The U.S. Department of Treasury issued a comprehensive report last week with recommendations to reform the U.S. capital markets regulatory system. The Report to President Trump recommends sweeping changes, including ones aimed to roll back certain Dodd-Frank rules issued after the 2008 financial crisis. It responds to the “core principles” for regulating the U.S. financial system identified in Presidential Executive Order 13772.1
The Treasury’s broad-based recommendations are aligned with several proposed changes in the Financial Choice Act of 2017 (generally referred to as CHOICE 2.0). Consistent with CHOICE 2.0, the Treasury recommends repealing Dodd-Frank provisions that directed the SEC to require disclosures regarding CEO pay ratio, use of conflict minerals, mine safety information, and governmental payments by resource-extraction issuers.2
The Treasury also takes direct aim at limiting the number of shareholder proposals submitted to public companies through SEC Rule 14a-8 under the Securities Exchange Act of 1934. The Report, unlike CHOICE 2.0, does not provide specific recommendations for ownership and resubmission thresholds. Rather, the Treasury recommends that the SEC “substantially” revise such threshold requirements.
Under Rule 14a-8, a company must include shareholder proposals in its proxy materials unless the shareholder fails to comply with certain procedural or eligibility requirements or the proposal falls under one of the thirteen bases for exclusion specified in the rule. As summarized in the chart, the Treasury recommends “substantially” revising the eligibility requirements to make it tougher for shareholders to submit proposals in company materials.
The Report cites the following core principles supporting the stricter eligibility requirements:
- Enable American companies to be competitive with foreign firms in domestic and foreign markets;
- Make regulation efficient, effective, and appropriately tailored; and
- Restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
The Report contains a number of other recommendations, including related to market structure, liquidity, securitization and derivatives, not covered above. We will provide further updates on the potential implications of Treasury’s Report for public companies or regulatory action from the SEC as these developments unfold.
|Eligibility Requirements to Submit Shareholder Proposal||Existing 14a-8 Requirements||Treasury Recommendations|
|Ownership Thresholds||Shareholder must have continuously held at least $2,000 in market value, or 1%, of the company’s securities entitled to be voted on the proposal at the meeting for at least one year.||The $2,000 holding requirement for shareholder proposals should be “substantially revised” by the SEC and the SEC should explore options that better align shareholder interests (such as considering the shareholder’s dollar holding in company stock as a percentage of his or her net liquid assets) when evaluating eligibility, rather than basing eligibility solely on a fixed dollar holding in stock or percentage of the company’s outstanding stock.|
|Resubmission Thresholds||If the proposal deals with substantially the same subject matter as another proposal that has been previously included in the company’s proxy materials within the preceding five calendar years, the new proposal may be excluded from proxy materials for any shareholder meeting held within three calendar years of the last submission if the proposal received:
(i) Less than 3% of the vote if proposed once within the preceding five years;
(ii) Less than 6% of the vote on its last submission to shareholders if proposed twice previously within the preceding five years; or
(iii) Less than 10% of the vote on its last submission to shareholders if proposed three times or more previously within the preceding five years.
|The resubmission thresholds for repeat proposals should be “substantially revised” by the SEC from the current thresholds of 3%, 6%, and 10% to promote “accountability, better manage costs, and reduce unnecessary burden.”|
- For a detailed explanation of the core principles set forth in Executive Order 13772, see our earlier Client Alert The Trump Administration Launches its (De)Regulatory Initiatives, available here.≈
- See our earlier Client Alert The Right CHOICE (2.0)? Bill Voted Out of Committee; SEC Chair Clayton Sworn In, available here.≈