Paul Hodgson: Who is the SEC really trying to protect with its new proxy guidance?

The SEC held a roundtable but has ignored the outcome

The message from the Staff Roundtable on the Proxy Process last year was: don’t do anything about proxy advisory firms, leave the shareholder proposal process alone, but please hurry and fix the proxy plumbing process, the mechanism by which shareholders actually vote their proxies.

The response from the SEC: fix proxy advisory firms’ role that no one thinks is broken, accelerate amendments to the shareholder proposal process and “think” about doing something about the proxy plumbing.

Shareholders should hope that the SEC does not move on its coming Regulatory Flexibility Agenda before the next election.

“The SEC’s job is to protect shareholders, but it is clear this Commission’s sees its job is to protect management from shareholders.”

If it does they may find that changes to “amend the submission and resubmission thresholds for shareholder proposals” and “proposed rule amendments to address proxy advisory firms’ reliance on the proxy solicitation exemptions” mean that there will be no more shareholder proposals and that proxy advisors can no longer offer advice.

Split along party lines, the Commissioners voted on ‘guidance’ for investment advisers and ‘interpretation’ of rules governing proxy advice this week.

Commissioners Allison Herren Lee and Robert Jackson dissented, while chair Jay Clayton and commissioners Elad Roisman – the one responsible for the ‘guidance’ – and Hester Peirce supported it.

Dire warnings were made by Lee in her statement that the proxy advisor’s role was being changed before the Commission had actually decided on changes to the rules governing them. This does seem to be the wrong order of events.

The SEC’s job is to protect shareholders, but it is clear from this guidance that this Commission’s view of its job is that it must protect management from shareholders.

This entire release is motivated by complaints from corporations and the Business Roundtable, among others, that there are ‘mistakes’ in proxy advisory firm’s advice and that they are allegedly subject to conflicts of interest.

Here is the giveaway from the release: “Solicitations that are exempt from the federal proxy rules’ filing requirements remain subject to Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which… is false or misleading with respect to any material fact.”

The guidance reconfirms that “the furnishing of proxy voting advice does constitute a ‘solicitation’”.
In other words, the SEC is saying that proxy advisors are, technically speaking, soliciting votes by providing advice.

And it reconfirms that this is the case even where they are just reiterating the proxy voting guidelines of their clients. But providing advice that is “false or misleading” would lead to a violation of the exempt solicitation rule, the rule that allows proxy advisors to do their job.However, as has been stated over and over again, proxy advisors’ statements that companies allege are ‘false’ are matters of opinion, not fact.

The guidance goes even further, however, and alleges that the rule about ‘false and misleading’ “also extends to opinions, reasons, recommendations, or beliefs that are disclosed as part of a solicitation”.

This is an extraordinary statement. How can opinions and beliefs be false or misleading?

Beyond these problems with the guidance, how does the Commission justify its actions?
Roisman does so thus: “For example, I have heard that the Commission should not take any action related to proxy voting advice provided by proxy advisory firms because ‘…the investors themselves…the ones paying for proxy advice…are not asking for protection.’ To be clear, in this context, I do not consider asset managers to be the ‘investors’ that the SEC is charged to protect. Rather, the investors that I believe today’s recommendations aim to protect are the ultimate retail investors, who may have their life savings invested in our stock markets.” This is an extraordinary statement, and one that many asset managers may take amiss.

But the real problem is that the justification for this guidance is based on an infinitesimally tiny number of retail investors who allegedly wrote to the SEC to complain about the outsize influence of proxy advisors and who claim that proxy advice is full of factual errors.

I have already questioned whether many of these investors are real people rather than robo-commenters – zombie investors, if you will – but even if they all were, the number of them who complained is less than a hundred, compared to the hundreds of millions of retail investors who are actually out there and are clearly not concerned.

Not only is the Commission taking this action for no reason, it is also making the situation worse. Jackson notes that the effects of the guidance are likely to make small to medium-sized investment firms vote less – thus concentrating even more voting power with the mega firms – and will reduce the incentives for new entrants to an already over-concentrated proxy advisory market.

Clearly this could be the result: “The guidance… discusses whether an investment adviser is required to exercise every opportunity to vote a proxy for a client where it has assumed voting authority on behalf of the client.”

Peirce says: “we are not building a new regulatory regime, but are explaining the contours of an existing one to help investment advisers and proxy advisors carry out their responsibilities.”

But Lee, in one of her first ever statements in the job, respectfully disagrees. Advice from the Commission that investment advisers ‘should’ do something, actually means that they ‘must’ do it, in this heavily regulated industry.

But she also takes aim at the guidance’s call for “more issuer involvement in the process”, the fact that it will increase costs for everyone, and that it will increase the amount of work required to be completed in an already compressed timeframe between the publication of a proxy statement and a company’s annual meeting.