Why Team Trump Will Probably Kill SEC Rule Reshaping Proxy Fights

A Securities and Exchange Commission effort to rewrite the rules for proxy fights that pit dissident directors against incumbent boards is more likely than ever to die on the vine.

It's doubtful that an agency chief under the incoming Trump administration will have any interest in adopting the rule, proposed in October, since it's opposed by the U.S. Chamber of Commerce and could increase the likelihood of proxy fights.

Also like to be nonstarters are a proposal under consideration by the SEC and other regulators requiring big financial firm executives to wait much longer to cash out bonuses as well as one that gives the same institutions several years to claw back CEO pay connected to misconduct. A major effort driven by Sen. Elizabeth Warren and other Democrats to set up a political spending disclosure rule also isn't expected to see the light of day in the Trump administration.

"I can't see why they would go forward with those," said Roel Campos, a former Democratic commissioner who overlapped at the agency with the Trump administration's adviser on the SEC, Paul Atkins. "They will die or stay dead."

The proxy fight proposal is designed to give shareholders more flexibility to choose between incumbent board members and dissident candidates that activists like Starboard Value or Elliott Management often seek to install to help drive their M&A or operational change agendas.

Currently, shareholders who don't go to company meetings can vote only for the director candidates offered on the activist's proxy card or those on the company's card. They can't support only a few of each.

The SEC's proposed rule would require both the protagonist and the incumbent board to issue universal proxy cards giving shareholders the ability to pick and choose from all candidates.

Some observers say the move would hurt activists because it would make it less likely their full slate would be elected. Others argue that it would offer them the opportunity to get at least some of their nominees onto a board.

Bruce Goldfarb, founder of proxy solicitor Okapi Partners, agrees that the rule may never be adopted, given the almost guaranteed change in the composition of the commission. "They have so many other things to do, and I don't think a Republican-led commission will consider it a priority," Goldfarb said.

One of the two chief advocates for the universal proxy card and CEO-clawback rules, chairman Mary Jo White, has announced that she intends to leave the agency at the end of the Obama administration.

One slim possibility is that White -- as one of her final acts as SEC chief -- moves to adopt a universal card rule in the period before she leaves the agency. That seems very unlikely, however, given that the proposal's comment period expires on Jan. 9, only 11 days before President-elect Donald Trump's Jan. 20 inauguration.

The comment period on the CEO salary-clawback rule ended in July, which suggests that White could more easily move on that measure.

Nevertheless, the most likely outcome is for the proposals to be considered by the next SEC chairman.

Atkins, Trump's SEC transition team leader, served as a Republican commissioner at the agency from 2002 to 2008. He's probably best known for his fervent opposition to an effort by the agency's then-chairman, William Donaldson, to regulate hedge fund managers and increase mutual fund board independence.

Critics argue that Atkins and the agency failed to tighten up regulations on large financial institutions in the buildup to the 2008 financial crisis.

"Ultimately, there will be a chair of the SEC that has a lot in common with Paul Atkins, a strong conservative that disfavors regulation and thinks the financial world is over-regulated," said Campos. "I believe it is Paul Atkins's position to refuse."

Atkins might recommend two other ex-Republican SEC commissioners in his stead, Kathleen Casey, a commissioner from 2006 to 2011, or Dan Gallagher, who left the agency in 2015. Both Casey and Gallagher work at Patomak Global Partners, a Washington-based regulatory consulting firm founded by Atkins.

The agency's only remaining Republican commissioner, Michael Piwowar, may take an interim leadership role at the agency, observers say. Piwowar voted against introducing both the universal proxy card and clawback proposals.

The proxy card measure, he said, would increase the likelihood of such fights at companies and distract management from oversight of the business.

One caveat on the deregulatory front is Carl Icahn. The billionaire raider turned activist is a close Trump ally and is a strong advocate for a universal proxy card system, limits on CEO pay and shareholder rights.

In October, Icahn said in a statement that the universal card measure would "give shareholders greater freedom of choice" and he hoped that "powerful voices in opposition" (read: US Chamber of Commerce) will not be successful in defeating it.

However, the forces against both provisions may simply be too strong, with Atkins in charge of the SEC transition and Piwowar holding the fort at the agency.

"While Carl has a lot of influence with Trump and his team I just don't see how that influence will make its way throughout the SEC ranks," said Andrew Freedman, partner at Olshan Frome Wolosky.

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