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Senators Hear Views on Proxy Voting Reform

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Reforming the proxy voting process was the focus of a Senate Banking Committee hearing Thursday, with the business community, investing and retirement savings industries cheering the move while pension fund representatives urged a stop to any anticipated action.

The Securities and Exchange Commission has recently been dusting off old shareholder proxy rules to potentially reform the process that lawmakers and others have argued give outsize influence to proxy advisory firms and fund managers on shareholder voting results. The agency organized panels at a recent roundtable discussion in November.

At issue is shareholder engagement and the weight and influence of proxy advisory firms in the voting process.

The U.S. Chamber of Commerce testified that public companies and their shareholders have been increasingly targeted in the past 15 years through the proxy system over social and political issues that it says are unrelated to and sometimes, even “at odds with” a public company’s long-term performance.

Business stakeholders want the SEC to add conditions that a proxy advisory firm must satisfy, be subject to disclosure and filing requirements that apply to proxy solicitations and subject them to more economic interest disclosures.

Dan Gallagher, an SEC commissioner from 2011 through 2015, told lawmakers that the current shareholder environment makes investors rely on proxy advisory firms to a degree that was not anticipated when laws were first crafted, back when institutional ownership of shares was negligible.

Gallagher, now the chief legal officer of the drug company Mylan N.V., said that previous SEC rulemaking has had unintended consequences, including “a direct increase in the extent to which for-profit third-party proxy advisors, which have no economic risk in the underlying investments, drive decision making at investment advisers and corporations.”

Gallagher warned lawmakers about proxy firms’ recommendations and research.

The research, he says, often is “just not good enough, and proxy advisory firms publish some recommendations that are based on clear, material mistakes of fact. Moreover, they base some recommendations on a cookie-cutter approach to governance … even if there is a sound basis for challenging the assumption that an otherwise beneficial governance reform might not be appropriate for a given company.”

Karen Barr, president and CEO of the Investment Adviser Association, said in her letter to Senate Banking Committee members that the consensus among issuers, investors, intermediaries and academics “is that the proxy infrastructure is broken and in need of urgent attention.

SEC Chairman Jay Clayton, Barr noted, “recently reaffirmed the fundamental importance to the public capital markets of an accurate, transparent and efficient proxy process.”

Barr expressed her hope that the committee will use the hearing to examine “how best to tackle the weaknesses in the infrastructure of the proxy system. The recent SEC staff roundtable on the proxy process confirmed the importance of addressing the problems with the proxy infrastructure, including issues such as end-to-end vote confirmation and verification,” Barr said. IAA “members want assurances that their proxy votes are in fact counted and counted accurately.”

Senate Banking Committee Chair Michael Crapo, R-Idaho, said during the hearing — titled “Proxy Process and Rules: Examining Current Practices and Potential Changes” — that many times proposals from proxy firms pursue a social or political agenda that has, he argued, nothing to do with a company’s financial performance but instead creates a resource drain for investment advisors and others in taking time to evaluate their claims.

“It is time to re-examine the standards for inclusion of these proposals as well as the need for fiduciaries to vote all proxies on all issues in light of the proliferation of environmental, social or political proposals, and the rise of diversified passive funds,” Crapo said in his opening statement.

Crapo noted that although retail investors own roughly two-thirds of Russell 1000 companies, often through mutual funds or pensions, according to SEC data, it isn’t very clear whether “proxy rules promote the long-term financial interests of those retail investors.”

In response to the hearing, American Securities Association CEO Chris Iacovella stated that “the conflict-ridden proxy advisory process should be reformed in a way that recognizes the rights of Main Street investors who are saving for retirement and preparing for their financial future.”

The ASA says proxy firms should be registered as investment advisors due to their research, and wants them prohibited from offering rating and consulting services to issuers on any matter when they are also being paid by an investor to provide a voting recommendation on the matter.

However, Michael Garland, a representative of the trustee for four New York City pension funds and assistant comptroller for corporate governance and responsible investment in the Office of New York City Comptroller Scott Stringer, testified that he is opposed to anything that would hamper its research or impose additional costs on staff, participants or beneficiaries.

In his testimony, Garland targeted the vocal critics of proxy advisory firms’ research, stating that “many of those who are the subject of the proxy analysis do not like to be criticized and receive negative vote recommendations, so they are reportedly lobbying aggressively and inappropriately to insert themselves between the proxy advisors and the clients of those advisors.”

He said the chief allegation of past recommendations and political influence come from lobbyists that try to “sow seeds of doubt” about the ability of institutional investors.

“To the extent that there are concerns on the quality of proxy advisory firm research, that is our problem as investor clients,” Garland stated.