Tuesday, November 22, 2022

Commissioner Uyeda says agency should mull new Schedule 13G disclosures for asset managers

By Mark S. Nelson, J.D.

SEC Commissioner Mark T. Uyeda suggested in a narrowly-focused speech to an audience at the 2022 Cato Summit on Financial Regulation that asset managers’ efforts to assert themselves on ESG matters may not be getting adequately disclosed in their Schedules 13G, a situation Uyeda likened to that of an activist shareholder who would instead disclose their control-oriented discussions with a company on related Schedule 13D. Uyeda suggested that the Commission may need to consider requiring more disclosures about asset managers’ discussions of ESG matters with companies.

Schedule 13G and its cousin, Schedule 13D, typically arise in the context of mergers and acquisitions, such as happened earlier in the year when Elon Musk initially submitted a Schedule 13G regarding his plans to acquire Twitter instead of a Schedule 13D, where his intent to take control of the company would have been clearer. Commissioner Uyeda’s recent address, although not mentioning any specific Schedule 13G controversies, suggested a similar issue may exist for asset managers regarding their discussion of ESG matters with public companies.

A person whose acquisition or beneficial ownership of a company’s stock exceeds the regulatory threshold may be eligible to use Schedule 13G if, among other things, they acquired the securities of a company in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the company. If a change in control is contemplated, the person acquiring a company’s securities typically would instead make disclosures on Schedule 13D. Uyeda said his anecdotal belief was that most large asset managers make disclosures on Schedule 13G because they believe they satisfy the criteria about not intending to effect a change in control of the companies whose stock they hold.

For Uyeda, the question regarding asset managers is one of whether the exercise of stewardship on ESG and other matters can morph into a question of intent to control. For example, Uyeda suggested the example of an asset manager that engages with a company on ESG matters under current SEC guidance but then votes to oust some of the company’s directors because the company’s ESG policy does not align with the asset managers’ ESG policy.

“So can an asset manager’s stewardship and engagement activities – with the implicit threat of voting against a director standing for re-election – be described as having the purpose or effect of changing or influencing control of the company? In my view, that is an open question,” said Uyeda.

Uyeda traced his concerns about the weight of asset managers’ influence to an evolution during the last 20 years in how shareholders elect directors. Specifically, Uyeda explained that in the late 1990s, many directors were elected based on a plurality vote, meaning that a single “for” vote could get a person elected director, at least in an uncontested election. But more recently, Uyeda said, uncontested director elections tend to be based on principles of majority voting in which a director would lose if he or she received more “against” votes than “for” votes. This change in how directors are elected in uncontested elections may have shifted power to asset managers, said Uyeda.

Uyeda further suggested that an asset manager’s control intent may not be determinative of whether they should be required through enforcement of existing rules or by future regulations to disclose more about the matters, such as ESG matters, that they discuss with companies.

Said Uyeda: “Even if an asset manager is determined not to have control intent–and therefore eligible to use Schedule 13G–the Commission should consider whether additional and more timely disclosure of the asset manager’s discussions with a company’s management and its voting intent should be required, either on Schedule 13G or elsewhere.”