WASHINGTON — The Securities and Exchange Commission proposed Wednesday to eliminate one of the federal government’s longstanding mechanisms governing how shareholders get proposals before their fellow investors — potentially shifting much of that fight back to the states and individual corporations.
The SEC proposed rescinding Exchange Act Rule 14a-8, the federal rule governing shareholder proposals included in companies’ proxy materials.
If adopted, the change would not merely tweak eligibility thresholds or adjust paperwork. It would remove Rule 14a-8 altogether.
The Referee Leaves the Room
In its announcement of the proposal, the SEC says the rule exceeds the scope of the Commission’s statutory authority and intrudes into an area traditionally governed by state corporate law. The agency also argues that some of the original policy justifications for the rule have either failed to materialize or become less persuasive over time.
Under the proposal, questions about the role of shareholder proposals would instead largely be determined by state law and companies’ own governing documents.
That is a substantial jurisdictional shift disguised in the familiar beige wrapping of federal rulemaking.
Rule 14a-8 currently establishes a federal framework through which qualifying shareholders can submit proposals for inclusion in a company’s proxy materials, subject to numerous procedural requirements and grounds for exclusion. The system has consequently made the SEC an important referee in disputes between corporations and shareholders over what belongs on the ballot.
The Commission is now proposing to send much of that argument elsewhere.
Atkins, Briefly, in Plain English
SEC Chairman Paul Atkins described the proposal as part of an effort to keep federal securities regulation from improperly encroaching upon state corporate law while modernizing rules to account for changes in markets and technology.
The SEC also proposed amendments to Rule 14a-4(c), which governs circumstances in which companies may exercise discretionary authority over proxy votes. According to the Commission, those changes would provide companies greater flexibility while giving shareholders greater control over proposals subject to discretionary voting.
While They Had the Hood Open
And Rule 14a-8 was not the only piece of proxy plumbing placed on the workbench Wednesday.
In a separate proposal, the Commission moved to modernize additional portions of the proxy solicitation process. Among other things, the SEC proposes eliminating the requirement that companies deliver annual reports to security holders, eliminating certain delivery deadlines for documents incorporated by reference into proxy statements, eliminating Notices of Exempt Solicitation, and shortening the minimum broker search period from 20 business days to five.
Simplification, or Just a Change of Address?
Taken together, the proposals suggest something larger than regulatory housekeeping.
The Commission is reconsidering how much of corporate shareholder governance should be administered through federal proxy rules in the first place, while simultaneously stripping away some procedural requirements built for a decidedly less digital era.
Whether that produces a simpler system or merely relocates the complexity remains to be seen.
State corporate law is not uniform, corporate governing documents vary, and removing a national SEC framework could produce considerably different shareholder-proposal environments depending upon where a company is incorporated and what its governing documents permit.
For now, nothing changes.
These are proposed rules, and the SEC will accept public comments for 60 days following publication of the proposals in the Federal Register.
But the proposal is worth watching closely. Washington occasionally simplifies a regulatory system by simplifying it.
Other times, it simply moves the paperwork somewhere else.
Bureaucracy Times 