By Rodney F. Tonkovic, J.D.
In his first formal speech as a Commissioner, Elad L. Roisman told a group of investment managers that it is a "good time" for the Commission to consider guidance to help asset managers use the services of proxy advisory firms. In a March 18, 2019 keynote address before the Investment Company Institute members at the group's Mutual Funds and Investment Management Conference, Roisman discussed the proxy process, paying particular attention to the fiduciary role of a fund adviser and the responsible use of third party proxy advisory firms in the voting process.
Roisman has been charged by Chairman Jay Clayton with taking the lead on the Commission's efforts to improve the proxy process. Roisman began his remarks by noting that his experiences before becoming a commissioner, including serving as a corporate secretary, were still fresh in his mind, inspired his interest in the proxy voting system, and informed his current role.
Roisman framed his remarks as a follow-up to questions he posed at a November 15, 2018 proxy process roundtable concerning: 1) how fund boards and advisers fulfill their fiduciary duty in the context of proxy voting; 2) how they rely on proxy advisory firms; and 3) whether the SEC should take any actions to alter the current state of affairs. He observed that the Commission's current set of rules governing the role of fund advisers in voting proxies focuses on principles and disclosure. Advisers are also explicitly required to adopt and implement policies and procedures to ensure that advisers vote clients' proxies in the clients' best interests.
Best interest? The Commission's rules leave fund advisers with a lot of flexibility, Roisman noted, and their fiduciary duty fills in the gaps. The critical question then, is: "What is in the best interest of a fund in the context of proxy voting?" The default position of many advisers, he said, seems simply to be to vote on every proxy. But, there are costs behind voting that could add up quickly, so he asked for input on whether the Commission should provide guidance on what the rules require with respect to whether an adviser must vote and on what considerations should go into that vote. Roisman personally feels that the answer should, in some cases be "No."
Roisman also asked for input as to how advisers handle conflicting interests when proxy voting functions are centralized within the fund complex, especially where asset managers aim to vote uniformly across funds. Distinct funds could have different interests or investment objectives that could lead them to desire a different outcome in the same company's proxy. Roisman inquired if advisers have found voting policies that are flexible enough to apply to all funds while accounting for their differences.
Proxy advisors. Roisman then turned to the role of third party proxy advisory firms, stating that he was interested in hearing from asset managers about how they use these firms to case votes. He said up front that these firms provide valuable services, so additional regulations should not be imposed upon them without thorough consideration. But, he stressed, asset managers must use their services responsibly. Here, he noted the practice of "robo-voting," where asset managers rely too heavily on advisory firms' recommendations. He also brought up concerns about factual errors in the advisors' reports and how asset managers react to them. A final concern is potential conflicts of interest arising when proxy advisory firms consult for public issuers on corporate governance matters and how they disclose or otherwise mitigate these conflicts.
In light of these concerns, Roisman said that "it is a good time for the Commission to consider whether guidance would be helpful to asset managers as they consider how to utilize the services of proxy advisory firms." Relatedly, he added that it may be appropriate for the Commission to reassess whether current practices fit within the intended scope and purpose of the Exchange Act's proxy solicitation exemptions relied on by proxy advisory firms.
Other reforms. Roisman closed his remarks by briefly addressing other areas of the proxy process that are less directly related to asset managers. He observed that the infrastructure, or "plumbing," underlying the proxy voting system is complex, inefficient, and sometimes unreliable in a way that might require "comprehensive solutions based on modern technology. He is also interested in the thresholds for submission and resubmission of shareholder proposals and the balance between robust shareholder engagement and the consideration of idiosyncratic views rejected by the majority of shareholders.