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115th Congress    }                                    {        Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                    {       115-904




August 24, 2018.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed


Mr. Hensarling, from the Committee on Financial Services, submitted the 

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 5756]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 5756) to require the Securities and Exchange 
Commission to adjust certain resubmission thresholds for 
shareholder proposals, having considered the same, report 
favorably thereon without amendment and recommend that the bill 
do pass.

                          PURPOSE AND SUMMARY

    On May 10, 2018, Representative Sean Duffy introduced H.R. 
5756 to direct the U.S. Securities and Exchange Commission 
(SEC) to revise Rule 14a-8(c)(12) to protect the interests of 
long-term shareholders and allow a company to exclude a 
shareholder proposal that focuses on substantially the same 
subject matter as a prior proposal that failed to receive at 
least six 6 percent of the vote on its first submission, 15 
percent on the second submission, and 30 percent on the third 


    The goal of H.R. 5756 is to eliminate burdensome costs on 
companies by modernizing the shareholder resubmission 
    Modern corporations are subject to numerous pressures and 
continuous scrutiny from the respective corporation's many 
stakeholders--which include its shareholders, management, 
employees, customers, suppliers, special interest groups, 
communities, politicians, and regulators. These stakeholders 
have a broad array of interests in the corporation's operation 
and success. Although boards are expected to consider these 
diverse and sometimes conflicting interests of the 
corporation's stakeholders, the board's primary obligation is 
to ensure that the corporation creates long-term value for the 
corporation's shareholders.
    Over time, a board's ability to focus on shareholder value 
has been inhibited by the proliferation of shareholder 
proposals for public companies' annual meetings. Section 14 of 
the Securities Exchange Act of 1934, and Rule 14a-8 thereunder, 
govern the submission of shareholder proposals. The Rule allows 
any shareholder who holds $2,000 or 1 percent worth of a 
company's stock for a period of one year to submit a non-
binding shareholder proposal on any subject matter. (To put 
this into perspective, the largest publicly traded company in 
the United States by market capitalization is Apple, with a 
current market cap of more than $1 trillion. Rule 14a-8 
currently would allow a shareholder who owns .000000002 worth 
of the stock (or roughly 10 shares of Apple) to offer a 
proposal, and force Apple (and all other shareholders) to pay 
for the proposal's dissemination.
    Due in part to the extremely low bar for qualification to 
submit a proposal, as well as the SEC's increasing tendency 
over the past decade to err on the side of proponents in 
allowing these proposals access to the corporate proxy, the 
shareholder proposal process has become one of the favorite 
vehicles for special interest activists to advance their 
social, environmental, or political agendas. Proponents largely 
include activist public pension funds, social, or 
environmentally-focused funds, as well as so-called ``gadfly'' 
investors who own miniscule amounts of a company's stock, often 
times just so they are able to submit proposals year after 
year. In other words, the current shareholder proposal rules 
allow persons to hijack U.S. public companies' proxy processes 
to advance non-value related goals at the expense of long-term 
shareholders. The cost of a proposal can run $150,000 per 
measure, and some companies face 15 or more a year--equating in 
such instances to $2 million of time and resources being 
diverted from the core fiduciary responsibility to maximize 
shareholder value.
    Despite the increasing number of proposals at public 
companies, shareholder support for environmental, social, or 
political issues remains stubbornly low. According to Proxy 
Monitor, in the decade they have been tracking proposals at 
Fortune 250 companies, only two environmental-related 
shareholder proposals received the majority support of 
shareholders over board opposition.
    In addition to low thresholds for the initial submission of 
a proposal, shareholders are allowed to resubmit their proposal 
in subsequent years, even if they receive extremely low levels 
of support. Current regulations allow a company to exclude a 
resubmitted proposal from its proxy only if it failed to 
receive the support of 3 percent of shareholders the last time 
it was voted on; 6 percent if it has been voted on twice in the 
last five years; and 10 percent if it was voted on three or 
more times in the last five years. Thus, in many cases 
shareholder proposals that have been opposed by over 90 percent 
of shareholders on multiple occasions are allowed to be 
resubmitted, forcing companies to spend time and money in 
deciding how to deal with them.
    Data shows that out of 2,341 shareholder proposals 
submitted to companies that comprise the Russell 200 index from 
2001 to 2018 relating to special meeting, environmental and 
social, political and social and human rights, only 4 percent 
passed and 29 percent, were zombie proposals (those that failed 
to gain the majority support after three times). Additionally, 
the U.S. Department of Treasury's Report on Capital Markets 
issued pursuant to President Trump's Executive Order 13772 on 
Core Principles for Regulating the United States Financial 
System, found between 2007 and 2016, 31 percent of shareholder 
proposals were a resubmission of a prior proposal, 
demonstrating that companies have to waste resources on 
proposals that have continuously been rejected.
    Under the leadership of Chairman Jay Clayton, the SEC has 
begun to focus on the overly burdensome nature of the 
shareholder proposal process and has offered some new 
shareholder proposal guidance. The SEC's Division of 
Corporation Finance published a Staff Legal Bulletin on 
November 1, 2017, to provide guidance to shareholders and 
companies for the upcoming proxy season. The guidance addresses 
the following: (1) the ordinary business exclusion; (2) the 
relevance exclusion; (3) proposals by proxy; and (4) the use of 
images in proposals. The updated ordinary business exclusion 
suggests that the SEC will give greater deference to companies 
whose board of directors provide detailed analysis on how a 
proposal may implicate an ordinary business matter, and thus 
can be excluded. The relevance exclusion provides the same 
deference to companies if their board can determine that a 
proposal does not account for more than 5 percent of a 
company's total assets or net earnings and gross sales. The 
proposals by proxy guidance would have proposals by proxy to 
provide documentation describing the shareholder's delegation 
of authority to proxy. Lastly, the use of images in proposals 
would prohibit the use of graphs and/or images that are 
misleading or irrelevant to the subject matter of a proposal.
    While the SEC's staff guidance is a step in the right 
direction, it does not significantly reduce the burdens placed 
on companies from the current shareholder proposal process. The 
bill offered by Mr. Duffy is a modest change to the current 
regulatory structure that would help to reduce unnecessary 
shareholder proposals and allow companies to focus their 
resources on getting the greatest returns for investors. The 
bill would update the resubmissions thresholds for companies to 
exclude a resubmitted proposal from its proxy if it failed to 
receive the support of 6 percent of shareholders the last time 
it was voted on; 15 percent if it had been voted on twice in 
the last five years and 30 percent if it was voted on three or 
more times in the last five years. The updated thresholds are 
based on a 1997 SEC proposed rule.
    The U.S. Department of the Treasury's October 2017 Report 
on Capital Markets included several recommendations to the 
shareholder submission regime. The Treasury report recommended 
that the resubmission thresholds be updated from their current 
form to promote accountability, better manage costs, and reduce 
unnecessary burdens.\1\ Treasury also recommended ``substantial 
revisions'' to the $2,000 holding requirement, which was 
instituted in 1983 and last updated in 1998 to adjust for 
inflation. Treasury also recommended that the SEC ``might also 
want to explore options that better align shareholder interests 
(such as considering the shareholder's dollar holding in 
company stock as a percentage of his or her net liquid assets) 
when evaluating eligibility, rather than basing eligibility 
solely on a fixed dollar holding in stock or percentage of the 
company's outstanding stock.''
    \1\U.S. Department of the Treasury, A Financial System That Creates 
Economic Opportunities: Capital Markets, available at: https://
    Further, the campaign to allow persons to hijack public 
companies to advance political projects that are immaterial to 
shareholder value has distorted the impact of this modest 
modernization. First, nothing in this bill eliminates a 
shareholder's ability to submit a proposal for the first time 
under the current rules; the bill simply raises the thresholds 
to levels proposed in 1997 to govern when a shareholder can 
resubmit the same proposal. The new thresholds provided in this 
legislation are sensible, and the idea that shareholders' 
ability to effect change at companies will be mooted disregards 
basic facts. After all, if these thresholds had been in place 
since 2001, proposals relating to special meeting, 
environmental and social, political and social and human rights 
matters that failed to gain majority support after at least 
three tries still would have been eligible for a third year on 
company ballots two-thirds of the time--and a quarter of them 
would have been eligible for a fourth year. These are sensible 
ratios because of all the proposals relating to these issues, 
which often are immaterial to shareholder value, only 4 percent 
of them pass anyways. This outdated system imposes costs on the 
investors that have no interest in such proposals, and also 
serves as a distraction for boards of directors and management, 
which are trying to focus on long-term performance.
    This bill is important for all companies that are incurring 
unnecessary costs from shareholder proposals that are submitted 
year after year to push a social or political agenda and are 
not supported by the majority of shareholders. However, this 
bill is especially important for small and emerging companies 
that cannot afford to waste necessary capital on the same 
proposals every year. The Business Roundtable correctly noted 
``As the rule currently stands, a proposal that is opposed by 
90 percent of a company's shareholders can be resubmitted 
indefinitely, leading to a ``tyranny of the minority'' 
situation.''\2\ When a company cannot use their capital to grow 
and create long-term value, shareholders are ultimately the 
ones who suffer because they cannot get the greatest return on 
their investment.


    The Committee on Financial Services held a hearing 
examining matters relating to H.R. 5756 on May 23, 2018.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
June 7, 2018, and ordered H.R. 5756 to be reported favorably to 
the House by a vote of 34 yeas to 22 nays (recorded vote no. 
FC-183), a quorum being present.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole recorded vote was on a motion by Chairman Hensarling to 
report the bill favorably to the House without amendment. The 
motion was agreed to by a recorded vote of 34 yeas to 22 nays 
(recorded vote no. FC-183), a quorum being present.


    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the Committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.


    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 5756 
will reduce regulatory burden and allow companies to focus 
their resources on getting the greatest return for investors by 
raising the shareholder resubmission thresholds.


    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.


    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, July 11, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 5756, a bill to 
require the Securities and Exchange Commission to adjust 
certain resubmission thresholds for shareholder proposals.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
                                             Mark P. Hadley
                                        (For Keith Hall, Director).

H.R. 5756--A bill to require the Securities and Exchange Commission to 
        adjust certain resubmission thresholds for shareholder 

    Under current law, shareholders' proposals may be excluded 
from the proxy statements of publicly traded companies if the 
proposals are substantially the same as others presented for a 
vote within the previous five years. If a proposal fails to 
receive 3 percent support in a first vote, 6 percent on the 
second, or 10 percent after the third vote in a five-year 
period, the company may exclude it. H.R. 5756 would raise those 
thresholds to 6 percent, 15 percent, and 30 percent, 
    Using information from the Securities and Exchange 
Commission (SEC) on the costs of similar activities, CBO 
estimates that implementing H.R. 5756 would cost less than 
$500,000 for the agency to amend its rules. However, the SEC is 
authorized to collect fees sufficient to offset its annual 
appropriation; therefore, CBO estimates that the net effect on 
discretionary spending would be negligible, assuming 
appropriation actions consistent with that authority.
    Enacting H.R. 5756 would not affect direct spending or 
revenues; therefore, pay-as-you-go procedures do not apply.
    CBO estimates that enacting H.R. 5756 would not increase 
net direct spending or on-budget deficits in any of the four 
consecutive 10-year periods beginning in 2029.
    H.R. 5756 contains no intergovernmental mandates as defined 
in the Unfunded Mandate Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments. If the SEC 
increased fees to offset the costs of amending its rules, H.R. 
5756 would increase the cost of an existing mandate on private 
entities required to pay those fees. Using information from the 
SEC, CBO estimates that such an increase would amount to no 
more than $500,000, falling well below the annual threshold for 
private-sector mandates established in UMRA ($160 million in 
2018, adjusted annually for inflation).
    The CBO staff contacts for this estimate are Stephen Rabent 
(for federal costs) and Rachel Austin (for mandates). The 
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995.
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 


    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 


    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         EARMARK IDENTIFICATION

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 


    In compliance with clause 3(c)(5) of rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 


    Pursuant to section 3(i) of H. Res. 5, (115th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires one 
directed rule making within the meaning of such section. The 
directed rulemaking requires the SEC to revise section 240.14a-
8(i)(12) of title 17, Code of Federal Regulations to raise the 
resubmissions thresholds for companies to exclude a resubmitted 
proposal from its proxy if it failed to receive the support of 
6% of shareholders the last time it was voted on; 15% if it had 
been voted on twice in the last five years and 30% if it was 
voted on three or more times in the last five years.


Section 1. Resubmission thresholds for shareholder proposals

    This section directs the SEC to raise the resubmission 
thresholds to at least six 6 percent of the vote on its first 
submission, 15 percent on the second submission, and 30% on the 
third submission.


    H.R. 5756 does not repeal or amend any section of a 
statute. Therefore, the Office of Legislative Counsel did not 
prepare the report contemplated by Clause 3(e)(1)(B) of rule 
XIII of the House of Representatives.

                             MINORITY VIEWS

    H.R. 5756 harms shareholders by making it easier for 
companies to exclude shareholder proposals from their proxy 
materials. The shareholder proposal process, governed by SEC 
Rule 14a-8, gives shareholders an opportunity to engage 
corporate management on issues that boards might otherwise be 
reluctant to address To be eligible to submit a proposal, an 
investor must have continuously held the lower of $2,000 or 1% 
of the company's securities for at least one year. To resubmit 
the same proposal in successive years, an investor must garner 
an increasing percentage of affirmative votes. Currently, a 
board can exclude a resubmitted shareholder proposal that 
received less than 3% of the vote on its first submission, 6% 
on the second, and 10% on the third. H.R. 5756 would increase 
the resubmission thresholds to 6% of the vote on the first 
submission; 15% for the second submission; and 30% for the 
    Proposals related to emerging issues have often taken years 
to develop enough traction among investors to receive more than 
10% of the vote. However, many proposals that received low 
support in the beginning have facilitated industry-wide changes 
in the long term. For example, a 1997 shareholder proposal 
calling upon ExxonMobil to evaluate and report on the business 
implications of climate change received less than 6% of the 
vote. In 2017, after decades of resubmissions, similar climate 
change proposals at ExxonMobil and other energy companies 
passed with majority shareholder support. H.R. 5756 would have 
the effect of restricting many important shareholder proposals 
on the environment, diversity, corporate governance, and other 
critical issues.
    H.R. 5756 is premised on the misconception that 
shareholders are abusing the shareholder proposal process to 
promote activist interests to the detriment of public 
companies. To the contrary, shareholder proposals have 
benefited public companies in terms of increased shareholder 
engagement and improved performance. For example, in a letter 
to the Committee opposing H.R. 5756, New York State Comptroller 
Thomas DiNapoli noted shareholder success in improving gender 
diversity on corporate boards, which has enhanced company 
financial performance and board decision-making. According to 
Mr. DiNapoli, this progress would not have been possible if 
H.R. 5756 had been enacted during the early stages of board 
diversity proposals.
    Another misconception is that shareholder proposals 
routinely force companies to expend significant resources to 
analyze and answer them. This is false because most public 
companies never receive shareholder proposals and thus incur no 
burden whatsoever from the existing process. According to a 
voting analytics database maintained by Institutional 
Shareholder Services, Inc. (ISS), only 13% of Russell 3000 
companies received a shareholder proposal in any given year 
between 2004 and 2017. The data also shows that any company 
that receives a shareholder proposal is likely among the 
largest corporations, as less than 4% of shareholder proposals 
in the ISS database were filed at companies with under $1 
billion in market capitalization.
    When a similar provision was included in H.R. 10, the 
``Financial CHOICE Act,''--which was unanimously opposed by all 
House Democrats--several state treasurers and comptrollers 
signed a joint letter that underscored the importance of 
preserving shareholder rights as set forth in Rule 14a-8. 
According to these state officials, ``[t]he robust shareholder 
proposal process, as currently structured and administered 
under SEC Rule 14a-8, works well for investors, public 
companies and capital markets.''
    In addition, several consumer and investor advocates, 
religious organizations, civil rights groups, organized labor 
organizations, public company shareholders, pension plans, 
institutional investors, and other proponents of sound 
corporate governance wrote to Congress opposing H.R. 5756 and 
the related provision in H.R. 10. These stakeholders view the 
existing shareholder proposal process as striking an 
appropriate balance between management discretion and 
accountability to shareholders.
    For these reasons, we oppose H.R. 5756.

                                   Maxine Waters.
                                   Wm. Lacy Clay.
                                   Stephen F. Lynch.
                                   Carolyn B. Maloney.
                                   Daniel T. Kildee.
                                   Michael E. Capuano.