SEC Chairman Signals Possible Rule Changes for Proxy Advisors and Shareholder Proposals

In a Dec. 6 speech, SEC Chairman Jay Clayton indicated that he supports SEC action on two important policies long-supported by Nareit: (1) strengthening the SEC conflict of interest and other rules governing proxy advisor firms; and (2) increasing proxy proposal resubmission thresholds.

Nareit has long advocated that the SEC improve the proxy process, most recently in a Nareit comment submitted to the SEC in advance of the Nov. 15 SEC roundtable. In that comment, Nareit specifically urged the SEC to review the regulatory framework applicable to proxy advisory firms, such as Institutional Shareholder Services, Inc. (ISS) and Glass Lewis.

In that comment, Nareit also reiterated its long-advocated position that the SEC should reassess the resubmission rule for shareholder proxy proposals as set forth in SEC Rule 14a8(i)(12).

Revision of the Regulatory Framework Applicable to Proxy Advisory Firms

Clayton noted that he had concluded from the recent proxy roundtable that “there is growing agreement that some changes are warranted” in the oversight of proxy advisory firms. He said among the issues that the SEC should consider are the framework for addressing conflicts of interests at proxy advisory firms, and ensuring that investors have effective access to issuer responses to information in certain reports from proxy advisory firms.

Nareit’s recent comment to the SEC in advance of the proxy roundtable urged that the SEC “take additional steps to ensure proxy advisors operate fairly, transparently, and free of conflicts, including issuing necessary regulatory guidance and/or engaging in appropriate rulemaking to achieve this goal.”

Raising the Proxy Proposal Resubmission Thresholds

Clayton also said, “it is clear that we should consider reviewing the ownership and resubmission thresholds for shareholder proposals,” noting that “a lot has changed” since the current $2,000 ownership threshold was adopted 20 years ago and resubmission thresholds were set in 1954. Nareit also long advocated that the SEC reassess the resubmission rule for shareholder proxy proposals, which currently provides that an issuer may only exclude a shareholder proposal when it has failed to receive the support of 3 percent of shareholders if voted on once in the last five years; 6 percent if voted on twice in the last five years; and 10 percent if voted on three or more times in the last five years.

This outdated rule permits shareholder proposals that have been rejected by 90 percent of shareholders on multiple occasions to be resubmitted again and again—at the expense of the firm and its shareholders—for a shareholder vote. As Nareit noted in its comment, “this situation does not benefit the overwhelming majority of shareholders who have voted against the proposal; to the contrary, it is costly to them and is distracting for both management and shareholders.”

(Contact Penny Rostow: vrostow@nareit.com)