Rules that impose new requirements on proxy advisory firms and could make it harder for investors to submit shareholder proposals were proposed Tuesday by the Securities and Exchange Commission in a 3-2 vote.
Echoing concerns raised by many investor groups, the two Democrats on the commission opposed the moves.
The proposed changes will be subject to a public comment period first.
If finalized, proxy advisory firms would have to disclose more information about their process and any conflicts of interest, and give companies the opportunity to offer revisions. Companies wishing to do so would have to file their proxy materials earlier.
The changes to the shareholder proposal process include raising the minimum amount of stock held and the time held — currently $2,000 and one year — before shareholders could file resolutions at annual corporate meetings. The new proposal calls for a minimum of $2,000 and three years, $15,000 and two years or $25,000 for one year. Shareholders could not aggregate their holdings with others and must be available to meet with the company to discuss the proposal.
Thresholds for shareholder proposals to be resubmitted in subsequent years would also be higher. Currently, proposals must get 3% of shareholder support in the first year, 6% in the second year and 10% in the third year. The new changes would prohibit a subject matter proposed for the last five years that got less support two or three times in a row, and allow companies to exclude proposals if the most recent proposals receive less than 50% of votes and declining votes from previous years.
The current resubmission rules, SEC Chairman Jay Clayton said, "are ripe for modernization and retrospective review."
The actions were welcomed by business groups that have long campaigned for tighter controls on proxy advisers, which they complain have significant errors and too much influence. The higher proposal submission thresholds are needed, the Business Roundtable has argued, partly because of an increased concentration of stock ownership by institutional shareholders more likely to support shareholder proposals, and because there are more efficient ways to address shareholder concerns.
Other groups like the Chamber of Commerce and National Association of Manufacturers have pushed for tighter controls on proxy advisers and activist investors "that cause companies to focus on political issues at the expense of company growth," NAM President and CEO Jay Timmons said in a statement after the commission meeting, which he said "shows the SEC has listened to manufacturers' concerns."
That is what has institutional investors concerned. "It's very troubling seeing the SEC acting on the behalf of issuers. This is not a usual rule-making. It goes to the heart of shareholder democracy," said Brandon Rees, deputy director of corporations and capital markets at AFL-CIO, Washington, in an interview.
Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, argues that shareholder proposals help companies address issues before they become significant problems "and have contributed to substantial and tangible benefits for companies. It does not benefit the economy, companies or capital markets to diminish this fundamental right. The shareholder process is working and there is no need to fix it," Ms. Woll said.
To Josh Zinner, CEO of the Interfaith Center on Corporate Responsibility, a coalition of 300-plus global institutional investors, the SEC actions are "part of a broader effort to weaken the ability of shareholders to have a say in the process." With proxy advisers "playing a crucial role in the ecosystem, the attack on that industry becomes another way to limit shareholders," he said in an interview.
