The Securities and Exchange Commission will host a roundtable later this year to hear from investors, issuers, and other market participants about whether its proxy rules should be refined.
Commissioner Jay Clayton made the announcement. No exact date, agenda, or roster of invited experts has been finalized.
“Shareholder engagement is a hallmark of our public capital markets, and the proxy process is a fundamental component of that engagement,” Clayton said in a statement. “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.”
Oversight of the proxy process has been a continuing focus by the Commission for years.
In 2010, the SEC 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.” Since the 2010 concept release, there has been “a dramatic increase in the number of U.S. companies reporting shareholder engagement,” with 72 percent of S&P 500 companies reporting engagement with shareholders in 2017, compared to just 6 percent in 2010, Clayton said.
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,” Clayton said.
Potential topics for consideration include the voting process:
The potential for over-voting and under-voting of securities by broker-dealers, the reasons this may occur, and ways to address it;
The extent to which “empty voting” (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;
How challenges could be attributable to the number of participants that may be involved in the voting process, including issuers, transfer agents, third-party administrators, vote tabulators, securities intermediaries, and proxy service providers; and
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.
The forum is also intended to consider retail shareholder participation. In the 2017 proxy season, retail shareholders voted approximately 29 percent of their shares, while institutional investors voted approximately 91 percent. Clayton said 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 rules, or investor education could increase participation.
Related discussion topics:
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;
Suggestions that fund shareholders should have a means of providing input into how the fund adviser votes its portfolio securities; and
The extent to which relatively low retail investor participation should be of concern and should inform analysis of existing regulation.
Clayton suggested that the process governing shareholder proposals may also be discussed. “Shareholders may benefit from the engagement and potential for enhanced performance brought about by consideration of a shareholder proposal,” he said. “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 the benefits of shareholder engagement.”
Clayton also noted that in some situations a small group of shareholders will submit a significant percentage of the total number of shareholder proposals each year. With that in mind, areas of the shareholder engagement process that may warrant particular attention include:
Whether the current thresholds for minimum ownership (shares held and length of time) to submit a proposal to be included in the company’s proxy statement appropriately consider the interests of all shareholders;
A consideration of 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;
Whether rules that allow companies to omit resubmitted proposals that received less than 3 percent, 6 percent, or 10 percent of the vote, depending on how many times the subject matter has been voted on in the last five years, 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; and
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.
The SEC also plans to discuss the ever-controversial issues surrounding proxy advisory firms. Clayton laid out potential topics pertaining to these firms that may be discussed at the upcoming roundtable:
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 with respect to related consulting services provided by proxy advisory firms, and, if so, whether those conflicts are adequately disclosed and mitigated; and
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 should be modified, rescinded, or supplemented.
Clayton expects there to be a review of emerging technologies that could influence and expedite the proxy process. The potential benefits and consequences that could result from the use of blockchain and distributed ledger technology are among the key technologies that could influence the process in the future.