Sec Speeches Cryptocurrency Statement on Proposals to Rescind Rule 14a-8, Amend Rule 14a-4, and Modernize Proxy Solicitation

Today, the Commission issued two proposing releases related to its proxy rules under the Securities Exchange Act of 1934. The proposals reflect two of my highest regulatory priorities. First, ensuring that the Commission does not improperly intrude into state corporate law when applying the federal securities laws. Second, updating the Commission’s rules to reflect developments in market practice and technology, and other innovations, since the rules’ adoption or last amendment.

To begin, the Commission proposed to rescind Rule 14a-8. The proposal reflects the notion that none of the Commission’s rules—no matter how entrenched within the agency—are immune from retrospective review. We are duty bound to question whether a rule is a proper exercise of the Commission’s statutory authority and whether it continues to reflect sound policy. As the proposing release explains, Rule 14a-8 fails this review in both respects and thus should be rescinded.

The proposed rescission of Rule 14a-8 would, if adopted, eliminate the federal rule regulating inclusion of shareholder proposals in a company’s proxy materials for vote by the company’s shareholders. To be clear, the proposed rescission would not eliminate the concept of shareholder proposals and is not an attempt by the Commission to silence shareholders. Rather, it is a recognition that the Commission must act within its authority. Absent authorization from Congress—which it has not granted for shareholder proposals—the Commission has no authority to determine which matters are a proper subject for a shareholder vote. This issue of corporate governance must be resolved by the state in which a company domiciles. 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, and resolve disputes in the state’s courts or other permitted forums.

Rescission of Rule 14a-8 would help ensure that states are able to fully exercise their longstanding authority over shareholder proposals. Even if the Commission had authority to maintain Rule 14a-8, further refining the rule—such as changing ownership thresholds to submit a proposal or clarifying what constitutes ordinary business to exclude a proposal—would continue to ensnare the Commission in making judgments about matters that should be governed by state law. Such sustained entanglement through an overlay of federal law has resulted, and likely would continue to result, in Rule 14a-8 effectively supplanting, and hindering the development of, state law with respect to shareholder proposals.

As we experience an exciting period of increased competition among states for corporate domicile, there is no better time for the Commission to recognize the limits of its authority, relative to state law, for regulating shareholder proposals. Competition has always been the engine for innovation and progress in America. As part of states’ efforts to attract companies, the proposed rescission of Rule 14a-8 should, if adopted, provide states with both the legal clarity and the motivation to implement their own ideas for a sensible shareholder proposal framework.

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As part of the same release proposing to rescind Rule 14a-8, the Commission also proposed amendments to Rule 14a-4. If adopted, these amendments would provide companies with discretionary proxy authority to vote on matters presented at shareholder meetings but not included on the company’s proxy card, while simultaneously providing shareholders with the means not to confer that authority. Currently, companies have this discretionary authority with respect to timely received proposals only if the shareholder proponent for the matter does not solicit a requisite percentage of shares. Other shareholders cannot opt out of companies using such authority, if available. The amendments, therefore, would provide companies with more flexibility and shareholders with more agency.

The proposed amendments to Rule 14a-4 are independent of the proposed rescission of Rule 14a-8. However, it is possible that if the Commission ultimately rescinds Rule 14a-8, shareholders may be more likely to file their own proxy materials to solicit votes for their proposals. Considering this possibility, the Commission proposed amendments to Rule 14a-4 to recalibrate the use of discretionary proxy authority in a new environment for shareholder proposals.

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Finally, in a separate release, the Commission proposed amendments to four of its proxy solicitation rules that, if adopted, would modernize the rules to reflect technological advancements and changes in shareholder communications.

• Annual Report to Security Holders. The Commission proposed to eliminate the requirement in Rule 14a-3 that a company must deliver a separate “annual report to security holders” even if it has already filed a Form 10-K. Today, shareholders receive essentially the same information from both the annual report required by Rule 14a-3 and the Form 10-K. Accordingly, the proposal would, if adopted, reduce costs to companies arising from preparing and delivering an annual report, without sacrificing investor protection and access to timely information.
• Incorporation by Reference Waiting Period. The Commission proposed to eliminate the requirement in Schedule 14A and Forms S-4 and F-4 to send a proxy statement or prospectus to shareholders at least 20 business days prior to the date of a shareholder meeting if the document incorporates information by reference. This 20-business-day requirement predates companies filing on EDGAR Schedule 14A, Forms S-4 and F-4, and incorporated documents. Today, this requirement no longer serves any investor protection considerations because shareholders can quickly and efficiently access those documents on EDGAR. The proposal would, if adopted, provide companies with greater flexibility in planning their shareholder meetings or business combination transactions, without sacrificing investor protection and access to timely information.
• Notice of Exempt Solicitation. The Commission proposed to eliminate the requirement in Rule 14a-6(g) for a shareholder owning more than $5 million of a company’s securities to submit on EDGAR a notice for its exempt solicitation with respect to that company. The notices no longer serve their intended purpose and, in recent years, the substantial majority of these notices have instead been submitted voluntarily by shareholders owning less than the requisite amount. The proposal would, if adopted, eliminate an unnecessary filing requirement and help ensure that EDGAR cannot be misappropriated to become a platform that prominently communicates views not required to be publicly disseminated, as such outcome may confuse shareholders and hinder their access to a company’s required filings.
• Broker Search Period. The Commission proposed to reduce Rule 14a-13’s timeframe for initiating a broker search in connection with a shareholder meeting from 20 business days before the record date to five business days. The current timeframe, which the Commission adopted in 1983, has become outdated with technological advancements. The proposal would, if adopted, provide companies with greater flexibility in planning their shareholder meetings, while continuing to ensure that companies accurately identify their beneficial owners for a shareholder meeting.

Today’s proposals demonstrate my focus on ensuring that the Commission’s rules are within the agency’s statutory authority and reflect policy positions grounded in current and anticipated market practice and modern technologies. I look forward to receiving and reviewing the public’s feedback on both proposals.

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Thank you to the following members of the Commission staff for their very dedicated and thorough work on the proposal to rescind Rule 14a-8 and amend Rule 14a-4.

Division of Corporation Finance: Jim Moloney, Sebastian Gomez Abero, Christina Thomas, Michael Seaman, Ted Yu, Tiffany Posil, Jenny Choi, Matt McNair, Madeleine Mateo, David Plattner, Blake Grady, Benjamin Holt, Valian Afshar, Nabeel Cheema, Jessica Ansart, Dillon Hagius, and Doris Gama.

Office of the General Counsel: J. Russell McGranahan, Jeffrey Johnson, Tracey Hardin, Theodore Weiman, Ezekiel Hill, Bryant Morris, Dorothy McCuaig, Eduardo Aleman, Bob Bagnall, David Russo, and Rebecca Orban.

Division of Economic and Risk Analysis: Joshua White, Oliver Richard, Amy Edwards, Stuart Gillan, Lyndon Orton, Albert Sheen, Vlad Ivanov, Mattias Nilsson, Angela Huang, Ruoke Yang, Aiyesha Dey, Lauren Moore, Timothy Dodd, Michael Pessin, Evan Avita, Don Edmond and Samantha Croffie.

Division of Investment Management: Brian Daly, Sarah ten Siethoff, Brian M. Johnson, Angela Mokodean, Rachel Loko, Michael Kosoff, and Yoon Choo.

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Thank you also to the following members of the Commission staff for their keen technical expertise and tremendous work on the proposal to modernize the four proxy solicitation rules.

Division of Corporation Finance: Jim Moloney, Sebastian Gomez Abero, Christina Thomas, Ted Yu, Tiffany Posil, David Plattner, Blake Grady, Benjamin Holt, Valian Afshar, Mark Green, Jessica Ansart, Dillon Hagius, and Doris Gama.

Office of the General Counsel: J. Russell McGranahan, Bryant Morris, Dorothy McCuaig, Eduardo Aleman, Mike Killoy, and Rebecca Orban.

Division of Economic and Risk Analysis: Joshua White, Oliver Richard, Amy Edwards, Parisa Mofakham, Vladimir Ivanov, Lauren Moore, Samantha Croffie, Stephen Hagenbuch, Wei Lu, and Joseph Luckett.

Division of Investment Management: Brian Daly, Sarah ten Siethoff, Christian Sandoe, Brian M. Johnson, Michael Kosoff, Bradley Gude, and Pamela Ellis.