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Statement on Adoption of Amendments to Proxy Rules Governing Proxy Voting Advice & Proposal of Amendments to Rule 14a-8

July 13, 2022

In the past, corporate democracy was traditionally exercised in-person at an annual meeting. At these meetings, company shareholders gathered together physically, in a room, to cast their votes on a variety of issues ranging from the election of directors to employee working conditions.[1] Today, with two years of COVID telework and remote technology under our belt, that may seem as antiquated as my parents’ landline rotary phone. The majority of shareholders now vote through the grant of proxy in advance of the meeting, electronically. In other words, they fill out a ballot, or someone, like their investment adviser, does so on their behalf through an electronic vote management system.[2] This process, as a whole, is generally referred to as the proxy process and, over time, the corporation’s proxy materials have become, as the D.C. Circuit acknowledged, “the forum for shareholder suffrage.”[3]

Shareholder voting is one of few avenues for investors to exercise their voices within a corporation.[4] The shareholder vote is a right granted in return for the investor’s capital.[5] But it is not unfettered. The right to vote on corporate affairs is limited to certain matters by state corporate law. Further, the right of shareholders to vote is balanced against the authority of the board of directors to make decisions about the management of the enterprise, which the board then delegates to the executive officers.[6] Regulation of the proxy process is a core function of the Commission under the Securities Exchange Act of 1934,[7] and part and parcel of the SEC’s responsibilities.

With that in mind, the federal proxy rules were drafted to ensure that state law shareholder rights are accessible and meaningful when those rights are exercised by proxy.[8] In this regard, we must remain constantly vigilant and must continuously evaluate whether the proxy system as it has evolved remains effective in ensuring these shareholder rights.[9] For example, the SEC made an important stride last year by finalizing the universal proxy rule.[10] Now, shareholders may more easily vote for a mix of board candidates, more closely approximating direct shareholder voting at an annual meeting.[11]

This proxy infrastructure seems fairly straightforward and seemingly simply to effect. In practice, however, complexities abound. In line with modern portfolio theory, many shareholders have diversified holdings, with ownership spread across many issuers rather than concentrated in a few individual stocks. The growth of index funds, and of the intermediation of equity holdings through institutional investors, for example, adds layers of complexity very quickly. Each proxy season, these institutional investors vote shares across thousands of issuers on a significant number of matters on behalf of their clients – resulting, some years, in over 7.5 million votes.[12] In order to manage this volume of voting, investors often hire companies, called proxy advisory firms, to help provide research, analysis, recommendations, and logistical support for the matters that appear on a given corporation’s proxy. And it’s no wonder. Academic research has shown that given such dispersed ownership, monitoring public companies from the outside is difficult, resource-intensive,[13] and the incentives to engage in meaningful oversight for many shareholders are reduced by competing considerations.[14]

But such monitoring and oversight are vital. Notably, shareholder proponents – those putting forward proposals – have used the shareholder proposals submitted in proxy materials to limit mechanisms that insulated boards and management.[15] Through proposals, corporate governance hygiene in the form of board declassification and term limits have become commonplace.[16]

The term corporate democracy and this proxy history are all part of an important and delicate balance. A balance that implicates shareholder rights granted through state laws which are vindicated through a federal scheme, a balance between corporate directors and the owners (shareholders) who have invested their capital into the corporation, and a balance of the practical realities of today’s world. Congress entrusted the Commission with authority to promote fair, honest, and informed markets, underpinned by a properly functioning proxy system devised by federal law and regulation – the forum for shareholder suffrage.[17] It is unreasonable to expect shareholders’ voices to be heard over a rotary phone. And as we have evolved with our telecommunications devices (most of us anyway), the Commission must evolve with the increasing sophistication, complexity, and intermediation of the securities markets. It is essential for the Commission to re-assess from time to time whether corporate democracy is in balance.

Proxy Voting Advice Adoption

Having conducted that assessment, today we are adopting amendments to the federal proxy rules governing voting advice. This advice, as noted above, is a foundational part of the proxy ecosystem. The steps we take today will help ensure that proxy voting advice remains independent and can flow to the investors who rely on it to inform their voting. Today’s release is responsive to feedback from the intended beneficiaries of a rule promulgated in 2020, who have stated, clearly, that changes made at that time would impede both the independence and timeliness of proxy voting advice. The data and evidence gathered by the Commission over the years also indicates that risks posed by the 2020 rule in terms of costs, timeliness, and a sacrifice of independence, quite simply, exceed the benefits of that rule.[18]

Moreover, the 2020 changes sought to ensure the accuracy of proxy voting advice. That goal is a good one. But the Commission’s own data show that the amendments implemented to achieve that goal were, in fact, unnecessary. The rate of factual errors in proxy voting advice was vanishingly small, less than two percent.[19] The rule as adopted introduced real and costly risks to address a problem that was marginal, at best. As a result, the Commission is taking important and measured steps today to continue to assess and promote an appropriate balance in corporate democracy and shareholder voting.

I want to thank the commenters for their input, without which, we could not make improvements.

Proposed Amendments to 14a-8

Relatedly, shareholder proposals go to the foundational arrangement of corporations: a separation of ownership and control. Shareholders invest their capital into the corporation, and the board of directors is responsible for managing the affairs of the corporation and deploying that shareholder capital. The board of directors then delegates this authority to officers, such as the CEO and CFO, while retaining responsibility for their oversight.

As part of this separation of ownership and control, shareholders have some opportunity, as I mentioned above, to put proposals to a shareholder vote, and include such proposals in company proxy materials alongside the company's own proposals.[20] But, as I also noted, there are limitations to those opportunities. Rules – both procedural and substantive – govern when a proposal can be put on the proverbial ballot, or proxy material, for a vote. When it comes to shareholder proposals on the corporation’s proxy materials, these rules come, in large part, in the form of Exchange Act Rule 14a-8, which governs both the ability to submit and include a proposal in the proxy materials and the ability of management to exclude certain proposals.

The benefits of 14a-8 shareholder proposals and the interactions that flow from the process have been many and meaningful.[21] Keeping this avenue of communication and transparency robust, healthy, and effective, for both the shareholder franchise and management, is critical to the balance of corporate democracy, and is an important function of the SEC. But over time, as the Commission has worked year-after-year with issuers and proponents on this framework, proposal after proposal, observers have expressed concern about variation and potential unpredictability in the application of some exclusions.[22] Today's rule seeks to clarify that framework, and in so doing, "facilitate[s] shareholder suffrage and communication between shareholders and the companies they own on important issues."[23] This modernization, in combination with the release language, seeks to provide transparency and predictability in how the principles under certain 14a-8 exclusions are applied and, in turn, help ensure that all proposals that ought to be put to a shareholder vote will be.

I look forward to the reviewing the comment file, to meeting with the relevant stakeholders, and moving forward to continuing to assess and modernize our rules as appropriate.

Thank you to the staff in the Division of Corporation Finance, Division of Economic and Risk Analysis, Office of the General Counsel, and Division of Investment Management. I appreciate the continued engagement with my office and for your constant support of investors and the markets.

[1] See, e.g., Sara Haan, Corporate Governance and the Feminization of Capital, 74 Stan. L. Rev. 515, n. 175 (2022).

[2] See, e.g., Sec. & Exch. Comm’n, Briefing Paper: Roundtable on the Federal Proxy Rules and State Corporation Law (May 7, 2007) [hereinafter Proxy Briefing Paper].

[3] See Concept Release on the U.S. Proxy System (July 14, 2010) (citing Roosevelt v. E.I duPont de Nemours & Co., 958 F.2d 416, 422 (D.C. Cir. 1992)).

[4] Other ways include direct engagement, activist campaigns, and independent proxy campaigns.

[5] Beyond the state law enumeration on matters suitable for shareholder vote, academics and observers have identified practical and structural impediments to shareholder voice within a corporation. See, e.g., J. Robert Brown, The Proxy Rules and Restrictions on Shareholder Voting Rights, 46 Seton Hall L. Rev. 45 (2016) (describing the hurdles and difficulties in using the 14a-8 process); Lisa Fairfax, Making the Corporation Safe for Shareholder Democracy, 69 Ohio St. L. J. 53, 61-78 (2008) (describing how shareholders have overcome certain mechanisms that previously reduced shareholder voice within a corporation).

[6] See Proxy Briefing Paper.

[7] See Section 14(a) of the Securities Exchange Act of 1934, Exchange Act Rule 14a-8.

[8] See, e.g., Renee Jones, Sec. & Exch. Comm’n, The Shareholder Proposal Rule: A Cornerstone of Corporate Democracy (Mar. 8, 2022).

[9] The system could use updates to keep pace with the changing markets, and the Commission is woefully behind. The proxy plumbing process, though it works, is as up-to-date and tailored to modern needs as my parent’s landline, rotary phone! See Caroline Crenshaw, Sec. & Exch. Comm’n, Statement on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 at n. 27, 28 & accompanying text (Sept. 23, 2020).

[10] See Universal Proxy, Release No. 34-79164 (proposed Oct. 26, 2016) (amending relevant Exchange Act rules to allow for universal proxy cards that include the names of all director candidates, issuer candidates and challengers, allowing shareholders to more practically vote for a mix of issuer and challenger director candidates instead of having to vote either the full issuer slate or full challenger slate). See also SEC Investor Advisory Committee, Recommendations of the Investor Advisory Committee (IAC) Regarding SEC Rulemaking to Explore Universal Proxy Ballots(July 25, 2013) (recommending that the Commission should relax the “bona fide nominee” rule so that proxy contestants can use universal proxy cards); Mary L. Schapiro, Commissioner, Sec. & Exch. Comm’n, Remarks Before the National Investor Relations Institute’s Fall Conference(Nov. 6, 1992) (noting that in adopting the bona fide nominee rule, “[t]he Commission chose a partial solution to the problem, opting not for the most simple approach that would permit the inclusion of some management nominees on the dissident’s proxy”).

[11] See supra note 10.

[12] See Amendments to Exemptions from Proxy Rules for Proxy Voting Advice, Release No. 34-89372 at n.8 (proposed Nov. 5, 2019) (citing Morris Mitler et al., Funds and Proxy Voting: The Mix of Proposals Matters, Investment Company Institute (Nov. 5, 2018) (“For funds, voting proxies is no small job. In the 2017 proxy season, funds cast 7.6 million votes on 25,859 proposals on corporate proxy ballots.”)).

[13] See J. Robert Brown, The Evolving Role of Rule 14a-8 in the Corporate Governance Process, 93 Denv. L. Rev. F. 151 (detailing the substantive bases for exclusion under Rule 14a-8, describing many pro-issuer restrictions and limitations, and detailing the hurdles which shareholder proponents have had to overcome); Lucian Bebchuk, The Case for Increasing Shareholder Power,118 Harv. L. R. 833, 851 (2005) (noting the agency costs between management and shareholders in publicly dispersed companies as excessive pay self-dealing, rejection of beneficial acquisition offers, over-investment and engagement in empire-building and agreeing for increased shareholder input on governance arrangements.); John Coffee, Liquidity Versus Control: The Institutional Investor as Corporate Monitor, 91 Colum. L. Rev. 1277, 1281 (1991) (arguing that institutional investors may be “rationally apathetic” when it comes to corporate governance because there is trade-off between liquidity and control so investors that want liquidity hesitate to accept control).

[14] See Coffee, supra note 13.

[15] See, e.g., Kosmas Papadopoulos, ISS Analytics, The Long View: The Role of Shareholder Proposals in Shaping U.S. Corporate Governance (2000-2018), Harv. L. Sch. F. Corp. Gov. (Feb. 6, 2019); Lisa Fairfax, Making the Corporation Safe for Shareholder Democracy, 69 Ohio St. L. J. 53, 61-78 (2008); Lucian Bebchuk, The Myth of the Shareholder Franchise, 93 Va. L. Rev. 675, 688-694 (2013).

[16] See supra note 15.

[17] See Amendments to Exemptions from Proxy Rules for Proxy Voting Advice, Release No. 34-89372 at 6 (proposed Nov. 5, 2019) (“Proxies are the means by which most shareholders of publicly traded companies exercise their right to vote on corporate matters. Congress vested in the Commission the broad authority to oversee the proxy solicitation process when it originally enacted the Exchange Act in 1934. As the securities markets have become increasingly more sophisticated and complex, and the intermediation of share ownership and participation of various market participants has grown in kind, the Commission’s interest in ensuring fair, honest and informed markets, underpinned by a properly functioning proxy system, dictates that we regularly assess whether the system is serving investors as it should.”)

[18] See, e.g., Concept Release on the U.S. Proxy System (July 14, 2010); Statement Announcing SEC Staff Roundtable on the Proxy Process (July 30, 2018); SEC Investor Advisory Committee, Recommendation Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 2020); Proxy Voting Advice, Release Nos. 34-95266, IA-6068 at n. 127 (adopted July 13, 2022) [hereinafter Adopting Release].

[19] See SEC Investor Advisory Committee, Recommendation Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals at 5, n. 16 (Jan. 24, 2020) (citing the Commission’s own data that managers only filed supplemental proxy statemts claiming errors in proxy advisor reports 1.5% of the time across a three period and over 17,000 proxy statements). See also Adopting Release at n. 127.

[20] Such proposals are typically advisory and non-binding because under the laws of most states, shareholders do not have the power to require the board to take action, and a binding proposal may be excludable under the substantive basis of exclusion that proposals cannot be “improper under state law” or “violate state law.” See, e.g., Sanford Lewis, Shareholder Rights Group, Analysis and Recommendations on Shareholder Proposal Decision-Making under the SEC No-Action Process, Harv. L. Sch. F. Corp. Gov. (Jul. 26, 2018); Latham & Watkins, M&A Deal Commentary (Aug. 1, 2006). See also Adrien K. Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7), 93 Den. L. Rev. F. 183, 183 (2016) (“Shareholders of a publicly traded company have the right under Rule 14a-8 (the Rule) to include their proposals in the company’s proxy materials. The presence of thirteen substantive grounds for omitting a proposal, however, limits this authority.”).

[21] See supra note 15.

[22] See Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8, Release No. 34 –95267, IC-34647 at n. 35, 18, 27 (proposed July 13, 2022) [hereinafter Proposing Release].

[23] See Proposing Release at 6. More specifically, the release would enhance the shareholder proposal process through amendments to three of the thirteen bases of exclusion that a company may cite to exclude shareholder proposals from its proxy materials. See id at Section II.A-C.

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