Investors sue U.S. regulator over Trump-era AGM resolution rules

By Ross Kerber

(Reuters) -A group of investors sued Wall Street's regulator on Tuesday over rule changes that raise the bar for filing resolutions at annual shareholder meetings to call for new priorities or reforms.

The group is concerned that the changes, pushed through in 2020 by appointees of former U.S. President Donald Trump and set to take effect next year, will restrict shareholder democracy just as activist investors are starting to drive significant change in Corporate America.

More top funds are throwing their weight behind investor challenges to companies on environmental, social and governance (ESG) issues and are putting companies on notice by choosing to publicize how and why they voted.

The investors argue the new U.S. Securities and Exchange Commission (SEC) rules make it harder to hold companies accountable over hot-button issues such as climate change or workforce diversity, and want them set aside.

"This was a political rulemaking not warranted by the record or the evidence," said Danielle Fugere, president of As You Sow, a California shareholder activist group and one of the plaintiffs in the lawsuit filed in U.S. District Court in Washington, D.C.

The two other plaintiffs are James McRitchie, an individual investor and frequent filer of shareholder resolutions, and the Interfaith Center on Corporate Responsibility, which represents religious groups and other institutional investors.

SEC representatives did not respond to questions about the lawsuit on Tuesday.

SEC commissioners voted 3-2 along party lines last September for changes including raising the threshold value of shares investors must own to file resolutions and the support levels needed to resubmit them.

Investors soon will need at least $25,000 of a company's shares if they want to file a resolution after they have held the stock for one year, for instance. They currently need to own at least $2,000 to do the same. They will be able to file a resolution owning $2,000 worth of stock only after they have held it for three years.

Asked about the lawsuit, Tom Quaadman, an official who follows capital markets for the U.S. Chamber of Commerce trade group, said it supported the rule changes "as they reflect the needs of global 21st century capital markets that must be competitive and not push the interest of special interest activists who push agendas unrelated to economic return.”

GAINING TRACTION

ESG resolutions have gained more traction lately. A forthcoming analysis from proxy solicitor Georgeson, details of which were given to Reuters, found the pass rate of environmental resolutions at Russell 3000 companies rose to 36% so far this year, up from 21% in 2020, while support for proposals on social topics rose to 18% from 10% in the same period.

Many more were withdrawn as companies agreed to make changes like releasing workforce demographic information.

Georgeson Senior Managing Director Hannah Orowitz, who said the company did not have a position on the regulations, said if left in place the changes would likely cut back on future ESG-related proposals despite their rising popularity.

She cited one calling on Dupont to report on plastic pollution that won a record 81% support after it was resubmitted for the company's meeting in May, but which would barely have been allowed to be considered under the new thresholds given the limited support a similar proposal received in 2019.

Dupont representatives did not respond to questions.

The Democratic administration of President Joe Biden has taken several steps to encourage sustainable investing, including a declaration by the Labor Department that it will not enforce Trump-era rules curbing the use of environmental and social factors in retirement accounts.

Under new chair Gary Gensler, appointed by Biden in February, the SEC is gathering comments on such topics as how it might have companies report data like carbon emissions.

Senate Democrats had introduced a resolution to undo the SEC changes on shareholder proposals, but a deadline to move it has passed.

The investor lawsuit claims the Trump-era SEC failed "woefully" to account for the benefits to shareholders of allowing more resolutions, such as stronger corporate performance. It alleges the regulator placed undue emphasis on the costs of the resolutions for the companies, which the regulator has previously pegged at up to $150,000.

The SEC also failed to account for a study by its staff that found the rules could reduce the number of resolutions up to 78%, the lawsuit states.

The case is Interfaith Center on Corporate Responsibility et al v SEC, U.S. District Court, District of Columbia, No. 21-01620.

(Reporting by Ross Kerber in BostonEditing by Greg Roumeliotis, Sonya Hepinstall and Matthew Lewis)