By Amanda Maine, J.D.
Speaking at the Council of Institutional Investors’ 35th Anniversary Annual Spring Conference, SEC Commissioner Elad Roisman reiterated his support for the SEC’s proposal on proxy advisory firms, which has met with CII criticism since it was issued in November 2019. In his remarks, Roisman thanked commenters for their suggestions and encouraged engaging with the Commission on alternative ways to approach issues related to proxy voting advice.
Proposal and CII objections. The SEC’s proposal would, among other things, require proxy advisory firms to submit their voting recommendations to the subject company, which would then have an opportunity to comment on the proxy firm’s report before it is distributed to its investment adviser clients. The proposal would also require firms to disclose material conflicts of interest in their proxy voting advice. The Commission voted to issue the proposal for comment by a 3-to-2 vote.
CII has been vocal in its opposition to the Commission’s proposal, as well as its sister proposal on shareholder proposal submission and resubmission thresholds, which was approved at the same meeting. In addition to its 65-page comment letter opposing the proposal, CII has also submitted comment letters asserting that the proposed rules, if adopted, would result in an even more compressed time frame for the proxy season, and chastising the Commission for proposing the amendments without sufficient evidence regarding alleged errors in proxy advisory firms’ recommendations.
Roisman responds. In his remarks, Commissioner Roisman acknowledged CII’s views and praised commenters who had offered alternative suggestions to the SEC’s proposal. One such suggestion would provide a contemporaneous review period where the proxy advisory firm sends its report to the company at the same time it distributes the report to its clients. Under this approach, the proxy advisory firm would notify its clients after a short period of time (two days has been suggested) if the company had raised any objections to the firm’s report, Roisman said.
Roisman is open to such suggestions, although he advised he had questions about how this approach might work in light of some voting practices, such as pre-populating clients’ electronic ballots and automatically submitting them for counting. Roisman wondered if such systems would make a concurrent review of the firm’s recommendations impossible. He added that it was unclear if such "set-it-and-forget-it" mechanisms would be consistent with an investment adviser’s duties, particularly in idiosyncratic and contested matters.
Roisman also addressed the proposed amendments relating to the disclosure of conflicts of interest. He said that he has learned about several other potential conflicts of interest besides the non-exhaustive list in the proposing release. For example, he noted that some proxy advisory firms rely on a subset of their own clients to develop their off-the-shelf voting guidelines. He inquired whether some clients are more involved than others and if some clients are unusually vocal when it comes to developing recommendations for clients generally. He also questioned the premise that all clients of proxy advisory firms have the same interests when it comes to the outcomes of voting. He emphasized that he is not opposed to proxy advisory firms or how clients have relied on their advice, but recommended that there be greater transparency about how the advice is developed.
Future action on proxies. More work needs to be done to improve the proxy system, Roisman said. Roisman reminded the audience that beneficial owners of a significant percentage of a company’s shares acting together as a group are required to disclose this collective action. He believes that the SEC should assess whether shareholders, acting through voting advice businesses, are operating as "groups" for purposes of the Commission’s beneficial ownership rules. "It does not matter whether that coordination is occurring directly among these persons or indirectly though an intermediary such as a proxy voting advice business," the required disclosures cannot be evaded, he warned.
Regarding "proxy plumbing," Roisman noted that there is broad consensus that investors should be able to confirm that their votes count in shareholder elections. However, determining who should pay for this is less clear, he said. While some have argued that issuers should foot the bill for providing end-to-end vote confirmation, Roisman questioned whether adding an additional expense for issuers, who already fund the voting process, would improve transparency or introduce new competition in the proxy services market.
Finally, Roisman voiced his support for consideration of a universal proxy rule. The Commission’s 2016 proposal, which would have required the use of universal proxies that include the names of both registrant and dissident nominees and thus allow shareholders to vote by proxy in a manner resembling how they can vote in person at a shareholder meeting, was never acted upon by the SEC. Roisman noted that the SEC has since received additional input from its 2018 roundtable on the proxy system regarding how a universal proxy could provide benefits for all involved. He urged issuers and investors to work with the Commission and its staff on the best way to move forward to implement a universal proxy rule.