Dear Chair Uyeda:
On behalf of the Society for Corporate Governance ("Society"), I am writing to congratulate you on your new role at the Commission and to share our thoughts for steps the Commission can take in the near term that will have significant benefits, without substantial costs or the need for formal rulemaking. These recommendations will advance the Commission's work in accordance with its statutory mandates, including protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.
I know you are familiar with the Society, a professional membership association that currently has more than 3,700 corporate and assistant secretaries, in-house counsel, outside counsel, and other governance professionals who serve more than 1,000 public companies, private companies, and non-for-profit organizations of almost every size and industry. Society members are responsible for supporting the work of corporate boards of directors and the executive managements of their companies on corporate governance and disclosure matters and for ensuring that the views of investors are communicated to directors and executives.
As you know, for many years, the Society and its members have regularly engaged with the Commission and its staff on a variety of regulatory topics. And we very much appreciate the constructive working relationship we have with the Commission staff and the personal engagement that you and other Commissioners have had with the Society.
While not intended to be comprehensive, the following are our suggestions for near-term action the Commission could take. If helpful, we would be happy to provide additional detail on any of these recommendations, including companies' current experiences with respect to the matters raised below.
General
• We encourage the Commission to sta1i the process to establish a Public Company Advisory Committee. We have discussed this idea with you and other Commissioners, as well as with the Commission staff, in the past. There appears to be broad support for creating such a panel, which can be established without legislation.
By providing the Commission with information, advice, and input in a thoughtful and organized manner before proposed rulemaking, such a committee would help streamline the SEC's regulatory process and assist the Commission's rigorous cost-benefit analyses.
There are several areas where this Committee could help the Commission improve regulations to more efficiently and effectively serve capital formation and the capital markets in the United States, including: (i) reducing the disclosure burdens on smaller issuers, (ii) rationalizing the shareholder proposal process, (iii) modernizing the proxy system, (iv) regulating proxy advisors, and (v) reducing costs associated with certain rules such as "pay versus performance" disclosure and clawbacks. Notably, many of these areas have been identified by investors, as well as issuers, as ripe for reform. We would envision that this Committee would include 15 to 20 representatives, with the vast majority from public companies that are not represented on the Commission's other advisory panels. As an initial step, we suggest that the Commission publish a request for nominations for this Committee.
Disclosure
• The Divisions of Corporation Finance and Enforcement should revisit how perquisites are interpreted with respect to the requirement that companies disclose executive security arrangements as a perquisite, especially given that Item 402 of Regulation S-K does not define perquisites. The interpretation of "integrally and directly related" to an executive's job duties should be re-examined and, in particular, be interpreted in a manner that recognizes that reasonable executive security arrangements (which may consist of physical protection, cybersecurity, financial security, event security, travel security, training, or other measures or arrangements deemed integral to an effective security program) may be "integrally and directly related" to executives' ability to do their jobs, and thus not disclosable as a perquisite. Companies are in the best position to make the determination as to whether or not such arrangements are "integrally and directly related." Current SEC guidance, which was developed in a different environment: (i) raises concerns about tipping off potential threat actors (who can now monitor executives' whereabouts 24/7) as to the relative level of protection (or the absence thereof) for certain executives; (ii) invites proxy advisor "no" vote recommendations based on a perception that any security is a perquisite and thus reflects a "problematic pay practice"; and (iii) increases the risk of investor backlash despite a bona fide business need.
• We support the Commission's stay of enforcement of the final climate risk disclosure rule until the SEC is in a position to make a final decision as to how to proceed, given the costs and burdens associated with complying with the rule, as compared with the benefits it provides to investors, including in light of disclosure obligations imposed by other jurisdictions.2 We also believe the Commission should stop work on its human capital disclosure rulemaking given the existing principles-based disclosure requirements already in place.
Proxy Reforms
• The Society is pleased to see the Division of Corporation Finance issue new Compliance and Disclosure Interpretations to address the surge in exempt solicitation filings appearing in corporate EDGAR feeds from proponents and other activists who do not have a shareholder proposal on the proxy ballot. These PX 14A6G filings, many of which contain false or misleading statements, have caused investor confusion and are sometimes cited in proxy advisor reports. If the staff considers additional guidance or the Commission embarks on rulemaking on this topic, we would be happy to provide additional input. We also would appreciate an opportunity to discuss with your office and the SEC staff our members' perspectives on the effectiveness of the new guidance after this proxy season, and ways to continuously promote the optimal use of exempt solicitations in the market.
• We request that the Division of Corporation Finance rescind the portion of Staff Legal Bulletin 14L (section B(2)) that applies to proposals that purport to address "significant social policy issues." As you observed in your remarks at the Society's 2023 National Conference, 3 there has been a substantial increase in the number of prescriptive environmental, social, and political proposals going to a vote since 2021. And as noted by several institutional investors, the increase in proposals that have little if any connection to shareholder value at particular companies results in additional costs for companies and their shareholders, while providing little to no benefit. As needed, this is a topic where the Commission could solicit input in an organized and efficient manner through a Public Company Advisory Committee.
• We ask that the Division of Corporation Finance review no-action requests without regard to the proposed amendments to Rule l 4a-8, released in 2022, as to decisions on substantial implementation (subsection (i)(l 0), proposal duplication (i)(l l), and the resubmission of low-polling proposals (i)(12), which should spare investors from having to evaluate and vote on repetitive proposals and reduce the costs imposed on both investors and companies.
• At minimum, and as an initial step, we encourage the Commission to reinstate the concurrent issuer-review ("notice and awareness") provisions of the 2020 proxy advisor rule, as ordered in June 2024 by the U.S. Court of Appeals for the 5th Circuit in National Association of Manufacturers v. SEC. To improve the quality of proxy advisor research provided to investors, it is imperative that companies have an opportunity to review the accuracy of proxy advice before investors start voting.
• We ask the Commission to direct the Office of the General Counsel to request leave from the U.S. Comt of Appeals for the D.C. Circuit to file a brief in the Institutional Shareholder Services Inc. v. SEC case that defends the SEC's authority to regulate proxy advice under the proxy solicitation rules. The SEC was a party to this litigation but dropped out last year after the briefing schedule was announced.
Enforcement
• Finally, the Division of Enforcement should reconsider its expansive reading of Rule 13a-15(a). We believe that this rule should not be extended to impose liability beyond its plain text, which only requires tracking information that an issuer must include in its SEC disclosures. As Commissioner Hester Peirce noted in her dissent5 in the Activision case, tracking internal data that may be of interest to the SEC "may distract management from collecting the data it actually needs to provide material information to investors and impose additional, unnecessary costs on investors who will not benefit from the company's collection of data points that the SEC highlights ... "
Thank you for your consideration of the Society's views. The Society would be pleased to schedule a meeting with you and your staff to elaborate on these suggestions.
Respectfully,
Paul F. Washington
President and Chief Executive Officer
Society for Corporate Governance
cc: Commissioner Peirce, Commissioner Crenshaw