Disclosure requirements, shareholder activism raise SEC commissioner's ire

SEC Commissioner Hester Peirce called for a return to narrower agency oversight, warning that expanding non-financial disclosure requirements risk obscuring material information for investors.

Speaking to securities law practitioners in San Diego, Peirce also argued that the SEC must better shield investors from shareholder proposals influenced by political and social interests, potentially through revising SEC Rule 14a-8. She criticized the agency's broad interpretation of internal accounting rules under former leadership.

"Public companies are confronting a symptom of a larger societal malady, importing politics and contentious social issues into everything that we do," she said.

The three-day Securities Regulation Institute is hosted every January on Coronado Island by Northwestern Pritzker School of Law and tends to draw major regulatory officials and lawyers. On Tuesday, Che Chang, general counsel at OpenAI, will speak.

Peirce, who was appointed by President Donald Trump in 2018 to fill a Republican vacancy, and was speaking in an individual capacity, said that a burgeoning industry of attorneys, accountants and consultants had emerged in response to this trend, with the aim of dragging companies into "hot social and political melees." She likened their overtures to corporate leaders as a form of "rent seeking," and said this is "often quite convincingly disguised in a flow of ethics and morality."

She said that steps must be taken to fend off efforts to "commandeer" the SEC's disclosure rules in the name of these interests and warned that disclosure regimes were "a very tempting target for people who want information from companies for reasons other than deciding whether to invest."

"The SEC's role is to ensure that investors have the information they need to channel funds to companies that can put them to the highest and best use by delivering the products and services that people demand," she said.

Peirce cited conflict minerals and CEO pay ratio requirements as examples of overly broad disclosure mandates. "If this trend continues, companies' securities disclosures will bury information material to investors in an unwieldy catalog of responses to special interest groups' demands," she warned, advocating for a return to materiality-focused disclosure from "the perspective of the reasonable investor."

To do a better job of protecting investors from shareholder proposals which were not intended to maximize shareholder value, Peirce suggested reviewing the ownership threshold for shareholder proposals under SEC Rule 14a-8.

"We should reexamine the ownership thresholds in rule 14a-8 and other available tools to ensure that a proponent has some meaningful economic stake or investment interest in the company," she said.

She added that the SEC should take a fresh look at the bases for excluding a shareholder proposal under Rule 14a-8.

Peirce limited her direct comments on recently departed SEC Chair Gary Gensler to stating, "Maybe the last chairman was overly aggressive in what he thought that the commission could do in the time that he was there." She said that she was "excited by the possibilities of a new day" under the new Trump administration and urged "people all across the political spectrum" to come together to keep capital markets apolitical.

The SEC is currently being overseen by Acting Chairman Mark T. Uyeda. Paul S. Atkins is President Donald Trump's nominee to lead the agency. Both men are Republicans.

Peirce said that under new leadership the SEC must "refrain from using enforcement actions to override managerial decision making," and argued that the agency's recent, "aggressively broad" interpretation of Section 13 of the Exchange Act, pertaining to internal accounting rules, was an example of such overreach under Gensler's leadership.

"As Acting Chairman Uyeda and I noted in a dissent in one case, the commission's attempts to convert an internal accounting controls provision into an ever-unfolding utility tool that magically converts every corporate activity into something the commission regulates are inappropriate extensions of the agency's authority," she said.

Regarding the U.S. Supreme Court's Loper Bright decision overturning Chevron deference to federal agency powers, Peirce suggested the impact on the SEC would be limited. "The SEC has never been an agency that gets to get a free pass from boards," she noted, though she expected increased emphasis on legal analysis following the decision.

The Daily Journal is a sponsor of the Securities Regulation Institute.