SEC Rulemaking Comment Tips

SEC Rulemaking Comment Tips

SEC Rulemaking Comment Tips: Action Needed

SEC rulemaking comment tips repeated here are primarily based on advice from the Council of Institutional Investors. However, I am also including tips from the Sustainable, Responsible and Impact Investing, conference I attended in Colorado Springs in November. (Search #SRI30 for other Conference tidbits at CorpGov.net and on Twitter.) See also US SIF for background and how to take action. 

On November 5, 2019, the SEC solicited public comment on two proposals that jeopardize fundamental investor rights:

  • Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a‐8 (File No. S7-23-19)
  • Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice (File No. S7-22-19)

All five commissioners made statements at the November 5 public meeting. Those statements provide important context and insight into their respective bases for supporting or dissenting from the proposals. Now is the time to make your voice heard as well.

Your Comments Matter

All direct and indirect investors have important experience and contextual information that can change the course of the SEC’s rulemaking proposals. By law, the SEC must consider all public comments received. While it can group similar comments, its internal guidance on economic analysis commits it to include in the release accompanying the final rule “a complete economic analysis of the final rule, addressing comments and realistic alternatives to the approach chosen.” (my emphasis) Rules that are arbitrary or capricious – e.g., if the SEC ignores evidence and research contravening their purported effects and benefits – can be challenged in court.

SEC Rulemaking Comment Tips: How and When

Comments are due February 3, 2020. The SEC has indicated that it intends to act on both proposals by April 2020. Therefore, filing comments on or about the due date is advisable.

The best way to ensure your comment receives attention is to send a PDF letter by email to [email protected]. Include the name and file number of the rulemaking proposal on the face of your letter and the subject line of your email message (e.g., Rule 14a‐8 File No. S7‐22‐19 and/or Rule 14a‐8 File No. S7‐23‐19). It should be addressed to:

Vanessa A. Countryman
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Alternatively, you can comment through the SEC’s electronic form or mail a paper letter to the above address.

SEC Rulemaking Comment Tips: Evidence More Useful than Opinions

You may be in possession of unique, important information to inform the SEC. Here are some areas of inquiry to consider –

  • Dispel myths and factual inaccuracies about shareholder proposals and proxy advisors. The SEC must base its rule change on facts. If you can show they have important facts wrong, you can change their course.
  • Discuss the Impact You Expect from the Proposals and Why. For example –
    • How would the proposal(s) affect the economic benefits (quantitative or qualitative) of the existing system? Discuss any specific problems, or unintended consequences, you foresee due to the SEC’s intention to prohibit aggregation, raise the ownership threshold to file, and change the percentage of support required to re-file a shareholder proposal.
    • Have you filed, or are you aware of examples of, successful shareholder proposals that would have been barred under the proposed changes to Rule 14a-8? If so, include your insights about the economic benefits (quantitative or qualitative) of those reforms, both at the subject companies as well as broadly across the market as the reform took hold.
  • Discuss Alternatives that the Majority Should Have Considered. The SEC’s economic guidance commits it to considering realistic alternative approaches. You may suggest alternatives the SEC should have considered without endorsing the need for any rule change. You may also express views or evidence about alternatives that others have suggested.

The Commission is only required to respond to comments that are directed at the proposed regulations or procedures followed (i.e., relevant) and that are received during the applicable comment period (i.e., timely). Comments not directed at the proposed changes or procedures followed are considered irrelevant and do not need to be responded to by the agency.

California Standards

I used to head a rulemaking office in California. We have stricter standards than the federal government but these standards are still worth considering in reviewing the SEC’s proposed rules. In California, all regulations must meet the following standards:

  • Authority and Reference standards. “Authority” means the provision of law which permits or obligates the agency to adopt, amend, or repeal a regulation.”Reference” means the statute, court decision, or other provision of law which the agency implements, interprets, or makes specific by adopting, amending, or repealing a regulation.
  • Consistency – in harmony with, and not in conflict with or contradictory to, existing statutes, court decisions, or other provisions of law.
  • Clarity – written or displayed so that the meaning of regulations will be easily understood by those persons directly affected by them.
  • Nonduplication – regulation does not serve the same purpose as a state or federal statute or another regulation.
  • Necessity –  the record of the rulemaking proceeding demonstrates by substantial evidence the need for a regulation to effectuate the purpose of the statute, court decision, or other provision of law that the regulation implements, interprets, or makes specific taking into account the totality of the record. For purposes of this standard, evidence includes, but is not limited to facts, studies, and expert opinion.

Review Previously Submitted Comments

Although it is always a good idea to review the comments that others have submitted and to second or amplify analysis you agree with, it is critically important to add your own information and insights.

  • Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice. File No: S7-22-19. Comments received are available  for this proposal.
  • Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8. File No: S7-23-19. Comments received are available  for this proposal.

With regard to Thresholds, File No: S7-23-19, many request an extended comment period. The following is a small sample:

There are too many good File No: S7-23-19 letters to list. The following provide what appears, as first glance, the most original substantive comments. What other letters should be brought to our attention?

I did not really cull through File No: S7-22-19 but a few jumped out at me. Please let me know of others that deserve attention.

SEC Rulemaking Comment Tips: Consider the Politics

The SEC is perhaps more politically divided than ever before. As you may be aware, the letters Chairman Clayton read supporting “modernization” sounded like folksy Main Street investors, “including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.” According to investigators at Bloomberg, “they are the product of a misleading — and laughably clumsy — public relations campaign by corporate interests.”

Even a casual reading of the letters shows something amiss. Four of the seven bear the same unusual error — an out-of-context phrase inserted into the SEC’s mailing address. The same mistake turns up in at least 20 other letters submitted by supposedly ordinary Americans in support of the change. (SEC Chairman Cites Fishy Letters in Support of Policy Change)

Either the Chairman didn’t read the SEC’s mailing address on the letters, did not notice or did not care. Maybe it is just another case of confirmation bias. We look for what we want to see.

A knowledgeable insider at the SRI Conference warned, “you are not going to change the vote. Think of possible legal challenges.” If someone takes the SEC to court, the legal arguments must generally be made first in our comments. Is the rulemaking arbitrary and capricious? What are our arguments for a lack of adequate economic analysis? We need to show the evidence of problems. Why are the proposed rules not the best available alternative. Take apart lack of economic analysis. Suggest what evidence they should provide.

The Commission is considerably more partisan than in the past. More laws have been passed recently mandating rules. More Hill staff are being appointed as commissioners. A Trump Administration Plan that Could Boost Corporate ‘Dark Money’ in Elections.

   

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