On Tuesday, December 10, 2019, Chairman Jay Clayton testified before the Senate Committee on Banking, Housing, and Urban Affairs (Committee) on the “Oversight of the Securities and Exchange Commission.” After Committee Chairman Mike Crapo delivered his opening remarks, which were supportive of the agency, Chairman Clayton gave an overview of the agency’s initiatives over the past year. Given that most of the governance-related topics that Chairman Clayton addressed were also raised back in September before the House Financial Services Committee, which we discussed, there were no real surprises.
Nonetheless, Chairman Clayton verbally reiterated that during SEC examinations, examiners will be looking for and reviewing the nature and extent of climate change disclosures, made both inside and outside SEC filings. Moreover, examiners may question a company on statements that appear inconsistent or misaligned. While this particular point was not raised during the testimony before the House Financial Services Committee, this is not the first time the SEC publicly shared its position. At minimum, William Hinman, Director of the SEC’s Division of Corporation Finance, publicly made similar remarks this year.
The following are the highlights of Chairman Clayton’s oral testimony that are most related to corporate governance:
Proxy Voting Advice
Last month, the SEC issued a rule proposal regarding regulating proxy voting advice services. Prior to its release, companies as well as corporate groups complained that while proxy advisor voting recommendations influenced corporate governance matters, the advisors themselves were subject to little regulatory oversight. They further contended that there were issues concerning accuracy and conflicts of interest. In his testimony, Chairman Clayton articulated three objectives of the proposal: for proxy voting advice to be (1) subject to the solicitation of anti-fraud rules, (2) accompanied by the appropriate material conflicts disclosure, and (3) accurate and complete.
Ranking Member Sherrod Brown asked Chairman Clayton to justify recommending stricter requirements for a shareholder proposal (that never achieved majority support) to remain on the ballot indefinitely. Currently, a shareholder proposal cannot be excluded on the grounds that the proposal is the same or similar to a prior proposal that was voted on within the preceding five years, if the most recent vote occurred within the preceding three calendar years and equaled or exceeded 10%.
Chairman Clayton acknowledged that the proposed amendment would raise the 10% threshold to 25%, but added that the potential would still exist for a proposal to remain on the ballot indefinitely. Clayton justified the proposal by reasoning that the rules had not been updated in decades and the SEC had tested the recommended thresholds prior to their release.
Timing and Overview of the Proposed Rules
Chairman Clayton suggested that given that the proposed rules on proxy voting advice and shareholder proposals are on the SEC’s near-term agenda, which we previously covered, the agency hopes that it “will be able to move them forward in the coming year.” Senator Jack Reed expressed concern about the adequacy of one year, given the complexity of the proposals, the anticipated large volume of comment letters and the results of a study conducted by the Council of Institutional Investors, which Senator Reed conveyed as saying “that since 2016, the median number of days that an SEC rule has been promulgated then adopted is 41 days,” which is more than a year.
The SEC has set February 3, 2020 as the deadline for the public to submit comments on these proposals. We previously issued a client memorandum providing an overview of the proposals.
Monitoring Foreign Investment in U.S. Companies – Form 13D and 13G Filings
Senator Menendez raised concern about foreign investors that invest in U.S. companies without making the required filing on Form 13D or 13G that would put the marketplace on notice that the investor beneficially owns more than 5% of a company’s securities. The filing of this beneficial ownership report potentially acts as an early flag of a possible upcoming shift in control. The Senator expressed concern that through their holdings, Chinese investors could potentially exert influence on companies in industries such as media and technology.
Senator Robert Menendez asked Chairman Clayton whether and how the SEC monitors foreign investors, and more specifically, what action the SEC takes against these violators. Clayton responded that although the agency has the ability to monitor U.S.-based investors, it is not as robust for foreign investors, and the agency is exploring better methods.
Climate Risk Reporting
Chairman Clayton stated that during an examination, the SEC is reviewing and monitoring the extent to which climate-related disclosures are being made. In addition, the SEC examiner will compare climate-related disclosures both in and outside SEC filings and may ask the company to explain or fix inconsistencies. Chairman Clayton encourages folks (presumably issuers and their advisors in particular) to review the comment letters as they become public.
Some critics of buybacks, including SEC Commissioner Robert J. Jackson, argue that executives have improperly used this mechanism to enrich themselves because it presents the executives with an opportunity to sell their own shares at better prices. Some detractors contend that, instead, the corporate funds could have been invested in the company, such as the workforce through increased wages, benefits, or training.
Chairman Clayton testified, that generally speaking, whether a company decides to invest in a new product line, pay a dividend, or buy back stock is a capital allocation decision to be made by the company’s board of directors. In his view, these decisions are not in the SEC’s purview.