U.S. Chamber Letter to Acting Chairman Uyeda on SEC Agenda

Dear Acting Chairman Uyeda:

The U.S. Chamber of Commerce ("Chamber") hereby submits its recommendations to the Securities and Exchange Commission ("SEC" or "Commission") for consideration as part of the SEC's regulatory agenda. We look forward to working with the SEC to maintain the status of the U.S. capital markets as the most competitive, liquid, and efficient in the world.

The Chamber makes the following recommendations, detailed in discussion below:

I. Strengthen the Public Company Model

A. Reinstitute robust oversight of proxy advisory firms

B. Protect shareholders from activist campaigns conducted through the shareholder proposal system

C. Adopt a formal policy affirming materiality as the standard for corporate disclosure

II. Facilitate Capital Formation and Increase Opportunity for Investors

A. Modernize the SEC's accredited investor definition

B. Exempt business development companies from the acquired fund fees and expenses ("AFFE") rule

C. Enact further changes to improve the initial public offering ("IPO") process and encourage more companies to go and stay public

III. Prioritize the Needs and Preferences of Investors

A. Adopt a rule to make e-delivery default for investor documents

B. Provide permanent exemption for fixed income securities from Rule 15c2-11Discussion:

I. Strengthen the Public Company Model

A. Recommendation: Reinstitute robust oversight of proxy advisory firms

In 2020, after an extensive, years-long examination of flaws within the proxy advisor industry, the SEC adopted a rules package that required proxy advisors to adhere to basic standards of transparency and accountability. These rules required that proxy advisors provide public companies that are subject to vote recommendations from proxy advisors with an opportunity to review and respond to draft recommendations, disclose conflicts of interest that could taint voting recommendations, and be held liable for any false or misleading statements contained in vote recommendations.[1] At the time, the SEC also issued Commission-level guidance that clarified the fiduciary duty of investment advisers when hiring proxy advisors for voting advice.

Proxy advisors play an important role within the corporate ecosystem. Proxy advisors make recommendations to institutional investors about how to vote on important topics during proxy season, including director elections, shareholder proposals, and approval of mergers or executive compensation plans. However, the industry is dominated by just two firms - Institutional Shareholder Services (ISS) and Glass Lewis - which make up 97% of the industry. ISS and Glass Lewis operate with inherent conflicts of interest, including providing consulting services on how to improve proxy voting outcomes, that compromise their voting advice and have a proven track record of committing factual and analytical errors each proxy season. Enhancing regulation of the industry has won bipartisan support in Congress over the last decade.

Unfortunately, in 2021 and after a change in leadership at the Commission, the SEC announced a "no-action" enforcement approach to the new proxy advisor rules, and ultimately issued a new rule that rescinded much of the 2020 reforms before those reforms even took effect. The SEC undertook this rescission without providing any evidence that doing so was in the best interest of all investors.

The Chamber urges the SEC to prioritize re-implementing robust oversight and regulation of the proxy advisory industry. Investors deserve to know whether a voting recommendation is based upon false or misleading information and whether a proxy advisor may be prioritizing its own financial or policy interests ahead of the interests of public company shareholders.

Additionally, the SEC should also expand its regulation of proxy advisory firms to include ESG and sustainability ratings firms, whose influence in the marketplace continues to grow unchecked and who have similar deficiencies - including accuracy of information and conflicts of interest - to the proxy advisory firms.

B. Recommendation: Protect shareholders from activist campaigns conducted through the shareholder proposal system

Worryingly, U.S. capital markets have become increasingly politicized over the past 10 years. Public companies often find themselves as the targets of sophisticated activist campaigns animated by political objectives that have little to do with improving a company's performance or increasing returns for shareholders. Professional activists across the political spectrum seek to implement through boardrooms what they cannot achieve through the ballot box.

Nowhere is this more evident than the SEC's shareholder proposal system, governed under Rule 14a-8 of the Securities Exchange Act. Originally intended as a mechanism to improve communication and make companies more responsive to their shareholders, Rule 14a-8 has devolved into the preferred tool of political and socially-motivated activists that have little to no interest in the financial performance of underlying companies. The shareholder proposal system, however, imposes significant costs and serious distractions for companies and their shareholders and weakens the reputation and appeal of U.S. public markets. The true cost of frivolous shareholder proposals must be weighed through the lens of reputational harm and opportunity costs.

The SEC made the situation worse in 2021 when it issued Staff Legal Bulletin 14L ("SLB 14L"), which effectively allowed any shareholder proposal to receive a vote during an annual general meeting so long as the proposal dealt with an issue that has a "broad societal impact." This ill-defined and broad standard unsurprisingly led to a marked increase in the number of immaterial and politically-motivated proposals submitted to public companies during proxy season.

Fortunately, under your leadership, [BH1] the SEC rescinded SLB 14L and issued new guidance, Staff Legal Bulletin 14M ("SLB 14M"), which returns to the general principle that proposals must relate to a company's ordinary business operations to move forward during proxy season.

The Chamber recommends that the SEC solicit public input on further changes to Rule 14a-8 with an eye towards more fundamental changes to the rule and to adopt any necessary reforms to prevent further abuse of the system. Politically motivated campaigns should be focused on the public square and voters there, not on public companies and their leaders via shareholder proposals. The SEC should act to remove politics from capital markets as much as possible and bring certainty to investors and companies via steady, well-defined, well-supported rules.

C. Recommendation: Adopt a formal policy affirming materiality as the standard for corporate disclosure

For 90 years, materiality has been the guiding principle of corporate disclosure and financial reporting under the federal securities laws. The materiality standard - i.e. what determines information that is important to a reasonable investor who is focused on investment returns - is critical to providing investors with confidence in the integrity and accuracy of information provided by corporate issuers. Materiality has served as a constant throughout the SEC's history regardless of who chairs the Commission, or which party occupies the White House. In short, materiality is a bedrock of the U.S. public capital markets and has long been interpreted to ensure that federal securities regulation and the SEC remain faithful to the SEC's mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.

In the landmark 1976 case of TSC Industries, Inc. v. Northway, Inc.,[2]Justice Thurgood Marshall, writing for a unanimous Supreme Court, articulated a meaningful standard of materiality designed to provide investors with the significant information they need to make informed voting and investing decisions, but with a caution - namely that the "disclosure policy" under the federal securities laws "is not without limit"[3] because investors should be safeguarded from being overwhelmed with information that runs counter to the goal of better investor decision making.[4] The Court operationalized this principle in its decisions - subsequently affirmed by the Court in Basic, Inc. v. Levison[5] - by rejecting the notion that information is material if it "might" be important to an investor in favor of the following test: information is material for purposes of federal securities regulation if "there is a substantial likelihood that a reasonable shareholder would consider it important" in deciding how to vote or invest.[6]

The Chamber is concerned that calls to "improve" the materiality standard can be more accurately interpreted as calls to change the materiality standard in a way that would be harmful for investors. U.S.-based companies now also face the potential threat of being forced to make disclosures according to different materiality standards under reporting mandates adopted by the European Union with extraterritorial reach. Over the past few years, new theories have been proffered about how corporate disclosures and a changing definition of materiality can be bent to achieve social or policy objectives. Indeed, this deployment does not match the intended purpose of corporate disclosures and financial reporting, which is to provide investors with essential information to make informed decisions regarding a company and its performance.

Accordingly, the Chamber encourages the SEC to adopt a formal, Commission-level policy statement that affirms the Supreme Court-articulated materiality standard as the standard for corporate disclosure in the United States, akin to legislation authored by Senator Mike Rounds and Representative Bill Huizenga.[7] The Chamber also encourages the SEC to apply this principle to its oversight of the standards set at the Financial Accounting Standards Board ("FASB") and the Public Company Accounting Oversight Board ("PCAOB").

Click here to view the full letter

[1] See e.g. U.S. Chamber "Examining the SEC's Proxy Advisor Rule" https://www.uschamber.com/assets/documents/proxyadvisoryrule_examine_nov2020.pdf

[2] 426 U.S. 438 (1976).

[3] Id. At 448.

[4] See id. At 448-9.

[5] 485 U.S. 224 (1988).

[6] TSC Industries, 426 U.S. at 449.

[7] See: S. 2005 (118^th), Mandatory Materiality Requirement Act of 2023. https://www.congress.gov/bill/118th-congress/senate-bill/2005/related-bills

[BH1] Just flagging that the byline might change to Paul Atkins if he is confirmed by the Senate this week. If so, this line would need to be changed/deleted.