Companies should be able to bypass SEC ‘no action’ rules, says commissioner

Republican SEC commissioner Mark Uyeda has suggested that listed US companies could bypass the regulator when determining whether a shareholder proposal should go to the vote by setting their own standards, governed at state level.

Speaking on Wednesday at the Society for Corporate Governance 2023 National Conference, Uyeda said the financial watchdog’s Rule 14a-8 provides only a “procedural bases for exclusion”, which should be viewed as “default standards that apply only if companies decline to establish their own standards in their governing documents”. 

“If a company established its own standards,” he added, “then neither the commission nor its staff should be involved in determining whether the proponent satisfied those standards under state law; instead, any disagreement between the proponent and the company should be treated like any other dispute over an interpretation of a company’s governing documents and resolved in state court”.

The potential for companies to pursue such “private ordering” when it comes to shareholder proposal requirements “may not require any legislative or regulatory action”, Uyeda said.  

He argued that, since Rule 14a-8 has been interpreted as facilitating shareholder rights under state law, it cannot override them.

“To reflect the rule’s philosophy and intent, a company should have the right to adopt, in its governing documents, requirements for shareholder proposals that differ from those set forth in rule 14a-8,” Uyeda said.  

“If this were not the case, then the federal securities law will have supplanted state law on the issue of whether a shareholder can add a proposal to the meeting agenda, because nearly all voting today occurs by proxy.” 

Such federalisation “would upend our long history of recognising the primacy of state law in governing the internal affairs of a corporation”, he concluded.  

Under Rule 14a-8, companies can petition the SEC for permission to exclude shareholder proposals by appealing to rules governing the process. If successful, these “no action” letters provide assurance to companies that the regulator will not pursue the matter if the firm omits it from the agenda of its annual shareholder meeting.        

During the administration of former president Trump, the SEC increasingly allowed companies to exclude shareholder proposals on ESG issues – particularly emissions reduction targets – based on appeals to the rules around ordinary business, micromanagement and substantial implementation.   

Since president Biden came into office in January 2021, however, the balance of power has tipped towards investors and away from companies. This was crystallised with the introduction of new guidance and the proposal of new rules around “no action” letters.   

The last two proxy seasons have seen a substantial increase in the number of shareholder proposals, particularly on ESG issues. 

In total, 629 shareholder proposals made it to the vote this year, according to Uyeda, representing a 40 percent increase compared to 2021. 

“The increase was especially noticeable among environmental and social proposals, where the number of submissions increased by 52 percent and the number voted on increased by 125 percent,” he added.     

Uyeda argued that companies setting their own filing standards would provide a level of stability that is not provided by reliance on the SEC’s interpretations and the judgements of its staff, given the sensitivity to political shifts within the regulator. 

“Relying on the commission’s rules, or its staff’s positions, in this area is akin to building a sand castle on the beach,” he said. “Any rule or interpretation, no matter how recently adopted, is at risk of being erased by the next wave.”