SEC committee which backed ESG disclosures in row over nominations

The US Securities and Exchange Commission (SEC) is revamping the nominations process for an independent advisory committee which previously broke ranks with the regulator by supporting standardised ESG corporate disclosures and proxy advisors.

The move is opposed by Commissioner Allison Herren Lee, one of two sitting Democrats on the five-strong Commission, who cautioned that the new procedure would exclude candidates with expertise in “ESG investing, climate change expertise, proxy, shareholder rights, or even corporate governance broadly”.

Under the new procedure, the SEC’s “career staff” will lead the process of nominating candidates to the regulator’s Investment Advisory Committee (IAC). To guide the process, the Commission has created 23 functional categories describing potential candidates which include retail investors, angel investors, institutional investors, and investor education professionals.

However, Commissioner Lee said that the proposed categories were “rigid, narrow and inadequate” and “excludes some of the most pressing current issues for investors” in reference to sustainability-related considerations.

In addition, she suggested that the SEC was “singling out the IAC” since elements of the new nomination procedures have not been apllied to any of the regulator’s other advisory committees.

Commissioner Lee also pointed to the IAC’s track record of producing 28 recommendations in less than ten years, which she described as “a remarkable number of serious and substantive policy recommendations”.

She said: “These recommendations have at times offered criticism of the Commission’s regulatory agenda and policy choices. In other words, the Committee has functioned just as it should, as an independent voice that pushes us to do better, not one that just tells us what we want to hear and reinforces what we’re already doing.

“The IAC has functioned well, and no one has been able to identify for me any problem with the current Committee or the nominating process that produced it.”

The IAC, an independent committee established under the Dodd-Frank Act to advise the SEC on “regulatory priorities”, recently made headlines for backing standardised principles-based rules for ESG disclosure to which the Republican-controlled Commission, and the wider Trump administration, is opposed. The IAC also criticised now-abandoned proposals by the SEC to limit the influence of proxy advisors in shareholder voting.

The seventeen-person IAC currently includes Anne Simpson from CalPERS, and until earlier this year was chaired by Anne Sheehan, the former Director of Corporate Governance at CalSTRS.

In his speech announcing the new nominations procedure, SEC Chair Jay Clayton said the previous approach, which relied on sitting Commissioners to “nominate a set number of [IAC] members”, did not reflect “best practices for good corporate governance”.

Going forward, the nomination process will be led by the SEC staff and will allow members of the public to put themselves forward for consideration. The ultimate decision to appoint nominees to the IAC continues to rest with the Commission.

Earlier this year, the IAC’s nominations process was criticised for being “unclear” by US investment and private equity trade bodies the Council of Institutional Investors and the Institutional Limited Partners Association, who urged “the SEC to set forth a transparent process for seeking nominees, and making appointments, to the IAC.”

CII and current members of the IAC did not respond to requests for comment in time for publication.