The SEC steps out of the proxy ballot

Most deregulation removes a requirement. This proposal removes a right, or more precisely argues that the right was never the Commission's to grant.

The Securities and Exchange Commission proposed on 16 September to rescind Rule 14a-8, the rule that decides when a public company must include a shareholder's proposal in its proxy materials. The Commission says the rule exceeds its statutory authority and intrudes on matters of state law, and that many of the justifications offered for it "have not been substantiated in practice or are less compelling today".

If adopted, whether a shareholder can put a proposal to a vote would be decided by the law of the state where the company is incorporated and by the company's own governing documents. The Commission also argues that the federal rule's implied pre-emption may have discouraged states from writing their own.

Paul Atkins, the chairman, framed it as jurisdiction rather than preference. "Companies and their shareholders should look to the state's legislature — and if permitted by the state, the company's governing documents — for the framework governing shareholder proposals," he said in a statement, adding that the proposal "is not an attempt by the Commission to silence shareholders".

The practical effect depends on what fills the space, and the answer is already visible. Texas last year allowed companies incorporated there to impose ownership thresholds on proponents, and the direction of competition among incorporation states has been towards giving boards more control, not less. A federal floor replaced by state law is a floor each state can lower.

The rule's defenders see exactly that. "If shareholders want to make a proposal they have to print their own proxy materials and pay to circulate them," Ann Lipton, a law professor at the University of Colorado, told CFO Dive, estimating such a campaign could cost as much as $20,000. Mike Flood of the U.S. Chamber of Commerce took the other side: "For too long, special interests have exploited Rule 14a-8 to advance their own agendas at the expense of public companies and their shareholders."

Both sides are describing the same mechanism. A proposal costs a proponent almost nothing to file under the federal rule and costs a company real money to exclude, which is why it became the tool of choice for environmental, social and governance campaigns and why companies came to resent it. Removing the rule shifts that cost to the proponent.

The package goes further than 14a-8. It would amend Rule 14a-4(c) on discretionary voting authority, and modernise proxy solicitation by, among other things, dropping the requirement to deliver annual reports with proxy materials and shortening the period brokers have to identify beneficial owners from 20 business days to five. Those are housekeeping. The rescission is not.

It also completes a withdrawal that began last proxy season, when the Commission's staff stopped responding substantively to most requests from companies seeking permission to exclude proposals. Stepping out of the adjudication and then out of the rule is a consistent position, whatever one thinks of it.

Comments are open for 60 days after the proposal is published in the Federal Register. The rule has governed the American proxy ballot for most of a century, and this is the second long-standing rule the Commission has proposed to delete this month. The pattern is a Commission defining its job more narrowly, and leaving the rest to whoever is willing to pick it up.