Has the SEC’s ‘13D’ ruling changed shareholder engagement?

This week marks five months since the Securities and Exchange Commission (SEC) blindsided investors with an update seeking to clamp down on their influence over US-listed companies.

In February, on the back of Donald Trump’s presidential win, the regulator issued a new interpretation of existing rules on how shareholders should file forms known as 13Gs and 13Ds.

A 13G is a relatively simple piece of paperwork, through which investors disclose if they own more than 5% of shares in an issuer.

A 13D, on the other hand, is what one investor called “a regulatory and administrative nightmare”.

It is much more onerous, requiring the shareholder to notify company management of any intentions to influence its strategy, and must be filed within five days of crossing the 5% threshold.

A 13D is traditionally used to compel activist investors, who take strategic positions in companies, to make themselves known to management quickly, and explain any plans they have to push for fundamental changes to the way the business is run.

But, in a move that has prompted alarm amongst ESG teams around the world, the SEC now wants any major investor seeking to influence a company to file a 13D.

“Many passive investors that file 13Gs also regularly engage with issuers on ESG topics,” says Andrea Reed, a Chicago-based partner in the capital markets practice of law firm Sidley.

“This SEC guidance says if the investor [owns more than 5% and] is looking to influence control, even on these types of topics, they need to file a 13D.”

“One company had a conversation with an investor recently, which they thought had gone well. And then the investor voted against them on the topic.”

Kilian Moote, ESG specialist at Georgeson

For large, highly diversified investors who trade on a daily basis, filing 13Ds every time they cross the 5% threshold is practically impossible.

From panic to stiffer communication

As a result, the initial response to the news was panicked.

Many of the world’s biggest asset managers immediately suspended their stewardship efforts while they sought to make sense of the guidance.

“All our meetings with investors were cancelled more or less overnight,” said one sustainability engagement specialist at a large listed US firm, who asked not to be named.

Five months later, the dust has begun to settle, and engagement has resumed.

But most investors have changed the way they do it to avoid being seen as pressuring their portfolio companies, according to Kilian Moote, an ESG specialist at advisory firm Georgeson.

It is now standard for a shareholder to email a company ahead of a meeting, to state they have no intention of trying to influence it.

Firms will often reply with an acknowledgement to provide reassurance that they won’t accuse it of doing so in the future.

When it comes to the meeting itself, Moote says “it’s moved from a dialogue to a monologue”.

“Companies choose what they want to present, and investors fish for the information they actually care about without coming out and asking for it.”

Some shareholders are communicating with companies via the timing of their disclosures: delaying the publication of their voting intentions as a silent signal that they aren’t happy with management’s current position.

While the situation is frustrating for engagement teams, it’s also confusing for firms, says Moote.

“We know of one company that had a conversation with an investor recently, which they thought had gone well.

“And then the investor voted against them on the topic.”

Although the firm was “shocked”, the investor’s vote was clearly aligned with its guidelines – it just didn’t express its position during the meeting, for fear of being accused of pressuring management.

“Investors haven’t changed their mind on what companies should be doing, especially not on governance issues,” Moote insists.

Escalation policies and collaborative engagement

Sidley’s Reed agrees that internal policies are less vulnerable to the SEC’s new stance, but many of those internal policies, especially in Europe, include an escalation plan for companies that don’t respond sufficiently to investor expectations.

And those plans almost always cite divestment as the final stage.

“We don’t have any definite guidance, but I would think that the threat of an escalation like that, particularly if it’s a large investor, would be something that might lean more towards perceived pressure,” says Reed.

“Because it relies on the issuer taking on the policy the investor puts forward.”

There is also confusion about what the rule means for collaborative engagement – whether investors with a combined stake of 5% in a company would also have to be wary of influencing it – but Reed says that’s less of a concern.

A spokesperson for the SEC told IPE its division of corporation finance would “continue to help market participants” understand its position through public and private dialogues.

Next steps

Moote believes it will take a full year to truly understand the impacts of the change.

For now, he’s watching to see whether investors will resume their engagement activities more freely once the proxy season ends and there is less of a direct link between their demands and their votes at annual meetings.

“It’s too early to tell whether this will vastly change shareholder engagement,” he says.

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