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SEC Dismantles Roadblock to Shareowner Engagement
By Holly Testa, Director, Shareowner Engagement

Investment advisors who file shareholder proposals on behalf of clients can no longer be compelled by companies to provide unwarranted documentation that proves their authority to do so.  This is thanks to the work of Bruce Herbert, Chief Executive of Newground Social Investment, a Seattle-based investment advisor and long-standing partner of First Affirmative Financial Network


Baker Hughes Incorporated, a major oil field service company, filed a "no-action" request at the Securities and Exchange Commission (SEC) indicating that it planned to omit a shareholder proposal that Newground had filed on behalf of a client regarding the company's vote-counting practices.  The company challenged at the SEC on two grounds: 1) that Newground did not provide proof it was authorized to file the proposal on behalf of the shareowner, and 2) that the shareowner failed to provide its own written Statement of Intent that it intended to continue to hold shares through the date of the company's next annual meeting.  (While the Statement of Intent is a required document, Newground issued the Statement on behalf of its foundation client, while the company asserted that only the client itself could author the Statement.)

These are not new tactics.  In fact, over the years companies have repeatedly contended that each shareholder proposal requires case-by-case documentation of a client's authorization, and with these tactics have successfully blocked meaningful discussion and shareholder votes on a variety of important topics.

First Affirmative, for instance, has been routinely asked for this type of documentation.  Ironically, these demands for proof of authorization often come from law firms that themselves act on behalf of a corporate client.  The attorneys, who act in an "Agency" capacity, never submit evidence of their being authorized by these corporate clients.  And because they serve as agents, it is neither a requirement nor would it be appropriate to ask them to prove an agency relationship.

This is also the case with investment firms—though for years companies have gotten away with denying it.  The fact is that State and Federal law give investment firms quite broad agency powers to act on behalf of clients in a wide range of investment activities, such as deciding which securities to buy and sell.

Newground's founder, Bruce Herbert, refused to jump through the hoops that Baker Hughes placed in his path; instead, he chose to fight the company's demand for proof of authorization in a rebuttal to the SEC—one that was deliberately presented as a test case of the principles of Agency as they apply to investment advisors vis-à-vis shareholder authorization and representation.  Newground's rebuttal was the culmination of a multi-year strategy that piece-by-piece put into place certain building blocks that eventually set the stage for this final step to be taken.

The process bore fruit—the SEC fully concurred with Newground's interpretation of Agency law in a precedent-setting ruling that now clarifies and establishes that investment advisors who represent their clients operate on the same Agency footing as attorneys that represent corporations.

As a result:

  • Companies can no longer stall or dodge accountability by demanding proof of representation when a Registered Investment Advisor files a shareholder proposal on a client's behalf.
  • An Advisor can issue a Statement of Intent (and other communications) on behalf of a client without being subject to spurious claims of misrepresentation.

Though on the surface it may seem technical or obscure, the SEC's decision has great potential to expand shareholder advocacy—both by allowing current advocates to extend their activities, and by encouraging new firms to join the effort.  First Affirmative, for example, will be able to devote more time and resources to actual advocacy and less time to company demands for unnecessary paperwork (that companies would then examine for technicalities to challenge on); and over time, this decision may also bring more investor advocates into the fold.

"This decision should make participation in this arena significantly more possible for advisors who have not yet gotten their feet wet," said Herbert.  "It's been a long-standing goal of Newground's to democratize the process of shareholder advocacy, and to have the ease and possibility of engagement walk arm-in-arm with the responsibility investors have to shepherd the impact of their assets in the world."

First Affirmative could not agree more.  We celebrate the SEC's determination and hope to see an expansion of investor engagement around equity, justice, and sustainability issues.

First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society.  We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world.  Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

Past performance is no guarantee of future results.  For information about the suitability of any investment opportunity, please contact your financial advisor.

Posted: March 17, 2016