SEC Chair Clayton tried to map the proxy system… but needed a bigger desk

SEC chief makes unscheduled appearance at investor committee

The head of the US financial regulator says he tried to map the country’s arcane proxy voting system but joked he realized he needed a bigger desk.

Speaking at the SEC Investor Advisory Committee yesterday in a wide-ranging talk also taking in ESG disclosure and Europe’s MiFID II rules, Securities and Exchange Commission Chair Jay Clayton, throwing his arms apart, said: “I tried to map the proxy system… I’m gonna need a bigger desk!”

While acknowledging the proxy advisors “add a great deal of efficiency to the process” he believed that could be improved.

He said: “That people have to scramble around to understand the debate in this era of communications technology does not make a lot of sense to me.” The dynamic between the firms, their clients and companies “needs to be more clear”.

He was speaking after a recent SEC event looking at the entire proxy voting system (see RI coverage). His appearance at the IAC was not on the original meeting agenda and Clayton fielded questions from investors in a ‘town hall meeting’ style and stressed that his remarks were his own.

The event was chaired by former CalSTRS Director of Corporate Governance Anne Sheehan.

In his prepared remarks on ESG, Clayton said he was aware of increasing disclosure of ESG information by issuers in the marketplace and requests for ESG information by investors.

“I am also aware of efforts by third parties to develop disclosure frameworks relating to ESG topics as well as calls by some market participants for issuers to follow third-party disclosure frameworks relating to ESG topics.

“Although third-party standards relating to ESG topics may allow for comparability across companies, that does not mean that issuers should be required to follow these frameworks in order to comply with SEC rules.

Each company and sector, he said in the remarks, has its own circumstances, which may or may not fit within a standard framework, although “that does not mean the standards do not have value”.

But he flagged up two principles.“First, in complying with our disclosure rules, companies should focus on providing material disclosure that a reasonable investor needs to make informed investment and voting decisions based on each company’s particular facts and circumstances.

“Second, investors—and here I’m thinking about asset managers who are required to vote in the best interest of their clients—should also focus on each company’s particular facts and circumstances.”

At one point the live discussion turned to investment research and Clayton observed that what he called Europe’s MiFID II “experiment” — which has changed the way investors access research — was “proving not successful from a broad availability of research perspective”.

He suggested the committee should have research on its agenda, saying: “You get a reduction in supply and the big guys win, end of story.”

CalPERS’ Anne Simpson, fresh from her appearance at the Oxford Union, made the point that modern markets and companies are totally different from when SEC disclosure rules were set down.

Clayton said: “Anne, I could not agree with you more that what drives the global economy has changed over last 30 years – have our disclosure rules kept up?” He was a firm believer, though, that there was nothing wrong with existing frameworks “but what goes into it needs to be assessed”.

He said that the accounting term ‘goodwill’ now means issues like supply chain and distribution etc. “Unfortunately, capturing that and ESG have become conflated.”

Susan Ferris Wyderko, the former SEC executive who heads the Mutual Fund Directors Forum non-profit organization, raised the issue of modernizing the SEC’s venerable Edgar (Electronic Data Gathering, Analysis, and Retrieval) system.

Clayton said it was a “multi-year project” and, given that the SEC is funded year to year, it needed an “incremental approach”.

There was one touching moment in which the former corporate lawyer had his colleague Kara Stein in tears (in a nice way!).

Commissioner Stein is due to leave the SEC and Clayton’s warm remarks ahead of her departure meant she had to take a moment to compose herself.