By Bill Flook
The Senate will vote on a bill funding the SEC and other financial regulators for fiscal 2020 “in the coming weeks”, according to the ranking Democrat on a key Senate Appropriations subcommittee.
Sen. Chris Coons, the ranking Democrat on the Financial Services and General Government subcommittee, made the prediction in an October 23, 2019, statement urging the passage of appropriations bills to avoid a government shutdown. The government is now operating on a continuing resolution, which is slated to expire on November 21.
One of the unfinished funding measures is the Financial Services and General Government Appropriations Act, which would provide $1.77 billion for the SEC in fiscal 2020, which began this month. Coons is a co-author of the funding measure, which also funds the Treasury Department, judiciary, Commodity Futures Trading Commission (CFTC), and other agencies.
Senate passage of the bill would set up a clash with the Democrat-controlled House over a dueling package of budget riders. The Senate bill contains language blocking the SEC from implementing a corporate spending disclosure rule, which is not found in the House version. In the House, Democrats have attached language to their bill blocking the commission from implementing its “best interest” standard on broker-dealers and other reforms, which Republicans in the Senate will likely oppose.
The Senate’s corporate political spending disclosure rider would maintain a long-standing ban on the rulemaking. Activists groups, Democratic lawmakers, and others have stepped up their calls for the disclosures following the Supreme Court’s 5-4 decision in Citizens United v. Federal Election Commission in 2010, which lifted restrictions on independent political expenditures by corporations and unions. But Congress for years blocked SEC action on a corporate political spending rule through the budget.
The SEC, even without considering the ban, has not been enthusiastic about launching a corporate political spending disclosure rulemaking. Neither the SEC’s current chair, Jay Clayton, nor his predecessor Mary Jo White have supported such a rule. GOP opponents of the rule argue that regulating election disclosures is not within the purview of the SEC.
When the House passed its financial services funding bill earlier this year, it attached riders that would block the SEC from moving forward in three areas: so-called Regulation Best Interest; reforms to the thresholds for shareholder proposals or resubmissions; and changes to a key exemption used by proxy advisory firms. None of those provisions survived in the Senate’s version of the bill.
All three of the riders were introduced as amendments by Rep. Maxine Waters, a California Democrat who chairs the House Financial Services Committee and has been a frequent critic of the SEC’s direction under Clayton.
Democrats are deeply unhappy with the SEC’s Best Interest standard, issued in June. In a cluster of four rules, the SEC established a set of new obligations for broker-dealers working with retail clients, an effort to ward off conflicts of interest. Democratic lawmakers, and investor advocacy groups, argue the changes will do little to protect retail clients from being steered into inappropriate investments that most benefit their broker.
The SEC issued the rules in Release No. 34-86031, Regulation Best Interest: The Broker-Dealer Standard of Conduct; Release No. 34-86032, Form CRS Relationship Summary; Amendments to Form ADV; Release No. IA-5248, Commission Interpretation Regarding Standard of Conduct for Investment Advisers; and Release No. IA-5249, Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser.
Another Waters amendment would block the SEC from “using funds to propose, implement, administer, or enforce any rule that would revise the threshold for shareholder proposals or resubmissions”.
Business groups have long sought changes to Rule 14a-8 of the Securities Exchange Act of 1934, which today allows an investor to put forth a proposal for vote during a public company’s annual meeting if that investor has owned at least $2,000, or 1 percent, of the issuer’s voting shares for at least a year. Industry also wants the SEC to change the so-called Resubmission Rule under Rule 14a-8(i)(12). The rule permits an issuer to exclude a proposal if it failed to win the support of 3 percent of shareholders if voted on once in the last five years, 6 percent if voted on twice in the last five years, and 10 percent if voted on three or more times in the last five years.
Waters also attached an amendment that would prevent the commission from “amending or otherwise revising the reliance of certain advisors on the proxy solicitation exemption” under Rule 14a-2(b). The exemption allows firms to provide their recommendations to clients without complying with certain filing requirements under proxy solicitation rules.
Business groups, such as the U.S. Chamber of Commerce, and Republican lawmakers have long sought to crack down on the proxy advisory industry, which is now dominated by two players: Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co.
Proxy firms provide institutional investors with recommendations on shareholders votes, while offering a range of consulting services. Critics say those two roles present an inherent conflict that could influence the firms’ recommendations, and necessitate greater regulatory scrutiny. Companies have also complained that they have do not have adequate channels to raise concerns with the proxy adviser and shareholders if they disagree with a proxy adviser’s recommendations or feel they are based on faulty information.
SEC staff is weighing whether to recommend amendments to how proxy firms are able to rely on the exemption in Rule 14a-2(b), which follows an SEC roundtable on proxy reforms late last year.
Institutional investors say they rely on proxy firms’ recommendations, and have pushed back against industry efforts to crack down on the firms. Democratic lawmakers have also expressed skepticism over the campaign to impose new regulations on proxy advisors.
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