SEC’s Abrupt Change of Course on Proposals Shakes Up Proxy Season

Investors’ favorite time of year, proxy season, is right around the corner. New guidance from the Securities and Exchange Commission has added a wrinkle to this year’s festivities, though.

This month, a bulletin from the SEC Division of Corporation Finance – better known as CorpFin – upended previous guidance regarding shareholder proposals. Primarily at issue: Rule 14a-8 under the Securities Exchange Act of 1934 and its ordinary business and economic relevance exceptions.

In 2021 under chair Gary Gensler, the SEC put tighter restrictions on what kinds of proposals could be removed from proxy statements, with a key directive to its staff members to “consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” Corporate governance specialists generally agree that stance made it more difficult for registered companies to get the Commission’s blessing to remove such measures from their proxy statements. Filings of such proposals increased dramatically as a result, with notable growth in measures aimed at environmental and social issues.

CorpFin’s latest announcement swings the exemption pendulum back in favor of publicly traded companies, offering them more latitude to nix shareholder proposals from their proxy statements. Specifically, CorpFin directed its staff members to “take a company-specific approach in evaluating significance, rather than focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally ‘significant.’”

It shouldn’t come as a surprise that a Republican-aligned SEC would seek to tilt the playing field for governance back to businesses. The timing of the move is a different story, though, as both issuers and shareholder advocates have already started drawing lines over this year’s proxy fights. As lawyers at Morrison Foerster pointed out in a memo to clients, the new guidance does seem to recognize the potential for disruption this year. For instance, the SEC stated it will apply its interpretation of Rule 14a-8 to so-called no-action requests submitted by companies this year. Companies can also supplement their existing no-action requests with new information and arguments prompted by the commission’s change to its position. Additionally, late submissions of no-action requests based on the change in guidance will be accepted by the SEC.

While those accommodations for issuers work well in theory, it remains to be seen if the SEC can handle a possible deluge of no-action letters with proxy season quickly approaching. Bear in mind that the current administration’s DOGE cost-cutting initiative for the federal government has put the commission in its sights. If a substantial number of staff members find their jobs at the agency terminated, it’s easy to envision stacks of unopened no-action letters piling up on empty desks around SEC headquarters.