While we were all enthusiastically traveling back (on June 9) from the 2017 NIRI Annual Conference in Orlando, the House of Representatives passed the Financial CHOICE Act of 2017 (FCA2017), a bill predominantly intended to undo various aspects of Dodd-Frank. As all things Washington DC these days, it’s anyone’s guess what path the Senate will take per the bill handed to them.
The banking “too-big-to-fail” (Volcker Rule) regulatory points captured the main interest of many Wall Street and political pundits, however the new bill covers several important changes affecting corporate governance and SEC reporting and disclosure requirements.
A FCA2017 provision, strongly opposed by institutional investors, will modify the rules regarding the inclusion of shareholder proposals in proxy statements.
FCA2017 will require the SEC to amend the eligibility requirements for submission of shareholder proposals from the existing requirement that a shareholder must own $2,000+ of company stock for at least one year to requiring a shareholder to hold at least 1% percent of company stock for at least three years.
FCA2017 will require the SEC to raise the resubmission thresholds for the minimum level of mandatory support for a shareholder proposal to be eligible for inclusion in a company’s proxy statement in the following years:
- An increase from 3% to 6% of the vote if the proposal was voted on once in the last
- five years
- An increase from 6% to 15% of the vote if the proposal was voted on twice in the last
- five years
- An increase from 10% to 30% of the vote if the proposal was voted on twice in the last
- five years
Shareholder Proposals by Proxy Prohibited
FCA2017 will disallow an issuer from including in its proxy materials “a shareholder proposal submitted by a person in such person’s capacity as a proxy, representative, agent, or person otherwise acting on behalf of a shareholder.”
Proxy Advisory Firms Registration
Coveted by the investor relations professionals but viewed as unnecessary by many members of the institutional investor community, FCA2017 could require proxy advisory firms to register with the SEC several disclosures including:
- Financial statements
- Potential conflicts of interest
- Their code of ethics
- Staffing and internal resources and the
- Methodology behind proxy voting policies and voting recommendations
Most importantly, FCA2017 would force proxy advisory firms to establish, disclose, maintain and enforce policies and procedures relating to managing conflicts of interest.
The goal of this provision is, of course, to give issuers an equitable chance to review and remark on draft proposals and to fairly to address any issues raised.
Single Ballot Exclusion
FCA2017 will prohibit the SEC from mandating the use of a “universal proxy card.”
Shareholder Voting on Say-on-Pay
One dramatic change expected from FCA2017 is the amending of the current requirement that companies hold a non-binding shareholder vote on say-on-pay vote at least once every three years to require executive compensation votes only in the years “in which there has been a material change to the compensation of executives of an issuer from the previous year.”
Exemption from XBRL
FCA2017 will exempt EGCs from the requirement to file 10-Ks and 10-Qs in XBRL as well as any current issuer with total annual gross revenues of less than $250 million until five years after the date of enactment of the FCA2017 or two years after any determination by the SEC that the benefits of the requirements to issuers outweigh the costs.
The bill would repeal various other Dodd-Frank provisions relating to SEC disclosure requirements.
Most notably, the bill would repeal:
- Requirement to disclose the ratio of median annual compensation of all employees and compensation of The CEO
- Authorization for the SEC to adopt proxy access rules
- Requirement that the SEC issue rules requiring companies to disclose and explain their chairman and CEO structures
- Conflict minerals disclosure requirements: resource extraction issuer disclosure requirements and the mine safety disclosure requirements
A last comment: the Financial CHOICE Act of 2017 has passed the in the House. Not the Senate. It’s still business as usual. Counsel with your Council.