The Securities and Exchange Commission is to vote Nov. 5 on whether to amend rules governing the shareholder proposal process and to issue rules requiring more disclosure from proxy advisory firms.
The commission will consider requiring more disclosure of any material conflicts of interest and create procedures "to facilitate issuer and shareholder engagement," a move supported by business groups. In August, the SEC approved guidance stipulating that proxy advisory firms must disclose how they reach their shareholder recommendations.
On the shareholder proposal process changes, a notice on the SEC website posted Wednesday describes it as modernizing submission and resubmission requirements and updating procedural requirements, which is expected to include higher ownership thresholds for submitting proposals.
The shareholder proposal process under SEC Rule 14a-8 allows shareholders meeting certain criteria to submit proposals to be included in a company's proxy statement to be voted on by all shareholders. Business groups have pushed for changes, including higher ownership thresholds. An October 2018 report by the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness found that "zombie proposals" — ones submitted three or more times without garnering majority support — divert corporate resources and harm other shareholders.
Institutional investors consider those shareholder proposals and votes part of their fiduciary duty to beneficiaries. "We don't yet know what the SEC will propose, but we are concerned it may reduce shareholder rights," said Ken Bertsch, executive director of the Council of Institutional Investors, in an email.
Mr. Bertsch said the SEC description of what changes are being considered for proxy advisers "is particularly cryptic, but we gather from news reports that the commission may propose a regulatory structure that would undercut the contractual relationship between investor clients and proxy advisory firms, limiting the firms' independence and business viability.
"The goal appears to be a more management-friendly approach by proxy advisers, particularly on executive compensation," Mr. Bertsch said. "As we wrote to the SEC last week, there is little evidence for the main contention of CEO organizations that tighter regulation is needed because of pervasive errors in proxy advisory firm reports. The SEC should proceed based on evidence, not pressure from CEOs who would like more control of the voting process."
The current commission includes two Democrats and three Republicans, including Chairman Jay Clayton.
The changes are expected to be approved.