Acceleration of Trump's Red Tape Reduction Policy Imminent
The Securities and Exchange Commission (SEC) has made a significant move by formally withdrawing 14 pending regulations, including an anti-greenwashing rule and a rule involving the shareholder proposal process. This decision, made under the Biden administration, reverses the Trump administration's efforts that aimed to raise the bar for shareholder proposals.
The anti-greenwashing rule, introduced in response to the rise of environmental, social, and governance (ESG) investing, was intended to tighten controls on funds that label themselves "green." The rule used a three-tiered structure to delineate the centrality of ESG to the fund at issue.
Historically, the SEC's Rule 14a-8, which governs shareholder proposals, has set relatively low bars for proposals to qualify for inclusion on annual corporate meeting proxy ballots. However, during the first Trump administration, the SEC sought to raise the bar for shareholder proposals, such as by increasing the stock-ownership threshold for inclusion on proxy ballots.
The SEC's involvement in the shareholder-proposal process is questionable, as it largely abrogates state law in this area and gives itself a "shareholder-proposal gatekeeper" role. Jarrett Dieterle, a legal policy fellow at the Manhattan Institute, has expressed concerns about this role, stating that it could potentially infringe on state laws and the rights of shareholders.
The withdrawal of these regulations leaves the SEC with a decision: whether to re-raise the bar for shareholder proposals or to return the issue to the states. The number of shareholder proposals related to environmental and social causes has increased significantly, as tracked by the Manhattan Institute's Proxy Monitor project.
On the other hand, a more narrowly tailored effort to ensure basic truth-in-advertising for ESG funds might find favor on both the right and the left. This could involve mandating disclosure of methodologies for measuring carbon footprint and assessing progress toward ESG goals.
The Trump administration's financial deregulatory agenda has commenced, and it is expected to accelerate in the months ahead. The delay in enforcing the SEC's Names Rule, which was also enacted during the Biden administration and involves additional requirements for ESG funds, further supports this expectation.
As the SEC deliberates on its next steps, the debate surrounding the shareholder proposal process and the role of ESG investing continues to heat up. The SEC's actions suggest that the Trump administration may be revving up its deregulatory agenda, which could have far-reaching implications for the future of ESG investing in the United States.
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