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SEC rows back on providing oral responses to shareholder resolution no-action requests

Commissioner gives update on the SEC’s approach to the no-action process and diversity

The US Securities Exchange Commission (SEC) has stopped giving verbal feedback in response to requests by companies to omit shareholder proposals from annual meeting agendas, less than a year after the policy was first introduced.

The change in tack by the regulator was revealed by Commissioner Allison Herren Lee, one of the five Commissioners overseeing the SEC, in yesterday’s keynote interview, during the first day of the RI USA conference.

Commissioner Lee said: “It’s my understanding that they [SEC staffers] ultimately decided that the oral piece was not the best way to proceed, so they have pulled back from it.”

Last year, the SEC said that staff would in certain cases be allowed to verbally respond to company requests for ‘no-action’ letters, which provide assurances to companies that the regulator will not pursue the matter if the company omits a proposal from the agenda of its annual shareholder meeting.

However, according to Commissioner Lee, the SEC will continue to reserve the right to not provide a definitive response to no-action requests – another recent policy change.

“They [SEC staffers] did decide to go forward with the decision in some instances to not provide a view, and right now the staff are actively assessing how the last proxy season went. I’ve always been of the opinion that shareholders add a lot of value through their proposals, so I’m actively monitoring that process to consider if it needs further changes.

“On that point, I think the staff were simply trying to streamline the process, but if we didn’t get it right, let’s talk about it.”

The procedural changes were first introduced in a bid to lessen the workload of SEC staff following the 2018-19 proxy season where, due to a month-long partial government shutdown, the regulator found it difficult to provide timely responses to no-action requests.

But the updated policy was criticised by shareholder rights groups who said that informal communications and agency silence would result in poorer governance and increased opacity of the no-action process.

While companies are within their rights to exclude shareholder proposals if the proposals meet certain conditions, such as attempting to micromanage a company or by being “economically irrelevant”, the no-action process is being increasingly used to circumvent ESG-focused shareholder resolutions. A review of the 2019 season found that over 40% of no-action issued in the letters related to ESG matters.

Separately, Commissioner Lee mooted the creation of a new office within the SEC’s economic research office, the Division of Economic and Risk Analysis, to assess how the regulator’s rulemaking and policies affect the ability of minority communities to access capital.

“The view that if the SEC focuses on supporting capital raising then somehow a rising tide lifts all boats has clearly not held true. So we need to isolate that data and understand the dynamic, and we can do that through economic and risk analysis.”

She also said that the regulator could consider leveraging the work of its Office of Minority and Women Inclusion, which has so far focused on the SEC’s own diversity policies and practices, to integrate diversity considerations in its external rulemaking.