The Securities and Exchange Commission’s new guidance earlier this month on investor activism and engagement with portfolio companies has thrown asset managers into confusion, with some of the industry’s largest firms, including BlackRock and Vanguard, putting a temporary pause on meetings.
The SEC issued staff guidance on Feb. 11 regarding beneficial ownership reporting requirements around Schedule 13D and 13G filings - required when an investor beneficially owns more than 5% of a class of registered voting equity. Schedule 13D, the more costly and time-consuming of the two, had previously been required of activist investors potentially vying to take control of a company, demanding disclosure on plans and core proposals with respect to the issuer.
The new guidance requires investment firms that "pressure" companies over environmental, social or governance, ESG, matters to file the more extensive Schedule 13D.
In the space of about a week, BlackRock paused corporate meetings in the wake of the guidance before again resuming meetings. A spokesperson for the $11.6 trillion firm told Pensions & Investments on Feb. 21 that BlackRock “does not use engagement as a way to control publicly traded companies.”
“After the SEC issued new guidance, BlackRock temporarily paused stewardship engagements with companies as we assessed the new requirements," the spokesperson said. "After completing our assessment, we resumed our stewardship engagements on behalf of clients,” the spokesperson said.
“We are complying with the new requirements including by highlighting our role as a ‘passive’ investor at the start of each engagement. We operate in one of the most highly regulated industries globally and are committed to following the law in every respect.”
Asked whether compliance with the new SEC guidelines called for relatively cosmetic changes or more material changes in how BlackRock conducts ESG-focused stewardship, a spokeswoman for the firm declined to go beyond pointing back to the statement BlackRock issued Feb 20.
Vanguard, a $10.4 trillion asset manager as of Jan. 31, also paused its engagement following the SEC’s guidance.
“We are analyzing the new guidance from SEC staff to determine what, if any, modifications to the Vanguard funds’ passive approach to investment stewardship activities may be warranted,” a spokesperson for the firm told P&I in a statement. “Our investment stewardship team prioritizes transparency with investors, policymakers, and portfolio companies — and we continue our commitment to working constructively with policymakers to address questions related to passive investing and proxy voting.”
Among other managers with large passive equity businesses, a spokesperson for State Street Global Advisors declined to comment while a Northern Trust spokesman did not respond to a request for comment.
SEC guidance
The SEC said in its newest guidance that, “Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be “influencing” control over the issuer.”
The regulator went on to say that Schedule 13G “may be unavailable to a shareholder” that recommends “specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation.”
The SEC said that Schedule 13G filings may also be unavailable to a shareholder that “discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management.”
A spokesperson for the SEC did not respond to a request for comment.
Acting SEC chairman Mark Uyeda had previously addressed ESG and asset manager’s use of Schedule 13G vs. 13D.
In a speech at the 2022 Cato Summit on Financial Regulation he said, “ESG investing has been a trending topic for the past several years … the Commission should consider whether current rules capture the activities and behavior associated with the new trend, particularly with the efforts of significant shareholders to change or influence the management and policies of public companies. If so, the Commission should enforce those rules, and if not, then the Commission should evaluate whether an update to those rules is needed.”
An activist filing?
Attorneys have been fielding questions from asset managers about the change.
The difference between filing a Schedule 13G and 13D is “significant,” said Marc Rotter, counsel in the capital markets group at Ropes & Gray.
Schedule 13D filings are “much more time intensive and therefore costly” and any amendments to Schedule 13D must be filed within two business days of a triggering event, he added.
And Rotter said there is a perception difference between the filings.
“There is certainly concern among investors that Schedule 13D filings are viewed as more activist filings, and institutions that don't want to be viewed as activists do sometimes hesitate to file Schedule 13Ds because they're afraid of the perception that it might create,” he said.
The perception difference could have an impact on dynamics between companies and shareholders, said Ele Klein, partner, co-chair of the M&A and securities group, co-chair of the global shareholder activism group at Schulte, Roth & Zabel.
“Amendment requirements are much more onerous, and the status of being a 13D filer is perceived drastically differently than being a 13G filer by companies, meaning that it may chill conversations and may chill the perception of someone being a friendly shareholder or a cooperative shareholder or a non-threatening shareholder, now it is switched into totally different modes,” he said.
Klein said the guidance has caused marked confusion.
“It creates confusion, which is going to perhaps cause some people to pull back from certain ESG initiatives and I imagine that it was the goal of it,” he said.
“So, what people will do, we'll see. I actually don't think it's going to cause drastic change. It's going to cause a lot of people to be thinking about things. It may, we'll see, chill certain conversations that I think companies would appreciate having so I do think, it can have a negative effect on the market from both investor side and company side.”
The impact the guidance will have on ESG investing is up in the air.
“I don't think it's a brick wall for ESG engagement,” Rotter said. “I do think it's going to change how investors approach certain types of shareholder engagement, and is certainly causing institutional managers to reassess and rethink their approaches.”
The largest managers that use these filings more often will have to be cognizant of the changes and may need time to reset, said Amy Lynch, founder and president of FrontLine Compliance, a consulting firm.
“This is a change in course. They have to make changes in how they change filings based on these specific types of investment scenarios. And that’s what is new here,” she said.
Douglas Appell contributed reporting to this story.
