SEC’s Jackson sees Financial CHOICE Act’s “troubling” limits to shareholder rights

And SEC Chief Accountant Bricker on keeping sustainability and financial reporting distinct

Robert Jackson, Commissioner at the Securities and Exchange Commission, has told RI that some limitations on shareholder proposals comprised in the Financial CHOICE Act would be “troubling” and an obstacle for engagement and stewardship.

The Financial CHOICE Act requires the SEC to revise the holding requirements for a shareholder to be able to submit a proposal, which should “hold 1% of the issuer’s securities… or such greater percentage as determined by the Commission”.

Jackson was a keynote speaker at the Society for Corporate Governance’s Annual Conference held in Washington held in late June.

RI asked Jackson about the tone at the SEC’s top regarding the Financial CHOICE Act, the legislation that aims at rolling back substantial investor protection buffers established by the Dodd-Frank Act 2010 after the financial crisis.

Offering his personal views, he told RI: “I’m puzzled by a proposal [that would require] to be long $7bn of common stock to bring a shareholder proposal at Google.”

“It’s not good for anybody, not even corporate management, because it would significantly constrain the ability of the board to engage with shareholders.”

For context, Google parent Alphabet’s share price trades today at $1,142 and a significant investor such as the Norwegian Government Pension Fund Global owns 0.88% of the company’s shares (of which it can vote on 0.43%).

The Financial Choice Act already passed the House of Representatives a year ago and needs to pass the Senate before being signed into law by President Trump (link).
Jackson said, however, he doesn’t have the sense that a significant change might come from Congress.

The SEC’s Division of Corporate Finance issued in November 2017 guidance on issues arising under Rule 14a8, which governs the exclusion process of shareholder proposals from companies’ ballots.This has been the first proxy season since the issuance of the new guidance. Jackson said: “I worried that there would become the new basis for excluding a lot of proposals but that’s not what happened.”

Instead, based on the new guidance, Jackson said the Division of Corporate Finance has encouraged thoughtful and clear explanations from boards in order to exclude proposals from ballots.

Separately, at the Institute of Management Accountants’ Annual Conference in Indianapolis, RI asked SEC’s Chief Accountant Wesley Bricker what the regulator approach is regarding sustainability reporting.

In particular RI asked whether the Financial Accounting Standards Board (FASB) should be given a broader mandate to set sustainability reporting standards.

Speaking in a personal capacity, Bricker told RI that general purpose financial reporting and special purpose financial report should be kept “distinct without merging the two”.

Bricker argued that the Management Discussions and Analysis (MD&A) section of 10-K filings is the right context, within the general purpose financial reporting framework, to include sustainability disclosures.

“We require, and have required for longer than any other securities regulator, the disclosure of material risks and uncertainties that impact the investment decisions. So, the sustainability question has been a question for the SEC since the late seventies.”

He added that FASB is appropriately focused on the general purpose framework and emphasised the importance of internal controls when preparing materially accurate information.

“It is the internal controls discussion what underpins the confidence [in data], whether sustainability disclosures or core financial statements,” Bricker told RI.