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Regulation and Compliance > Federal Regulation > SEC

Fight Over SEC Proxy Rule Changes Comes to a Head

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After BlackRock Chairman Larry Fink’s revelations about the asset manager’s renewed push for sustainable investments, State Street released its own prerogative to companies, announcing it would begin to vote against board members at companies that didn’t follow environmental, social and governmental practices. The reason, especially for underperforming funds, is State Street found that “shareholder value is increasingly being driven by issues such as climate change, labor practices, and consumer product safety.”

As ESG interest grows, the fight over the Securities and Exchange Commission’s proposed proxy voting changes, which could hamper shareholders targeting corporate behavior, is being met with some derision across the industry. In fact, The Investor-as-Owner Subcommittee of the SEC Investor Advisory Committee (IAC) in its comment letter to the SEC was adamant about the wrongness of the SEC proposed rules, stating:

“In addition to republishing the rule proposals, the SEC should reconsider the guidance actions it took in the summer of 2019. Our review [is] … that the guidance did not achieve what it sought to achieve, i.e., clarity for market participants. On the one hand, the SEC purported to not be changing anything material in its rules regarding shareholder voting or reliance on proxy advisors. On the other hand, there are widespread impressions … that the guidance was intended to “update” the way the SEC approached investment advisors’ fiduciary duties relating to proxy voting. From the perspective of a regulated investment advisor, any alteration that may increase the scrutiny of the SEC in its evaluation of compliance with a fiduciary duty is material. The resulting confusion is therefore highly problematic and, for the reasons [in the comment letter], we therefore recommend that the SEC reconsider its interpretations.”

We asked two experts to provide their viewpoints on the letter: Jon Hale, global head of sustainable research at Morningstar, and Barbara Roper, director of investor protection for the Consumer Federation of America.

Roper broke down the comment letter, noting that it urges the SEC “to revisit its priorities in this area. Specifically, it reasserts the view of the IAC that other issues related to the proxy process are of higher priority (e.g., the ability to get an accurate vote count).

“… It also raises serious concerns regarding the lack of balance in the SEC’s presentation of the issues and its failure to follow its own guidance on economic analysis. Based on this concern, it urges the Commission to withdraw, revise, and republish the proposals to:

  • Present a balanced assessment of proxy advisors and shareholder proposals.
  • Comply with SEC guidance on the economic analysis included in the releases.
  • Present evidence supporting the need for the proposals, rather than stating simply that problems “may” exist.
  • Address reasonable 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.
  • More fully address how the PA/SP actions particularly affect small and mid-sized investment managers and “Main Street” shareholders.
  • Discuss the risk that the proposals could impair the ability of proxy advisors to sustain their businesses, or new competitors to enter the business, which could result in increased monopoly power and more — not fewer — one-size-fits-all voting outcomes.

“These procedural abuses in the Commission proposal were of critical importance to me,” she stated in an email. “While the procedural abuses are particularly egregious in these proposals, the problem is more widespread. Apparently, under the current leadership, careful economic analysis and a balanced presentation of the issues is only required when you are proposing to strengthen protections. When you’re proposing to roll back investor protections, anything goes.”

Hale, who has been arguing against the SEC’s proposed proxy rules, told ThinkAdvisor in an email: “The SEC’s [IAC] letter argues that these proposed rules would reduce the influence of shareholders on corporate governance, which is absolutely true. But even worse, as the letter points out, are the commission’s shoddy arguments and lack of evidence presented in favor of these rules. The commission didn’t clearly identify a problem, didn’t present a balanced assessment, and didn’t consider potentially less-disruptive alternatives.

“Other than inside-the-Beltway business trade groups and conservative think tanks, it’s unclear who supports these rules. … The asset managers and asset owners who have commented so far all seem to be opposed. And none of the corporate execs who supposedly would benefit from these rules have spoken out in favor of them. Then again, why should they?

“There is no evidence that shareholder proposals burden corporations and a lot of evidence that they spark instructive dialogue between shareholders and managements that can enhance corporate value. Likewise, there is scant evidence that proxy advisors give advice based on factual errors or that they somehow mislead asset managers into voting their proxies contrary to their preferences.

“SEC rulemaking traditionally has been based on problems that investors widely agree need to be fixed. That’s not the case here. And the solutions, if they are contentious, are usually based on compromise. In this case, those investors and corporate execs on the side of the commission, if they exist, are not even making themselves visible.”

Thus far there have been roughly 7,000 comment letters to proposed Rule 14a-8 submitted to the SEC, a large majority a form letter against any changes. The comment period for the proposed rules ends Feb. 3.

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