Paul S. Atkins, Chairman of the U.S. Securities and Exchange Commission, delivered remarks addressing critical aspects of corporate governance and market regulation, emphasizing a return to fundamental principles of disclosure and shareholder engagement. His address, delivered to the Society for Corporate Governance, underscored a commitment to refining the disclosure regime and re-evaluating the shareholder proposal system to foster more efficient and transparent capital markets. The views expressed are those of Chairman Atkins and do not necessarily reflect the official stance of the Securities and Exchange Commission or its staff.
A Foundation Built on First Principles
Chairman Atkins commenced his remarks by reflecting on the enduring principles that have guided the United States since its inception, particularly in the context of its 250th anniversary. He posited that the nation’s prosperity and resilient capital markets are rooted in the foundational belief of limited government, designed to foster conditions for prosperity rather than engineer it. This framework, he argued, empowered individual ingenuity and the "invisible hand" of the market to serve the common good.
"Two hundred and fifty years ago, our Founders embraced basic principles," Chairman Atkins stated. "That government must be limited. That its purpose is to set the conditions for prosperity, not to engineer it—trusting that the collective ingenuity of individuals pursuing their own interests, Adam Smith’s ‘invisible hand,’ will serve the common good more reliably than any top-down design."
He drew a parallel between this historical context and the role of securities regulation, highlighting the Securities Act of 1933 as an example of preserving free markets through transparency. The law, he contended, was not a rejection of market principles but an effort to ensure investors had access to honest information, thereby restoring trust and facilitating capital formation. This historical perspective serves as a crucial backdrop for his subsequent policy proposals.
Reforming Regulation S-K: A Return to Materiality
A central theme of Chairman Atkins’ address was the urgent need to reform Regulation S-K, the SEC’s disclosure requirements for public companies. He expressed concern over the proliferation of rules that have led to a significant increase in public companies, noting a 40 percent decline over recent decades. This decline, he suggested, might be exacerbated by an overly complex and burdensome disclosure regime.
"Today, the SEC must do likewise," Chairman Atkins declared. "Presented with a 40 percent decline in public companies over the past few decades, we are summoned not to create more complexity nor reinvent our mandate, but to restore it to its foundation: that is, disclosure of material information."
He critiqued the trend of "accretive rulemakings" that have resulted in extensive documentation, often containing "immaterial information" that can "obscure than to illuminate." Citing Justice Thurgood Marshall’s warning against "bury[ing] shareholders in an avalanche of trivial information," Atkins emphasized the detrimental effect on informed decision-making. The substantial costs, both financial and temporal, incurred by companies in preparing these lengthy reports were also highlighted, impacting not only fees for legal and accounting professionals but also the valuable time of boards and management.
A key element of his reform agenda is to re-center the disclosure regime on the concept of "materiality." He observed that terms like "double materiality" or "decision useful" have been introduced, which he asserts have "no standing in the relevant jurisprudence." Chairman Atkins firmly reiterated the Supreme Court’s definition of materiality: "if there is a substantial likelihood that a reasonable investor would consider it important."
The objective standard of materiality, as defined by the Supreme Court, inherently centers on the financial returns of an investment. "When applying this objective standard, it is indisputable that the common interest of reasonable investors is the financial returns of the investment," he asserted. "Or, said another way, materiality, as defined by the Supreme Court, is and has always been a concept inherently rooted in financial considerations. Accordingly, information must, at a minimum, facilitate an evaluation of financial returns to qualify as material."
Chairman Atkins expressed concern that special interest groups, politicians, and even the SEC itself have, in recent years, "weaponized the disclosure framework" for social and political agendas that deviate from the SEC’s core mission.
In response, the SEC has initiated efforts to solicit public feedback on reforming Regulation S-K. Since January, over 100 comment letters have been received, including detailed recommendations from the Society for Corporate Governance. A significant proposal gaining traction is the inclusion of an "overarching materiality qualifier," or "materiality overlay," applicable throughout Regulation S-K. This concept, first raised in 2015, would permit companies to omit information otherwise required by a specific line item if that information is not material to investors.
While some commenters suggested exceptions, such as for executive compensation, others advocated for a universal application of the qualifier. Chairman Atkins’ primary objective is to ensure that Regulation S-K elicits material information without imposing overly prescriptive line-item requirements that frequently yield immaterial details. He acknowledged that even with the best intentions, the Commission may not be able to guarantee that every line item is material to every public company’s investors, especially as corporate structures and business practices evolve.
The "materiality overlay," he believes, could foster a principles-based disclosure regime, representing the "minimum effective dose of regulation" and allowing for information to be tailored to the specific facts and circumstances of each company. This approach aligns with market forces that already drive companies to provide non-GAAP financial measures and key performance indicators relevant to their investors.
However, the effectiveness of such an overlay hinges on companies exercising discretion and omitting immaterial information. Chairman Atkins stressed that prescriptive rules, when replaced by principles-based ones, still require companies to exercise judgment. If companies are unwilling to do so, even the most well-intentioned disclosure regime will fail to provide investors with truly material information without the accompanying burden of trivial details.
He observed a tendency among companies to retain disclosures simply because they appear in peer filings, without critically assessing their materiality. This can lead to a "disclosure death spiral" that benefits no one. While the SEC can create an environment conducive to material disclosures, it cannot compel companies to embrace it. The responsibility for the volume, clarity, and substance of filings ultimately rests with the companies themselves.
Rethinking Rule 14a-8: Empowering Shareholder Engagement
Beyond disclosure reform, Chairman Atkins addressed the ongoing re-evaluation of Rule 14a-8 and the shareholder proposal system, deeming it crucial for making public markets more attractive. He characterized the recent shareholder proposal season as "unique" and highlighted the SEC’s Division of Corporation Finance’s decision to no longer respond to no-action requests, except under specific circumstances.
To his surprise, the Division received no requests under the specified exception, leading to widespread speculation about potential outcomes. Skeptics predicted widespread exclusion of proposals, while others anticipated litigation or adverse recommendations from proxy advisors.
However, nearly eight months later, Chairman Atkins reported that these dire predictions had not materialized. He cited reports indicating that year-over-year trends in proposal exclusion remained largely consistent. Litigation remained a small fraction of overall exclusions, with some cases resolved in favor of companies or settled. Adverse recommendations from proxy advisors were also rare. Furthermore, several investor groups reported increased direct engagement with companies, leading to resolutions without SEC staff intervention.
"My greatest takeaway is that the Commission staff’s interposition between companies and shareholder proponents is unnecessary to effectively and efficiently resolve whether shareholder proposals should be included in proxy statements," Chairman Atkins stated. He noted the significant time and cost savings achieved by avoiding the SEC’s role as an intermediary. He argued that markets, including the corporate governance market, are more resilient and self-correcting than often credited.
The Division’s decision to cease issuing no-action letters was likened to removing "training wheels" from the shareholder proposal process. Both companies and proponents, he suggested, had become overly reliant on this support, when in reality, they possess the capacity to navigate these matters independently.
Chairman Atkins contended that companies and their advisors routinely make complex judgments on various federal securities law issues without no-action letters, such as materiality or solicitation status. Applying Rule 14a-8 should be no different. He pointed to the "ordinary business" exclusion under paragraph (i)(7), suggesting that companies can reasonably determine when an issue has transitioned from an extraordinary social policy concern to ordinary business without SEC guidance.
The SEC is also holistically evaluating Rule 14a-8 itself, with Chairman Atkins reiterating his long-held view that the rule may infringe upon state corporate law. In a 2008 speech, he expressed concerns that the SEC’s rule "inappropriately infringes upon state laws that govern the relationships among shareholders and between shareholders and the corporations that they own." He emphasized the importance of respecting federalism and avoiding overreach.
Since its initial adoption in 1942, Rule 14a-8 has undergone numerous amendments, increasing its complexity. However, Chairman Atkins questioned whether a fundamental consideration—the federal government’s appropriate role in regulating shareholder proposals—has been adequately addressed. He maintained that the Commission’s authority to prescribe rules "in the public interest" is not unlimited and that longevity does not substitute for legal authority.
He implored all parties involved in the shareholder proposal process to prevent it from being "weaponized by those who represent fringe interests," asserting that annual meetings should not become platforms for political or social debates unrelated to investor financial returns. Companies possess mechanisms to defend themselves, but their reluctance to utilize these tools leaves the SEC with limited recourse.
Furthermore, Chairman Atkins called upon states to ensure their corporate laws do not facilitate the politicization of shareholder meetings, particularly as they compete to attract corporate domestication. He reiterated his 2008 warning against the "tyranny of the minority," highlighting that a single individual was the proponent for approximately 41 percent of shareholder proposals voted upon in the recent season, with only eight percent receiving majority support. This situation, he concluded, indicates an ineffective system in desperate need of reformation.
Conclusion: A Renewed Commitment to Market Fundamentals
In conclusion, Chairman Atkins reiterated that the enduring strength of the U.S. markets stems not from expanding government intervention but from upholding the foundational principles that have guided the nation since its inception. The reform of the disclosure regime and the re-evaluation of the shareholder proposal process are, at their core, manifestations of this commitment.
"As we work toward this end, we realign our markets with their most fundamental purpose—and with our Founders’ first principles—which is to empower American citizens, to enable enterprise to flourish without unnecessary friction, and to help capital flow more freely to its highest and best use," Chairman Atkins stated. He expressed gratitude for the opportunity to engage with the Society for Corporate Governance and looked forward to further discussions on these vital matters.
