In a Dec. 6 speech, SEC Chairman Jay Clayton commented on the commission’s recent roundtable on the proxy process, and signaled that improving this process will be “a significant initiative for 2019.”
Nareit has long advocated that the SEC improve the proxy process, most recently in a Nareit comment submitted to the SEC in advance of the Nov. 15 SEC roundtable. In that comment, Nareit specifically urged the SEC to review the regulatory framework applicable to proxy advisory firms, such as Institutional Shareholder Services, Inc. (ISS) and Glass Lewis.
In that comment, Nareit also reiterated its long-advocated position that the SEC should reassess the resubmission rule for shareholder proxy proposals, set forth in SEC Rule 14a8(i)(12). In his speech, Clayton indicated that the commission will move forward next year to address both of these proxy process concerns.
Revision of the Regulatory Framework Applicable to Proxy Advisory Firms
Clayton noted that he had concluded from the recent proxy roundtable that “there is growing agreement that some changes are warranted” in the oversight of proxy advisory firm. He said among the issues that the SEC should consider are the framework for addressing conflicts of interests at proxy advisory firms, and ensuring that investors have effective access to issuer responses to information in certain reports from proxy advisory firms.”
Nareit’s recent comment to the SEC in advance of the proxy roundtable urged that the SEC “take additional steps to ensure proxy advisors operate fairly, transparently, and free of conflict, including issuing necessary regulatory guidance and/or engaging in appropriate rulemaking to achieve this goal.”
Nareit’s recent comment also highlighted the confusion caused by ISS’s 2016 voting policy targeting the REIT industry, which ISS adopted at the urging of a labor union, UNITE HERE (not a pension adviser). Under the ISS so-called “shareholder bylaw amendment voting policy,” ISS now recommends that investors vote against, or withhold votes, for governance and nominating committee board members of firms—including Maryland REITs—that do not provide their stockholders with the power to directly (without board approval) amend corporate bylaws and charters.
The ISS shareholder bylaw amendment voting policy is set forth in language nearly identical to shareholder proposals made in 2016 to several lodging REITs by a union representing hotel workers, which then held de minimis, e.g., $2,000/one-year shares, and is, by ISS’ own admission, intended to target Maryland REITs.
Raising the Proxy Proposal Resubmission Thresholds
Clayton also said, “it is clear that we should consider reviewing the ownership and resubmission thresholds for shareholder proposals,” noting that “a lot has changed” since the current $2,000 ownership threshold was adopted 20 years ago and resubmission thresholds were set in 1954. Nareit also long advocated that the SEC reassess the resubmission rule for shareholder proxy proposals, which currently provides that an issuer may only exclude a shareholder proposal when it has failed to receive the support of 3 percent of shareholders if voted on once in the last five years; 6 percent if voted on twice in the last five years; and 10 percent if voted on three or more times in the last five years.
This outdated rule permits shareholder proposals that have been rejected by 90 percent of shareholders on multiple occasions to be resubmitted again and again—at the expense of the firm and its shareholders—for a shareholder vote. As Nareit noted in its comment, “this situation does not benefit the overwhelming majority of shareholders who have voted against the proposal; to the contrary, it is costly to them and is distracting for both management and shareholders.”