New SEC Guidance Expected to Prompt a Further Re-Evaluation of Investor Engagement with Issuers and External Organizations – Broader Than Just ESG
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Authors: Bryan Chegwidden, Michael R. Littenberg, Craig E. Marcus, Amy D. Roy, Robert A. Skinner, Marc Rotter
Introduction
On October 7, 2026, the Securities and Exchange Commission (the SEC) issued a report of investigation (the “Report”) addressing when engagement with multistakeholder initiatives may cause investors to be treated as a “group” under Section 13(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) or lose eligibility to report their beneficial ownership on the shorter-form Schedule 13G, rather than the longer and more detailed Schedule 13D, and rely on an exemption from Section 16 of the Exchange Act. It is the first such report issued by the SEC in nearly eight years. Although the SEC decided not to bring an enforcement action (in light of the lack of evidence supporting such an action), it indicated that it “has serious concerns about the conduct of CA100 members and other participants” described in the Report.
This is the latest in a series of recent SEC actions reshaping engagement between issuers and shareholders, including, but not limited to, in connection with ESG-related matters. Those developments include, among others, the staff’s guidance on shareholder engagement published in February 2025 and the SEC’s recent proposal to rescind the rule requiring companies to include shareholder proposals in their proxy materials.
The Report’s novel (and untested) reading of the applicable rules governing beneficial ownership leaves potential implications for investors to bear in mind going forward.
Key Takeaways
- Many institutional investors are likely to re-evaluate engagement with some ESG-focused and other multistakeholder initiatives. The Report focuses on Climate Action 100+ (CA100) and Ceres, but extends to “any initiative, enterprise, association, foundation, society, agency, syndicate, or similar group of persons that combine for the purpose or effect of changing or influencing control at a specific issuer.” Importantly, the SEC clarifies in a footnote that the organizations covered by the Report do not include “groups that do not pressure, negotiate, or otherwise introduce recommendations or proposals that have the purpose or effect of changing or influencing control at specific issuers, including trade associations and public advocacy groups.”
- Issuer-specific engagement is a touchstone of the guidance. Organizations that publish broad principles without identifying or targeting particular companies should pose less risk than those seeking change at identified companies.
- The Report focuses on climate-related issues, but its principles would apply equally to efforts addressing other topics at a specific issuer.
- Some investors may be prompted by the SEC’s interpretation to adjust their engagement with specific external organizations and their related messaging, as well as enhance their internal recordkeeping, to mitigate enforcement risk. It also is likely that some investor-focused organizations will proactively reframe their messaging, policies, and practices to align with the Report.
- The SEC provides a new interpretation of “ordinary course of business.” Many institutional investors file a Schedule 13G as qualified institutional investors (QIIs) and rely on a parallel exemption from Section 16 of the Exchange Act. In order to file a Schedule 13G as a QII and rely on that exemption from Section 16, the relevant securities must be acquired and held “in the ordinary course of the person’s business and not with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect.” As the Report notes, the SEC has never defined, and has issued only limited guidance addressing, the phrase “ordinary course of business,” generally leaving the determination to the QII’s own judgment and the surrounding facts. The Report includes new views on that requirement, stating that: Index funds typically have mandates limited to tracking the financial performance of a designated benchmark. A manager of an index fund that directs the acquisition, disposition, and voting of securities held by the fund should therefore carefully evaluate whether joining a coordinated effort or initiative unrelated to the fund’s benchmark performance, including through participation in an intermediary-driven organization such as CA100, aligns with Rule 13d-1(b)’s “ordinary course” requirement. Although directed at index funds and external organizations, this interpretation may raise concerns that any fund engaging on topics not specifically identified in its mandate could be viewed as acting outside its ordinary course and lose eligibility to file as a QII and exemption from Section 16. Institutional investors should consider how the rationale for engagement with issuers is expressed and documented.
- Engagement through an external organization can raise control-intent concerns. The Report discusses when, in the SEC’s view, engagement with external organizations may call into question whether an investor is acting with the purpose or effect of changing or influencing control of an issuer. It is clear that engagement with efforts to change the composition of a board of directors at any issuer presents substantially heightened risk that an investor will become ineligible to use Schedule 13G. However, the Report is clear that efforts on other topics may also be seen to impact eligibility to file on Schedule 13G, stating that: Even in the absence of a board refresh initiative, a QII’s eligibility to report on Schedule 13G may be called into question when the investor joins an organization – such as CA100 – that engages on specific issuers and targets specific management or policy outcomes. Membership in such an organization, coupled with commitments to the organization’s objectives and actions undertaken in support of them, can demonstrate that the securities are being held with a purpose or effect of changing or influencing control. Group formation and Schedule 13G eligibility are separate questions: an investor can lose Schedule 13G eligibility even if no group forms. Conversely, an independently determined vote for an activist’s nominees, without more, does not itself cause loss of Schedule 13G eligibility.
- While broadly consistent with the February 2025 staff guidance, the Report extends that guidance by making clear that engagement through external organizations – not just direct engagement with an issuer – may be considered evidence of an intent to influence management.
- The Report reiterates that disclaimers alone are insufficient if actual conduct suggests coordination or control intent.
- A group can be established through circumstantial evidence. The Report emphasizes the SEC’s position that the existence of a group “is a factual question that can be demonstrated through circumstantial evidence.” It further states that “[c]ertain CA100 members voting in alignment following CA100 ‘flagging’ a vote and working to influence its members’ votes may constitute circumstantial evidence of an ‘agreement, arrangement, understanding, or concerted action’” and that “[s]uch coordination may occur through organized engagement efforts, evaluative frameworks that the members have agreed upon, and harmonization of its members’ voting decisions on specific matters presented at an issuer’s shareholder meetings.”
- The Report reiterates guidance that “parallel actions that arise from independent decision-making” and simply having aligned interests do not, without more, result in the creation of a group. It will continue to be important for investors to establish a record that decisions were made and any actions taken independently rather than as part of a coordinated effort.
- Investors that beneficially own 5% or less of a class of Exchange Act registered voting equity securities of an issuer would nonetheless have reporting obligations under Section 13(d) or Section 13(g) of the Exchange Act if they are deemed to be part of a “group” that in the aggregate beneficially owns more than 5%. Investors can also become subject to Section 16 if they are part of a group that in the aggregate beneficially owns more than 10%. As a result, the Report is likely to prompt even many smaller investors to re-evaluate their policies around engagement with external organizations.
- Membership dues and contributions may trigger proxy disclosure obligations. The Report also discusses contributions to external organizations, specifically addressing membership dues paid to Ceres. The Report notes that “it appears Ceres’ use of those funds was not restricted” and goes on to assert that if contributions “were channeled through CA100 or Ceres and used to support” a proxy solicitation, contributing investors may have become participants whose identities must be disclosed to remain in compliance with Section 14(a) of the Exchange Act.
- The Report does not expressly address whether an investor intended, or even knew about, the ultimate use of its contribution to support a proxy solicitation, or whether such funds were in fact used for solicitation. It is possible those factors would be relevant. However, absent further guidance, some investors may consider restricting how membership dues and contributions may be used, or obtaining further clarity from the external organization.
Next Steps
The Report makes clear that the SEC views joining an organization, together with related commitments or conduct, as providing potential circumstantial evidence of “group” formation, or of control intent or acting outside the ordinary course of business that results in a loss of Schedule 13G eligibility and the related exemption from Section 16 of the Exchange Act. The Report is therefore likely to prompt many institutional investors to further re-evaluate policies and practices for engagement with external organizations, including public statements and commitments (especially with respect to specific issuers), and the use of their dues and contributions. At a more fundamental level, some institutional investors may reconsider their participation in some external organizations.
The Report is likely to draw harsh criticism from some constituencies as inconsistent with the applicable securities laws and perhaps the First Amendment, and there may be some investors that seek to goad the SEC into enforcement to be able to mount a challenge to the position taken by the SEC in the Report. Other institutional investors may try to manage just below the radar screen for the next two years, waiting things out until there is clarity on the policies of the next administration.
In the meantime, institutional investors should review all of their organizational commitments – not just those mentioned in the Report or that are ESG-focused – and make sure they understand how those organizations’ activities and the investors’ related practices fit within the framework of the Report. Investors also should consider how to position and document their engagements to demonstrate independent decision-making rather than coordinated efforts, that any engagements are consistent with the mandates of their funds and taken in the “ordinary course” of their activities, and that there is an absence of efforts aimed at influencing control.
Published by
Ropes & Gray LLP
Ropes & Gray LLP
