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SEC's Gallagher seeks reforms to stop activist shareholder proposals

A man walks past a doorway at the Fort Worth Regional Office of the Securities and Exchange Commission (SEC) in Fort Worth, Texas June 28, 2
A man walks past a doorway at the Fort Worth Regional Office of the Securities and Exchange Commission (SEC) in Fort Worth, Texas June 28, 2

By Sarah N. Lynch

WASHINGTON (Reuters) - U.S. corporate governance rules make it too easy for activist investors to get politically driven shareholder proposals onto public company ballots and should be overhauled, a top U.S. Securities and Exchange Commission official said Thursday.

"Activist investors and corporate gadflies have used these loose rules to hijack the shareholder proposal system," said SEC Republican Commissioner Daniel Gallagher, in prepared remarks for a conference at Tulane University Law School in New Orleans.

"The vast majority of proposals are brought by individuals or institutions with idiosyncratic and often political agendas that are...unrelated to, or in conflict with, the interests of other shareholders," he added.

The SEC is in charge of enforcing the rules that govern communications with shareholders over proxy voting solicitation.

Under current rules, a shareholder who has owned $2,000, or one percent of the company's stock for a year is generally allowed to include a proposal on the ballot as long as certain conditions are met.

Proposals that raise ordinary business concerns, for instance, are typically not permitted on the ballot, unless they give rise to significant policy issues.

When companies and shareholders disagree as to whether a proposal can be excluded or not, the SEC staff acts as an arbiter between the two.

In his speech, Gallagher said it is "inexcusable" that the SEC'S rules are often forcing shareholders who may be saving for retirement or college to "subsidize activist agendas".

He proposed some reforms to make it harder for groups like organized labor to get their proposals on the agenda.

For starters, he said, the $2,000 stock ownership threshold is "absurdly low". And while the SEC could raise the figure to $200,000 or even $2 million, he said instead the SEC needs to do more economic analysis and come up with a percentage threshold that is based on a company's size.

Moreover, he said it is problematic that the SEC rules also allow these proposals to be easily resubmitted on future ballots, because they only need anywhere between 3 and 10 percent of the votes to reappear, depending on how many times in the prior five years they were brought.

The SEC's resubmission policy, he said, should perhaps be a "three strikes and you're out" approach.

In addition, Gallagher said he's troubled by the way the SEC polices the substance of shareholder proposals.

Many proposals that the SEC has permitted to appear on corporate ballots because they were deemed a significant policy issue have been dubious, he said.

One such example, he said, involved a February 2013 decision in which SEC staff told PNC Bank it could not exclude a shareholder proposal by Boston Common Asset Management to require the company board to report greenhouse gas emissions that were resulting from its portfolio.

In that matter, the SEC declared that climate change is a significant policy issue and therefore the proposal could appear on the ballot.

Gallagher said the SEC's rules defining what constitutes a significant policy matter are too vague. In addition, he added that the agency's five presidentially appointed commissioners, and not staff, should have the final say.

Whether any of Gallagher's ideas can get traction at the SEC remains to be seen. Only the agency's Chair, Mary Jo White, can set the policy agenda, and not all of his peers on the commission are like-minded.

(Reporting by Sarah N. Lynch; Editng by Stephen Powell)

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