On March 6, Tiffany Posil, Chief, Office of Mergers and Acquisitions at the U.S. Securities and Exchange Commission, aimed to clarify the SEC’s stance on new guidance for institutional investors. Speaking at the Tulane Corporate Law Institute, Posil tried to ease some of the tension by clarifying the agency’s updated interpretation for 13G filers.
A month earlier, the SEC tightened reporting guidance for fund managers. Investors who own stakes of 5% or more and who try to influence their portfolio companies will now need to issue a 13D, a more onerous and costly filing than the standard 13G – and one that comes with an activist stigma.
Why it matters: The new guidance significantly narrows what it means to be a “passive” investor and has already caused large index funds to alter their engagement processes. The limitation on how topics must be presented will also restrict useful feedback received by Boards.
What has changed?
Stewardship teams at 13G filers, namely those at large managers such as BlackRock, Vanguard and State Street, have, for decades, engaged with companies on a range of topics.
Prior guidance allowed passive holders to press companies privately on ESG, public interest, and other matters and remain a 13G filer.
But the SEC says that is no longer the case. More topics now cross over into 13D territory, including:
Explicitly or implicitly applying conditions to the support of one or more director nominees
Discussing a voting policy on a particular topic with management
Posil tried to tamp down some of the anxiety around the new guidance.
Speaking to a New Orleans ballroom packed with advisors, Posil said that simply publishing voting guidelines with no actions taken stays within 13G parameters.
Posil added that if the company initiates the engagement, and the investor is just answering questions, that too stays within the boundaries.
Yet the guidance appears to make clear that if 13G filers engage on topics including executive compensation, poison pills, and staggered boards, and imply a negative director vote if the Company doesn’t change its policy, they must switch to a 13D.
"13G status is at risk the more the discussion turns into a negotiation. So that's where the 13G filer is, for example, demanding specific actions in exchange for its votes,” Posil said. “The greater the specificity of the actions demanded, the greater the insistence on those actions, the more it becomes a quid-pro-quo type of exchange, the more 13G status is at risk.”
The impact
Muting index fund feedback: After temporary pauses, BlackRock resumed stewardship meetings but will remain in ‘listen-only’ mode. Vanguard will now reiterate its passivity at the start of each meeting.
Companies are flying blind: Boards and management teams may need to make significant strategic decisions without the benefit of their largest holders’ views.
How to navigate these changes
To demonstrate your commitment to shareholder engagement and feedback, which remains an ISS requirement, company representatives – whether Board directors, members of the C-suite or the investor relations team – should consider:
Assessing the state of play: Review the latest 13G guidelines and what it means for your shareholder base – especially if there is a history of low shareholder support or unsolicited shareholder proposals.
Tracking shareholder engagement and sentiment: Keep tabs on which shareholders declined an invitation to meet and, without direct engagement, take steps to ensure your proxy and other materials effectively communicate your Board’s engagement efforts and message.
Increase dialogue with active holders: Provide top active funds such as Wellington, Capital Group, Fidelity and T. Rowe access to members of the Board in controlled, 30-minute sessions. Building relationships with these institutions can directly lead to better outcomes for shareholders.
Find unconventional ways to communicate: More effectively use videos, corporate IR page and social media to highlight Board qualifications and contributions and ensure those messages are reaching your largest investors. One-way communication will be increasingly