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US Securities and Exchange Commission

Investors, State Securities Regulators, Academics Increasingly Question SEC Plans to Reform Proxy System

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Soyoung Ho

If SEC Commissioner Elad Roisman’s recent speech is any indication, the commission is determined to push through a pair of highly controversial plans vehemently opposed by many investor and consumer groups but strongly supported by corporations and business groups.

A few days before the public comment period ended on February 3, 2020, Roisman, who spearheaded the commission’s effort on proxy reforms, dismissed the opposition as merely being based on “myths”, not realities about what the SEC is attempting to do. But comment letters show mounting questions about the commission’s work that went into drafting the proposals, and it is unclear how the SEC will respond to the criticisms before adopting the revised rules.

Even before submitting comment letters, the Council of Institutional Investors (CII) has already asked about some of the data presented in Release No. 34-87458Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, and Release No. 34-87457Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice. Both were issued in November 2019.

Release No. 34-87458 would make it harder for investors to bring shareholder proposals for vote during a public company’s annual meeting in (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 would subject proxy advisory firms to greater oversight in (See Split SEC Decides to Propose Greater Oversight of Proxy Advisory Firms in the November 6, 2019, edition of ACA.)

Now, CII—which represents pension funds, foundations, and endowments with combined assets under management of about $4 trillion—is urging the SEC to withdraw both proposals. The group believes it would “undercut important shareholder rights, hamper the ability of investors to cast informed votes at public company annual meetings and restrict the collective voice of shareholders on issues of concern at companies in which they invest.”

The proposals were issued in response to business groups’ complaints that as the rules currently stand, it is too easy for a handful of activist investors to put forward proposals or resubmit failed proposals that have little to do with a company’s operations or financial performance at the expense of the rest of the shareholders as they deal with social and environmental matters.

Companies have also complained that proxy advisory 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.

In questioning the SEC’s basis for issuing the proposals, CII said that the number of shareholder proposals filed annually has been declining since 2015, and on average, a company receives only one proposal every seven years. At the same time, average voting support for proposals has increased. “That reflects well on the Rule and indicates that shareholder proposals are not a growing burden on public companies,” the group noted.

In a follow-up comment letter, CII also questioned the claims made by certain corporations that there are “pervasive factual inaccuracies in proxy advisors’ reports, claims that we believe were relied on in the Release and in the decision of a majority of SEC commissioners to support proposing a new regulatory regime.” The SEC has not provided any underlying data of company concerns, the investor group said.

Several academics and state regulators in comment letters also asked the SEC not to move forward. The North American Securities Administrators Association, Inc. (NASAA) said certain statements in Release No. 34-87458 are not supported even by the SEC staff’s data.

Moreover, “Management groups have derided certain proposals as having little relevance to long-term shareholder value or imposing higher costs to other shareholders, but many such proposals have led to widely adopted changes and have proven critical to ensuring long-term shareholder value,” NASAA wrote.

In a comment letter signed by several professors, they said that the SEC uses an inappropriate metric for measuring success. The success of the current rule “should not be measured in terms of how many proposals garner majority approval, or even substantial minority support, from the shareholders,” said James Cox, a law professor at Duke University who took the lead in writing the letter. Such a narrow focus overlooks the fact that many companies alter their practices following the proposals. Moreover, bringing a shareholder proposal is only the first step in private agreements. Oftentimes, a company makes changes even before the proposals get onto the ballot, the letter said.

There are separate comment letters from other professors that also ask the SEC not to adopt the proposed rules as the commission has not justified its plans.

 

This article originally appeared in the February 13, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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