Category SEC

On November 5, 2019, the SEC issued two new proposed rules. One impacts proxy voting advice and the other impacts shareholder proposals.

Proxy Voting Advice

The proposed rule amends Exchange Act Rule 14a-2(b), which provides exemptions from the proxy rules’ filing and information requirements for certain kinds of solicitations. The amendment would call for enhanced disclosure of material conflicts of interest and would codify the August 2019 guidance’s change in the definition of “solicitation” to include proxy voting advice.

Under the proposed amendments, proxy voting advice businesses (i.e., proxy advisory firms) relying on the Exchange Act Rule 14a-2(b) exemptions from the information and filing requirements of the proxy rules would be subject to the following conditions:

• They must include disclosure of material conflicts of interest in their proxy voting advice
• Public companies must be given an opportunity to review and provide feedback on proxy voting advice before it is issued; and
• Public companies may request that proxy voting advice businesses include in their voting advice a hyperlink or similar method of directing the recipient of the advice to a written statement that sets forth the public company’s views on the proxy voting advice.

The proposed amendments would permit the proxy voting advice businesses to require public companies to enter into confidentiality agreements for materials exchanged during the review and feedback period and would allow proxy voting advice businesses to rely on the exemptions where failure to comply with the new conditions was immaterial or unintentional.

The proposed rule will be subject to a 60-day public comment period.

The SEC announcement about these proposed rules changes can be found at: https://www.sec.gov/news/press-release/2019-231

Shareholder Proposals

The other rule changes that the SEC proposed involved shareholder proposals. The proposed amendments would:

• update the criteria, including the ownership requirements, that a shareholder must satisfy to be eligible to have a shareholder proposal included in a company’s proxy statement.
• Update the “one proposal” rule to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting, whether the person submits a proposal as a shareholder or as a representative of a shareholder; and
• Modernize the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings

The changes to the ownership requirements represent a significant increase over the current standard. Currently, the ownership requirement is met if a shareholder hold at least $2,000 or 1 percent of a company’s securities for at least one year. The $2,000 amount is retained, provided the individual has held the shares for at least 3 years but increased to $15,000 if held for at least 2 years and increased again to $25,000 if held for at least 1 year (25 times the current ownership standard!).

Even the changes to the resubmission thresholds for proposals are being increased. The current resubmission thresholds of 3 percent, 6 percent, and 10 percent for matters voted on once, twice or three or more times in the last 5 years, respectively, would be changed to 5 percent, 15 percent, and 25 percent respectively, and an overriding provision would be added for proposals that have been previously voted on three or more times in the last five years could be excluded if (1) it received less than 50 percent of votes cast, and (2) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.

These proposed changes are also subject to a 60-day public comment period. It will interesting to see what comments shareholders have on these proposals as they all seem to limit the current rights of shareholders with respect to the companies in which they hold securities.

The SEC announcement about these proposed rules changes can be found at: https://www.sec.gov/news/press-release/2019-232

On August 21, 2019, the SEC issued two sets of guidance: (1) for proxy advisors, stating that the proxy rules apply to the provision of proxy voting advice, and (2) for investment advisers, regarding their proxy voting responsibilities.

This guidance could significantly change the proxy voting landscape and impact voting process at public companies. I provide my observations about these potential impacts and summaries of the SEC guidance in this Exequity Client Alert.

Earlier this month, the SEC issued a press release announcing that it was soliciting comments on earnings releases and quarterly reports. Specifically, the SEC is seeking comments on how the existing periodic reporting system, alone or in combination with other factors, may foster an overly short-term focus by managers and other market participants.

The request for comments addresses the following:

• The nature and timing of disclosures that reporting companies must provide in their quarterly Form 10-Q reports, including when the Form 10-Q disclosure requirements overlap with the disclosures companies voluntarily provide to the public in earnings releases furnished on Form 8-K.
• How the SEC can promote efficiency in periodic reporting by reducing unnecessary duplication in the information that reporting companies disclose and how any such changes could affect capital formation, while enhancing, or at a minimum maintaining, appropriate investor protection.
• Whether SEC rules should allow reporting companies, or certain classes of reporting companies, flexibility as to the frequency of their periodic reporting.
• How the existing periodic reporting system, earnings releases, and earnings guidance (either standing alone or in combination with other factors) may affect corporate decision making and strategic thinking, including whether these factors foster an inefficient outlook among reporting companies and market participants by focusing on short-term results.

The SEC will accept comments through March 21, 2019.

The SEC Press Release can be found at, https://www.sec.gov/news/press-release/2018-287, and the version of the request published in the Federal Register can be found at, https://www.sec.gov/rules/other/2018/33-10588.pdf.

On December 18, 2018, the SEC announced that it had finalized the hedging rules required by the Dodd-Frank Act (see https://www.sec.gov/news/press-release/2018-291). The SEC then made the Final Rule release (Release No. 33-10593; File No. S7-01-15) available on its website at: https://www.sec.gov/rules/final/2018/33-10593.pdf).

Final Rule Requirements

• New Item 407(i) of Regulation S-K requires a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director.
• Companies can satisfy this requirement by providing a summary of the practices or policies that apply, including the categories of persons they affect and any categories of hedging transactions that are specifically permitted or specifically disallowed, or by disclosing the practices or policies in full.
• If the company does not have any such practices or policies, the company must disclose that fact or state that hedging transactions are generally permitted.
• Equity securities for which this disclosure requirement applies are equity securities of the company, any parent, or any subsidiary of the company or any parent.

Timing of Application of Final Rules

Companies must generally comply with these new disclosure rules in proxy and information statements for the election of directors during fiscal years beginning on or after:

• July 1, 2020 for smaller reporting companies and emerging growth companies; and
• July 1, 2019 for public companies
• But note that the rules will not apply to closed-end funds and foreign private issuers.