In Focus

CII Rebukes SEC Rule Proposals That Undercut Investor Rights

SEC commissioners proposed two new rules November 5 that CII believes would impair the independence of proxy advisory firms and restrict shareholder proposals. Both proposals, approved on a 3-2 vote along party lines, would undercut critical shareholder rights and stifle investors’ voice at public companies in which they invest, CII said in a statement. The commission backed a new regulatory structure that would require proxy advisory firms to let public companies review their reports twice before sending the reports to institutional investors, their paying clients. The firms also would have to include in their reports hyperlinks to company rebuttal if management requested. If adopted, the proposal would pressure proxy advisory firms to take a more management-friendly approach in their reports and vote recommendations, and make it more difficult for shareholders to cast informed votes on time. CII also objected to SEC proposals to raise ownership and resubmission thresholds for shareholders to place their own resolutions on company ballots. This will restrict the ability of some investors, especially small holders, to submit shareholder proposals and impede future new social and environmental proposals, since those generally take time to gain traction. “CEOs do not like public challenges to how and how much they are paid, or to be second-guessed by shareholders on a range of environmental, social and governance matters,” said Ken Bertsch, CII’s executive director. “That is what is driving the concerted effort by lobbyists for CEOs to prod the SEC to shackle proxy advisory firms and limit shareholder proposals. The rules are an unnecessary interference in the free market, and would impede investors’ voice on critical matters at U.S. public companies.” This will “make it harder and more expensive for institutional investors to get the expert advice they need to hold executives accountable and, in turn, to make it less likely that investors vote against management or even vote at all.” CII wrote to the SEC October 24 pointing out that there is little evidence for allegations of pervasive errors in proxy advisory firm reports. Earlier in October, CII sent another letter to the SEC co-signed by 60 investor organizations urging the commission not to saddle proxy advisors with requirements that would reduce independence, effectiveness and competition in the field. See CII’s fact sheet for additional comment on the SEC proposals.

ISS Sues SEC Over Interpretation that Policy Advice is Solicitation

Institutional Shareholder Services (ISS), a leading proxy advisory firm, filed a lawsuit against the SEC, seeking to overturn the commission’s August 21 guidance that voting advice is solicitation under federal proxy rules and the regulatory regime the SEC plans to put in place as a result of that determination. The complaint filed in U.S. District court for the District of Columbia contends that the SEC’s determination was unlawful and should be set aside. ISS contends that providing proxy advice is not solicitation, the SEC should have sought public comment on the proposed guidance and the determination was arbitrary and capricious. In a November 5 op-ed in the Financial Times, ISS President & CEO Gary Retelny wrote that the August interpretation and an anticipated proposal today “will disrupt the system for proxy voting, in place for many years, and harm the very investors the SEC is charged with protecting."

CII Files Amicus Brief in Forum Selection Case

CII has filed an amicus brief with the Delaware Supreme Court in a case involving Blue Apron, Stitch Fix and Roku. CII supports a Delaware Chancery Court decision finding that adoption of forum selection provisions governing federal securities claims are invalid under Delaware law. A board “lacks authority…to govern matters beyond the corporation-stockholder relationship defined by state corporate law,” says the brief. A forum selection provision limits certain litigation to particular judicial forums, and in this context limits shareholder rights.