By Soyoung Ho
The SEC’s Investor Advisory Committee (IAC) on January 24, 2020, voted to recommend that the commission go back to the drawing board with its controversial plans to revise the rules on proxy voting advice.
The majority of the panel believes that the SEC proposals do not serve investors’ interests, and the commission should issue revised proposals before attempting to adopt any rules. The panel also believes the commission ought to tackle a bigger problem first—making sure that shareholder votes are counted correctly, which the panel had recommended previously but has yet to be taken up by the agency.
The vote was 10 to 5, and two abstained from voting. The panel voted during an ad hoc telephone meeting.
Last year, the SEC issued a couple of proposals and two interpretive guidance as part of a broader initiative to overhaul the proxy system. But the regulatory actions stem from long-running business complaints, and the advisory committee believes that the SEC has not shown clear evidence that the rulemakings are necessary, among other flaws.
“The SEC has, I think, quite sensibly adopted into its own guidance regarding cost benefit analysis in rule proposals…, and we just don’t think the current rule proposals comply with some elements of that self-imposed guidance,” said IAC member John Coates, a professor at Harvard Law School who drafted the recommendations.
Issued in November 2019, one proposal would make it harder for investors to bring shareholder proposals for vote during a public company’s annual meeting in Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8. (See Divided SEC Proposes to Make it More Difficult for Shareholders to Bring Proposals for Vote at Company Annual Meetings in the November 6, 2019, edition of Accounting & Compliance Alert.)
The other proposal, also issued in November, would subject proxy advisory firms to greater oversight in Release No. 34-87457, Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice. (See Split SEC Decides to Propose Greater Oversight of Proxy Advisory Firms in the November 6, 2019, edition of ACA.)
Business groups have been criticizing Rule 14a-8 of the Securities Exchange Act of 1934, which lets investors put forth proposals if they own at least $2,000, or 1 percent, of a public company’s voting shares for at least one year. The groups believe that as currently set, the rule allows a handful of activist investors to easily put forward proposals that have little to do with a company’s operations or financial performance at the expense of the rest of the shareholders.
Companies have also complained that two firms that provide voting recommendations on issues ranging from executive compensation to director elections during shareholder meetings wield outsize power over shareholder votes but do not give an appropriate opportunity for companies to raise concerns if they disagree with a proxy adviser’s recommendations or find errors in them. Investor advocates, however, do not want the SEC to revise the rules because, among other things, they believe small retail investors will be disenfranchised if the thresholds were raised. Most of all, they believe the current process helps to hold corporations accountable. On proxy advisers, asset managers who hold shares face logistical challenges in voting each proxy season, say the advisers provide efficient research on tens of thousands of vote recommendations.
IAC recommendations stated that to revise the rules, the SEC should have justified its rulemaking actions, but it has failed to identify the problems intended to solve, among other shortcomings. And another IAC member, Barbara Roper, was even more blunt in her criticism of the SEC’s work.
“I am as concerned with what I view as the SEC’s abusive process in this rulemaking, really egregious abusive use of process of this rulemaking as I am about the very concerning content of that rulemaking,” Roper, director of investor protection with the Consumer Federation of America, said. “This is a problem that goes beyond this rule proposal. We are seeing more frequently proposals come out that don’t even pretend to provide a full reflection of the record regarding the issues that are being addressed in those proposals.”
However, the five IAC members who voted against believe the SEC has done a relatively good job with the proposals, and they said the commission should be the one to figure out what its next step should be.
“I believe investors will be well-served by the commission’s effort to balance the interests of shareholders and the responsibilities of issuers and proxy advisory firms and asset managers in proxy voting,” said Heidi Stam, a former managing director and general counsel with Vanguard. “I also believe the commission has studied the issues raised by these proposals for years and has solicited and received input from the public on numerous occasions. Together with comments on this proposal, the commission has sufficient information to determine how best to move forward. And I believe the commission is in the best position to determine whether a reproposal may be necessary.”
Coates responded he was puzzled by those who “wrongly” think that the SEC is in the best position to decide whether to issue a second round of proposal or not.
“Why you think that the commission, having adopted guidance for itself that requires basic elements economic analysis to be in the rule proposal should be in a position to file a proposal without those elements and then without republication, proceed to vote on a rule proposal,” he said.
This article originally appeared in the January 27, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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