Short-Handed SEC Remains Active in Rulemaking

SEC HQ4The short-handed SEC continues an active pattern with an open meeting on Oct. 26, 2016. The Commission will consider whether to propose amendments to the proxy rules relating to the use of universal proxy cards and disclosure about voting options and voting standards in director elections. The SEC will also consider whether to adopt rule amendments related to Securities Act Rules 147 and 504 to facilitate intrastate and regional securities offerings and whether to repeal Securities Act Rule 505. The open meeting follows on the heels of recent rulemaking under the Investment Company Act as part of the Commission’s initiative to enhance its monitoring and regulation of the asset management industry.

Universal Proxy Ballot

The universal ballot would significantly alter the way shareholders cast their ballots. Currently, if shareholders do not attend the annual meeting, they can vote for board nominees put forth by management or a slate submitted by dissidents, but not both. They may only vote on one proxy card. Under a universal ballot, both management and activists could send out a ballot listing all candidates, regardless of whether they are backed by management or dissidents. Shareholders would no longer be required to attend the annual meeting to be able to split their votes among competing slates of board candidates.

The issue has been quite controversial. A roundtable on proxy issues hosted by the SEC in February 2015 produced widely-different views from the panelists. Sarah Teslik, at the time the senior vice president at Apache Corp. and now of counsel with Joele Frank, a strategic communications firm, observed that in light of the number and success rate of activist investor campaigns, “it doesn’t strike me that we have an absence of activism right now and need commission help in having more of it.” She expressed concern about the pendulum swinging too far in the favor of shareholder activists, and told the SEC that “we here at least have to run a profitable business competing globally with whatever rules you come up with.”

On the other hand, Anne Simpson, then senior portfolio manager and director of global governance for the California Public Employees' Retirement System, said that a universal ballot “would facilitate a higher degree of shareholder engagement and more candidates coming forward.” She noted that boards function best when they are independent and diverse, and concluded that “this is a situation where change needs to take place for good economic reasons.”  Simpson is now the investment director for sustainability at CalPERS.

The universal ballot issue also has attracted the attention of Congress. In a July 2015 letter to SEC Chair Mary Jo White, Rep. Scott Garrett, a Republican from New Jersey, stated that:

Put simply, it is not clear that the SEC has identified a market failure that would warrant such a rulemaking,” wrote Garrett in the letter. “I am also concerned that instead of directing Commission staff to take a comprehensive approach towards reforming our proxy system, your announcement puts into motion a singular rulemaking that is likely to favor special interest activists over the vast majority of public company shareholders.

In July 2016 the House of Representatives passed by a 243-180 margin a bill sponsored by Rep. Garrett that would effectively prohibit the Commission from adopting a universal proxy rule. No further action has been taken on the measure.

Securities Act Registration Exemptions

The Commission also will consider adopting changes to Rule 147, which provides an exemption for intrastate securities offerings. The proposed changes would eliminate restrictions on offers and ease the issuer eligibility requirements, while limiting the availability of the exemption at the federal level to issuers that comply with certain requirements of state securities laws.

Proposed changes to Rule 504 of Regulation D would also serve to facilitate capital raising and provide additional investor protections. The proposed amendments to Rule 504 would increase the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million and disqualify certain bad actors from participation in Rule 504 offerings. These proposals were relatively non-controversial, and generated few public comments.

The SEC will also decide if it should repeal Rule 505. The rule allows issuers to offer and sell, without general solicitation, up to $5 million of securities in any 12-month period to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions. Rule 505 will be rendered largely obsolete by the amendments to Rule 504.