Are SEC “no-action” letters to become a thing of the past?

What are the implications of the recent announcement by US regulator?

The SEC’s recent announcement that commission staff may respond verbally to ‘no action’ requests rather than by letter may render no-action letters a thing of the past.

SEC staff will soon be getting companies and proponents on the telephone to let them know what their decision is. Quite how this will save time and resources is difficult to understand. It will certainly make the process more opaque and more difficult to challenge for both companies and shareholders.

‘No action’ describes a company request for a letter from the SEC staff to confirm that excluding a shareholder proposal would not violate securities laws and that therefore the regulator will take ‘no-action’. A ‘no-action’ letter from the SEC effectively means a company can omit a shareholder proposal.

The no-action process can involve voluminous correspondence between companies, proponents and the SEC. For example, a recent interchange regarding the auditor at Microsoft ran to a Dickensian 76 pages.

This is how the new announcement phrases it: “Starting with the 2019-2020 shareholder proposal season, however, the staff may respond orally instead of in writing to some no-action requests.”

Not only this, sometimes staff won’t offer an opinion at all. It is much clearer how this change will save time and resources – for the SEC, though, not the courts.

Again, this is how the announcement phrases it: “If the staff declines to state a view on any particular request, the interested parties should not interpret that position as indicating that the proposal must be included.

“In such circumstances, the staff is not taking a position on the merits of the arguments made, and the company may have a valid legal basis to exclude the proposal under Rule 14a-8. And, as has always been the case, the parties may seek formal, binding adjudication on the merits of the issue in court.”

Given that the most recent decision in the of binding adjudication in the courts, the TransDigm case, this may not work too well for companies.It may have been a misstep for an SEC that increasingly seems captured by corporate interests.

The TransDigm case was where the New York pension funds under City Comptroller Scott Stringer were successful in a legal bid to get a proposal on emissions targets onto the agenda of the annual meeting of the aerospace components maker.

Commenting on a post I wrote on LinkedIn, James McRitchie, the publisher of corporate governance site, said: “One way to eliminate proposals without raising the threshold. One more reason to get a new SEC.”

Other shareholder advocates raised alarms around lack of disclosure of new policies and decisions by the SEC.

On the other hand, Sarah Wilson of Minerva/Manifest noted that elsewhere, securities regulators are not involved in deciding the fate of shareholder proposals in the first place.

Also commenting on LinkedIn, she said: “Another way to look at this is that in Europe and elsewhere, securities markets regulators don’t opine on the merits of shareholder resolutions as these are private property matters.”

More radically, for the US, perhaps, she added: “Perhaps the SEC should have no involvement at all in what are company law issues. Many aspects of corporate governance, particularly shareholder voting, have been broken by financial services intermediation [referring to the current proxy plumbing issues being debated within the SEC and by shareholders and corporations]. Securities regulators are better placed to create efficient trading markets than post-trade, after market ownership matters.” Wilson added that according to history, before the creation of the SEC, shareholders had more rights than they do now.

See Responsible Investor’s detailed look at the ‘no-action’ process in relation to investors’ climate change proposals.