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Opposition to SEC Proxy Proposals Grows

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SEC building (Photo: Diego Radzinschi/ALM)

On the final day of public comment on two related proposals by the Securities and Exchange Commission on proxy voting rules, a petition signed by more than 18,000 individuals opposing the policy change was submitted to the SEC, which was also the subject of a protest by some of the signatories.

Green America, a not-for-profit membership organization focused on the economic power of consumers, investors and businesses to create a environmentally sustainable economy, along with Americans for Financial Reform and As You Sow, delivered the petition.

Both SEC proposals, if finalized, would make it harder for investors to challenge corporate management on environmental, social and governance issues.

In one proposal, a shareholder would have to own at least $2,000 worth of stock for three years to sponsor a first-time proxy proposal, up from one year currently. A $25,000 stake would be required if they owned the stock for one year and $15,000 if they owned it for two years.

The rule also raises the minimum vote percentage required to resubmit a proxy proposal for the first time from 3% to 5%. For the second and third resubmissions, the requirement moves from 6% and 10%, respectively, to 15% and 25%, and it restricts the activities of proxy advisor firms.

In the related proposal, proxy advisory firms would be required to give a company a chance to comment on its recommendations and include a link to those companies in its distributions to clients and disclose any conflicts of interest. In recommending a vote against management, for example, a proxy advisory firm would need to include management’s opinion in their final report to shareholders.

SEC Jay Clayton has said that the amendments are long overdue and were “carefully crafted to more appropriately balance the benefits and burdens to all shareholders.”

The Green America petitioners don’t agree.

They are “deeply concerned about the need to build an economy that will be successful over the long term,” which requires “that social, environmental, and corporate governance issues facing corporations are effectively addressed, “according to the petition.

The shareholder proposal process, known as Rule 14a-8, has worked well since 1934 and “should certainly not be weakened.”

“There is no democracy for shareholders in America unless they have a right to engage in meaningful shareholder advocacy and to be heard,” said Green America Executive Co-Director Fran Teplitz. “Many of the major advances of recent corporate history — going back to the rejection of racist apartheid South Africa and as recently as action on climate change — owe their success to shareholder advocacy.“

Andrew Behar, CEO of As You Sow, said, “With this vote, the SEC has apparently inverted its mandate of protecting shareholders to that of protecting companies from shareholder inputeven where company action creates increasing risk to shareholders, people, or the environment.”

Behar said the proposal to limit shareholder proxies “has the potential to increase shareholder and company risk, particularly regarding growing climate concerns” and is unlikely to face “public or legal scrutiny.”

In its comment letter filed Monday, the PRI, which represents the world’s largest institutional investors that support the UN’s Principles for Responsible Investment, wrote that the SEC shareholder proxy proposal would block hundreds of shareholder proposals and lock out smaller and medium-size investors from influencing outcomes of votes.

“By erecting hurdles to the resubmission of proposals, the SEC will effectively hamper U.S. companies’ ability to make progress on ESG goals,” said Fiona Reynolds, CEO of Principles for Responsible Investment. “U.S. corporations will inevitably fall behind on sustainable business practices compared to their competitors in the global market, losing out on both a competitive advantage and changes necessary for a more sustainable marketplace.”

PRI noted in its press release that the proposed rule on proxy advisor firms” would impose prohibitive costs on proxy advisory firms,” which many institutional investors use to supplement their own research and understanding of proxies for their portfolio.

The SEC will first review public comments before proceeding with the proposal. It could potentially revise the proposal, which would involve additional public comments. No meetings on the current proposals have been scheduled yet.

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