SEC Chair Jay Clayton has streamlined the Regulatory Flexibility Act Agenda to limit it to the rulemakings that the SEC actually expects to take up in the subsequent period. Clayton has previously said that the short-term agenda signifies rulemakings that the SEC actually plans to pursue in the following 12 months. (See this PubCo post and this PubCo post.) The SEC’s Fall 2019 short-term and long-term agendas have now been posted, reflecting priorities as of August 7, the date on which the SEC’s staff completed compilation of the data. Items on the short- and long-term agendas are discussed below.
You’d have to assume that the SEC didn’t spend a whole lot of time agonizing over the rule proposal—as reported by CNBC and Reuters, it took only a little over a week for the SEC to reject the NYSE’s proposed rule change that would have allowed companies going public to raise capital through primary direct listings. (See this PubCo post.) It remains to be seen whether the SEC is opposed to the concept in general, making rehabilitation of the proposal unlikely, at least in the near term, or whether the proposal could be quickly resurrected after some fixes to the proposal (or to other rules to accommodate the proposal).
Last week, the SEC voted to issue a new rule proposal intended to “modernize” the shareholder proposal rules, with Commissioners Robert Jackson and Allison Lee dissenting. Generally, the proposal would modify the criteria for eligibility and resubmission of shareholder proposals; provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; and facilitate engagement with the proponent. As anticipated, at the meeting, the commissioners expressed strong views on these issues, with Chair Jay Clayton observing that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needs some work, and Commissioner Jackson characterizing the proposal as swatting “a gadfly with a sledgehammer.” The proposal is subject to a 60-day comment period.
Last week, the SEC voted (by a vote of three to two) to propose amendments to the proxy rules to add new disclosure and engagement requirements for proxy advisory firms, such as ISS and Glass Lewis. The proposal is part of the third phase of the SEC’s efforts to address perceived problems in the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC’s recently issued interpretation and guidance (see this PubCo post). Of course, not everyone perceives the same problems in the system or perceives them the same way—a disparity that was plainly evident at the open meeting as the proposal’s advocates and critics were hardly reticent in expressing their views. (For a discussion of the goings-on at the open meeting, see this PubCo post.) The proposal is subject to a 60-day comment period and, if adopted, the rules would be subject to a one-year transition period.
SEC proposes new obligations for proxy advisory firms and changes to rules for shareholder proposals
Are issuers precluded from raising concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that form the basis of a recommendation? Are firm conflicts of interest insufficiently transparent? Are proxy advisory firms an effective “market-based solution” helping large numbers of institutional investors with time and resource constraints make better voting decisions? Are proxy advisory firms “faux regulators,” wielding too much influence—with too little accountability—in corporate elections and other corporate matters? Maybe all of the above? At an open meeting this morning, the SEC voted, with two dissents, to propose amendments to add new disclosure and engagement requirements for proxy advisory firms and to “modernize” the shareholder proposal rules by increasing the eligibility and resubmission thresholds. These actions represent the third phase of the SEC’s efforts to address the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC’s recently issued interpretation and guidance (see this PubCo post). As anticipated, at the meeting, the commissioners expressed strong views on these topics, with Chair Jay Clayton observing that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needs some work, and Commissioner Robert Jackson characterizing the proposal as swatting “a gadfly with a sledgehammer.” Both proposals are subject to 60-day comment periods. Next up, according to Clayton, proxy plumbing and universal proxy.
Today, ISS filed suit against the SEC and its Chair, Jay Clayton (or Walter Clayton III, as he is called in the complaint) in connection with the interpretation and guidance directed at proxy advisory firms issued by the SEC in August. (See this PubCo post.) That interpretation and guidance (referred to as the “Proxy Adviser Release” in the complaint) confirmed that proxy advisory firms’ vote recommendations are, in the view of the SEC, “solicitations” under the proxy rules and subject to the anti-fraud provisions of Rule 14a-9. In its complaint, ISS contends that the Proxy Adviser Release is unlawful and its application should be enjoined for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” is contrary to law, that the SEC failed to comply with the Administrative Procedures Act and that the views expressed in the Release were arbitrary and capricious.
Interestingly, the litigation comes right before the SEC is scheduled to consider and vote (on November 5) on a proposal to amend certain exemptions from the proxy solicitation rules to provide for disclosure, primarily by proxy advisory firms such as ISS and Glass Lewis, of material conflicts of interest and to set forth procedures to facilitate issuer and shareholder engagement and otherwise improve information provided. There are various rumors circulating about the details of the proposal, including this Reuters article stating that the proposal would require proxy advisory firms to “give companies two chances to review proxy materials before they are sent to shareholders.” (Note that also on the agenda is a proposal to “modernize” the shareholder proposal rules by changing the submission and resubmission requirements.) Whether the firms’ advice is a “solicitation” takes on particular significance given that the SEC’s anticipated proposal appears to be predicated on the firms’ reliance on the exemptions from the proxy solicitation rules.
Yikes! What is going on at the PCAOB? You may recall that, back in 2018, former staffers at the PCAOB and former partners of KPMG were charged by the SEC in connection with “their participation in a scheme to misappropriate and use confidential information relating to the PCAOB’s planned inspections of KPMG.” You know, that case where the former PCAOB staffers were accused of leaking to KPMG the plans for PCAOB inspections of KPMG—“literally stealing the exam.” (See this PubCo post.) The same scheme led the U.S. Attorney’s Office for the SDNY to file criminal charges against the former staffers, and some have actually been sentenced to prison. But that’s not even the half of it.