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Jan 31, 2020

SEC investor panel queries proxy reforms

Committee says proposals do not tackle the most serious issues facing the proxy system

The SEC should reconsider what it is trying to achieve in revamping the regulatory framework governing proxy advisers and shareholder proposals – and revise its rulemaking proposals in the area, according to the commission’s own investor advisory committee (IAC).

‘While we appreciate the commission’s effort to seek a productive balance in a changing environment for corporate governance and shareholder engagement, we are concerned that the [proxy advisers and shareholder proposals] actions may collectively shift the balance in a manner that does not serve investor interests,’ the panel writes in a January 24 statement.

‘We believe the [proxy advisers and shareholder proposals] actions as currently framed will not reliably achieve their stated goals, because the system is in need of more basic reform, and because it is necessary to establish a link between the actions and clearly identified problems.’

The SEC in November proposed amendments to its rules governing proxy solicitations that officials wrote would ‘enhance the quality of the disclosure about material conflicts of interest that proxy voting advice businesses provide their clients.’ It would also allow issuers to review and give feedback on proxy voting advice. The agency recently released guidance on the proxy advisory process.

The commission has also proposed amendments to Rule 14a-8 that would change the criteria, including ownership requirements, that a shareholder must meet to be eligible to require a company to include a proposal in its proxy statement. The proposal would also increase the levels of shareholder support a proposal must receive to be eligible for resubmission.

Both proposals have stirred widespread debate in the industry, and the comment period on each closes next Monday, February 3. For example, the Council of Institutional Investors has criticized the proposed increases in ownership and resubmission thresholds, saying they would curb the ability of retail investors to submit shareholder proposals and would impede future new social and environmental proposals, which generally take time to gain traction.

On the other hand, the US Chamber of Commerce said in a statement in November that the shareholder proposal measure was ‘long overdue.’ Tom Quaadman, executive vice president of the chamber’s Center for Capital Markets Competitiveness, said at the time: ‘The current structure allows special interest activists to push narrow agendas even when shareholders have repeatedly rejected those proposals. These new SEC reforms will help improve communication between investors and businesses.’

The IAC, which is chaired by former CalSTRS director of corporate governance Anne Sheehan, makes three main recommendations. The first is that the SEC revisit its priorities, with the panel arguing that the recent proposals do not deal with the most serious issues facing the proxy system, such as counting votes correctly.

‘We believe it critical that the SEC take up end-to-end vote confirmations, reconciliations and universal proxies,’ the IAC states. ‘Despite inclusion in the SEC’s overall proxy system agenda, despite our previous recommendations, no formal guidance or rulemaking regarding proxy plumbing has yet been published by the SEC, and the SEC has not moved to finalize its 2016 proposal on universal proxies.’

The IAC also urges the agency to revise and reissue the rule proposals to:

  • Present what it calls ‘a balanced assessment of proxy advisers and shareholder proposals.’ The IAC states: ‘In the economic analysis of the releases… there is no sustained description or analysis of the benefits of proxy advisers and shareholders’
  • Comply with SEC guidance on the proposal’s accompanying economic analysis
  • Present evidence supporting the need for the proposals rather than what the IAC describes as ‘stating simply that problems may exist’
  • Look at alternatives to the proposed changes and why they are not more likely to achieve the stated goals of the proposals ‘at a lower net social cost’
  • Take a closer look at how the proposals would impact small and mid-sized asset managers and retail shareholders
  • Discuss the risk that the proposed rule changes might harm the ability of proxy advisers to continue in business or of new competitors to enter the business, which the panel says could result in increased monopoly power and ‘more – not fewer – one-size-fits-all voting outcomes.’

Finally, the IAC calls on the SEC to reconsider its proxy adviser guidance, arguing that because the guidance documents did not go through a notice-and-comment process they did not take into account feedback that is now being given on the rule proposals. ‘They have generated confusion among many investors and should be reconsidered in the context of revised rule proposals that respond to the above recommendations,’ the committee writes.

An SEC spokesperson declined to comment.

Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...