SEC shelves anti-proxy proposals

SEC fallout grows as row rages over amendments

A prominent SEC Commissioner has admitted that the US regulator needs to rethink parts of its proxy voting rule amendments.

Speaking at the Council of Institutional Investors’ 2020 conference this week, Commissioner Elad Roisman said the regulator may reconsider parts of its proposals to appease market commentators.

According to Mr Roisman, the SEC could be forced to reassess its proposal that proxy advisory firms supply companies with advance copies of their advice prior to passing this to investors. The contentious proposal has been a sticking point for market participants, sparking concerns that days devoted to issuer pre-review could disrupt current voting practices. 

Specifically, some commenters have expressed worry that these changes could reduce the time available for their own review of the proxy voting advice.

Elad Roisman, SEC Commissioner

“I take this feedback seriously, and I am certainly open to considering other ways to accomplish the policy goals of improving the total mix of information available to the marketplace and enhancing fairness and transparency in the voting process,” Mr Roisman said.

One alternative offered by the industry is to allow proxy advice businesses to send the report to the issuer at the same time it’s distributed to clients. The proxy advisory firm would then notify clients if the issuer raises objections to the report within a short time period, such as two days.

Mr Roisman said the regulator would need to weigh up how this alternative might work in light of certain voting practices carried out by clients.

“The most heavily utilised voting advice businesses offer the related services of pre-populating their clients’ electronic ballots with voting recommendations and automatically submitting them for counting.

“Do these ‘set-it-and-forget-it’ mechanisms tie clients’ votes to the proxy voting advice businesses’ recommendations?  If so, would a concurrent review period for companies come too late to allow information generated by the review period to be considered by investors?” Mr Roisman questioned.

More to come

Despite Mr Roisman suggesting that the SEC may have to revise its original proposals, he said the regulator’s overhaul of the proxy process could yet see further proposals.

“I believe the Commission’s proposal on proxy voting advice makes headway in updating our rule set to account for the increased importance of proxy voting advice businesses in the marketplace today. 

“But, even if adopted, I do not believe our work would be close to complete.  In fact, over the last year or so, I have come to see how much more the Commission could do to improve the proxy process, beyond either of our current rule proposals,” he warned.

Further SEC examinations would likely focus on identifying registered investment advisers who outsource their voting decisions to proxy voting advice businesses without appropriate diligence or oversight, he said. 

One criticism that has been put to the SEC is why it is prioritising proxy voting advice and shareholder proposals when there is the issue of proxy plumbing to tackle. Indeed, this issue was raised by Minerva chief executive officer, Sarah Wilson, in her letter to the SEC earlier this year.

Ms Wilson pointed out the real problem in the US proxy system is its ‘dysfunctional plumbing’.

“The proxy system is indeed broken. That is to say, the proxy plumbing is broken, not research,” she said.

“Issuers and shareholders collectively pay far too much for inefficiency; there are multiple layers of obscure and opaque fees; confidentiality is not assured, and the market has been monopolised by one dominant intermediary which prevents freedom of choice.”

Ms Wilson explained that the SEC has been presented with an historic opportunity to bring the US proxy plumbing into the 21st century, but warned that, so far, it had been “misdirected.”

Despite this appeals, Mr Roisman claims that tackling the proxy plumbing would be too complicated – with no clear winners.

“Don’t be fooled.  Proxy plumbing is anything but simple,” he claimed.  “It is an area of our market where many different types of actors are intertwined and entrenched in their current roles and have been for several decades.

“Many have decried the complexity, inefficiency, and archaic nature of this system. But, I have yet to hear anyone describe an easy path toward improvement.  In fact, as I see it, every one of the market participants involved would have to sacrifice something in order for the system to undergo meaningful change.”

However, Mr Roisman is in favour of adopting a universal proxy rule. An alternative to the current US proxy regime for contested director elections, a universal proxy would allow public stockholders to vote for any combination of company and activist nominees.

Last Updated: 13 March 2020
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