, and the staff had used the data to estimate the impact of the proposed amendments before the commission voted to issue the proposal in Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, published in November 2019.
“Yet the data and the staff’s analysis were held back from the Release accompanying the proposed amendments and not released until the Commission announced that it is prepared to vote on final changes to Rule 14a-8, without an opportunity for public comment,” the investor rights groups wrote. “We ask that the Commission re-open the comment period to provide the public a meaningful opportunity to address the data.”
The groups are Council of Institutional Investors, Ceres, AFL-CIO, Interfaith Center on Corporate Responsibility, Shareholder Rights Group, Principles for Responsible Investment, and US SIF: The Forum for Sustainable and Responsible Investment.
Unusual Early Notice of Public Meeting
On the same day the SEC posted the DERA memo, the commission posted an announcement that it will hold a public meeting on September 16 to finalize the rules in Release No. 34-87458.
This is highly unusual as the SEC usually announces a public vote one week before the meeting. Securities lawyers at the time noted that because the commission released that memo, the SEC probably thought that it has more work to do before adopting the changes.
Dave Brown, a partner with Alston & Bird LLP, speculated that the early meeting notice was intended to serve a few purposes.
“One, to make it clear that the SEC was going to take this up before the election and two, to motivate and make sure the staff and Commission finish their work prior to a pre-announced deadline,” he said. “This is a way for Chairman Clayton to put a stake in the ground. Given this is going to be rather contentious, early notice serves a large purpose of transparency.”
When there is a presidential election coming up, the chair of the commission usually leaves the agency shortly around the election. Clayton has signalled that he wants to leave the commission sooner rather than later, and if he leaves the SEC without voting on some controversial rules, those rules will not get adopted because the vote will be 2 to 2.
Also, “the SEC is likely being cautious to make sure any rulemakings stand up to judicial scrutiny,” Brown added.
Rule Changes Pushed by Businesses
Investor advocates oppose the changes, and thousands of individuals also sent in form comment letters to voice their opposition. But business groups have been criticizing Rule 14a-8 of the Securities Exchange Act of 1934, which lets investors put forth proposals if they own at least $2,000, or 1 percent, of a public company’s voting shares for at least one year. The groups say that it allows a handful of activist investors to easily put forward environmental and social related proposals—such as disclosure of political spending—that have nothing to do with a company’s financial performance. And companies say it is too easy for a small group of shareholders to submit losing proposals repeatedly.
The SEC under Chairman Jay Clayton’s leadership has been sympathetic to business complaints and has made it a priority to make commission rules less burdensome so more companies will be encouraged to go and stay public.
In particular, the SEC would update the conditions and thresholds that a shareholder must meet for a proposal to be included in a company’s proxy statement. (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 Accounting & Compliance Alert.)
Investor advocates want current 14a-8 rules left intact because, among other things, they believe non-financial matters are increasingly material today. They also believe small retail investors will be disenfranchised if the thresholds were raised. Most of all, they believe the current process helps to hold corporations accountable.
DERA Memo in Question
The data in question is from Broadridge Financial Solutions, Inc. In July 2019, the SEC requested the firm to provide five years’ worth of data related to shares held beneficially in street name. Broadridge at the time provided a subset of data. but the memo said it declined to be identified as the source. In June 2020, the firm agreed to be identified.
In October 2019, Chief Economist S.P. Kothari concluded that the limitations of the data “significantly narrowed its potential value,” according to the memo. Moreover, Kothari noted that he did not believe the analysis was relevant.
However, the shareholder rights groups said the data reveals that the effect of the rule changes would be bigger than the proposal stated.
“Moreover, the fact that the data was withheld is a significant breach of the Commission’s Current Staff Guidance on Economic Analysis in SEC Rulemaking, which among other things requires that the economic analysis that accompanies a proposed rule provide a fair assessment of the predicted impact of a proposed rule, including costs and benefits, as well as that it ‘clearly address contrary data or predictions,’” the investor groups wrote in the joint letter.
In their view, withholding the data hid the “extreme extent of the proposed cut to investor rights.” They pointed to the memo that said DERA staff estimated that, in up to 55 percent of all companies, less than 5 percent of investor accounts would be eligible to file a shareholder proposal under the proposed changes.
“That is an extreme cut to investor rights, which the Release did not disclose,” the letter stated. “Also, based on the staff’s estimate, up to 99 percent of all companies (and 99 percent of S&P 500 companies), the proposed rules could deprive three-quarters of accounts the rights and ability to file a shareholder proposal. Neither the Release nor the Preliminary Draft Analysis even attempted to justify that impact, as required by the Staff Guidance on Economic Analysis.”
The investor advocates also questioned why the memo said Broadridge first declined to be identified.
“It is not clear whether this is an implied assertion that the Commission could not have disclosed the results of the analysis until Broadridge agreed to be identified,” they wrote. “In any event, the Staff Guidance on Economic Analysis does not contemplate exclusion of evidence or excuse the obligation to conduct a complete economic analysis, because of confidentiality restrictions.”
Further they took issue with the memo being released in mid-August, two months after Broadridge had agreed to be identified as the source.
“From time to time, the SEC requests aggregated and anonymized data that it may analyze in consideration of its mission,” a Broadridge spokesperson said. “In this case, the SEC concluded that the data Broadridge provided was not relevant to its preliminary draft analysis. They requested and we agreed to be identified as the source.”
This article originally appeared in the September 11, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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