As noted in the prior post, the SEC has proposed rescinding Securities Exchange Act Rule 14a-8 (the shareholder proposal rule).
The SEC Proposes to Scrap the Shareholder Proposal Rule: Part 1
As we have discussed many times here at Bainbridge On Corporations, Securities and Exchange Commission Chairman Paul Atkins has been signalling an interest in modifying and/or rescinding the shareholder proposal rule (Securities Exchange Act Rule 14a-8). The time has finally come.
Among the SEC’s arguments in favor of repealing the rule is the assertion that the SEC lacked authority to adopt the rule. Indeed, the lack of authority is the SEC’s main argument. To be sure, it offers up various policy arguments, but the SEC frames those as secondary—"independent of," in its own words—its threshold conclusion that Rule 14a-8 exceeds what Congress gave it power to do under Section 14(a) of the Exchange Act.
The legislative history of section 14(a) is relatively sparse, in large part because the controversy over federal proxy regulation was resolved early in the legislative process. As originally introduced, the proxy provision mandated substantial disclosures and gave the SEC authority to adopt additional disclosure requirements. The proposal met with substantial criticism.
Congress redrafted section 14(a) in response to these criticisms. In doing so, Congress did what it often does when it has a tough problem to solve: it told somebody else to solve it. In effect, the Act simply made it unlawful to solicit proxies “in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.” If the delegation doctrine had any teeth, that statutory language would never have succeeded because it gave the SEC zero guidance as to how to regulate proxies.
Having punted the problem to the SEC early in the legislative process, there were few references to proxy regulation in the legislative history. Indeed, virtually the only pertinent legislative history are a pair of cryptic references in a House Committee Report1 to “fair corporate suffrage”:
“Fair corporate suffrage is an important right that should attach to every equity security bought on a public exchange.”
“Inasmuch as only the exchanges make it possible for securities to be widely distributed among the investing public, it follows as a corollary that the use of the exchanges should involve a corresponding duty of according shareholders fair suffrage.”
The question is what those sparse references tell us about the scope of the SEC’s authority under § 14(a).