The SEC should drop its proposed changes or modify them so that they are less onerous and less damaging to the rights of shareholders under American securities law.




Editor’s note: the following is based on a letter sent by Ciara Torres-Spelliscy to the Securities and Exchange Commission regarding the SEC’s proposed reform of how proxy advisory firms can advise shareholders on how to vote. For our previous coverage of this proposed reform, see here.


Since 2010, I have urged the Securities and Exchange Commission to adopt a rule that would require disclosure of money in politics spent by publicly traded companies.


The past decade had shown that shareholders are similarly concerned with the lack of transparency of corporate political spending. Shareholder proposals about corporate dark money have been one of the most frequently filed topics in the past few years. The Forum for Sustainable and Responsible Investment (US SIF) reported that “[i]n the 2014 season, the bulk of the 130-plus resolutions on political spending and lobbying asked companies to report on their lobbying expenditures, including through indirect channels such as trade associations and non-profit organizations that do not have to report their donors.”


The trend remained the same years later according to the Sustainable Investment Institute (Si2), which tracked these types of shareholder proposals in 2018, “80 resolutions ask[ed] companies to disclose political activity spending ….”


As the SEC has refused to act and as Congress has placed riders in the federal budget to prevent the SEC from completing an anti-dark money rule, fortunately hundreds of companies have been responsive to shareholder proposals asking for better reporting of corporate political spending.


But the rule change recently proposed by the SEC (File No. S7-23-19) would make shareholders’ ability to ask for accountability from publicly traded companies more difficult by shrinking the pool of eligible shareholders who could legally offer shareholder proposals on dark money as well as a host of other issues of interest to investors. There are a few moving parts to this proposed rule. Currently, shareholders who own at least 1 percent or $2,000 worth of a company’s stock for a year can file shareholder resolutions. The SEC proposed changing that eligibility requirement limiting shareholder proposals to investors who had $25,000 worth of stock for one year; $15,000 worth of stock for two years or $2,000 for three years. The new proposed rule would also change what shareholder proposals could be relisted year after year at a corporation.


This proposed rule does not seem consistent with the binding legal precedent of Medical Committee for Human Rights v. SEC, in which the DC Circuit Court recognized the rights of shareholders to raise social and political issues on corporate proxies under Rule 14a-8, which governs shareholder proposals. As the Medical Committee for Human Rights Court stated:


“It is obvious to the point of banality to restate the proposition that Congress intended by its enactment of section 14 of the Securities Exchange Act of 1934 to give true vitality to the concept of corporate democracy. The depth of this commitment is reflected in the strong language employed in the legislative history:


‘Even those who in former days managed great corporations were by reason of their personal contacts with their shareholders constantly aware of their responsibilities. But as management became divorced from ownership and came under the control of banking groups, men forgot that they were dealing with the savings of men and the making of profits became an impersonal thing. When men do not know the victims of their aggression they are not always conscious of their wrongs . . . . Fair corporate suffrage is an important right that should attach to every equity security bought on a public exchange.’”((Med. Comm. for Human Rights v. SEC, 432 F.2d 659, 676 (D.C. Cir. 1970) (citing H.R. Rep.No. 73-1383, at 5, 13 [1934]))

The language above appeared in a case where shareholders at Dow used a shareholder resolution to try to implore the firm to stop selling napalm. The DC Circuit in a later case reiterated the importance of shareholder proposals in 1992.


Moreover, Supreme Court precedent is also clear that the highest court in the land values corporate democracy. The Supreme Court has referred to the federal securities law as providing for “[f]air corporate suffrage.”


And in 1991, in Virginia Bankshares, the Supreme Court quoted the legislative history of the Securities Exchange Act of 1934 about the centrality of shareholders’ voting rights: “[a]ccording to the House Report, Congress meant to promote the ‘free exercise’ of stockholders’ voting rights, and protect ‘[f]air corporate suffrage,’ from abuses exemplified by proxy solicitations that concealed what the Senate Report called the ‘real nature’ of the issues to be settled by the subsequent [shareholder] votes.” Even in Citizens United v. FEC, Justice Kennedy writing for the Court referenced “[s]hareholder objections raised through the procedures of corporate democracy…”


The new proposed rule from the SEC runs counter to corporate democracy because it attempts to artificially shrink access to the proxy to either wealthy investors ($25,000) or very long term investors (3-year). The Commission should either drop these proposed changes or modify them so that they are less onerous and less damaging to the rights of shareholders under American securities law.


Ciara Torres-Spelliscy is a Professor of Law at Stetson University College of Law, where she teaches courses in business law and corporate governance. She is writing on her own behalf and not her institution. She is the author of the book Political Brands.


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