A Look at the SEC Shareholder Proposal Rule Changes

In September 2020 the Securities and Exchange Commission (SEC) approved significant amendments to Rule 14a-8, a key shareholder proposal regulation.

Among several other changes, the revisions to the SEC shareholder proposal rule include:

  • A sharply steeper threshold for the amount of stock shareholders must hold to file a resolution.
  • An increase in the percentage of shareholder support needed to resubmit a measure that fails to pass the first time.

Here is a closer look at the changes and what they may mean for investors pursuing environmental, social, and governance (ESG) goals.

Changes to Rule 14a-8

New Ownership Thresholds

The SEC commissioners voted to increase the amount of stock shareholders must own to submit proposals for voting during annual meetings.

Previously, shareholders had to own $2,000 of stock for one year before submitting a proposal. Now, shareholders who own $2,000 of stock must hold those investments for a minimum of three years before they can submit a proposal. Shareholders who have owned stock for less than three years will have to meet higher thresholds in order to submit: $15,000 for those holding stock for two years and $25,000 for one year. The revised rule prohibits multiple shareholders who do not meet the minimum thresholds individually from submitting a proposal together.

New Resubmission Thresholds

The changes to the SEC shareholder proposal rule also affect the amount of shareholder support required for a proposal to be resubmitted for another vote in subsequent years, should the measure fail to go through. Under the new rules, an unsuccessful proposal must receive at least 5% of the voting shareholder support the first time it is submitted in order to be resubmitted within the following three years, compared with 3% mandated before. Proposals submitted two times in the preceding five years will require 15% support to be allowed to be resubmitted over the next three years, versus 6% previously; those presented three times would need 25% support, up from 10%.

Most importantly, the revisions will exclude most small investors from submitting proposals.

Weakening Shareholder Oversight on ESG

SEC commissioners who supported the changes to Rule 14a-8 say they did so, in part, to discourage gadfly investors. “The amendments . . . aim to ensure that shareholder-proponents demonstrate a sufficient economic stake or investment interest in a company before they are able to submit proposals to be included in a company proxy’s statement, paid for by all shareholders,” said SEC commissioner Elad Roisman.

However, opponents contend that the amendments will weaken shareholder oversight of the companies in which they invest. Most importantly, the revisions will exclude most small investors from submitting proposals. According to advocacy nonprofit Ceres, the SEC’s own analysis shows that the amendments will stop all but a quarter of shareholders at 99% of the companies in the S&P 500 from filing proposals. “Shareholder resolutions are a proven and effective pathway to suggesting changes to management . . . today we have shut this down,” said SEC commissioner Caroline Crenshaw.

For ESG investors, the changes threaten shareholders’ ability to push for companies to account for sustainability issues. The amendments to Rule 14a-8 follow rule changes in July 2020 that added regulations on consulting firms offering proxy voting advice to institutional investors, as the Wall Street Journal notes. More recently, in October the US Department of Labor adopted a new rule requiring fiduciaries of retirement plans governed by the Employee Retirement Income Security Act (ERISA) to “select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.” While the new rule does not explicitly limit the ability of ERISA plans to invest in ESG funds, some investors worry that it will impede fiduciaries from adequately assessing financial risks related to ESG considerations like extreme weather, water management, and human rights violations.

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