SEC Proposes Rescinding Shareholder Proposal Rule and Proxy Reforms

What is changing in the U.S. shareholder proposal system? The Securities and Exchange Commission proposed today rescinding Rule 14a-8, the federal rule on shareholder proposals, and proposed separate changes to the proxy solicitation process.

The SEC said Rule 14a-8, under the Securities Exchange Act of 1934, exceeds the scope of its statutory authority and intrudes into matters of state law. The agency also cited independent policy reasons, saying many justifications for adopting the rule have not been substantiated in practice or are less compelling today. It said the rule has had unintended consequences, including the implication of federal preemption that may have discouraged states from developing their own laws governing shareholder proposals.

Rescinding Rule 14a-8 would leave determinations about the role of shareholder proposals to state law and company governing documents.

SEC Chairman Paul S. Atkins said the proposals were issued as two releases related to proxy rules under the Securities Exchange Act of 1934. "The proposals reflect two of my highest regulatory priorities," Atkins said. He said the agency must avoid improperly intruding into state corporate law when applying federal securities laws and update rules to reflect developments in market practice, technology and other innovations since the rules' adoption or last amendment.

The Commission also proposed amendments to Rule 14a-4(c) under the Exchange Act to provide companies with greater flexibility and shareholders with greater control regarding proposals for which a company may seek discretionary proxy voting authority. Separately, it proposed amendments to modernize the proxy solicitation process, reflecting advancements in technology and current realities of shareholder communications.

The public comment periods will remain open for 60 days following the publication of the proposing releases in the Federal Register.