By Mark S. Nelson, J.D.
Senate Banking Committee Chair Sherrod Brown (D-Ohio) has introduced a resolution to invoke the Congressional Review Act (CRA) to disapprove the SEC’s recently adopted rule amending the eligibility and resubmission thresholds requirements for shareholder proposals submitted to public companies at annual meetings under Exchange Act Rule 14a-8. The SEC’s amended rules have proven to be controversial because the increased requirements for shareholder proposals may make it harder for some shareholders to submit proposals and it may become harder for certain types of proposals to remain viable over time, such as proposals on climate risk. The amended shareholder proposals rules became effective on January 4, 2021, although transition rules apply through January 1, 2023. In the House, Del. Michael San Nicolas (D-Guam) has joined Brown in seeking to disapprove the SEC’s amended shareholder proposal rule (See, H.J. Res. 36; S. J. Res. 16).
Calls for repeal or replacement. The calls from the investor community to repeal the SEC’s 2020 amendments to the shareholder proposal rules began soon after the amendments were adopted. For example, the SEC’s Investor Advocate, Rick Fleming, said in the Investor Advocate’s FY20 activities report that the Biden Administration should consider invoking the CRA or conduct new rulemakings to overturn or reverse four Clayton-era rulemakings, including the shareholder proposals rulemaking. In the case of the shareholder proposal amendments, Fleming said the SEC’s rulemaking release contained insufficient economic analysis.
Senator Brown, who is leading Congressional efforts to disapprove the SEC’s amended shareholder proposal rules, previously joined with Sens. Jack Reed (D-RI), Brian Schatz (D-Hawaii), and Dick Durbin (D-Ill) to submit a comment letter on the SEC's proposal. In the letter, then-Ranking Member Brown suggested that the then-proposed amendments would be an affront to shareholder democracy by squeezing out small investors from the proposal process through heightened eligibility requirements. For example, Brown noted that the then-current one-year holding requirement of $2,000, adjusted for inflation, would amount to $3,170, far less than the one-year holding requirement of $25,000 under the SEC’s proposal.
With respect to then-SEC Chair Jay Clayton’s focus on Main Street investors, Brown said of the proposed changes to the eligibility requirements: "These proposed changes are not only anti-shareholder, but they are particularly concerning because they discriminate against the non-wealthy investors that this Commissions claims are priorities" (footnote omitted).
Brown also criticized the heightened resubmission thresholds, which he said could hinder good shareholder proposals, which in the past had included proposals regarding opioids, the gender pay gap, and emerging proposals on ESG and sustainability reporting.
Congressional Review Act. The CRA had been used sparingly since its enactment in 1996, until the Trump Administration used it repeatedly to reverse key Obama Administration regulations, including the SEC’s resource extraction issuers rule. The CRA prescribes a method by which the Senate and the House can adopt a joint resolution disapproving a specific federal agency rule within a set time frame.
However, one significant provision in the CRA states that the Senate, upon considering a joint resolution to disapprove an agency rule, cannot filibuster the joint resolution if the Senate’s consideration of the joint resolution occurs within a prescribed time frame. This is potentially important given that the current Senate often uses a combination of the filibuster and the cloture motion on almost all major legislation, resulting in the need to obtain 60 votes just to bring a bill up for a vote by the full Senate. It remains to be seen if, in the current 50-50 Senate, whether Democrats can remain completely united, or pick up enough Republican votes, to effectively use the CRA with or without a deciding vote cast by Vice President Harris.
An agency rule disapproved under the CRA cannot be re-adopted by an agency in substantially the same form without new Congressional authority. This aspect of the CRA raises a number of questions for rules re-adopted following disapproval, including the SEC’s re-adopted resource extraction issuers rule.
Eligibility; resubmission thresholds. The SEC’s interest in amending Exchange Act Rule 14a-8 is not new. The agency began the process in the late 1990s with a proposal that, in some ways, was very close to what the SEC actually adopted in late 2020, especially regarding the resubmission thresholds (See 1997 proposal and concurrence of Commissioner Wallman). Likewise, House Republicans previously advocated for similar changes by including a shareholder proposal provision in the second iteration of the Financial CHOICE Act during the 115th Congress (2017-2018) (See, H.R. 10 at Section 844).
Moreover, the Trump Administration’s Treasury Department had issued a Capital Markets report which made only two somewhat cryptic recommendations: (1) that shareholder eligibility requirements be tied to something other than "solely" a fixed dollar holding or percentage of a company’s outstanding stock (e.g., the "shareholder’s dollar holding in company stock as a percentage of his or her net liquid assets"); and (2) that the resubmission thresholds be "substantially revised."
The amendments adopted by the SEC in 2020, among other things, created a tiered eligibility requirement such that a shareholder must continuously hold: (1) $2,000 in a company’s stock for three years; (2) $15,000 in a company’s stock for two years; or (3) $25,000 in a company’s stock for one year. The eligibility requirement immediately before the 2020 amendments required only that a shareholder continuously hold at least $2,000 or 1 percent of a company’s stock for one year. By comparison, the SEC’s 1997 proposal would have used the same formula as the most recent rule before the SEC’s 2020 amendments (i.e., $2,000 or 1 percent for one year), while the CHOICE Act would have eliminated the specific dollar amount and instead require that a shareholder continuously hold at least 1 percent of a company’s stock for three years rather than one year.
The SEC’s 2020 amendments also raised the resubmission thresholds from 3, 6, and 10 percent to 5, 15, and 25 percent. By contrast, both the SEC’s 1997 proposal and the CHOICE Act would have raised the resubmission thresholds to 6, 15, and 30 percent. In its explanation of the 2020 amendment to the resubmission thresholds, the SEC explained: "… we do not believe that companies and other shareholders should repeatedly bear the costs of proposals that have not demonstrated the potential of obtaining broader or majority support in the near term absent a significant change in circumstances."
In the weeks prior to the SEC’s adoption of the shareholder proposal amendments, the Council of Institutional Investors sought a reopening of the public comment period because, after the group evaluated a previously unreleased data analysis conducted by the SEC’s Division of Economic and Risk Analysis that was posted to the public comment file on the SEC’s proposal, the CII said the proposed rule changes would have a much greater impact on investors (especially retail investors) than was indicated in the text of the SEC’s proposing release.