Back in 2016, US Senator Bernie Sanders opposed the confirmation of Gary Gensler as head of the Commodity Futures Trading Commission (CFTC) – the government department that regulates the country’s derivatives markets. But in the end, Gensler’s tough approach to implementing the Dodd–Frank Wall Street Reform and Consumer Protection Act, which sought reform in the derivatives market, won him support from progressives in the Democratic Party. His insider knowledge of the finance companies that benefited unfairly from the derivatives market was useful, because it meant he understood how they tried to circumvent regulations.
It is likely these skills are what led to Gensler’s expected nomination by president-elect Joe Biden to lead the Securities and Exchange Commission (SEC). His record of enforcement and fines at the CFTC hints at the possibility of a stricter future for the SEC, which has seen enforcement plummet under Trump.
But what else?
RI asked the responsible investment community for their first impressions of Gensler; what his first ESG actions should be; and whether a new SEC should reverse recent anti-shareholder actions by the SEC, or leave them to the Congressional Review Act (a law that allows the US Congress to undo regulations enacted over a limited look back period without recourse to either the agency involved or public comment). The answers are fairly unanimous.
“Gary Gensler is an excellent choice to lead the SEC at this important time,” says Fiona Reynolds, CEO of the Principles for Responsible Investment. “He has a unique combination of industry expertise and a strong track record for fighting for the public interest from his time at the CFTC in the years following the financial crisis.”
On environmental disclosures and social issues, Reynolds says the PRI “will be advocating for the SEC to prioritise the development of mandatory issuer disclosures of ESG matters, with metrics that provide investors with decision-useful information”, pointing to the recent move by NASDAQ to improve diversity reporting as “a positive step”.
On shareholder rights, she notes that under the Trump Administration, both the SEC and the US Department of Labour “made it more difficult for shareholder voices to be heard” – specifically in relation to the SEC’s recent shareholder proposal rules, which make it harder for investors to engage with company management on ESG issues.
“We'll continue to encourage the Biden Administration and the incoming Gensler team to undo what we and many others see as harmful measures and enable active ownership,” she says. “There are several bad rules that were finalised in the remaining months of the Trump Administration, and we think it is likely the Congressional Review Act (CRA) is being considered for many of them.
“The US is so far behind other markets around the world when it comes to active ownership and incorporation of ESG principles. We encourage the SEC and Congress to look at every tool to help us catch up and create a more investor-friendly regulatory regime and advance sustainable finance.”
According to a recent blog from investor activist James McRitchie, Gensler will champion the cause of Main Street Investors – real ones, that is, rather than the robot ones dreamed up by corporate lobbyists. Proxy plumbing, he predicts, will finally be addressed, but the recent “anti-shareholder regulations adopted at the behest of astroturf lobbyists” would be more quickly repealed using the CRA rather than piecemeal by the SEC.
Small changes to how fund votes are disclosed, he added, could make investor knowledge about how their retirement funds are being voted much clearer and allow them to choose which funds to invest in based on those voting patterns. Similarly, lobbying and campaign contributions should be disclosed as they happen.
Lastly, Ritchie notes that if you look up ‘shareholder voting’ on the SEC’s investor.gov website, the latest entry is from 2012. “The world has not stood still since then,” he said. As well as providing more up to date information for Main Street Investors, “the SEC could encourage a more automated ‘client directed voting’ by facilitating development of internet voting platforms and proxy voting policy defaults like institutional investors use.”
Richard Clayton is the Research Director at Change to Win Investment Group, which works with pension funds and unions in the US to push for ESG improvements through shareholder advocacy. He tells RI that the firm participated in transition meetings with Gensler in both 2008 and this year, and “both times we’ve come away very impressed by his openness to new ideas, knowledge of the financial system’s nooks and crannies, and commitment to serving investors’, workers’, and the public’s interest”.
“We were also impressed with his performance as CFTC chair and his willingness to investigate abuses and hold powerful and wealthy institutions accountable,” he continues.
“On the social front more broadly, we’d like the SEC to require companies to disclose certain key workforce metrics, their strategy for managing human capital, and the board’s role in overseeing that strategy. We’d also like to see a requirement that the Equal Employment Opportunity Commission report be disclosed [this has been the subject of many shareholder proposals in recent years] as a precursor to more comprehensive assessments of racial equity; and we’d like to see mandatory disclosure of political and lobbying spending.”
CtW also wants the recently introduced thresholds for proxy advisor and shareholder resolutions repealed, on the basis that they make it harder to undertake stewardship activities through the ballot box. Clayton said the SEC needed to be stricter about when companies can use the ‘ordinary business rule’ to snub shareholder resolutions. It’s a trend that has been gathering pace in recent years – companies get proposals excluded on the basis that they relate to everyday business activities that should be left with the board or directors and management team. Clayton says the tool should be “clearly constrained to only enable non-inclusion of resolutions where there is no plausible connection to any shareholder concern”, adding that this could be achieved via the CRA or by issuing guidance clarifying that the “SEC is reviewing the rules with an eye toward repeal/substantial modification, and that until that process has been completed, the SEC will assess no action requests based on the pre-Trump standards”.
Andrew Behar, CEO of shareholder advocacy firm As You Sow wants “all companies to be required to disclose their EEO-1 data [data on employee diversity] and make public a climate transition plan that is Paris-aligned to 1.5℃ and Net Zero 2050”.
“Further, I would have every company ask shareholders to provide feedback to their companies with a vote on these disclosures every year,” he continues. “Standardising transparency and providing a feedback mechanism will allow leaders with best practices to be rewarded and laggards to have time and a specific path forward.”
He also recommends a focus on the long term, noting that in the past “many SEC rulings and decisions seem to favour shortcuts put forth by business lobbyists”. “The truth is, when mandatory transparency is standardised it levels the playing field and reduces risk for business and shareholders.”