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US Securities and Exchange Commission

SEC Commissioner Criticizes New Nomination Process for Investor Advisory Committee

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Soyoung Ho

SEC Commissioner Allison Herren Lee, a staunch investor protection advocate, voted against the commission’s new way of nominating candidates for its Investor Advisory Committee (IAC). Lee, who believes the previous process worked well, criticized that the new procedure—which establishes a staff-led nominating committee—could undermine the effectiveness of the advisory panel.

The IAC set up by Dodd-Frank recommends to the commission rule changes or policies intended to safeguard investors’ money, among other recommendations. The rest of the commissioners, who have been more business-friendly and backed deregulatory measures, voted for the change delineated in Procedures for Appointments to the Investor Advisory Committee on August 5, 2020. PL111-203

“These procedures bring much needed improvements to the process of appointing members to the Investor Advisory Committee,” said SEC Chairman Jay Clayton. “A similar staff-led process based on functional membership categories has proven to work with the SEC’s other advisory committees and is consistent with established and proven governance practices.”

Lee disagreed.

“The Commission purports to implement simple governance changes, consistent with the processes that govern other advisory committees,” Lee said. “In fact, we are singling out the IAC, which has at times been critical of the Commission, and subjecting it to a process unlike that for any other committee.”

Further, Lee said “the new process marginalizes participation by the office best situated to handle the process—the Office of the Investor Advocate—and restricts functional membership categories in a way that fails to prioritize the most pressing needs of investors.” Dodd-Frank also mandated the creation of the Investor Advocate Office within the SEC.

New Procedure

Previously, each commissioner selected individuals to serve on the committee. Now, the Nominating Committee, which will be initially chaired by Robert Marchman, Senior Policy Advisor for Diversity and Inclusion, will prepare a list of potential IAC candidates. The ultimate decision will continue to rest with the commission.

The committee includes representatives from the following:

  • Division of Corporation Finance;
  • Division of Economic and Risk Analysis;
  • Division of Enforcement;
  • Division of Investment Management;
  • Division of Trading and Markets;
  • Office of Inspections and Examinations;
  • Office of the Investor Advocate;
  • Office of Investor Education and Advocacy; and
  • Office of Minority and Women Inclusion.

The committee will identify candidates based on 23 functional membership categories, such as retail investor, financial analyst, and accountant.

Individuals who are interested to serve on IAC can also email a letter of interest for consideration.

Commissioner Lee’s Criticisms

In explaining her dissent, Lee said the SEC does not select members for other advisory committees using a formal and rigid process.

“Most importantly, we do not sideline the office or division that is best positioned to understand the needs and operations of that committee,” she said.

For example, the Advocate for Small Business Capital Formation, selects nominees for the Small Business Capital Formation Advisory Committee.

“And yet for the IAC, our Investor Advocate has been pushed to the side,” Lee said.

While the final version includes the Investor Advocate on the Nominating Committee, she said Investor Advocate Rick Fleming was not even included initially. Moreover, he cannot hold a leadership position except once every nine years.

“Even then, his views could be simply overridden by a majority of members from other offices—unlike any construct we have in place for any other advisory committee,” Lee said.

She also criticized the functional categories as being rigid and narrow as they do not include environmental, social, and governance (ESG) investing, climate change expertise, or corporate governance. Investors are increasingly demanding more disclosures as well as better management of sustainability issues.

“We fail to ensure that the IAC can speak to some of the most significant issues facing investors today,” Lee said, while adding that she hoped that the staff can transcend the problems.

However, Commissioner Elad Roisman said the new process represents an improvement because previously the SEC pursued an informal and minimal process.

“Commissioners are not the best placed people to identify advisory committee candidates—the expert SEC staff is better positioned to identify people with relevant areas of expertise,” he said. “I learn more from committee members who are able to weigh in based on practical experience and technical knowledge, rather than based on their ideological viewpoints.”

While Roisman did not explain what he meant by ideological viewpoints, the advisory panel has experienced some partisan feuding. For example, two years ago, an IAC member who is a strong investor protection advocate harshly questioned an invited guest speaker who supported a deregulatory legislative bill. The guest speaker ended up becoming a member of the IAC.

Roisman said that he also likes the new procedures because a member that served one term cannot be renominated to serve an additional consecutive term.

Previously, some members got two terms while others did not.

Investor Concerns About Old and New Processes

The new procedure in part follows concerns recently expressed by institutional investors about the appointment process.

Two investor groups—Council of Institutional Investors (CII) and Institutional Limited Partners Association (ILPA)—in June asked SEC Chairman Jay Clayton to be more transparent about how the panel members are picked. The two groups said their members often ask how IAC members are appointed. A few days later, the SEC established a portal on the IAC’s webpage so members of the public can apply to serve on the panel.

“We are pleased that the Commission has responded to our written request with ILPA to set forth a more transparent process for seeking nominees and making appointments to the Investor Advisory Committee,” CII General Counsel Jeffrey Mahoney said in an emailed statement. “More transparency is particularly welcome given the recent unannounced changes to the process that resulted in the May appointment of six new members to the IAC without significant investor input,” Mahoney said.

“In that regard, we share Commissioner Allison Herren Lee’s view that the new process should have granted the Office of the Investor Advocate a greater role,” Mahoney said.

“In addition, the new process should have explicitly included consideration of qualified investors with expertise in corporate governance and shareowner rights,” Mahoney said. “Like Commissioner Lee, however, we are hopeful that despite these deficiencies the new process will operate in a manner that will ensure that the IAC ‘continues to function as an independent voice, capable of, and willing to offer, meaningful and constructive criticism of the Commission.”

 

This article originally appeared in the August 7, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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