Securities Regulation Daily House proposes bill to short circuit SEC proxy proposal as Commission prepares to vote on adoption
Wednesday, July 15, 2020

House proposes bill to short circuit SEC proxy proposal as Commission prepares to vote on adoption

By Mark S. Nelson, J.D.

A House discussion draft would protect the Commission’s existing shareholder proposal rules, but the Commission is likely to act first within a week to adopt amendments that will increase the requirements for shareholder proposals.

The House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship and Capital Markets recently held a hearing at which it presented a number of bills aimed at amending the CARES Act to fix perceived defects in that legislation that allow companies to continue executive pay and other practices despite receiving federal COVID-19 aid. However, the collection of bills announced at the hearing also includes a discussion draft that would preserve existing proxy rules for shareholder proposals as the Commission prepares to adopt revisions to those rules next week that would likely impose heightened requirements.

Proxies. The Commission is scheduled to hold an open meeting July 22, 2020 to consider whether to: (1) adopt proxy rule amendments; and (2) publish supplementary guidance to the Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019) with respect to how the fiduciary duty and Investment Advisers Act Rule 206(4)-6 relate to an investment adviser’s proxy voting on behalf of clients. The Commission’s proposal of the shareholder proposal items had been marred by the revelation that SEC Chairman Jay Clayton publicly cited bogus comment letters urging proxy reforms on behalf of Mainstreet investors.

The House discussion draft, titled the Ensuring Shareholder Governance (ESG) Act of 2020, would require the Commission to retain existing shareholder resubmission thresholds at 3, 6, and 10 percent rather than raise them, for example, to the proposed 5, 15, and 25 percent levels. The discussion draft also would preserve the existing share ownership threshold at $2,000 (inflation adjustments would be allowed) rather than a higher threshold, such as the proposed tired ownership thresholds of: $2,000 for three years; $15,000 for two years; and $25,000 for one year. The Commission also could not lengthen the share ownership period beyond one year. Moreover, the discussion draft would bar the Commission from prohibiting the aggregation of shares by a group to meet the ownership threshold and would bar the Commission from limiting the use of proxies to make shareholder proposals.

CARES Act and other bills. Other bills announced at the House subcommittee hearing seek to limit certain corporate behaviors generally and by amending portions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among the CARES Act bills, most of which are sponsored by Rep. Alexandria Ocasio-Cortez (D-NY), companies receiving federal aid regarding coronavirus (COVID-19) would have to maintain employee benefits, worker pay, and collective bargaining agreements at levels existing before the COVID-19 emergency declaration. Similarly, a second bill would require companies receiving such aid to provide 14-days fully-paid leave, provide a minimum wage of $15 per hour beginning in January 2021 (although a sense of Congress in the bill urges companies to act sooner), and would cap executive pay using a 50:1 ratio of CEO to median worker pay (the bill also provides that no employee at a company could earn more than the company’s CEO). A third bill would strip the Treasury Secretary and the Fed of their waiver authorities under the CARES Act. (See, H.R. 6778H.R. 6827H.R. 6852).

Still other bills would ban stock buybacks. One bill sponsored by Rep. Sean Casten (D-Ill) would ban buybacks during the 120-day period after the end of the COVID-19 emergency period, although the SEC would be given authority to sunset the provision earlier if it notifies Congress and the public of why such action is in the public interest. Commission votes on such measures also would have to be unanimous (H.R.6339).

A related discussion draft would not only ban stock buybacks, but also would bar executive bonuses, golden parachutes payments, and the payment of dividends. Still another discussion draft, focused on COVID-19 aid and reminiscent of Sen. Elizabeth Warren’s Accountable Capitalism Act that was first introduced in the 115th Congress, would require that employees of a company that is a large accelerated filer (i.e., the company has a market value of at least $700 million ) elect one-third of the company’s directors in a one-employee-one-vote election process; the Warren bill would require that employees elect two-fifths (40 percent) of a company’s directors (current versions of the Warren bill are sponsored by Sen. Warren and Rep. Ben Ray Lujan (D-NM) (H.R. 6056S. 3215)). The discussion draft requiring employee directors also would require disclosures about corporate political spending, human capital, and environmental, social, and governance (ESG) measures.

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