September 14, 2020

Shareholder Engagement: Effect of Proposed Amendments to Form 13F

Ever since the SEC proposed amendments to increase the Form 13F reporting thresholds, there has been ongoing commentary voicing concerns – here’s John’s blog about some of the ‘hot’ comment letters.  A recent MarketWatch opinion piece from Ethan Klingsberg and Elizabeth Bieber of Freshfields does a nice job explaining why, if adopted, the rules could ultimately make things more difficult for company directors – and we could add to that most everyone involved in shareholder engagement efforts.

The authors note how off-season shareholder engagement has evolved to become “de rigueur for public companies.”  During proxy season, asset managers and governance specialists are swamped and pressed for time, which as many corporate secretaries have learned, has made off-season shareholder engagement a priority.  As investors look to engage with companies and sometimes request executives and directors be part of those conversations, the authors acknowledge the development has been good for business.  Even though there are still periodic activist campaigns, the authors note that a spectrum of shareholders are engaging in constructive dialogue with companies and then explain what could happen if the proposed amendments are adopted:

But all of these positive developments hinge on one factor: knowing who your shareholders are. Right now, mega-shareholders (those owning more than 5% of the outstanding stock) make mandatory filings, but for many companies, there are large numbers of institutional shareholders under this threshold that boards want to take into account and to which they want to organize outreach.

The way that these shareholders are identified is by the quarterly filings on Form 13F.  The SEC has proposed to cut back the 13F filing requirement dramatically, with boards ceasing to have visibility on holdings by 4,500 institutional investment managers representing approximately $2.3 trillion in assets, according to one SEC commissioner.  Only the most proactively vocal shareholders and the largest shareholders will be visible to boards.

Today in response to 13F filings, companies are able to proactively reach out to shareholders to help educate shareholders and understand their views.  We should keep the board-shareholder dynamic healthy and constructive rather than impeding it by tearing down the 13F regime.

Comment Period on Shareholder Proposal Rules – Request to Re-Open It

With the SEC slated to consider amendments to the shareholder proposal rules on Wednesday and despite a deluge of comment letters, a coalition of shareholder rights advocates have requested the Commission re-open the comment period for the proposed rule amendments.  The crux of the request to re-open the comment period relates to previously undisclosed data used to estimate the impact of the proposed amendments, here’s an excerpt from the group’s letter:

We are troubled by the 11th-hour submission by the Chief Economist of the Commission’s Division of Economic and Risk Analysis (“DERA”), on August 14, long after the February 3, 2020, public comment deadline, of the staff’s analysis of previously undisclosed data that is material to the public’s understanding of their predicted impact. The August 14 DERA Memo indicates that the Commission has been in possession of the data since at least August 2019 and that DERA staff had used the data to estimate the impact of the proposed amendments before the Commission voted to propose them. Yet the data and the staff’s analysis were held back from the Release accompanying the proposed amendments and not released until the Commission announced that it is prepared to vote on final changes to Rule 14a-8, without an opportunity for public comment.

The letter elaborates and asserts that the fact that the data was withheld is a significant breach of the Commission’s Current Staff Guidance on Economic Analysis in SEC Rulemaking, which among other things requires that the economic analysis that accompanies a proposed rule provide a fair assessment of the predicted impact of a proposed rule, including costs and benefits, as well as that it ‘clearly address contrary data or predictions.’

The SEC recently cancelled an open meeting when it was scheduled to consider adopting amendments to its whistleblower program.  Even with periodic last-minute cancellation notices, with so much anticipation around the proposed amendments to the shareholder proposal rules, it would come as a bit of a surprise if Wednesday’s meeting was cancelled – we’ll see where this goes, stay tuned!

Tomorrow’s Webcast: “Non-GAAP Measures & Metrics: Where Are We Now?”

Tune in tomorrow for our webcast – “Non-GAAP Measures & Metrics: Where Are We Now?” – to hear Mark Kronforst of Ernst & Young, Dave Lynn of Morrison & Foerster and and Lona Nallengara of Shearman & Sterling discuss non-GAAP disclosures that are back in the spotlight as companies grapple with how to quantify the effect of COVID-19 on their results of operations and the Corp Fin Staff continues its focus on individually tailored accounting principles and disclosure of key performance metrics.

– Lynn Jokela