What’s going on at the SEC

Summary

Podcast Summary: "What’s Going On at the SEC"

Shareholder Primacy | Free Float Media Inc.
Hosts: Mike Levin (activist investor) & Ann Lipton (Colorado Law Professor)
Date: April 1, 2026

---

Episode Overview

This episode centers on recent developments and overarching trends at the U.S. Securities and Exchange Commission (SEC). The hosts examine major policy changes—most notably those relating to shareholder proposals under Rule 14a-8, new litigation and lawsuits, evolving disclosure requirements, and shifting priorities regarding shareholder power and corporate governance. Their discussion is informed by both their expertise and recent news, with an emphasis on the real-world implications for investors and companies.

---

Key Discussion Points & Insights

1. Host Updates & Teaching (00:05 - 03:06)

• Mike Levin shares his new role as a guest lecturer at the University of Chicago Law School, teaching a seminar on activist investing.
• The class culminates in teams presenting real-life activist situations, potentially surfacing noteworthy cases for discussion.
• Quote:
  • “There may be a company or two we could talk about.” — Mike Levin (02:42)

---

2. SEC Rule 14a-8: Policy Shift & Impact (03:08 - 21:49)

Background of Rule 14a-8 (04:11 - 06:43)

• Traditionally, companies could seek the SEC’s input on whether to exclude a shareholder proposal; the SEC would respond with “no action” or “agree/disagree” letters.
• If the SEC sided with exclusion, companies felt safe; rarely would shareholders sue.

New SEC Stance: Hands-Off, “No Objection” (06:44 - 09:41)

• The SEC now largely declines to adjudicate exclusion matters, effectively stepping back from enforcement (“no objection” policy).
• Shareholders wishing to challenge exclusions must now sue companies directly.
• Memorable Quote:
  • “What it comes down to is the SEC’s just not going to get involved anymore.” — Ann Lipton (07:10)

Company & Shareholder Responses—Litigation (09:43 - 16:44)

• Companies are testing boundaries; some are being cautious, while others exclude proposals, leading to lawsuits.
• Four to five lawsuits have arisen—most settle quickly once filed.
  • AT&T Case (11:30): NYC pension funds demanded EE01 diversity data disclosure. AT&T argued “ordinary business,” lawsuit filed, and swiftly settled (AT&T agreed to disclose).
  • PepsiCo Case (12:54): PETA sought supply chain animal welfare compliance; lawsuit led to immediate settlement and inclusion on the ballot.
  • Axon Case (13:45): Nathan Cummings Foundation asked about political spending disclosure. When pushed to explain why it was too burdensome, Axon reversed course: “As soon as they got that order, Axon said, nevermind, we’ll include the proposal.” — Ann Lipton (14:45)
  • Pending cases: BJ’s Wholesale Club (deforestation), Chubb Insurance (climate claim recovery; procedural objections re: Swiss legal status).

Lawsuit Against the SEC’s Policy (17:01 - 21:49)

• Groups such as As You Sow and ICCR have sued the SEC, alleging their informal non-enforcement constitutes unlawful rulemaking, bypassing the Administrative Procedure Act (APA).
• Ann admits her expertise is more on substance than administrative procedure, but observes: “If you are a shareholder, this has been a very huge and impactful change.” (18:51)

---

3. SEC Policy Changes Beyond Shareholder Proposals (21:55 - 44:25)

Exempt Solicitation Changes & Shareholder Communication (21:55 - 28:50)

• SEC will no longer allow voluntary filings of proxy exempt solicitation materials unless the filer meets the $5 million threshold.
• This narrows a previously low-cost, effective communication avenue, which studies show influenced voting behavior.
• Ann’s critical take: “It was being abused, but I don’t think this was entirely just about the abuse.” (28:50)

Mandatory Arbitration in IPOs & Push from SEC Chair Paul Atkins (30:03 - 36:53)

• SEC no longer objects to IPO companies requiring arbitration of securities claims, and Atkins encourages such clauses even post-IPO.
• Significant legal and insurance uncertainties exist; companies hesitating, with only one example (Zion Oil & Gas, Texas) trying (and bungling) it so far.
• The real goal: preclude class actions, limiting shareholder legal recourse.
• Memorable Moment:
  • Ann describes Zion’s approach: “They forgot to include the part about individualized claims. So under their arbitration clause, theoretically, you could still bring a class action.” (35:13)

Other SEC Hot Topics (37:38 - 43:57)

• Registered Investment Advisors (RIAs): SEC now signals they don’t have to vote every proxy, referring to “rational apathy.”
• Quarterly Reporting: Potential shift to semiannual reporting (from quarterly), triggering mixed reactions—investors expected to push back.
• Executive Compensation Disclosure: SEC chair hints at reducing required disclosures, arguing burden outweighs utility. Ann and Mike argue disclosures are key to shareholder engagement, especially say-on-pay and performance monitoring.
  • Quote:
    • “If we’re going to have a lot less to work with… that’s a big problem.” — Mike Levin (47:58)

---

4. Overarching Theme: Empowering Boards, Disempowering Shareholders (44:25 - End)

• Ann's argument: All recent SEC moves point in a single direction—consolidating power in company boards and insulating them from shareholder influence and accountability.
  • “Everything is moving in exactly one direction. There is no proposal anywhere to increase shareholder power … eliminating the levers of influence that shareholders have.” (44:38)
• Mike’s nuanced response: While boards should represent shareholders, these changes diminish shareholders’ tangible ability to hold boards accountable.
• Evidence cited: Rising obstacles to shareholder lawsuits, proposal submissions, communications, and voting; declining engagement from major index funds due to regulatory pressure.

---

Notable Quotes & Memorable Moments

• “That is awesome.” — Ann Lipton, regarding Mike’s new teaching gig (01:42)
• “The company gets to decide and shareholders have to bring a lawsuit.” — Ann Lipton (20:58)
• “They forgot to include the part about individualized claims. So under their arbitration clause, theoretically, you could still bring a class action.” — Ann Lipton on Zion Oil & Gas (35:13)
• “Every single lever is being pushed in one direction.” — Ann Lipton (46:07)
• “If we’re going to have a lot less to work with… that’s a big problem.” — Mike Levin (47:58)

---

Key Timestamps

• 00:05 — Host welcome & teaching updates
• 03:08 — Introduction to SEC, mailbag question prompt
• 05:05 — Explanation of Rule 14a-8 tradition
• 07:10 — Shift to “no objection” policy by SEC
• 11:30 — AT&T/NYC Pension Fund case discussed
• 12:54 — PepsiCo/PETA lawsuit overview
• 14:45 — Axon’s court-avoidant response
• 17:01 — Lawsuit against the SEC's policy change
• 21:55 — Exempt solicitation communication crackdown
• 28:50 — Ann’s critique on motivations behind the change
• 30:03 — Mandatory arbitration and SEC’s push
• 37:38 — RIA proxy voting “rational apathy”
• 39:21 — Move toward semiannual reporting
• 41:44 — Exec comp disclosure: investor vs. regulatory perspective
• 44:25 — Conclusion: all moves aim to concentrate power in boards

---

Summary & Flow

This episode offers a sophisticated, accessible, and at times wryly humorous overview of complex but pivotal SEC regulatory shifts. Through detailed case examples, legal explanations, and clear-eyed commentary, Ann and Mike reveal a consistent pattern: recent SEC policies cumulatively disempower shareholders, concentrating authority in boards and management. While policy specifics span shareholder proposals, disclosures, communications, and litigation, the big picture is unambiguous. The episode serves as both a primer on current regulatory battlegrounds and a warning to investors about diminishing influence—making it a must-listen for anyone interested in corporate governance and securities law.

Transcript

[A]

Foreign.

[B]

Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal worlds intersect and collide in real life. We have returned after a week off. Ann Lipton and I are here to delve into a meaty subject for everybody. Ann, of course, is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of this podcast.

[A]

And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.

[B]

Yes, I make an effort to do that, but as I started explaining, I took on another job this past year.

[A]

Yeah. So you're treading onto my turf now. You're teaching. What are you doing?

[B]

I am. I. I am guesting in a seminar on activist investing at the University of Chicago Law School.

[A]

Oh, that's great.

[B]

For the next, for the next eight weeks. So Professor Adrian Robertson, who, you know, I think you've worked with at the University of Chicago, had me guest lecture at her securities law at her corporate finance class last spring. And after that she said, I'm supposed to teach a seminar in the spring, meaning this right now. Would you care to do it? So we started pulling together. So we spent the last several months kind of structuring this and I went and read a bunch of syllabi. Syllabi? Syllabuses. Syllabi from some friends of mine, got some friends who teach at Columbia and nyu and we structured a class.

[A]

That is awesome.

[B]

So we'll have to talk about it. The, the. We're teaching seven weeks of just seminar of discussion. And then the eighth week is a presentation where we have, I think 20 students and they're going to be in teams and they each come up with a case. They each come up with a real life activist situation.

[A]

So they actually find a company and they propose an activist intervention. Is that the idea?

[B]

Yes, exactly.

[A]

That is.

[B]

Engagement. Engagement intervention. Yes. So just this past week was the very first. So I don't get nervous about a whole lot of stuff. I was really kind of nervous about this.

[A]

Well, how'd it go?

[B]

I think it went pretty well. I mean, everyone hung on my every word and was eager to talk to Professor Levin. I never thought I'd be called that. So you'll have to. So I hope you're used to it by now. But not Levin. Professor Levin. Professor Levin. So anyway, it was pretty good. So we'll have to talk about that as this kind of unfolds and to followers here that have Money to have dry powder. There may be a company or two we could talk about.

[A]

Yeah. See what the students come up with.

[B]

Yes, exactly. So anyway, so that was kind of fun. Now I have a good. A little idea about what you have to experience each week, each month. So then I would just get you managing some money and then we can really share experiences.

[A]

Anyway, not for a while.

[B]

Yeah. Right. Let's plunge into the subject of the day, which is the securities. The U.S. securities and Exchange Commission. The SEC. I think it's been a lot. Well, we haven't actually, I look back, we haven't devoted a single. An entire single episode to just looking at the sec. And again, we touch on it in all sorts of ways.

[A]

We mentioned developments, but there have been a lot of stuff. So we actually got a mailbag question to talk about general SEC development. So we figured. Good time to kind of summarize what's happening there.

[B]

Yes. And we'll look at some of the detail because even since the last time we looked at, I think, 14 8, there's been some. Some pretty interesting developments on that specific subject. But there's a bunch of other things that kind of came up. So we thought we'd talk about that and then try to tie it together and sort of see what we think. Yeah, go ahead.

[A]

No, just a reminder that since this was inspired by a mailbag question, again, anyone who wants to can email us with comments or other suggestions for topics at shareholderPrimeCrimeFloat LLC.

[B]

Excellent. So SEC develops, there are developments, there are several related to disclosures related to requirements for shareholder proposals related to RIAs and so forth. Again, we've talked about these on and off to a greater or lesser extent, but here we thought we'd kind of tie it together. The first biggie that's got everybody's attention is the SEC's policy on their Rule 14A8, which pertains to shareholder proposals and what companies are obligated to do. I thought we'd take two seconds and just recap what the SEC did, what, about three or three, four months ago? It was late last year, I think. Right. So they sort of informally, informally changed a policy about how they were going to handle this.

[A]

They didn't change the policy. They just didn't go through any formal rulemaking. They didn't actually change the rule in any way. They keep saying that they're going to actually make amendments to the rule, but so far nothing's been proposed. So instead we have an SEC that's fairly hostile to shareholder proposals in General. And they've essentially taken a hands off, we're just not going to get involved kind of policy. It's a little more complicated than that. But traditionally the way this has worked is shareholder gives. A shareholder wants a proposal to appear at the company on the company proxy ballot. They give it to the company. The company can then just include it. We're done. But the company may want to exclude it because it feels that it violates a rule. One of the restrictions on what you can put on the right.

[B]

It's like ordinary business or it's already been implemented or whatever, or the shareholder

[A]

doesn't have sufficient holdings, whatever it is. And so the company, if it wants to exclude it, the rule requires. Requires that they go to the SEC and say, hey, we're planning on excluding it on this basis. Now, what has traditionally happened after that is that the SEC would either say, we agree with you, it's excludable, or we don't agree with you, it's excludable. And if the SEC agreed with it, then the company was kind of safe in knowing that the SEC wasn't going

[B]

to come out, they weren't going to pursue litigation and they were going to pursue an enforcement action. So no action.

[A]

Exactly. So they could. So the company could leave it off. Now what actually what the company would be at risk for is even if the SEC said we're not going to sue you over a proposal over excluding a proposal, the shareholders still could say, the SEC is just wrong, it's not excludable. Be able to include it on the ballot and the sheriff could bring an action. Now that's happened a couple of times in history, right?

[B]

Ever.

[A]

Yeah, it's really very, very rare. The fact is that if the SEC said it's excludable, it would. Matters would stop there. Alternatively, the SEC could say, we disagree that it's excludable. We think it should be included. That was sort of a warning shot to companies. If you exclude it, you might risk an SEC enforcement action. And they basically just went along with it. They would include the proposals.

[B]

Well, yeah, the company wasn't going to sue the SEC over that.

[A]

Well, the company wasn't going to risk getting into a fight with the SEC over. Exactly. So basically, as a practical matter, the SEC was being the adjudicator of these things. And what's happened, the new policy is functionally, I mean, there are bells and whistles, but what it comes down to is the SEC is just not going to get involved anymore. They've made clear that they're not really going to evaluate whether a proposal is excludable or not. And they've also made clear since they're pretty hostile to shareholder proposals, they're certainly not going to sue the company for failing to include it. So what this means as a practical matter is that the company is going to either going to notify the SEC that it plans to exclude it or not, but then after or that it plans to exclude it or they'll just include it. But if they notify the SEC that it plans to exclude it, then if the shareholder disagrees with that, since the SEC isn't really taking action, the only option for the shareholder is to bring

[B]

a lawsuit which has happened, which has happened happened like several times in the past month.

[A]

My, my theory like so right now companies are mostly being fairly careful about this and a lot of the exclusions have been on the basis of the shareholders simply didn't qualify like they didn't have sufficient holdings procedurally improper late, things like that. Yeah, those have been most of them. But there have been a couple of aggressive moves to exclude and I'll just say my theory is that this is eventually going to settle into an equilibrium where companies do not want to go to court over this. So they're just going to deny when they want to deny and, and wait to see if a shareholder sues them. And maybe they'll just include the ones even if they have grounds to exclude them. They'll include the ones by shareholders who are obviously have the wherewithal to sue like the political organizations and so forth. But that's right.

[B]

Or like the major, the major labor unions or something.

[A]

Yeah, exactly. So that's what I think that I think they're going to settle into as a pattern. But right now what's happened is companies have actually seem to be including a lot of them because they just don't want to get into a fight over it. But, but a few have excluded them leading to some very public lawsuits.

[B]

Right. So there's actually there's three parts to this that we should. First when we talked about this, you touched on this a second ago. Is the status of like companies acting on this new. I think I saw somewhere it's called like a non objection policy rather than no action. It's no objection. The SEC just not really taking just Stephanie. So the status of that. The second let's we'll talk for a minute about all these different. There's probably half a dozen lawsuits that have been filed and third, there was a lawsuit filed I think last week

[A]

about the ruling about this, about the change of policy itself.

[B]

Exactly. It's not working or whatever.

[A]

That's the basis of the lawsuit.

[B]

That's the lawsuit. Okay, good. So let's talk about this for you. The status of the notices is a lot of companies started taking advantage of. Of this no objection policy or position. Call it position. The number of shareholder proposals even just submitted to companies is down this year based on some of the data.

[A]

I don't think it's necessarily this policy. I think.

[B]

Oh no, right. I'm just. But overall, like the denominator is kind of lower. And I had sort of, when we talked about this, a coup. I think we potted about this two, three months ago. I kind of speculated that is a nothing burger companies are, you know, liked the COVID of the SEC's no action stuff. And so they just kind of let these things. Man, was I wrong. There are dozens and dozens and dozens of these no objection letters that have been sent out. And you know, companies are really availing themselves of this new, this new position. And you know, there's a few that have been kind of let you. We haven't seen. Exactly.

[A]

But yeah, I think companies, everybody's in a state of uncertainty now. But there are definitely some that are kind of testing the limits and some of them have gotten sued as a result of it. Right, so.

[B]

So yeah, let's talk about that. So there have been four or five of these lawsuits. Go ahead.

[A]

Yeah. So they're. And, and so. And a lot of them proceeded the way I expected. So my view has been companies don't really want to litigate it. The, the proposals are not that important. They don't like them, but it's not that big deal. Right. So as soon as they file a lawsuit. Why are they seriously gon. As soon as someone files a lawsuit, they're not going to go to the expense of defending it. They're just going to settle and include it. And that's happened in several cases. So New York pension public pension funds put a proposal at. At&t.

[B]

I was gonna say the at&t one is. Was very emblematic.

[A]

Yeah. They asked for disclosure of EE01 reports, which are basically reports on the diversity of AT&T's workforce. They asked AT&T to voluntarily disclose these. They want a proposal to ask them to disclose these. AT&T said oh no, we're. That is ordinary business that's micromanaging. We're not going to include it on our ballot. NYC Public Pension Fund filed a lawsuit to force it on the ballot in the. AT&T. Like within eight days they settled it.

[B]

And the nature of the settlement was. I think not we're going to put on the ballot. It was. We're just going to disclose these reports.

[A]

Oh, is that what they said?

[B]

I believe, I believe. I think it was, yeah. So they basically just agreed to the policy, you know, because this is, this was these EEO one and I don't. I know their workplace diversity things that AT&T. All companies are, they have. All companies are required to send in. They had been disclosing these publicly.

[A]

Yeah.

[B]

And then they stopped. So I thought I saw that AT and T basically just. Okay, we'll go back.

[A]

Yeah. I mean the idea that this is ordinary business is very silly. I mean, if there's anything that it just is. That's pretty well established. So the next one was PETA and PepsiCo. PETA wanted a report from PepsiCo about whether its supply chain was in compliance with animal welfare policy.

[B]

Yes.

[A]

And once again, PepsiCo said they were going to exclude it. PETA filed a lawsuit. It settled immediately. PepsiCo agreed to include the proposal on the ballot.

[B]

Right. So that one, they didn't agree to the policy, but they just agreed. Okay, well let's shareholders vote on this. And I would guess PepsiCo probably had a pretty good idea of how this, how many votes it would get. And they tend not to get a whole lot.

[A]

Yeah, I mean there are some that do get a lot, but this is the kind of thing that tends not to. But we'll see then the next one. Now this one was a funny one. Nathan Cummings foundation, which is a sort of social justice foundation.

[B]

Yes.

[A]

Nonprofit.

[B]

An investor. They're an investor too. They're an asset manager. Yeah.

[A]

They also donate to a lot of causes. Like, I mean, all the foundations, they're all like, they need to do something with their money. So they put it in stocks.

[B]

Exactly right. Okay, good, good.

[A]

So they had an. A lawsuit. They filed a proposal for a company called Axon, which I do not know what Axon is, but it exists. Axon, to disclose political spending.

[B]

Okay. That's a very routine precatory proposal that's been out there for many years now constantly.

[A]

At Exxon though, they said they were going to exclude it. This was micromanaging their business. And Nathan Cummings foundation filed suit to force it on the ballot. And this one was funny because Axon opposed, you know, they wanted. Nathan Cummings wanted this preliminary injunction to force it on the ballot. And Axon opposed that on the grounds that it would be too burdensome for them to try to put together like, and to micromanaging their business to put together the details of their political spending. So the judge said, all right, well if that's true, I want you, Axon, to put a representative in my courtroom immediately so we can cross examine them on just how difficult it is for them to put together a report on their political spending. And as soon as they got that order, Axon said, nevermind, we'll include the proposal. I want to put somebody on the stand.

[B]

No, no, no, no, no. And there's a decent chance that proposal will attract some material votes.

[A]

Yeah, yeah, yeah.

[B]

At least based on, based on the history of those proposals. Right. May not get a majority, but you know, it might be enough for the board to get the 30 or 40.

[A]

Yeah, 30 or 40% tends to get some kind of compliance. And then there are two cases that I know of still pending about this. So one again, New York State Common Retirement Fund, they had a proposal at BJ's Wholesale Club asking for a report on the risks of deforestation on their supply chain, how deforestation would affect their supply chain. BJ's again claims this is micromanaging and excluded it. So there's a case pending. New York State Home Retirement Fund filed a lawsuit to force it onto the ballot. And then the last one, and this was just funny I mentioned this last week. So as you so wanted a proposal at Chubb, the insurance company, right. About whether they should pursue compensation from essentially carbon emitters to offset the cost of insuring against climate change losses. So I think, as I understand it, it's something like Chubb has to pay losses that are associated with climate change. So the proposal is, should Chubb sue the oil companies for causing climate change

[B]

or somehow get some recovery from them?

[A]

Yeah, something like that. But Chubb is excluding it and there's a lawsuit over it. But here's the best part. Chubb's argument is. One of Chubb's argument is that this is micromanaging its ordinary business. But their other argument is that when as you so sued them, they did not properly serve Chubb with the complaint because Chubb is claiming we are a Swiss organization, we have to be sued in compliance with the Hague Convention procedures for suing an army. And you just tried to serve our American subsidiary or something. So anyway, all that's pending in court. We'll see how that goes.

[B]

Right, so. So two of these. So three of these settled.

[A]

So three settled and two are still.

[B]

And one of those two was really Kind of the objection was on some really procedural cows.

[A]

We'll see what happens. But now, as you say, there's this whole complete.

[B]

There's another lawsuit. Exactly. Against the SEC where, as you saw, who we just mentioned in another group, iccr, the Interface center, corporate responsibility. So they work together a lot. They submit a lot of proposals. They're very active in the ENS and a little bit G, but more of the ENS world. You know, together they account for dozens of proposals in a year. And they sued the sec, I guess in federal court somewhere.

[A]

Yeah.

[B]

Over the policy making.

[A]

Over the policy change itself. Their claim that this was functionally amending 14A8, that they have changed 14A8, but by essentially not enforcing it, they somewhere between amended it and repealed the rule as a practical matter, without formally doing what you need to do. Like if the SEC wants to change the rule, there are procedures for change.

[B]

There's a whole law that pertains to rulemaking.

[A]

Yeah. Called the Administrative Procedure Act.

[B]

Okay, that's what it's called.

[A]

Yeah, yeah, exactly. And so the claim here is that by essentially adopting a non enforcement policy, the SEC has functionally amended Rule 14 without actually going through the proper procedure to do it.

[B]

All right. You are a securities expert. You are a scholar in securities law and state corporate law, particularly Delaware, though you've gotten pretty good about Texas and Nevada and a few other states. You really know SEC rules a lot. The 40 act, all that stuff. You are the first person I would call for a lot of that stuff. What do you know about the apa?

[A]

Very little. So this is the thing that, like, it's embarrassing to admit, but I mean, I know, like, you know, there was a time when I knew a lot more about APA procedure than.

[B]

Oh, there was really. Oh, no kidding.

[A]

Well, I mean, you know, but I have forgotten a lot and my focus these days is the substance of the law, not the procedural ruling. So what I'll say so I have no idea how this lawsuit is going to come out. I will say that. I mean, I think they're right. If you look as a practical matter, the Entire regime for 14A8 has now been changed. If you are a shareholder, this has been a very huge and impactful change. Whether that. Whether that is sufficient to meet the standard that they need to meet to show it is an improper rulemaking form of rulemaking that I have no idea. So I just, I don't.

[B]

So what do we think the other end of this then? We can move on to some other SEC stuff besides 14A8. What do we think of the relief that like these two plaintiffs are looking for? They basically want to go back to the old 14. A8.

[A]

They want the SEC. Well, they want the SEC to weigh in formally, of course. I'm not sure they'll like how the sec.

[B]

Right. Is that really what people want?

[A]

Yeah, I mean, but, you know, these decisions, no action required. I mean, they're decided by the staffers. The staffers don't change with the political wind. So unless now Paul Atkins wants to like adjudicate every single no action letter at some point, every single request for exclusion at some point is going to have to let the staff do their thing. And the staff, you know, they, you know, I mean, everybody or that way. But at the end of the day, they're going to take a more straight line way of approaching.

[B]

Well, but there was, there was a significant dislike of, under both, you know, Atkins and Democratic predecessors and so forth of how the SEC handled, SEC staff handled all this. No action steps.

[A]

Yeah. I mean, with every new administration, they move one way or another way in terms of no action letters. And you can see differences. But I think at the end of the day, that's still gonna be a better regime. One where it's at the staff level is gonna be a better regime for shareholders than this.

[B]

You have just letting or letting the companies essentially decide.

[A]

Yeah, essentially the company gets to decide and shareholders have to bring a lawsuit. And we have no idea how these lawsuits are going to come out. I mean, one of the more bizarre things is that there are so few lawsuits over this that the actual legal standards for how to interpret the rule are incredibly unfair.

[B]

Especially because there's just no case law about this.

[A]

There's nothing. And because remember, when the SEC weighs in, the SEC doesn't even have any legal reasoning. It issues a letter that says, we

[B]

think we agree or disagree or we

[A]

think there's, we don't think there's a basis. But they don't really explain their reasoning. So in the couple of times courts have had to decide this, they're kind of like, well, I've got all these SEC no action letters. Can I see a pattern? Like, they don't. So, so in fact, if we actually start getting decisions, we actually get more articulation of what the rule is supposed to mean.

[B]

All right, all right, so there's some other SEC stuff going on and then we'll take a quick break and then we can talk about some more SEC stuff.

[A]

And then, yeah, we'll keep talking about,

[B]

discuss what we Think. Another interesting one that this ESG community was very upset about had to do with how they can do these exemption from the solicitation rules.

[A]

Right.

[B]

And just to recap real quickly, if you don't, if you're, if you submit one of these precatory proposals, you by definition aren't going to be soliciting proxies. You're not hiring a proxy solicitor, you're not going to be asking people for the proxy, you're going to be voting. You're letting the company do all that you can under this little exemption, communicate with other shareholders.

[A]

Well, it's. Yeah, I mean it's actually, yeah. I mean it's not even just proposals, it's sort of, it's anything.

[B]

Oh, okay.

[A]

Really? So it's, it works this way. If you are trying to persuade someone to vote a proxy in a particular way, you are engaged in proxy solicitation. Any attempt to persuade shareholders as to how they should vote is a proxy solicitation, technically. Now, normally, as you know, if you are engaged in proxy solicitation, you have to file a proxy statement, which is a great big long.

[B]

Right.

[A]

Document. And okay, so they thought, well, wait a minute, not everybody should have to file that big long document. And you know who shouldn't have to file that big long document? People who aren't seeking proxy authority. Meaning if you are looking at a preexisting thing that shareholders are voting on and you just want to argue they should vote one way or another, but

[B]

you'll say, here's what we think or here's how I think you should vote.

[A]

Right, exactly. So like if you're not the person who's saying, give me proxy authority to vote your ballot at the meeting, if you're watching a different dispute, like an activist dispute or anything else, you just want to basically communicate shareholders, I think you should vote this way. Vote no campaign on a direct election.

[B]

Right.

[A]

You just want to commute. If you just want to do that, you do not have to file the big long proxy statement, which is important because otherwise it would really inhibit shareholders ability.

[B]

Oh yeah, that's a hassle. I do. That's what I, that's what I do a lot. And it's, it's, it's expensive and detailed and discloses all sorts of really information that sometimes I'd rather not have to disclose.

[A]

Exactly. So the first principle here is that if you are engaged in a proxy solicitation meeting, you're trying to persuade someone, but you're not actually asking to be designated as their proxy at the shareholder meeting, then for the most part, with a few exceptions, you don't have to file a proxy statement. But what the rule did require that you file is that if you are a shareholder with more than $5 million in investment in the company and you were using written materials that are non public, which is to say not newspaper advertisements, you know, just like you're handing

[B]

out written materials, like a letter.

[A]

A letter, they wanted you to file that publicly with the SEC so that other all shareholders could see it. So that rule has been around for a while that if you're doing proxy solicitations and you're not seeking proxy authority, but you are using non public written materials and you have $5 million in assets, you should file those materials with the SEC.

[B]

Right. So those end up on Edgar for everyone to see.

[A]

For everyone to see. And meaning that people who subscribe to get alerts get alerted to that update. At which point several years ago, shareholders figured out, like smaller shareholders who don't have $5 million figured out, I can just voluntarily file solicitation materials. And that way it's a cheap way of distributing them. Just because it doesn't matter whether I have $5 million, if I just want to persuade shareholders to vote one way or another way, I can just file them on Edgar and then it's cheap and it distributes them to all the shareholders.

[B]

And it's sort of on some sort of a docket or record that this is out there. All right, good.

[A]

So, so, so what happened was shareholders started doing this. Now the first thing they started doing it for was if they had a shareholder proposal that's going in the proxy materials, but they're limited to 500 words. So if they wanted to circulate extra materials in favor of their proposal that go beyond the 500 word limit.

[B]

Right.

[A]

They could file them this way even if they weren't required to, because they didn't have $5 million and they weren't, you know, they weren't otherwise sending out solicitation materials and then shareholders started filing. Well, to be fair, it really was abused. Like shareholders started like completely uninterested parties started filing all kinds of things this way. So unquestionably the docket was getting a little crowded. But what was also true, there's actually a paper on this. It's called why does shareholder communication? When does Shareholder Communication Matter? Evidence from the proxy Exempt solicitations. And it's by like a bunch of authors whose names I will mispronounce if

[B]

I try, but it's When's the paper from?

[A]

It's from a few years ago. It's on. When does shareholder communication matter? Evidence from proxy exempt solicitations. And what these authors found was that when shareholders filed these exempt solicitations voluntarily or required, either way, they really were read. They were read by shareholders. They were downloaded. They were read and they tended to influence how people voted, including opposing management proposals, opposing director nominations, say on pay, things like that. They were taken seriously. But in any event, this is what the SEC changed its rule. They decided that there were too many of these voluntary filings. People were using EDGAR as a means to cheaply disseminate proxy solicitation material. And they said this is not what the rule is for and we're going to object now. So now they only want you. They don't want. They won't accept voluntary solicitations anymore. Now they will only let you file this solicitation material on EDGAR if you meet where it's required under the rule. And where is it required under the rule? You have at least $5 million and you are circulating yourself not through Edgar solicitation materials that are non public, then you can file.

[B]

I wonder, I wonder on the latter point, if you could forget the 5 million, which is what has all the ESG proponents irate is because no one owns $5 million worth of shares. I wonder if you can sort of meet that second requirement, like putting on your website. Does that count as circulating?

[A]

Well, they don't need public. Remember, remember, you only have to require it if it's not otherwise public. So I don't know if website isn't on the list of things they called public. I mean, that's pretty public. But they were thinking more like newspaper ads. But maybe that's borderline. I really don't know. But like, the point is that this severely restricts what had become a useful form of shareholder communication. And I can agree that it was being abused, but I don't think this was entirely just about the abuse.

[B]

Absolutely not. Wow. All right. This is actually good. This is a pretty comprehensive look at the status of what's going on with shareholder proposals, the lawsuits and so forth. The rule and now this exempt solicitation change. All right, there are several other developments in at the SEC we can cover. Why don't we take a quick break, we'll talk about those three or four things and then let's sort of see what we think of it all. Does that make sense?

[A]

Sure.

[B]

Cool. All right, let's take a break now. Here at Shareholder Primacy.

[A]

Shareholder Primacy is brought to you by free flow analytics.com the only free database of corporate directors, their influence and their performance. If you own a stock or retirement plan, go to freeflowanalytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your [e-mail] now back to the show. Welcome back to Shareholder Primacy. I'm Ann Lipton with Mike Levin, and we are talking about the latest SEC developments here.

[B]

Yes, we are. There's several others that we should address, and we've talked about these to a later. Greater. Yeah, before. Before. But because we're looking at the SEC kind of writ large, we thought we'd kind of bring them in. I don't know if there's been much in the much developments in the mandatory arbitration in IPOs subject that was the subject of the Atkins speech last year or whatever. But what happened? What happened? Anything since then?

[A]

Yeah. No. I just want to be good. So what the SEC did was that under Paul Atkins, they said they would stop objecting to companies requiring arbitration of securities claims when they went public. Now, as a practical matter, any publicly traded company after going public could have inserted a bylaw requiring arbitration of securities claims. They could have done that at any time, but it was clear the SEC didn't. Now, whether that would be enforceable is a separate question. It's let's just leave it as unsettled. But they could have done it at any time. They had chosen not to because they knew the SEC hated these things and hated them so much that they were refusing to allow you to adopt them at the moment of going public.

[B]

Hating these things. Mandatory arbitration.

[A]

Exactly. So the fact that the FCC said they will no longer object if you include them when you go public didn't just mean you could include them when you go public. It was also something of a green light to add them if you wanted to, even after you were publicly traded. Now, the big but the big holdup, and this is something we said before, is that under Delaware Raw, very recently they passed a law that said you can't deny access to a courtroom for shareholder litigation. They didn't. They weren't thinking about arbitration because they weren't expecting this change in SEC policy. But they did put that in their law so that now if you're incorporated outside of Delaware, you can't, you can try to do this. There are other questions whether it's enforceable, but you couldn't if you were in Delaware. And so Atkins, he has made it very clear that he doesn't. He's not just lifting the policy against having mandatory arbitration at IPO stage, he is actively encouraging mandatory arbitration. So he made a speech before the Delaware.

[B]

Oh, that was that anniversary thing or whatever. Yeah, right.

[A]

The entire political establishment of Delaware basically strongly suggesting that Delaware should change its law to allow companies to adopt mandatory arbitration provisions and also to change its law to make clear that shareholder proposals were illegal. And then he went to Texas, and at Texas he did the same thing. Texas, of course, we've talked about Texas law. Paul Atkins loved Texas law, but apparently it's not good enough. Because at Texas he also encouraged their legislature to make clear that companies could choose mandatory arbitration. And he encouraged their legislature to make clear that companies could adopt fee shifting provisions so that if shareholders sued Texas

[B]

companies, oh, they'd have to pay the company's fees.

[A]

They used to pay the company's fees if they lost. So he was. So he basically, Atkins has a lot of opinions of what state corporate law should look like, and he's going around to the different states to tell them how they should adopt the law that he thinks that they should have. And he's doing it in both Texas and Delaware. So this is his speech. But, and let's be really clear, the issue isn't arbitration. The issue is that if you choose arbitration, you can then say that claims have to be brought individually and not in a class right.

[B]

Not as a class right or as a group or as a mass tort or. You're right. Yeah.

[A]

That's the point. The point is not actually a preference for arbitration. The point is to make it impossible for people to bring class actions on the theory that if they can't bring class actions, there'll just be fewer lawsuits because these are very expensive to adjudicate outside of the class action context. So Atkins has now given a sort of green light. There are other kinds of legal challenges that people would bring if companies adopt them, but he's given a green light. He's made the clear the SEC isn't going to pursue you and actually encourages the adoption. Notwithstanding Atkins's get real encouragement at this point at the state for state legislatures and companies to adopt mandatory arbitration. Exactly. One company has done it so far, One publicly traded company, Zion Oil and Gas Incorporated in Texas. Zion markets its securities to retail investors through televangelist broadcasts. And their thesis is they use Bible verses to search for oil deposits in Israel. As far as I can tell, I Don't think they've actually found any oil.

[B]

Yeah, that sounds like an engineering challenge.

[A]

That is the pitch. We will use the Bible to identify oil deposits in Israel, and they sell through televangelism to retail investors. They are the only company that I know of that have taken Paul Atkins up on his challenge for mandatory arbitration and securities claims. And they did it so poorly, counseled so obviously without a lawyer, that they forgot to include the part about individualized claims. So under their arbitration clause, theoretically, you could still bring a class action.

[B]

In other words, just the class action has to go to arbitration.

[A]

Exactly. So the thing is, the companies have not shown great eagerness to this, despite the fact that Paul Atkins is pushing it. Now, why is that? There are probably a lot of reasons. First of all, because companies have a lot of advantages in federal court. There are a lot of really high barriers, procedural barriers to shareholders bringing securities claims in federal court. And companies like those procedural barriers, and they won't have them in arbitration. And there's also. I heard a defense attorney actually at a conference recently say that there are real concerns about how insurance would work in these scenarios. Like what insurance would cover, what it wouldn't cover.

[B]

When you like DNO insurance kind of thing.

[A]

Exactly. So that they're just. It's. It may not be a great idea. The fact is that Paul Atkins really wants to push this, but companies are slow on the uptake. Now, it's possible we may start seeing these mandatory arbitration provisions in IPOs rather than existing companies. Because in IPOs, it is easier to bring shareholder lawsuits in IPOs, because you don't.

[B]

There's a lot more causes of action in an ipo.

[A]

Yeah. If the registration statement is false in an ipo, then you can sue even if you don't show intent. And that's not true outside the IPO context. So it's not impossible that some companies will decide, given the risks of lawsuits without a showing of intent, it's worth requiring arbitration for that. But there are other ways to defeat those kinds of claims. So so far, companies are just. Despite Paul Atkins bullying Texas, bullying Delaware, and generally encouraging this, only Zion Oil

[B]

and Gas has shown has done this. All right, so that. All right, cool. There's two or three other things that we've referred to. There hasn't been a whole lot, as far as I can tell, in any of this, but let's bring them up just to make sure, for completeness. Several months ago, the head of the division at the SEC that oversees RIAs, and we talked about this on A podcast, registered investment, essentially registered vest managers was encouraging or was suggesting that raas and more generally, funds need not. Or there are all sorts of conditions under which they didn't necessarily have to vote proxies or vote for every matter on a proxy. This was the whole discussion of rational apathy.

[A]

Yeah, exactly. He was basically encouraging as it matters not. Do you really need to vote your proxies?

[B]

Right. And this was in some sense not an attack, but criticism, I suppose, of proxy advisors and so forth. But he was basically saying that all these investors, you know, contrary to decades of policy and pressure, where you really got to take these proxies seriously, maybe it's okay to not. Yeah, go ahead.

[A]

She's right. That the pot that the rule was never you must vote all your proxies.

[B]

Right. You just have to take it seriously.

[A]

The rule was always you can make a considered cost benefit calculation not to do it. Yes, but he was. But also depending on which administration was in place, like under the Obama administration, also a suggestion that. But given that there are proxy advisors, it's going to be rare. That it's too costly to vote your proxies.

[B]

Exactly.

[A]

But this speech was basically like, you know what? I think maybe it's often too costly.

[B]

Maybe it is. Right. Exactly right. So, sorry. So there's that we have seen a little bit of action on the potential that regulation SK which requires quarterly financial reporting, there was some news in the past week or two that that's making progress, that there's going to be, I think, some rulemaking or proposed rulemaking here. They are going to follow the apa.

[A]

They really are. Yeah, they really are going to go. Yeah, that's. There's no way to repeal the existing. They'd have to. There's no way to repeal the existing rules. So yes, there's. So that's what's been reported that they're really going to. Planning on moving ahead with requiring only semiannual reporting rather than quarterly reporting.

[B]

Right. And so that's. There have been some steps. It's based on news, news accounts rather than real SEC stuff. But Atkins at some point, I think gave another speech recently where I think he said something. Yeah, this is. This is. This is happening. This is going to. This is going. And then the last point had to do with his suggestion. And this is this, I think, Texas speech from late last year that there's going to be a whole revamp, at least a research project to look at all the requirements around exec comp. Reporting that, you know, right now you've got a report on the top five NEOs and you got to, you know, there's all sorts of detail about how pay for performance is reported. And so he gave a fairly detailed set of theses about how this might change. And the hint was that this reporting on exec comp is a huge burden and really delivers a lot of data and information that investors don't find particularly useful. And I would interrogate that.

[A]

I don't read. I just show them to my students and I leave it.

[B]

Oh, I read this stuff. No, no, I study the. Well, there are parts, now that you mentioned it, there are parts of the exec Comp disclosures that I find not informative. The pay ratio analysis is there for.

[A]

It's not there for investors.

[B]

Go. Good. Who's it there for? Anne? That's interesting.

[A]

No, I mean the pay ratio thing is ridiculous. Okay, so the pay. Well, I mean the reason there's a pay ratio is because Congress required it.

[B]

Right? I know.

[A]

And it was, it had nothing to do with investors. It was about hoping to cap like that.

[B]

I was hoping to shame. It was hoping to shame executives wells

[A]

to deal with income inequality to like shame CEOs into either raising worker pay or lowering their own pay.

[B]

Yeah, they were badly mistaken.

[A]

They were badly mistaken. But they were also doing it through the role wrong tool. They were using the securities laws which are aimed at investors. So the SEC gets hold of this and they're like, what are we supposed to do with this? This is not relevant to investors. And they come up with their rules for how this is implemented. But not, of course, that's not relevant to investors. It was never intended to be relevant to investors.

[B]

Exactly. So anyway, so there's, there's some other aspects of exec Comp reporting that are sometimes a little arcane and so forth. You know, part of the problem is that, you know, the way exec Comp works, there's so many tax considerations and you know, different ways of creating equity based incentives and so forth that creating sort of a uniform reporting tool or reporting system is tricky. But that doesn't mean that the SEC shouldn't like make an effort. You know, that doesn't mean that you just cut it back. And I would expect, I would expect and hope for significant pushback from the investor community, cii, all the big funds. If these exec comp. You know, if, if the result of this proposed research project there was like a roundtable last year, there was again, this isn't just like a speech were to result in a lot less Disclosure, the type of disclosure and the amount in the detail would be interesting. But just saying that this is a big burden, which is kind of the thrust of his comments. Yeah, I think is dead wrong.

[A]

And I think investors are going to object when he tries to switch to semiannual as well. I've already heard that some large investors are like, no, we like quarterly report.

[B]

Yeah, yeah, exactly. There's, you know, and the sentiment is there's, you know, there's a few, you know, companies that are just, you know, too clever, that okay, fine, we'll do it every half year, whatever. But most companies are so used to this cycle and so used to having investors happy with this cycle. And you know, they'll be allowed voluntarily to do. You could do monthly, you could do weekly reporting if you want. There's no restriction on it.

[A]

The assumption has been that companies will voluntarily do it. I'm not sure how long that'll last. I mean for a while, sure, but then new companies will go public with semiannual and on and on.

[B]

That's right. And that's going to be a loss. The idea that there's semiannual as infrequent as every six months is how we're going to find out officially how companies are doing. We'll have to rely on all sorts of really weird ass kind of other sources of information.

[A]

And that's bad for insider trading. It's a recipe for volatility. Yeah.

[B]

Right. So anyway, so this, so to look back on what we've sort of talked about here, we got all these changes in shareholder proposals, including how they can talk about their proposals in, you know, using exemption, solicitation and so forth and the arbitration stuff, the voting policies. I have some views, yeah, I have views about what's going on at the sec.

[A]

Everything. And I'm kind of, it's all rowing in exactly one direction and that's consolidate power of boards, insulate them from shareholder

[B]

pressure of companies, of company leadership, boards of company boards.

[A]

Like people keep saying it's like pro. These kinds of things are pro company. They're not, they're pro boards, they're company boards. It's consolidate power in boards and remove levers of pressure from shareholders. It's rowing exactly in one direction. Everything is moving in exactly one direction. There is no proposal anywhere to increase shareholder power is all towards eliminating the levers of influence that shareholders have.

[B]

Well, okay, let's, let's talk about that for a second because you know, I have this long standing view that again, boards are supposed to represent you know, they're the elected and paid for representatives of shareholders. And so on the one hand, just to react superficially to your assertion here that it's considering power in boards as a shareholder, say, oh, that's great. Rather, you know, boards compared to executives.

[A]

Oh, no, I mean management. I don't mean boards. I mean taking away the shareholder influence.

[B]

Okay. And what it's doing is it's, it's, it's not necessarily severing, but diminishing the influence that shareholders have Exactly.

[A]

Over the over, over board in every possible way. They can't. Making it difficult for them to sue, making it difficult to then get shareholder proposals.

[B]

Right.

[A]

Making it difficult for them to communicate each other about voting, making it, encouraging them not to vote, incur diminishing the information that's available. Every single lever is being pushed in one direction.

[B]

Right. And, and, and, and some of the things we've talked about I think are more and less important related to how shareholders can influence boards. Again, I've said this before, I'm not sure that the whole 14A8 changes are going to really influence significantly or change significantly the influence that, you know, all, you know, index shareholders have over boards. There are others that I think are much more important. Like the whole mandatory arbitration, the ability to sue and to hold boards to account through the court system. Yeah, I think is pretty critical. Well, I, Yeah, go ahead.

[A]

No, I mean, you could continue. Yeah, yeah.

[B]

Well, I was gonna say so. And that. And you know, having robust information about what boards are paying executives.

[A]

Yes.

[B]

And being able to react to that. You know, there's a whole system of shareholder engagement that revolves around exec comp. Okay. You know, when companies, and this was a point we made one or two pods ago about proxy advisors having all this influence over exec computer. That's really, you know, a company does poorly on a say on pay, relatively poorly on say on pay, and they're out right away, you know, talking to top 25 shareholders because they want to improve that. And you know, and so there's a huge amount of engagement about exec comp. As it turns out, that's, that's not quite as well known to a lot of show. And this information and it's all based on the information that's in these disclosures. And if we're going to have a lot less to work with or we're going to have to rely only on what companies choose to disclose and it's going to vary, you know, from, you know, there's going to be no rules around it, that's, that's, that's a big problem.

[A]

And it's not just that. Like, I think we talked about this on a pod like that. One of their got new guidance things is hinting that the large asset managers have be switched from being passive to active if they engage on these topics.

[B]

Oh, that's the. Yeah, the dg. The whole DG thing, right. Exactly.

[A]

Yeah, exactly. And that, of course, has resulted in dramatically less engagement from Vanguard and BlackRock on whatever it is they engage, which includes executive compensation.

[B]

I wouldn't say it's dramatically fewer, less. Oh. Because my experience is some. Okay. But the nature of the engagement has also changed somewhat.

[A]

Yeah, they're being, they're being. They're being more circumspect, but also like somebody actually clocked it. Like, it's like 30%, 40% fewer meetings. Okay, so. So, yeah, I mean, this is rowing in one direction on multiple fronts, and every single one of them is making it so corporate managers do not have to answer to shareholders.

[B]

Right. And the last point I'd make about that is that a lot of these change, you know, part of what happens and, you know, administration change and regulatory philosophy changes and so forth. Part of the problem is that stuff at the SEC changes pretty slow, slowly, because the SEC historically has been very, in part out of necessity, but just because that's how they are. You know, their rulemaking goes, you know, with. With some deliberation. So, you know, let's suppose that shareholders, you know, immediately have an impact. In 2028, there's a new SEC chair and they change things. It's going to be several years after that until there's any kind of change in what we're starting to see in this direction.

[A]

I'm not sure. I mean, like, the thing is that one of the things about this SEC that's been very obvious is that they haven't been acting through rulemaking yet. They've been doing this informal stuff like we're not going to respond to no action letters or we'll give guidance on 13D, 13G. They haven't actually been promulgating rules, and they've had a lot of influence just by sort of jawboning now.

[B]

Yeah. Oh, interesting.

[A]

If they actually do the rule change, they could, if they wanted to act very quickly. At the end of the Trump won, the SEC put a whole new package of rules about exempt offerings. Like, very quickly. They're sloppy, they're poorly written, they're internally contradictory because they were in such a rush to get them out. So it's not impossible that the SEC will start to actually make real rules. And if we get a new administration, one thing that people are expecting, I don't know how true it is, is that that administration will just like, without, you know, within, like gallop through repealing all of it. And then what we've got is, of course, a lack of financial stability in the because, like, every time there's a new, like, it's bad if the rules completely change every single time.

[B]

There's a new administration every four, even every two years.

[A]

Yeah.

[B]

So, yeah. All right. Wow. All right. This is. I found I learned a few things here. This is great. Hopefully this is, this is helpful to all our followers here about what, what might be happening here at the SEC based on all these different examples of rulemaking or non rulemaking or changes in policy. So. Yeah. All right. Why don't we conclude and get on with the rest of our day? Would you like to do that, Anne? All right, Cool. This is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Ann is professor of Law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me, Mike, at the activist investor1word.com and you can find Ann at Law Colorado. Edu. Our podcast is produced and distributed by Free Float Media. Thanks for listening. We will talk again soon.