With the SEC closed due to the government shutdown, ‘no action’ letters must be piling up unopened.
‘No action’ is the process where companies request a letter from the SEC staff to ascertain whether something would violate securities laws and if the regulator will take “no-action”. It has become shorthand for the process whereby companies try to omit shareholder resolutions from their AGM agendas.
Although the SEC’s Edgar filing system is working, there have been no public statements or news releases out of the agency so far this year and the ‘no action’ page on the SEC website has ground to a halt.
But is the current impasse good for corporations or for shareholders? Or for neither? The answer from those who know is that a prolonged shutdown might see a lot more proposals get onto proxies.
Sanford Lewis, an attorney who represents proponents in the no action process, said: “In the event that the government stays closed for a longer period of time, companies will not be able to get an assurance of no action, and therefore will be left to make a risk determination as to whether or not to exclude a proposal, at risk of potential SEC enforcement. One would think that most companies would not want to do so.” I asked Lewis what he thought might happen once the SEC opened up again.
“Once the government reopens,” he said, “the SEC staff will have a backlog of these letters and will try to triage them as quickly as they can. The number of no action requests submitted to the SEC multiplied beginning around December 20; what seemed an unusual number of no action requests. Obviously, nothing is happening with SEC decision-making now that the SEC is closed, though proponents are writing responses in anticipation of the SEC reopening.”
Timothy Smith, ESG director at Walden Asset Management, did not think it was having much of an impact. “In some cases,” he said, “proposal withdrawals or engagement processes are well underway in conjunction with the no action process.My sense,” he added, “is that it depends how long the shutdown lasts. The SEC often takes a month to respond to a no action letter and sometimes six weeks.
“So, it depends how large the backlog gets. But it could certainly delay no action letters, leaving companies with no alternative except to put the resolution in the proxy and oppose it there.”
“A proposal that might have been excluded ended up going to a vote”
Heidi Welsh of the SI Institute said: “This is always a critical time for proxy season people. I’d hate to have two weeks or more of my critical work time removed, and I expect the Corporation Finance lawyers may start biting their nails shortly.”
Welsh noted that there were delays last year, adding that in one case the SEC failed to respond to a company challenge before it had to publish the proxy statement. “This was at Navient,” she said, “a proposal concerning student loans. A proposal that might have been excluded ended up going to a vote and earning 42.8% support.
“So, while some companies may think a Trump-induced SEC vacation could give them an advantage, it might actually turn out to prompt the inclusion of resolutions they otherwise might knock out of contention.”
Shareholder advocate James McRitchie agreed. “In theory, it should help shareholders, since, if Staff issues no opinion, proposals will move forward. However, most of the outstanding requests came in December. There is still plenty of time for decisions.”
Brandon Rees of the AFL–CIO union body said that the shutdown was creating uncertainty for shareholders and companies alike, but, as a true labour union employee, also made the very pertinent point: “SEC employees are going without a paycheck, and we hope they will be back to work soon.”