SEC Securities & Exchange Commission

A war of words has broken out between investors and the Securities and Exchange Commission (SEC) following the regulator’s controversial proposal to amend its proxy voting rules. 

On 5 November, the SEC proposed new changes to how proxy advisory firms operate – with some criticising the move as a way to limit investors’ ability to hold public companies accountable. 

Under the proposed changes, proxy advisory firms would have to supply companies with advance copies of their advice before it goes to investors. Companies would be able to review these documents so they can “identify errors in the proxy voting advice”.  Analysts would also be required to include the company’s objections in a final report. 

In addition, the SEC is proposing that shareholders must hold a minimum $2,000 stock in a company for at least three years before they can require a company to include a proposal in its proxy statement. And for the first time since 1954, the regulator is also aiming to increase the levels of shareholder support a proposal must receive to be eligible for re-submission to 5%, 15% and 25%, depending on how many times the proposals had been submitted over a certain amount of time – up from the current 3%, 6% and 10% thresholds. 

While SEC chairman Jay Clayton said these changes would help ensure that proxy voting advice used by investors is “accurate, transparent, and materially complete”, some of his colleagues firmly disagree. In a strongly-worded statement, SEC Commissioner Robert J. Jackson warned that the proposals would have dire consequences for investors and their right to hold corporate insiders accountable. 

In an act of dissention, Jackson said: “Whatever problems plague corporate America today, too much accountability is not one of them. [These] proposals impose a tax on firms who recommend that shareholders vote in a way that executives don’t like. 

“Firms recommending a vote against executives must now give their analysis to management, include executives’ objections in their final report, and risk federal securities litigation over their methodology.  

“Taxing anti-management advice in this way makes it easier for insiders to run public companies in a way that favours their own private interests over those of ordinary investors,” Jackson warned

However, Clayton stood by the proposals, stating that the rule changes were “clearly overdue”.  “Twenty years ago, the business of providing proxy voting advice was virtually non-existent,” he said. “Today, there are thousands of investment advisers managing trillions of dollars in assets for our retail investors, and many of these investment advisers contract with businesses to provide proxy voting advice.” 

Clayton said several proxy voting advice businesses were “comparable to the services of other significant third-party market participants on whom shareholders rely, including auditors, rating agencies and research analysts. These market developments require our attention.” 

Wading in on the controversy, SEC Commissioner Elad Roisman threw his support behind Clayton, stating that while criticism of the proposals was inevitable, it was time for the commission to move beyond brainstorming and put pen to paper. 

“For decades, the commission has grappled with policy questions relating to the regulation of proxy voting because Congress tasked us with this responsibility, and our mission requires it,” Roisman said. “Some will likely say that we should have taken a heavier hand in overseeing proxy voting advice businesses. Others will oppose these measures as too drastic. But this proposal is a first step toward receiving actionable feedback that can help us move toward a sensible modernization of our rules”. 

Investor fury over proposed clamp down 

After suffering dissent within its own ranks, The SEC now faces a fierce backlash from powerful investors and their representatives.

CII, which represents institutions with more than $4tn in assets, said immediately after the publication of the proposals that “of particular concern is the heavy-handed regulatory structure the SEC today proposed for proxy advisory firms that provide institutional investors with independent research on the fairness of CEO compensation and other matters on company ballots at annual shareholder meetings”. If adopted, the rules would result in the most significant changes to the voting rights of share owners in decades, CII said. 

Unworkable consultation for unworkable proposals

Speaking immediately after the announcement, CII said that there was “no compelling need” for the federal government to step up regulatory oversight of proxy advisors. “The proposed onerous regulation of proxy advisory firms would provide no clear benefit to investors while creating new barriers to entry in what has historically been a low-margin industry with few competitors,” it said.  

The proposals, which run to a combined 320 pages, include 345 separate consultation questions which repeatedly seek supporting data to justify any responses. Since its initial reactions, CII has sent a blistering letter and freedom of information request to SEC Chair Jay Clayton, asking for equivalent transparency and demanding to see the underlying evidence and data that led to these proposals being created in order to carry out its own analysis. 

The letter, co-signed by the US’ largest state pension funds and money managers, also said that the current 60-day timetable, which includes three public holidays, would not give ample time to provide a fulsome reply. It has therefore requested that the comment period for the SEC’s proposals be extended from 120 days to allow full and proper discussion and debate of the points raised. 

Global consequences

As large fund managers operate around the world and investors’ portfolios are increasingly globally allocated, there is also a concern within the investment community that other governments may be encouraged by corporate lobbyists to follow the SEC’s lead and try to limit shareholder rights.  Many international issuers with secondary US listings may also find themselves caught between the conflicting demands of MIFID and the SEC with respect to disclosure, transparency and analyst independence requirements.

Last Updated: 15 November 2019
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