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ANALYSIS: Sparks Fly in Comments on SEC Proxy Advisor Proposals

Feb. 26, 2020, 5:45 PM

The notice and comment process for SEC rulemaking typically generates turgid prose and repetitive argument. That is definitely not the case with regard to the comments on the SEC’s proxy advisor proposals.

Corporate governance expert Nell Minow stated that the rules as proposed would “undermine a crucial element of accountability to shareholders by severely hampering the access of investors, including individual investors whose assets are managed by intermediaries to the sole source of independent information.” She emphasized that the proposal “is wrong in every category.” Meanwhile, Tom Quaadman from the U.S. Chamber of Commerce said that the “disruptive behavior of an unregulated capital markets participant should not continue,” and a group called the Committee for Justice claimed that proxy advisory firms “exhibit signs of market failure, but the market has not been able to eliminate them” because of a “lack of transparency that is so pervasive in this process.”

Minow responded by referring to the Committee comment as part of “a choir of sock puppets, perpetuating the corporate insider spin” on the need for proxy advisor regulation. She added that the Chamber comment continues its “pattern of accusations contrary to the data and recommendations contrary to the law.”

Rarely are SEC rulemakings so entertaining, and rarely do sock puppets make an appearance.

Investor Advisory Committee Response

The proxy advisor proposal, which would require advisors to disclose conflicts and to provide issuers an opportunity to review and provide feedback on proxy voting advice in advance, also sharply divided the SEC’s Investor Advisory Committee. A committee report urged the SEC to revise and re-issue the rule proposals to 1) present a more balanced assessment of proxy advisors (and shareholder proposals); 2) comply with SEC guidance on the economic analysis included in the releases; and 3) present evidence supporting the need for the proposals, rather than stating simply that problems “may” exist. According to the report, the sources cited by the SEC in the proposing release “provide no reliable basis for concluding material problems actually do exist, particularly problems that cannot otherwise be addressed by market responses, private action, contract, or heightened SEC enforcement of existing rules and duties.”

The report prompted an abstention and several dissents, however. As law professors Paul G. Mahoney and J.W. Verret stated in dissent, “no amount of private ordering can undo the effects of existing regulations that encourage investment advisors to rely on proxy advisory firms for reasons apart from the quality of their advice.”

Next Steps

The comment period closed Feb. 3, but letters continue to come in to the Commission. Following the departure of Commissioner Robert Jackson, there are three likely votes on the four-member Commission in support of the proposal.

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