Well, the SEC finally passed the long awaited proxy access rule. However, it could also be called the anti-hedge fund activist rule.
To me, the provisions are designed to bar the types of investors who have the appetite to stir things up and aggressively push companies to boost stock prices one way or another.
Ironically, the new rule more favors the unions and other special interest groups that folks at pro-business lobbies like the U.S. Chamber of Commerce and Business Roundtable fear would use this new power to promote their own narrow agenda.
So sad.
The best thing to come out of this event is that the SEC Wednesday voted 3-2 to approve the final proxy access rule. SEC chairman Mary Schapiro had promised when she was nominated last year to move forward with controversial issues even if the five commissioners couldn’t agree unanimously.
Here’s the scoop. Under the approved rule, investors must own at least three percent of a company’s stock for at least three years to be eligible to nominate their own directors and placed in the company’s proxy.
The three-year holding period is up from the two years most observers had anticipated. What’s more, an SEC draft rule in June 2009 called for a one-year period, Risk Metrics points out.
This change seems designed to lock out many hedge funds. After all, they do not typically hold on to declining, losing stocks for three years. They would rather sell way before then and do right by their investors rather than make a public statement down the road.
There is another provision that seems aimed at hedge funds and other aggressive activists. An investor is not permitted to seek more than 25 percent of the number of board seats. This prevents the rule from being used to launch proxy fights and change of control.
Risk Metrics points out that if multiple shareholder groups seek to nominate candidates that exceed the 25 percent cap, priority would be given to the group with the largest economic stake. “This provision differs from the draft rule, which would have given priority to the first group to file a notice of intent,” it noted.
Again, it penalizes aggressive investors.
Another provision would phase in “small reporting companies” over a three-year period, before they must comply. What a shame, given that many small companies that seem to operate below the radar of Wall Street and investors invariably wind up being targets of activists like hedge funds. But, under the new rule, they get some reprieve.
In the meantime, the SEC will study the potential impact on these companies and then possible offers revisions to its rule. Stand by for this one.
The new rule also says investors may not borrow stock to meet the three percent threshold, but can use shares on loan to meet that standard as long as they have the right to recall those shares. “This provision will help large pension funds that derive significant revenue from share lending,” Risk Metrics notes. We’re no longer surprised.
Are hedge funds upset by the new rule’s restrictions seemed aimed at the most aggressive investors? Probably not. As I noted earlier, one hedge fund activist calls proxy access “meaningless.” He tells me if you want to launch a proxy fight you would prefer to do it on your own rather than place your nominees on the company’s proxy. “Proxy access is not for the professional guys,” he says. “It is more for the gadflies.”
