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New SEC Staff Guidance on “Passive Investor” Status May Complicate Shareholder Engagement Efforts
Key Takeaways
On February 11, 2025, the SEC staff issued two updates to its Compliance and Disclosure Interpretations, or C&DIs, addressing Schedule 13D/G beneficial ownership filings. The full impact of this guidance remains uncertain, but at present some major institutional investors have paused engagement activities with certain portfolio companies. As we are heading into peak proxy season, this guidance may impact companies’ abilities to engage with their largest investors as they have in years past.
Background: Schedules 13 D and 13 G
In short, shareholders that beneficially own more than 5% of a company’s voting securities are required to report their ownership with the SEC. That reporting must be done via Schedule 13D – which entails relatively onerous reporting requirements – unless the shareholder is eligible for an exemption that permits use of Schedule 13G, a “short form” filing that requires substantially less information. Those exemptions require that the investor be “passive” – i.e., they did not acquire the securities with the purpose or effect of changing or influencing the control of the issuer. Historically, large institutional investors like BlackRock, Vanguard, Fidelity and the like have relied on those exemptions to avail themselves of scaled back Schedule 13G filings.
What’s Changed?
The new and revised C&DIs provide updated guidance on what the SEC staff considers to be a passive investor. Previously, ordinary course engagement on topics such as corporate governance, executive compensation, and environmental or social issues would generally not preclude finding that an investor is “passive.” The new guidance indicates that if, in the course of such engagements, an investor “exerts pressure” on management to make specific changes to policies or practices, or indicates its support for a company’s director nominees may be withheld absent change that aligns with the shareholder’s expectations, it may no longer use Schedule 13G. Accordingly, investors are now assessing their engagement practices and voting guidelines relative to this new guidance, that leaves much open for question and interpretation.
Need Assistance?
Compensia has extensive experience in helping companies review their executive compensation and corporate governance policies and practices and developing disclosure of such practices in their proxy materials taking into consideration SEC disclosure requirements, proxy advisory firm policies, and investor expectations. If you would like assistance with or if you have any questions on the subjects addressed in this Thoughtful Pay Alert, please contact your regular Compensia team members or the authors of this Alert:
Mark A. Borges, Principal Hannah Orowitz, Principal
415.462.2995 332.867.0566
mborges@compensia.com Horowitz@compensia.com