Paul Hodgson: SEC commissioner Elad Roisman puts on his tin foil hat

A recent speech in the lion’s den of the Council of Institutional Investors

SEC commissioner Elad Roisman made a speech in the lion’s den of the Council of Institutional Investors (CII) March conference that made a few concessions but also made a few threats as well.

Firstly, he appeared to accept that the proposal that issuers [i.e. companies] could review proxy voting advice before it was sent out to the advisers’ clients might cause voting problems for investors because of the delay in sending the advice out to them.

He promised to consider changing that to a concurrent review, so advice is sent out to issuers and investors at the same time. Amy Borrus CII’s deputy director said: “The crux of what institutional investors objected to was the pre-review. If the SEC is considering removing that, that takes the biggest problem with this release off the table.”

Glass Lewis’s Special Counsel for Public Policy, Gordon Seymour, in an email to RI, was similarly appreciative: “We appreciate Commissioner Roisman’s acknowledgment of some of the timing and other practical issues the Commission’s proposed issuer pre-review periods would cause for proxy advisors’ clients, and will continue to engage with the Commission on these issues.”

ISS special counsel Patrick McGurn, however, was unimpressed with the offer to consider concurrent review: “ISS opposes the fundamental idea of reclassifying proxy voting advice as a solicitation,” he said.

“Tinkering with the proposed exemptions won’t fix this flawed foundation. The SEC does not have the legal authority from Congress to regulate proxy advice as a solicitation and both its recent guidance and its proposed rule look to reverse decades of precedent by the Commission. To the extent any changes to how proxy advisory firms operate are truly required, a suggestion with which we disagree, we believe the vehicle for doing so is through the Investment Advisers Act of 1940 to which ISS has been subject for decades.”

Once this carrot was tossed out there, however, Roisman went on to address a number of other issues, many of which suggest that he does not fully understand how clients use proxy voting advice.

This usage, along with a number of other process issues, was very clearly explained during the two-day roundtable the SEC held on the proxy process in November last year.

I do not remember Roisman being in attendance for the whole two days of the roundtable, but one can be forgiven for hoping that he reviewed the video. Both KT Rabin, Glass Lewis’s then CEO, and Gary Retelny, ISS’s CEO, explained very clearly exactly how the proxy advice business works, how they get their information, how they put that information into practice, and how they formulate proxy advice based on that information.

I noted this to McGurn, but he went further: “All you have to do is go to our website for the full details of our policy development process and our benchmark and specialty policies.”

Since virtually everything Roisman said in the speech would appear to suggest that he does not fully understand how the proxy advice business works, it is of some concern that he is the commissioner tasked with formulating regulations for the industry.

The content of the speech seems to suggest that Roisman has trawled through the comment letters on the proposed regulations to find additional complaints about proxy advisors and to figure out a way of regulating those, regardless of the fact that most substantive comment letters objected strongly to the proposals.

He even used one comment letter – one of five the group sent – from CII executive director Ken Bertsch to point up an alleged conflict of interest not specifically noted in the proposed regulations, saying: “proxy voting advice businesses rely on a subset of their own clients to develop their off-the-shelf voting guidelines and, in some cases, specific recommendations”.

This is not what Bertsch’s letter said, which can be seen plainly from the quotation given from it in the speech’s footnotes. It said: “This process has ensured that proxy advisors’ recommendations reflect the views they receive from institutional investors, whose interests they serve.”

Borrus told me: “Proxy advisory firms have a broad policy-development process. They do not just rely on their own thinking. ISS in particular consults an array of different parties with different perspectives. CII thinks that is a good thing—and certainly better than if proxy advisory firms took an ‘ivory tower’ approach to forming their recommendations.

“It’s important to keep in mind that proxy advisory firms consult about policy, not about specific companies. It may be that the views of some of those whom proxy advisory firms consult carry more weight, for whatever reason. But that is typical when canvassing the views of a wide range of parties. If the views of those who are surveyed and choose not to respond are not strongly reflected in final policy, that’s not surprising.”

McGurn confirmed this: “ISS doesn’t limit our policy update survey to our institutional investor clients or any subset of them,” he said. “The electronic survey is open to investors and other interested parties, which includes, on the issuer side, the corporations themselves, their advisors and board members. Notably, we ask identical questions in the investor and issuer versions of the surveys because we want to get a 360-degree spectrum of viewpoints on any matter when we may consider a policy change.”

McGurn also took issue with the accusation that input to ISS is dominated by a small subset of investors. “ISS publishes, broken out by investor category, geography and assets under management, which type of institutions respond to the survey. If you look at this data over the years, the responses have consistently been provided by a meaningful cross section of our client base. The inference of some of the lobbyists, which the Commissioner appears to be referring to,” said McGurn, “is that the survey is dominated by one particular type of investor. In addition, these surveys are just one of the sources of information that ISS uses to assess potential policy changes. We also hold a series of in-depth telephonic and in-person policy roundtables. ISS uses this post-season feedback to validate what we heard in the Spring in our one-on-one conversations with investors and issuers. This inclusive and robust process is designed to ensure that our policies aren’t driven by the ‘squeaky wheels.’ Any suggestion that it’s a closed feedback loop or that certain kinds of investors stuff the ballot box just doesn't hold water.”

Roisman also criticised investors ‘outsourcing’ their votes to ISS and GL and questioned whether they were exercising their fiduciary duty, but misses the point that ISS and GL provide such a service based on clients’ own proxy voting guidelines, so they are ‘outsourcing’ the voting process, but not the decision-making process. And even where clients receive standard ‘off-the-shelf’ proxy advice, Roisman does not seem to be aware of the somewhat ubiquitous statistic that most clients do not follow ISS’ and GL’s voting advice but use it as an input when deciding how to apply their own voting philosophy.

Finally, he raised another potential problem: alleging that shareholders, acting through voting advice businesses, may be operating as “groups” for purposes of our beneficial ownership rules which would necessitate a Schedule 13D disclosure. Since those disclosures, he continued, aren’t being made, retail investors have no idea that such “groups” are operating and it disadvantages them. McGurn was even more dismissive of this allegation.

“Given the scores of thoughtful letters from some of the world’s leading investors,” he said, “it’s odd and unfortunate that one of the major takeaways appears to be drawn from the tin-foil-hat end of the commentary spectrum. This issue isn’t widely discussed in the comment material. There’s no frame of reference provided in the speech and it’s hard to really understand the genesis of the concerns being expressed since they are so far off from the reality. The suggestion was made that our clients get together, decide a course of action and then instruct us how to recommend on a particular issue. That is simply untrue.”