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Exclusive: Investors expect reprieve on contentious U.S. shareholder voting rights rule

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09/15/2020 | 05:46pm EDT

U.S. investors expect the securities regulator to drop a contentious provision in a new rule that would make it tougher for them to push companies on issues such as climate change and social justice, according to three people briefed on the matter.

The Securities and Exchange Commission (SEC) next Wednesday is scheduled to finalize the rule, first proposed last November, that would raise the bar for submitting shareholder proposals at companies' annual general meetings. It says the decades-old rule needs to be modernized.

Talks on the rule have gone down to the wire as investors made last-ditch efforts this month to halt the changes in meetings with SEC staff and letters, the people said.

While the SEC next Wednesday will push ahead with the new rule, it is poised to drop one of its most contentious provisions, which would have allowed companies to exclude proposals that have declining shareholder support, the sources said. SEC staff were still working on the final draft on Tuesday, one of the people said.

The expected removal of the provision, which has not been reported before, marks a critical reprieve for supporters of social and environmental motions, which can take years on the ballot to gain traction.

With nationwide racial justice protests, and wildfires in the U.S. West that scientists say are fueled partially by climate change, corporate America should be under more pressure to confront environmental and social issues, not less, investors argue.

"The rulemaking is tone-deaf to the surge in market support for environmental and social governance disclosure, and the groundswell of demand from young people that their investments and employers have a positive effect on the environment and society," said Sanford Lewis, director of the Shareholder Rights Group, which campaigns for greater corporate democracy.

An SEC spokeswoman declined to comment on Tuesday.

Once seen as distractions, U.S. shareholder proposals have taken on a new importance at many corporate annual meetings in recent years as investors, especially younger ones, pay more attention to issues like climate changes and social inequality.

Corporate lobbying groups, including the U.S. Chamber of Commerce, have pushed to rein in shareholder proposals and have argued that the bar for resubmitting them should be higher in order to stop niche issues with diminishing levels of support from clogging up company ballots.

The so-called "momentum" provision would have allowed companies to block motions for which shareholder support declines annually by more than 10% and which receive less than majority support.

Investors argued the provision made no sense, since it would allow companies to cut proposals which command a large chunk, if not a majority, of support and have fought hard to water down that and other aspects of the rule they say will gag them.

Lewis wrote to the SEC https://www.sec.gov/comments/s7-23-19/s72319-7760742-223259.pdf on Friday calling for it to review the economic effects of the whole package after other regulators warned https://www.reuters.com/article/us-climate-change-market-risks/us-regulator-calls-climate-change-a-systemic-risk-idUSKBN260120 climate change poses systemic risks.

The Council for Institutional Investors, the Forum for Sustainable and Responsible Investment and the Interfaith Center on Corporate Responsibility this month also wrote to the agency https://www.sec.gov/comments/s7-23-19/s72319-7741268-223144.pdf highlighting flaws in its economic analysis of the rule.

While SEC Chairman Jay Clayton can typically rely on his two fellow Republican commissioners, who are in the majority on the five-member panel, to pass rules, the SEC has been wary of alienating investors and has been looking to strike a compromise, the sources said.

By Katanga Johnson and Jessica DiNapoli

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