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Yesterday, the SEC posted this Section 21(a) report, detailing an investigation by the Enforcement Division, with support from Corp Fin, into whether the actions of certain members of Climate Action 100+ (“CA100”) in connection with the election of dissident directors at the May 2021 annual meeting of the Exxon Mobil Corporation may have violated the Exchange Act. As you might recall, this was the meeting where Engine No. 1 ran a proxy contest and won three seats, which led many companies to start taking “ESG” initiatives much more seriously.

Here’s an excerpt from the 23-page report:

The Commission has determined not to pursue an enforcement action based on the conduct and activities known to the Commission at this time, but has serious concerns about the conduct of CA100 members and other participants in these activities as described herein. The Commission in its discretion has determined to issue this report of investigation (“Report”) pursuant to Section 21(a) of the Exchange Act to inform those asset managers and investors who would join, or would consider joining, an organization such as CA100 to take appropriate steps to ensure compliance with the Exchange Act.

Specifically, this Report recognizes that the agreement, arrangement, understanding, or concerted action underlying the formation of a “group” may be implied and that coordinated engagement practices ̶ ̶ even when undertaken through an intermediary ̶ ̶ may implicate the beneficial ownership reporting framework. While shareholders may deny the existence of a group, such denials are not conclusive as to whether a group has formed.

Beneficial owners who do not wish to be part of a group therefore should proactively ensure policies aimed at avoiding group formation are adequately enforced. Irrespective of group formation, beneficial owners that report on Schedule 13G need to be mindful of whether their actions may be viewed as having been undertaken with the purpose or effect of changing or influencing control of a specific issuer. Membership in an organization whose stated purpose is to change or influence control of a specific issuer by promoting the election of dissident directors or otherwise could be a factor in the loss of eligibility to report on Schedule 13G instead of Schedule 13D.

Even though the Commission isn’t pursuing an enforcement action and the report is focused on activities that occurred in connection with a proxy contest, it’s fair to read the report as a warning to investors – especially asset managers that tend to own more than 5% of the shares of their portfolio companies and could face severe consequences and restrictions if they are not considered “passive investors.” Accordingly, the report reinforces some of the other pressure that is already being applied to asset managers, proxy advisors and the overall voting and engagement landscape. Here’s another excerpt:

This Report does not address any findings or conclusions, based on the activities described herein, regarding potential breaches of fiduciary duty by investment advisers. In addition, nothing in this Report should be understood as suggesting that the potential formation of a “group” or the loss of Schedule 13G eligibility is an issue unique to the asset managers identified in this Report. The considerations described herein apply equally to all members of CA100 that beneficially own securities in a covered class, as well as participants in any similar intermediary-driven organization.

As you might recall, the White House had issued an executive order late last year which – among other things – directed the SEC to:

Analyze whether, and under what circumstances, a proxy advisor serves as a vehicle for investment advisers to coordinate and augment their voting decisions with respect to a company’s securities and, through such coordination and augmentation, form a group for purposes of sections 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934

And in a speech that Commissioner Uyeda delivered a mere week or so ahead of the Executive Order, he questioned whether the practice of proxy advisor “robo-voting” – where funds and asset managers use proxy advisors for voting decisions and engage in “robo-voting” based on those recommendations – could constitute a group for purposes of Section 13(d)(3) or Section 13(g)(3) of the Securities Exchange Act.”

Alongside that earlier context, this report shows that the SEC is still paying close attention to the boundaries of “passive” activities, even as the Corp Fin Staff issued a clarifying CFI last month about permissible investor engagement activities. In a LinkedIn post announcing the Section 21(a) report, the SEC stated:

As we head into the 2027 proxy season, the Commission’s 21(a) report reminds asset managers and investors of their responsibilities with respect to shareholder engagement, especially in the context of organized efforts that follow a playbook similar to that of Climate Action 100+.

Shareholders have the right to express their views on a particular topic and explain their voting decisions. Congress has mandated that shareholders, acting individually or as a group, owning more than five percent of a public company must disclose their plans and other information if they seek to change or influence control of the company.

John had already shared a prediction that investors may still be somewhat measured with their engagements and communications in the coming proxy season. Now, they may also be taking another look at any coalition memberships that still exist…

– Liz Dunshee