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The Oft-overlooked Investor Costs of SEC Advisory Rules

The Oft-overlooked Investor Costs of SEC Advisory Rules

New research by USC Marshall’s John Matsusaka shows how the SEC’s informal regulatory guidance — as in the issuance of SLB 14L — can hurt investors without any obvious positive tradeoffs, despite the agency’s mandate to protect investors and maintain stable capital markets

by: Faculty Perspectives
02.19.26
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  • John G. Matsusaka

    John G. Matsusaka
    • Charles F. Sexton Chair in American Enterprise
    • Professor of Finance and Business Economics
    • Executive Director of Initiative and Referendum Institute

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The U.S. Securities and Exchange Commission (SEC) is the primary federal agency in charge of regulating financial markets, with a mandate to protect investors, maintain stable capital markets, and facilitate capital formation. Like many government institutions, the SEC has become increasingly politicized over time, and in recent years, its rules and regulations have swung dramatically with changes in presidential administrations. Those big swings have raised concerns that the Commission may not be faithfully advancing its mandate but rather catering to partisan political pressures in ways that harm investors and financial markets.

To respond quickly to emerging issues, the SEC and other agencies have increasingly relied on informal regulatory “guidance” or “advisories” that bypass procedural safeguards required for formal congressional rulemaking. Though these advisories explicitly do not have the force of law, they nonetheless command the attention of market participants.

To shed light on this issue, a new study co-authored by John G. Matsusaka at USC Marshall School of Business, Oguzhan Ozbas at Bilkent University, Chong Shu at the University of Utah, and Irene Yi at the University of Toronto, analyzes stock market reactions to a major 2021 policy shift on how shareholder proposals related to environmental and social issues should be handled. Focusing on the 2021 SEC advisory labeled Staff Legal Bulletin (SLB) SLB 14L, the study measures investor response by analyzing price movements in the days following the announcement.

How shareholder proposals work

Under state law, shareholders are permitted, under certain conditions, to call for a vote of all shareholders on matters related to a company’s policies and practices. The issue might concern the company’s governance processes, such as the composition and structure of the board of directors, or a social issue, such as a company’s carbon emissions.

Companies that seek to block a vote on an issue can ask the SEC to state that it will not take an enforcement action against the company if it excludes a proposal, called a “no-action letter.” While not legally binding, the no-action letter process substantially shapes the way corporations and investors approach shareholder democracy.

What is SLB 14L?

On November 3, 2021, shortly after control of the Commission passed from nominees of Republican President Donald Trump to nominees of Democratic President Joe Biden, the SEC abruptly and without previous announcement issued SLB 14L, which rescinded three earlier SLBs. The thrust of SLB 14L was that the Commission would permit voting on shareholder proposals that sought to restrict the greenhouse gas emissions of companies, or pressure them adopt carbon-neutral policies. As with all such bulletins, it explicitly stated that it had “no legal force or effect,” yet its implications were evident to market participants.

Policy shifts, markets strongly react

According to the study, the imposed regulatory change cost investors approximately $26 billion, without any observable offsetting benefit. Companies with high greenhouse gas emissions — those most exposed to the new guidance — experienced statistically significant stock price declines of about 1.6%. For firms in the energy sector, this translated into roughly $26 billion in lost market value. Companies with low emissions exposure saw no comparable effect.

Did investors expect firms to incur high costs by cutting carbon emissions and investing in cleaner technologies? The data suggests not.

In fact, the study finds no evidence that affected firms reduced emissions or committed to more aggressive climate targets after the policy shift. Instead, the market reaction appears to be driven by the costs of the process itself.

Managing shareholder proposals imposes significant organizational burdens, including preparing responses, negotiating with proposal sponsors, and navigating increased scrutiny. Corporate filings show that firms with the largest stock declines also reported substantial increases in shareholder-related engagements. Companies paid a price simply for managing the process, even without changing operations.

Research takeaways

A single, nonbinding advisory rule from the SEC intended to help the climate erased roughly $26 billion in market value, without evidence that it led to lower carbon emissions.

Matsusaka’s findings raise an important question: Should guidance that moves markets so powerfully be issued without the procedural safeguards required of formal rulemaking?

The results also raise questions about the extent to which the SEC’s actions are consistent with its mandate to protect investors and facilitate capital formation. In the case of SLB 14L, fossil fuel investors were harmed by the SEC’s action, with stock prices falling and borrowing costs rising.

In late 2025, the SEC announced plans to step back from its long-standing role in informally approving shareholder proposals, potentially returning more authority to state courts. If the experience of SLB 14L is any guide, that shift may mark an important recalibration, one that better aligns regulatory tools with their intended purpose.

The study also contributes to ongoing debates about shareholder democracy and corporate governance. While shareholder engagement can promote accountability, it may also impose unintended costs that fall unevenly across firms and industries. Understanding these trade-offs is essential for designing regulatory frameworks that protect investors without undermining economic efficiency.

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