Proxy voting

George Michael Gerstein on podcast to discuss fiduciary-related regulatory developments

Proposed Amendments to Issuer Disclosure: To ESG or Not to ESG

Proposed Amendments to Issuer Disclosure: to ESG or not to ESG

In connection with the SEC’s January 30 proposed amendments to certain of the financial disclosure requirements applicable to public companies under Regulation S-K, as well as accompanying guidance thereon, the separate public statements of Chairman Jay Clayton, Commissioner Hester Peirce, and Commissioner Allison Herren Lee underscore the continuing divide over the role of the SEC in disclosure related to ESG factors–and particularly climate-related disclosure–and its materiality to investors.

John P. Hamilton

Commissioner Peirce applauds the proposed amendments and guidance for “not bow[ing] to demands for a new [ESG-related] disclosure framework, but instead support[ing] the principles-based approach that has served us well for decades.” Citing the lack of sustainability-focused metrics disclosed in a recent sample of public disclosure filings, Peirce suggests that, “[t]here is reason to question the materiality of ESG and sustainability disclosure based on existing practices.” Further, Peirce highlights her skepticism of “calls to expand our disclosure framework to require ESG and sustainability disclosures regardless of materiality.”

Commissioner Lee, on the other hand, notes that she cannot support the proposal because the Commission has chosen to “ignore the challenge of disclosure around climate change risk rather than to begin the difficult process of confronting it.” Lee posits that investors have “overwhelmingly” made clear to the SEC, “through comment letters and petitions for rulemaking, that they need consistent, reliable, and comparable disclosures of the risks and opportunities related to sustainability measures, particularly climate risk …[and] that this information is material to their decision-making process, and a growing body of research confirms that.”  In Lee’s view, the “principles-based ‘materiality’ standard has not produced sufficient disclosure to ensure that investors are getting the information they need—that is, disclosures that are consistent, reliable, and comparable.”

Chairman Clayton, in his comments, took the opportunity to summarize steps that the SEC has taken over the last several years involving climate-related disclosure, framing the SEC’s commitment as “rooted in materiality,” and citing efforts such as the Commission’s 2010 guidance on climate change disclosure, as well as continuing engagement, both formally and informally, with market participants and non-U.S. regulators. In addition, Chairman Clayton noted certain of the challenges involved, including the “complex, uncertain, multi-national/jurisdictional and dynamic” landscape as well as the forward-looking nature of much of such disclosure, which “likely involve[s] estimates and assumptions regarding, again, complex and uncertain matters that are both issuer- and industry-specific…”

Looking ahead, Chairman Clayton highlighted two “avenues of engagement that currently are of particular interest” to him:

  1. Discussing with issuers, such as property and casualty insurers, the extent to which they use, and their experience with, environmental and climate-related models and metrics in their operations and planning, including price, risk and capital allocation decisions; and,
  2. Discussing with asset managers that have been using environmental and climate-related models and metrics to allocate capital on an industry or issuer specific basis their experience with that process.  

 De Facto Materiality – A Proposal in the ESG Disclosure Simplification Act

While several ESG-related bills have been filtering through Congress, and each will likely continue to face an uphill battle, one such bill, the ESG Disclosure Simplification Act of 2019 would address the materiality question raised in the Commissioners’ public comments referenced above by deeming ESG metrics “de facto material.” As such, the draft law would task public companies with mandatory reporting, while the SEC would be responsible for defining the relevant ESG metrics based on recommendations from the permanent Sustainable Finance Advisory Committee to be established pursuant to the law.

It’s true, ESG is a ‘compliance minefield’

Sometimes, our friends in the press come up with a headline that simply cannot be topped. Yesterday, Ignites published an article called, “Going Green: Shops Work to Navigate ESG Compliance Minefield.” The article opens appropriately, noting that while ESG funds “may be all the rage with investors […] shops that fail to think carefully about their investment methodologies and related disclosures could end up in the SEC’s hot seat.” Indeed, though, the SEC is certainly not the only regulator to keep a close eye on ESG products and mandates. In the United States, the Department of Labor also has ESG on its radar. ESG is also a hot topic for numerous regulators and legislatures globally. What are some of they important compliance challenges?

  1. Are fund descriptions, registration statements and disclosures accurate? If ESG factors are considered as part of the fund’s strategy, do such documents reflect that reality correctly?
  2. If the firm has publicly committed to engage in certain conduct (e.g., shareholder engagement, etc.) by reason of membership in a particular group or alliance (e.g., UN PRI, Climate Action 100+, etc.), is the firm following through on its promises?
  3. Are global legal developments considered, recognizing that Europe, North America and Asia are at different stages of ESG statutory and regulatory promulgation?
  4. Have proxy voting policies been considered in light of SEC and DOL guidance?
  5. Does the investment management agreement explicitly require (or prohibit) the investment manager to vote proxies or exercise other shareholder rights on behalf of an ERISA plan?
  6. Are the investment manager and asset owner on the same page in terms of which ESG strategy will be pursued?
  7. Does the investment policy statement or investment guidelines specify which E, S or G factor is part of the investment mandate?
  8. Has the investment manager considered potential conflicts of interest of proxy adviser firms?
  9. If the client is a governmental plan, has the investment manager diligenced the applicable state statutes and constitutional provisions to confirm that implementation of the mandate complies with applicable law?
  10. Is disclosure in due diligence questionnaires accurate and factually supportable?


ESG, Proxy Voting & ERISA Today

As we prepare for upcoming proxy voting rules from the Department of Labor (DOL), it is important to consider their context. A registered investment adviser (RIA) can indeed satisfy its fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) to plan clients when taking environmental, social and governance (ESG) risks into account as part of investment decisions and voting proxies. Some will cheer the preceding sentence, while others remain skeptical. The fact is, with proper structuring, a fiduciary to an ERISA plan, or a governmental plan, for that matter, can favorably respond to client requests for ESG issues to be part of the investment mandate without losing much sleep over fiduciary duty risk.

For all the headline-grabbing that ESG garners, there remains considerable uncertainty over what exactly it means. This is unfortunate, not least because it is hard to comply with fiduciary duties if the conduct at issue is a moving target. ESG issues are various environmental (e.g., climate change), social (e.g., child labor) and governance (e.g., board structure) risk areas. RIAs can zoom in slightly and focus just on environmental, social or governance risks. Zoom in even further and focus on a single risk area, such as climate change.

From here, there are four primary techniques for addressing ESG risk. First, one can screen out from investment consideration those portfolio companies that fail to satisfy one more ESG risk-related criteria, known as negative screening. For convenience, divestment, can be included in this category because it is effectively screening out existing holdings. The second technique is to limit the investible universe to those best-in-class portfolio companies that satisfy ESG risk-related criteria, known as positive screening. Third, treating an ESG risk like any other material risk to investment performance, no more and no less. This is known as integration. The fourth technique is to address ESG risk through proxy voting and other forms of shareholder engagement.

At this stage, we now recognize that ESG is an umbrella term that encompasses myriad environmental, social and governance risks. We appreciate that ESG can be boiled down to discrete risk areas, such as cybersecurity or board diversity, and that RIAs can focus on only one of these risks as part of their mandate with a plan client. We also understand that there are basically four main ways of taking these risks into account in a similar plug-and-play fashion. Our final threshold question for fully appreciating ESG investing, and, ultimately, how an RIA can satisfy its fiduciary duties under ERISA, is the reason for addressing the ESG risk.

ERISA’s fiduciary duties can most directly be satisfied if the reason for addressing an ESG risk is to mitigate material investment risk or seek material investment return (i.e., alpha). At least for now, a less direct, though entirely attainable, path toward satisfying ERISA’s fiduciary duties exist when investment risk/return is at most a secondary reason for taking ESG into account.

An RIA’s motivation for treating one or more E, S or G issues as material is possible because, depending on the issue, there is now data linking that issue with portfolio return. Climate change modeling, for example, can predict the sectors, industries and asset classes most vulnerable to climate change, whether it is because their source materials dry up, they face high regulatory uncertainty, or some of their key assets become stranded. The DOL, in Interpretive Bulletin 2015-01, acknowledged that ESG can present material risks and opportunities for a fiduciary. By doing so, the DOL put ESG risk on equal footing with more traditional material market risks.

The significance of the DOL’s acknowledgment that ESG issues may in fact present material risks to portfolio performance cannot be overstated. An RIA, acting as an ERISA fiduciary, effectively treats the ESG risk as if it were any other material risk factor. Historically, though, a fiduciary considering an ESG investment had to satisfy the “tie-breaker” test, a set of conditions fraught with risk and more understandable in the abstract than in practice. This test, which remains in effect for ESG investments that do not treat ESG as being material to investment performance, demands that an ERISA fiduciary serve up the potential ESG investment opportunity and a non-ESG investment alternative with similar risk and return characteristics; only when the RIA determines that the ESG opportunity does not create more risk relative to return (and vice versa) than the non-ESG opportunity, may the ESG investment be pursued.

It is worth noting at this point that the DOL’s most recent guidance on ESG, Field Assistance Bulletin 2018-01, expressly reaffirmed the notion that ESG issues can present material risks (and opportunities) for plans, and, consequently, could be treated the same way as any other factors a fiduciary would consider as part of a prudent process. The DOL cautioned fiduciaries against making too many assumptions and against not relying on the evolving data linking one or more ESG issues with investment performance. This makes sense and should not present too much of an operational nuisance, considering that more fine-tuned data is available reportedly showing one or more ESG issues as being material to performance.

Proxy voting and other forms of shareholder engagement (which usually precede voting decisions) are one of the most popular techniques used to account for ESG risks. The exercise of shareholder rights is a fiduciary function under ERISA. It is critical that an investment management agreement be crystal clear as to whether the RIA is responsible for proxy voting, and that the RIA review the plan’s proxy voting policies when managing a separate account. Commingled funds may develop their own proxy voting/shareholder engagement policies, to which the subscribing plans would be subject.

Indeed, proxy voting and engagement rarely cost much, and proxy advisor firms are often used to reduce costs even more. Where, however, the exercise of shareholder rights would be expensive, such as in cases where it would be unusually expensive to partake in a shareholder vote, or where the time and preparation to meet with a company board is more involved, RIAs, as ERISA fiduciaries, should analyze and document the cost of that activity and weigh it against the expected gain. This is easier said than done. If anything, costs should be monitored and recorded in the RIA’s files, and there should be some estimate or calculation of what benefits will flow back to the plan investor over the short, medium and long term resulting from one or more votes or engagements.

Proxy voting and shareholder engagement have become a flashpoint and is under scrutiny by the Securities and Exchange Commission, the DOL and even the White House. Just this past April, the President issued an Executive Order that required the DOL, in part, to determine whether additional guidance on proxy voting was necessary. The Executive Order’s aim was on energy independence, so it is fair to assume that the White House is interested in whether more onerous requirements are necessary for ERISA fiduciaries to vote proxies on ESG issues.

Whether the DOL will impose on fiduciaries a more exacting and granular cost-benefit analysis for proxy voting and shareholder engagement remains to be seen. With that said, the DOL must walk the tight rope: if new guidance contains so many trap doors, thereby introducing significantly greater fiduciary risk for voting proxies and engaging the boards of energy companies, for example, then RIAs may feel compelled to purge fossil fuel companies altogether from the portfolio to satisfy their fiduciary duties under an ESG mandate. A tilt toward divesting or negative screening, and away from engagement and voting, arguably undermines the very purpose of the Executive Order. The DOL could update this guidance any day now.

Finally, several influential individuals and institutions have publicly stated that one or more ESG issues are in fact material risks. While there is by no means a consensus on whether ESG is material to investment performance, ERISA fiduciaries, at a minimum, would be expected to kick the tires on these claims. A prudent process necessarily involves some knowledge of what others are fiduciaries are considering. An RIA could take the position that these materials are already reflected in the share price; ERISA fiduciaries, after all, are not required to second-guess the market price of a security absent extraordinary circumstances. A fiduciary could alternatively believe that the markets do not (yet) fully appreciate these risks, thereby presenting meaningful opportunities from a risk/return standpoint for the RIA. Following this latter path, the RIA has various techniques at its disposal to addressing one or more ESG risks and, as described above, can satisfy its fiduciary duties under ERISA in doing so.

New SEC Proposal May Complicate Proxy Voting & Engagement by Advisers

At an open meeting on November 5, 2019, a majority of the Securities and Exchange Commission (“SEC”) voted to recommend two proposals amending the federal proxy rules.1Commissioners Robert Jackson Jr. and Allison Herren Lee opposed these proposals.2 The first proposal conditions reliance on certain existing exemptions under the proxy rules by proxy voting advice businesses such as Institutional Shareholder Services (“ISS”) and Glass Lewis, upon compliance with additional conflicts disclosure and procedural requirements, including permitting issuers to review and provide responses to proxy businesses’ reports.3 The second proposal would amend the proxy rules applicable to the submission of shareholder proposals, including enhanced eligibility requirements and more onerous resubmission limits. The components of each of these two proposals are summarized below. Comments on the proposals are due 60 days after publication in the Federal Register.

I. Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice

The first proposal would amend the proxy rules applicable to companies that regularly provide proxy voting advice to asset managers and others (“proxy businesses”), such as ISS and Glass Lewis. The proposed amendments would (1) clarify that proxy businesses’ voting advice constitutes a solicitation, (2) require additional conflict disclosure in voting advice, (3) provide issuers up to two opportunities to review the proxy advice before it is delivered to clients, (4) provide issuers the opportunity to require in the advice that is delivered to clients a hyperlink to the issuer’s views on that advice and (5) enumerate specific examples of what may constitute misleading statements by proxy businesses. The proposed amendments would increase costs for proxy businesses and may shorten the amount of time asset manager clients have to review proxy advice prior to the vote.

  • Definition of “Solicitation.” The SEC’s proposal would amend the definition of “solicitation” under Rule 14a-1(l) and Section 14(a) to include any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent or authorization on a specific matter for which shareholder approval is solicited and that is furnished by a person who markets such advice separately from other forms of investment advice and sells such advice for a fee.4 This definition encompasses voting recommendations promulgated under proxy businesses’ benchmark voting policies or sets of guidelines. The SEC emphasized that the definition of solicitation should continue to be construed broadly. However, the SEC clarified that it intended that proxy voting advice furnished by a person such as a broker-dealer or an investment adviser made only in response to unprompted client requests would continue to be excluded under the definition.
  • Conflicts of interest disclosures. Proposed Rule 14a-2(b)(9)(i) requires that persons who provide proxy voting advice and rely on the solicitation exemptions in Rules 14a-2(b)(1) or 14a-2(b)(3) provide additional written disclosures about material conflicts of interest in their proxy voting advice to clients.5
  • Timely review and feedback period. Proposed Rule 14a-2(b)(ii), as a condition of relying on exemptive Rules 14a-2(b)(1) and 14a-2(b)(3), would require a standardized opportunity for timely review and feedback by issuers and certain other soliciting persons of proxy voting advice before the advice is disseminated to the proxy business’ clients. This would be required regardless of whether the advice on the matter is adverse to an issuer’s own recommendation, subject to certain conditions.6 The proxy business can condition this receipt of proxy voting advice on the issuer agreeing to keep the contents of the proxy voting advice confidential. The length of time for review and feedback varies depending on how far in advance of the shareholder meeting the issuer has filed a proxy statement (see table below). The proxy business would not be required to accept any suggested revisions. However, in accepting or rejecting any revisions, the proxy business would be subject to Rule 14a-9, which prohibits any materially misleading misstatements or omissions.
  • Final notice of voting advice. In addition to the review and feedback period and as a condition of relying on the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3), proxy businesses would be required to provide a final notice of voting advice to issuers at least two business days prior to the delivery of the proxy voting advice to their clients. This is required regardless of whether the issuer commented on the version it received during the review and feedback period. This final notice should contain a copy of the proxy voting advice that the proxy business will deliver to its clients, including any revisions to the advice as a result of the review and feedback period. As in the review and feedback period, proxy businesses can condition an issuer’s receipt of the proxy voting advice on the issuer keeping the contents of the proxy voting advice confidential.
  • Hyperlink to issuer’s statement. Under proposed Rule 14a-2(b)(9)(iii), as a condition of relying on the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3), a proxy business must, upon request, include in its proxy voting advice and in any electronic medium used to deliver the advice a hyperlink (or other analogous electronic medium) that leads to a written statement by the issuer about its views of the proxy business’s voting advice, regardless of whether the advice is consistent with the issuer’s recommendation. Thus, asset managers relying on proxy voting advice could be confronted with conflicting views of facts or analysis in such advice with very little time to evaluate and determine whether such disagreements should impact the asset manager’s decision on how to vote. Notably, the SEC requested comments on whether proxy businesses should be required to disable the automatic submission of votes unless a client clicks on the hyperlink and/or accesses the issuer’s response or otherwise confirms any prepopulated voting choices before the proxy business submits the votes to be counted. Moreover, an asset manager’s determination to vote in accordance with a proxy business recommendation when such recommendation is subject to an issuer written statement could be subject to increased scrutiny.7
  • Anti-fraud provisions. Currently, Rule 14a-9 prohibits any proxy solicitation from containing false or misleading statements or omissions with respect to any material fact. Proposed Rule 14a-9 would elaborate on the current examples of what might constitute misleading information by including failure to disclose information such as the proxy business’s methodology, sources of information and conflicts of interest.

II. Procedural Requirements and Resubmission Thresholds Under Rule 14a-8

The second proposal would amend the shareholder proposal process to (1) provide a tiered approach for eligibility, (2) require certain documents when a proposal is submitted by a shareholder representative, (3) require shareholder-proponents to state when they would be able to meet with the issuer with respect to the proposal and (4) clarify that each shareholder may submit one proposal to an issuer for a particular shareholder meeting.

  • Ownership Eligibility Requirements. Currently, Rule 14a-8 requires a shareholder to have continuously held at least $2,000 in market value or 1% of the issuer’s securities for at least one year by the date the proposal is submitted. Under the proposed amendments, a shareholder would be able to submit a Rule 14a-8 proposal if the shareholder satisfies one of the three following continuous ownership requirements.

    Shareholders would not be allowed to aggregate their securities with other shareholders’ securities to meet the minimum ownership thresholds. This tiered approach reflects the SEC majority’s understanding that a shareholder’s long-term investment in an issuer’s securities makes it more likely that a shareholder’s proposal is meaningful to the issuer and not for personal gain.
  • Co-filing/co-sponsoring shareholder proposals. Under the proposed rules, shareholders would be able to continue to co-file or co-sponsor shareholder proposals as a group if each shareholder in the group meets the eligibility requirements.
  • Use of a representative to submit a shareholder proposal. To address issuers’ concerns about whether a shareholder truly supports the proposal submitted on his/her behalf, proposed amendments to Rule 14a-8 would require shareholders who use representatives to submit their proposals or otherwise act on their behalf in connection with the proposal to provide the issuer with written documentation confirming the representative has authority to act on behalf of the shareholder.
  • Shareholder engagement with the issuer. The SEC proposal also would require a statement from each shareholder-proponent that he/she is able to meet with the issuer in person or via teleconference no fewer than 10 calendar days nor more than 30 calendar days after submission of the shareholder proposal. The shareholder would also be required to include contact information, business days and specific times that he/she is available to discuss the proposal with the issuer.
  • One-proposal limit. Rule 14a-8(c) currently provides that each shareholder may submit no more than one proposal to an issuer for a shareholders’ meeting. The SEC proposed amendments to address issuer concerns that proponents try to evade the one-proposal limitation, for example, by a shareholder submitting a shareholder proposal in its own name and simultaneously serving as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting.
  • Resubmissions. Currently, under Rule 14a-8(i)(12), an issuer can exclude a proposal if the matter was voted on at least once in the past three years and did not receive at least (i) 3% of the vote if previously voted on once, (ii) 6% of the vote if previously voted on twice or (iii) 10% of the vote if previously voted on three or more times. The proposed amendments to the resubmission thresholds would raise the current resubmission thresholds from 3%, 6% and 10% to 5%, 15% and 25%.8 Shareholders would be allowed to resubmit substantially similar proposals after a three-year “cooling-off” period.
  • “Momentum” requirements. In addition to the proposed amendments to the resubmission thresholds, the SEC proposed to amend Rule 14a-8(i)(12) to allow issuers to exclude proposals dealing with substantially the same subject matter as proposals previously voted on by shareholders three or more times in the preceding five calendar years that would not otherwise be excludable under the proposed 25% threshold if (i) the most recently voted-on proposal received less than a majority of the vote cast and (ii) support declined by 10% or more compared to the immediately preceding shareholder vote on the matter. The proposal stated that the purpose of the amendment is to relieve management and shareholders from repeatedly considering proposals in which shareholder interest has declined.

III. Conclusion

With regard to the first proposal, the SEC would permit a one-year transition period after publication of the final rule in the Federal Register. Issuers receiving shareholder proposals for 2020 annual meetings should continue analyzing proposals under existing rules. Interested parties are encouraged to express their views during the 60-day comment period.

The two proposals are part of the SEC’s ongoing work to “enhance the accuracy, transparency and effectiveness of our proxy voting system.”9 The split vote on the proposals, however, reflects the ongoing debate over shareholder engagement. In particular, Commissioners Jackson and Lee expressed concerns that the proposals “shift power away from shareholders and toward management” and limit investors’ ability to “hold corporate insiders accountable.”10


1 Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Release No. 38-87457 (Nov. 5, 2019); Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Release No. 34-87458 (Nov. 5, 2019).

2 Robert J. Jackson Jr., Commissioner, SEC, Statement on Proposals to Restrict Shareholder Voting (Nov. 5, 2019); Allison Herren Lee, Commissioner, SEC, Statement on Shareholder Rights (Nov. 5, 2019).

3 Rule 14a-2(b)(1) exempts solicitations by persons who do not seek the power to act as proxy for a shareholder and do not have a substantial interest in the subject matter of the communication beyond their interest as a shareholder. Rule 14a-2(b)(3) exempts proxy voting advice furnished by an adviser to any other person with whom the adviser has a business relationship.

4 The SEC’s proposed amendment would codify the definition from its recent proxy interpretation. Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Release No. 34-8671 (Aug. 21, 2019). The interpretation is subject to a lawsuit by Institutional Shareholder Services (“ISS”), which argued that proxy voting advice is not a solicitation. In addition, ISS challenged the interpretation on procedural grounds. Complaint, Institutional S’holder Servs. Inc. v. SEC, No. 1:19-cv-03275 (D.D.C. Oct. 31, 2019).

5 Currently, proxy businesses relying on the exemption under Rule 14a-2(b)(3) provide conflicts of interest disclosures, for example, on their websites. However, in its proposal, the SEC asserted these disclosures may be inadequate because they are often vague or boilerplate.

6 Proxy businesses would not be required to extend the timely review and feedback period or provide the final notice to persons conducting solicitations that are exempt pursuant to Rule 14a-2 or to shareholder-proponents who submit proposals pursuant to Rule 14a-8 and whose proposal will be voted upon at the issuer’s upcoming meeting.

7 In particular, the SEC’s recent guidance regarding proxy voting responsibilities of investment advisers includes a statement that for an investment adviser to form a reasonable belief that its voting determinations are in the best interest of the client, it should conduct a reasonable investigation into potential factual errors. Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019).

8 Specifically, Rule 14a-8(i)(12) would provide that a shareholder proposal may be excluded from an issuer’s proxy material if “the proposal addresses substantially the same subject matter as a proposal previously included in the issuer’s proxy materials within the preceding five calendar years, and if the most recent vote occurred within the preceding three calendar years and was: (i) less than 5 percent of the votes cast if previously voted on once; (ii) less than 15 percent of the votes if previously voted on twice; and (iii) less than 25 percent of the votes if previously voted on three times or more.”

9 Jay Clayton, Chairman, SEC, Statement of Chairman Jay Clayton on Proposals to Enhance the Accuracy, Transparency and Effectiveness of Our Proxy Voting System (Nov. 5, 2019).

10 See supra note 2.

SEC Proposes More Changes to Proxy Voting Process

Yesterday, the Securities and Exchange Commission (Commission ) voted 3-2 (Commissioners Jackson and Lee dissenting) to propose amendments to rules under the Exchange Act in connection with the ongoing review of the proxy process. The proposed amendments would impose additional requirements on proxy advisory firms that provide recommendations on votes and would raise the eligibility and resubmission thresholds for shareholder proposals:

Amendments to exemptions from the proxy rules

Among others, the proposed amendments would condition the availability of certain existing exemptions from the information and filing requirements of the federal proxy rules for proxy advisory firms on compliance with certain additional disclosure, including disclosure of material conflicts of interest in voting advice (not just to their clients). The proposed amendments also would provide registrants opportunities to review and provide feedback on reports before a proxy advisory firm disseminates its votes to institutional investor clients, regardless of whether the advice is adverse to the voting recommendation of the registrant. The Chairman asserted at the open meeting that the proposal is intended to incentivize the registrant to file its definitive proxy statement earlier, thereby allowing more time for the proxy advisory firm and its clients to formulate and consider voting recommendations, because registrants who file earlier (45 days or more in advance of shareholder meeting) have more time to review the proxy voting advice than those who file later (25-45 days in advance). In addition, the proxy advisory firm would be required to provide a final notice of voting advice no later than two business days prior to delivery of the advice to clients. The registrant thereafter would be permitted to include a hyperlink to its views on the voting advice in the report delivered to clients. This proposal also would add examples of when the failure to disclose certain information in proxy voting advice could be considered misleading under the proxy rules.

Procedural requirements and resubmission thresholds

These amendments would update the shareholder proposal rule, which requires issuers subject to the federal proxy rules to include shareholder proposals in their proxy statements, subject to certain procedural and substantive requirements. The amendments would revise the current eligibility requirements, the one-proposal limit and the resubmission thresholds.


To initially submit a shareholder proposal, a shareholder would need to hold at least $2000 or 1% of an issuer’s securities for at least three years, rather than the current one year holding period. Those with larger ownership stake could satisfy the eligibility standard in less time. In addition, shareholder proponents would be required to be available to meet with the company to discuss the proposal.

One-proposal limit

The proposed amendments would apply the one-proposal rule such that a shareholder proponent would not be permitted to submit a proposal in her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting (and similarly, a representative could only submit one proposal at a given meeting, even if the representative submits each proposal on behalf of different shareholders). Commissioner Roisman alleged at the open meeting that this process had been “misused” in the past by proponents wishing to submit multiple proposals at the same shareholder meeting.

Resubmission threshold

The proposed amendments would raise the current resubmission thresholds of 3%, 6% and 10% for matters voted on once, twice or three or more times in the past five years to 5%, 15% and 25% respectively. In addition, the proposal would allow an issuer to exclude a proposal that previously has been voted on three or more times in the past five years, even if the proposal received 25% in its most recent resubmission if the proposal: (1) received less than 50% of the votes cast and (2) experienced a decline in shareholder support of 10% or more. Commissioner Lee’s dissenting statement asserted that the amendments would “suppress” the exercise of shareholding rights with regard to ESG issues, including in particular climate-related proposals which made up more than half of shareholder proposals in recent years.

All of the proposals are subject to a 60-day public comment period. We will be following up in the near future with more detailed analysis of the proposals.