Statement Announcing
SEC Staff Roundtable on the Proxy Process
Statement Announcing SEC Staff Roundtable on the Proxy Process
Chairman Jay Clayton
July 30, 2018
Shareholder engagement is a hallmark of our public capital markets,
and the proxy process is a fundamental component of that engagement.
In 2010, the Commission issued a concept release seeking public
comment on whether the U.S. proxy system as a whole operates with the
accuracy, reliability, transparency, accountability, and integrity
that shareholders and companies should expect.[1]
In light of the many changes in our markets, technology, and how
companies operate since then, SEC staff will host a roundtable this
fall to hear from investors, issuers, and other market participants
about whether the SEC’s proxy rules should be refined.
The SEC’s rules governing the proxy process are at the center of
investor participation in, and influence over, corporate governance at
U.S. public companies. For example, our proxy rules specify the
requirements for information companies must provide to shareholders
and how votes may be solicited. Since the 2010 concept release, we
have seen a dramatic increase in the number of U.S. companies
reporting shareholder engagement, with 72% of S&P 500 companies
reporting engagement with shareholders in 2017, compared to just 6% in
2010.[2]
The scope of topics subject to shareholder engagement also has
increased. Consistent with the Commission’s mission, we must regularly
review whether our existing rules are achieving their objectives
effectively in light of changes in our marketplace. The SEC staff
roundtable is intended to facilitate that type of assessment with
respect to the proxy process and shareholder engagement.
SEC staff will announce the roundtable agenda items shortly. As they
develop that agenda, I have asked that staff consider the topics
outlined below.
Potential Topics for Consideration
Voting Process
Accuracy, transparency, and efficiency in the proxy system can inspire
confidence in the proxy voting process for both companies and
investors. Areas that may warrant particular attention include:
-
Potential for over-voting and under-voting of securities by
broker-dealers, the reasons this may occur, and ways to address it.
In addition, the extent to which “empty voting” (e.g., acquiring
voting rights over shares but having little or no economic interest
in the shares) is of concern to market participants and the
regulatory steps, if any, that should be taken to address those
concerns.
-
Practical difficulties in confirming whether an investor’s shares
have been voted in accordance with the investor’s instructions. For
example, challenges could be attributable to the number of
participants that may be involved in the process, including issuers,
transfer agents, third-party administrators, vote tabulators,
securities intermediaries, and proxy service providers.
-
Costs and challenges associated with distributing proxy and other
materials to beneficial owners who hold in “street name,” as well as
the costs and other challenges of communicating with such
shareholders more generally. In particular, concerns have been
expressed about the ability and expense for issuers to communicate
with street name holders through securities intermediaries,
regardless of whether the shareholder is an “objecting beneficial
shareholder” or “non-objecting beneficial shareholder.”
Retail
Shareholder Participation
In the 2017 proxy season, retail shareholders voted approximately 29%
of their shares, while institutional investors voted approximately 91%
of their shares.[3]
In this regard, it may be useful to better understand:
-
Reasons for this relatively low retail participation rate and whether
better communication and coordination among proxy participants,
increased use of technology, changes to our rules, or investor
education could increase participation.
-
How existing rules or market practices affect the ability of
individuals who invest in the public markets through investment
vehicles such as mutual funds and pension funds to participate in the
governance of public companies in which they have an interest. For
example, some have suggested that fund shareholders should have a
means of providing input into how the fund adviser votes its portfolio
securities.
-
And, more generally, the extent to which relatively low retail
investor participation should be of concern and should inform analysis
of existing regulation.
Shareholder Proposals
The shareholder proposal process is a channel for shareholders to
engage with the U.S. public companies in which they invest on specific
topics. All shareholders, as the ultimate owners of the company, bear
the costs associated with management’s consideration of a proposal and
its inclusion in the proxy statement. And, those same shareholders may
benefit from the engagement and potential for enhanced performance
brought about by consideration of a shareholder proposal. Many market
participants believe this dynamic has enhanced company performance.
Many market participants also believe that the costs of this process
could be significantly reduced without limiting (and potentially
increasing) the benefits of shareholder engagement. In this vein, it
often is noted that a small group of shareholders submits a
significant percentage of the total number of shareholder proposals
each year.[4]
Areas of the shareholder engagement process that may warrant
particular attention include:
-
Whether the current thresholds for minimum ownership (e.g., shares
held and length of time) to submit a proposal to be included in the
company’s proxy statement[5]
appropriately consider the interests of all shareholders, taking into
account the potential benefits to shareholders of a proposal (or
resubmission) being considered or adopted, as well as the costs
associated with the inclusion of a proposal (or resubmission) in the
proxy statement.
-
Further, whether rules that allow companies to omit resubmitted
proposals that received less than 3%, 6%, or 10% of the vote,
depending on how many times the subject matter has been voted on in
the last five years,[6]
are appropriate.
-
Whether meaningful ownership in the company can be demonstrated by
factors other than the amount invested and the length of time shares
are held.
-
Whether the voices of long-term retail investors (who invest directly
and indirectly through mutual funds, ETFs, and other products) are
appropriately represented in the shareholder proposal process and in
the shareholder engagement dynamic more generally.
Proxy
Advisory Firms
Proxy advisory firms provide a number of services related to proxy
voting, which include aggregating and standardizing information,
providing platforms for managing votes, and providing voting
recommendations. Areas that may warrant particular attention include:
-
Whether various factors, including legal requirements, have resulted
in investment advisers to funds and other clients relying on proxy
advisory firms for information aggregation and voting recommendations
to a greater extent than they should, and whether the extent of
reliance on these firms is in the best interests of investment
advisers and their clients, including funds and fund shareholders.
-
Whether issuers are being given an appropriate opportunity to raise
concerns if they disagree with a proxy advisory firm’s
recommendations, including, in particular, if the recommendation is
based on erroneous, materially incomplete, or outdated information.
-
Whether there is sufficient transparency about a proxy advisory firm’s
voting policies and procedures so that companies, investors, and other
market participants can understand how the advisory firm reached its
voting recommendations on a particular matter, and whether comparisons
of recommendations across similarly situated companies have value.
-
Whether there are conflicts of interest, including with respect to
related consulting services provided by proxy advisory firms, and, if
so, whether those conflicts are adequately disclosed and mitigated.
-
The appropriate regulatory regime for proxy advisory firms and whether
prior staff guidance about investment advisers’ responsibilities in
voting client proxies and retaining proxy advisory firms[7]
should be modified, rescinded, or supplemented.
Technology and Innovation
The use of technology is implicated in all areas of the proxy process.
As such, it may be appropriate to consider the following:
-
As technology continues to evolve, whether it can be used to make the
proxy process more efficient and effective for participants.
-
The potential benefits and consequences that could result from further
reliance on, and changes in, technology. For example, whether
technology, such as “blockchain” or distributed ledger technology,
could be used to streamline or create more accountability in the proxy
process.
Other
Commission Action
In 2016, the Commission proposed amendments to the proxy rules to
require the use of universal proxy cards that would include the names
of all nominees in contested board of directors’ elections.[8]
Under existing rules, nominees must consent to including their names
on a proxy card. This means that in an election contest, a dissident
may not include the other party’s nominees unless it receives consent,
which in my experience has rarely been provided. A consequence of this
current rule is that, if a shareholder wants to vote for a combination
of directors (e.g., some from the management slate and some from the
dissident slate), he would have to attend the shareholder meeting in
person.
Roundtable Details
The roundtable date, agenda items, panelists, moderators, and
logistical information will be made public as they are finalized.
Members of the public who wish to provide their views on the proxy
process, either in advance of or after the roundtable, may submit
comments electronically or on paper.[9]
Please submit comments using one method only. Information that is
submitted will become part of the public record of the roundtable and
posted on the SEC’s website. All comments received will be posted
without change. Persons submitting comments are cautioned that we do
not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
publicly available.
Electronic Comments:
Use the SEC’s
Internet
submission form or send an email to
rule-comments@sec.gov .
Paper Comments:
Send paper comments to Brent J. Fields, Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, D.C. 20549-1090.
All submissions should refer to File Number 4-725, and the file number
should be included on the subject line if email is used.
[1]
Concept Release on the U.S. Proxy System,
Release No. 34-62495 (July 14, 2010) [75 FR 42982 (July 22, 2010)].
The comment letters received in response to the 2010 concept release
are available at
https://www.sec.gov/comments/s7-14-10/s71410.shtml.
[2]
See Ernst & Young 2017
Proxy Season Review (June 2017), available at
https://webforms.ey.com/Publication/vwLUAssets/ey-2017-proxy-season-review/$File/ey-2017-proxy-season-review.pdf
.
[3]
See ProxyPulse, 2017
Proxy Season Review (September 2017), available at
https://www.pwc.com/us/en/governance-insights-center/publications/assets/pwc-proxypulse-2017-proxy-season-review.pdf
.
[4]
See Gibson Dunn,
Shareholder Proposal Developments During the 2018 Proxy Season (July
12, 2018), available at
https://www.gibsondunn.com/wp-content/uploads/2018/07/shareholder-proposal-developments-during-the-2018-proxy-season.pdf
(one proponent, and shareholders associated with him,
submitted or co-filed 24% of all proposals in the 2018 proxy season).
[5]
Shareholders must own either $2,000 or 1% of a
company’s stock for one year. 17 CFR 240.14a-8(b).
[6]
17 CFR 240.14a-8(i)(12).
[7]
See SEC Staff Legal
Bulletin No. 20, Proxy Voting: Proxy Voting Responsibilities of
Investment Advisers and Availability of Exemptions from the Proxy
Rules for Proxy Advisory Firms (June 30, 2014); Institutional
Shareholder Services, Inc. SEC Staff Letter (Sept. 15, 2004);
Egan-Jones Proxy Services, SEC Staff Letter (May 27, 2004). The
guidance states that investment advisers should ascertain whether a
proxy advisory firm has the capacity and competency to adequately
analyze proxy issues, including the robustness of its policies and
procedures identifying and addressing any conflicts of interest. In
addition, the guidance addressed the availability and requirements of
two exemptions from the federal proxy rules that are often relied upon
by proxy advisory firms. SEC Staff Legal Bulletin No. 20 (June 30,
2014).
[8]
Universal Proxy, Release
No. 34-79164 (October 16, 2016) [81 FR 79122 (November 10, 2016)]. The
comment letters received in response to the 2016 proposing release are
available at
https://www.sec.gov/comments/s7-24-16/s72416.htm.
[9]
Comments on the use of universal proxy cards should be
submitted to the rulemaking file for the 2016 Universal Proxy release
using the Commission’s Internet comment form (http://www.sec.gov/rules/proposed.shtml)
or via email to
rule-comments@sec.gov (please include File Number S7-24-16
on the subject line).
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