The SEC’s recent proxy proposals—both the proposal related to proxy advisory firms (see this PubCo post) and the proposal related to Rule 14a-8 shareholder proposals (see this PubCo post)—have been hit hard by the critics. Even the SEC’s own Investor Advisory Committee piled on, ultimately recommending that the SEC consider a do-over. (See this PubCo post.) To the defense comes SEC Commissioner Elad Roisman, who has been honchoing these proposals at the SEC.
In this speech to the Catholic University Columbus School of Law, Roisman argues that the proposals were long overdue, given that some of the rules subject to the proposal dated back to 1954. First to make their views known, he claimed, were some of the “loudest voices,” which accused the SEC of “serving as a shill for corporate interests, suppressing shareholder votes, and sheltering CEOs of big corporations from accountability.” But, Roisman maintains, these are myths he hopes to dispel in this speech, with the objective of encouraging constructive feedback from commenters.
The first “myth” that Roisman takes on is the charge that the proxy proposals are “driven by the lobbying efforts of corporate interests.” Not the case, he maintains, the SEC “does not act at the behest of lobbyists.” Rather, on these topics, the SEC has listened to a variety of market participants over the last two decades (see, for example, this PubCo post regarding the SEC’s proxy process roundtable), and he personally has held meetings with all comers, including institutional investors and asset managers whose concerns about the SEC’s pursuit of “large-scale reforms” to the proxy voting process influenced him and appeared to have “informed the staff’s thinking.” Any reader of the two proxy proposals “will see that they do not reflect wholesale acceptance of any particular market participant’s ideas for reform or change. Rather, they demonstrate a good faith attempt to serve the interests of all market participants through a careful combination of policy and pragmatic questions about how the current rules can be improved.”
Second, the proposals do not suppress shareholder votes, Roisman argues (apparently interpreting that contention perhaps more literally than it was intended). Neither proposal “alters a shareholder’s right to vote in any way”; instead, the proposals address the eligibility requirements for shareholder proposals and the requirements of proxy advisory firms that rely on SEC exemptions to make voting recommendations to investors.
In addition, he argues, it’s not the case that the proposal is “making it prohibitively expensive for retail investors to submit shareholder proposals.” The proposal would raise the eligibility threshold from $2,000 to $25,000 for shorter-term holders, but retain the original $2,000 threshold so long as the investor has held this amount of stock for a longer time—three years, instead of one year. The purpose of the proposal was “not to exclude smaller retail investors,” but rather to “ensure that those submitting proposals have demonstrated more than a short-term interest in a company.” Put another way, the intent was to limit the shareholder proposal process to “those who have a demonstrated interest in the company’s continued success.” And here’s where it gets more political: according to Roisman,
“most proposals today come from a miniscule fraction of shareholders. While some are undoubtedly well intentioned, some proponents appear to be using this system to promote their own social or political agenda without any regard for the specific company funding the ballot and its long-term success. Their efforts to broadcast their views to corporate America through the proxy process impose costs on all other shareholders. I, for one, would like to close loopholes that currently allow people to do this.”
The allegation that the SEC is “making it easier for CEOs to spend shareholder money” was perplexing to Roisman, but his response is that neither proposal reallocates any money, and actually aims “to preserve company (and therefore shareholder) money” by “curb[ing] the ability of a small subset of shareholders to spend the money of all other shareholders in furtherance of causes that the vast majority of other shareholders have repeatedly rejected.”
The “myth” that the proposals would now allow companies to sue proxy advisory firms “if they criticize the company” is also wrong in Roisman’s view. First, he contends, antifraud liability under Rule 14a-9 is not new, and the SEC has long taken the position that proxy voting advice is a solicitation subject to that rule. Second, liability under Rule 14a-9 requires that the statements at issue be “materially false or misleading,” not just critical of the company. Moreover, the same standard applies to others conducting solicitations, including companies and activist investors: “Why in the world would we want investors making voting decisions based on advice that is false or misleading with respect to a material fact? Or worse, why would we grant someone a license to make such statements without liability?”
In addition, Roisman does not believe, as some contend, that provisions in the proposal that would allow companies to review proxy advisors’ recommendations in advance “will compromise the independence of these businesses.” First, he asserts, the proposal was based on current market practices by ISS and Glass Lewis that apply for some issuers only. The proposal just extends that practice broadly, in his view, allowing “investors the opportunity to make more informed decisions when they vote.” Further, Roisman argues, the proposal was “careful to preserve the boundaries” by making clear that proxy advisors would only have to link to the company’s response and “would not have to make any changes to their reports in response to the companies’ feedback.”
Nor does Roisman agree that the proposals are “so burdensome that they will stifle competition” in the market for proxy advisory firms. Rather, he thinks the proposals seek to avoid freezing out other competitors by
“taking a light-touch approach to the SEC’s oversight of proxy voting advice businesses. For example, rather than require voting advice businesses to follow onerous regulatory procedures to have the Commission review their voting procedures and methodologies (as some policy-makers have advocated for), the proposals are modeled after current market practices—calling for such businesses to disclose their conflicts of interests and allow time for company review and response before publication. Additionally, since competition in the industry is an important concern, we have taken care to provide an alternative proposal for public comment, specifically asking whether we should exempt smaller proxy voting advice businesses from these requirements.”
Finally, Roisman addresses the myth that the “SEC is attempting to solve a problem that does not exist.” In particular, some institutional investors and asset managers argue that no changes are necessary because, as the clients that are paying for the proxy advisors’ advice, they “are happy with their voting advice and don’t worry so much about any errors or methodological weaknesses in these reports.”
Roisman argues that the SEC’s concern goes beyond the institutional investors and asset managers to the ultimate retail investors who will benefit from or bear the cost of the voting decisions of the institutional investors and asset managers: “In essence, I believe it is our job as regulators to help ensure that such advisers—fiduciaries, who take on voting authority for their clients—vote proxies in a manner consistent with their fiduciary obligations and that the proxy voting advice upon which they rely is complete and based on accurate information.” What’s more, proxy advisory firm advice has been characterized as “market-moving”: “how could anyone argue that the SEC should not care about proxy voting advice businesses’ recommendations, or whether they are influenced by the types of conflicts of interest, errors, or methodological biases that have been brought to the SEC’s attention?”
The one area that Roisman concedes could be a concern relates to the independence of proxy advisory firms. (Levine appears to be in sync here also.) The allegation is that some clients of these firms use the firms as a “fig leaf” to cover up their “group” activities. For example, the asset managers may decide together that “they do not like a particular member of a company’s board of directors. They then instruct the proxy voting advice business to recommend a vote against the director. The term [Roisman] heard for this practice is ‘social arbitrage,’ a way for an asset manager to vote against a company, while maintaining its relationship with management so that it can sell products to that company such as providing 401(k) services.” That behavior would be “deeply troubling” in that, as a result of a conflict, the proxy advisory firm is providing “voting advice to all its clients on the preferences of a select group of its own clients.” And, by potentially acting as a “group,” these activities could amount to a 13D violation.