The Proxy Adviser Saga Continues: CFA Institute Weighs In on the Latest Contemplated Changes to the SEC Proposal
Few proposed agency rules have garnered as much media attention, advocacy spend, or pushback as the Securities and Exchange Commission’s proposal on Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice (the “Proposal”). On May 13th, CFA Institute submitted our third comment letter, this time on potential changes to the Proposal. Specifically, we commented on the recommendations Commissioner Elad Roisman presented at a recent Council of Institutional Investors (CII) conference.
Sidebar: If you’re looking for a refresher on the proxy adviser saga, start with Jim Allen’s blog post “Is the SEC Jeopardizing Financial Analyst Independence?” or Matt Orsagh’s piece “Is the Proxy Advisory Industry in Danger?”
The rulemaking comment file includes more than 700 letters, but only a few discuss the changes contemplated by Commissioner Roisman, who has been entrusted by SEC Chair Jay Clayton with leading the Commission’s examination of the proxy process. Here is a brief summary of our latest letter:
CFA Institute encourages the Commission to publish a formal text detailing all changes before finalizing the Proposal so that the public can offer thoughtful and complete comments. At a minimum, we ask the Commission to articulate the changes it expects to introduce. This will ensure a more complete administrative process and fulsome input from public stakeholders.
We believe revisions of the complexity contemplated by Commissioner Roisman will generate substantial stakeholder interest. Without providing clarity on these changes, however, the Commission risks shutting out stakeholders from meaningfully participating in the rulemaking process, leaving the public comment file incomplete.
CFA Institute supports the elimination of issuer “pre-review” in favor of “contemporaneous review” as a step in the right direction if the Commission has indeed opted for this change. In our February comment letter, we underscored our strenuous objection to the Proposal’s regulatory requirement that proxy advisers would have to share their full reports with target companies before release to their clients. The Proposal would require proxy advisers to give issuers prior review for the universe of listed companies and give issuers two opportunities to rebut the advisers’ analyses and recommendations. Significantly, such a requirement runs counter to our professional Code of Conduct relating to conflicts of interest, not to mention independence procedures mandated by our Research Objectivity Standards. The requirement would have a chilling effect on analyst independence by setting inappropriate precedents for prior review and clearance by issuers.
CFA Institute supports the inclusion of a hyperlink to an issuer’s homepage on the front page of a proxy advisory report alerting clients that the issuer’s response, if any, can be accessed via that hyperlink. We believe this approach satisfies the Commission’s goal of ensuring that investors have access to a complete and accurate mix of information for two reasons: (1) issuers have many avenues to communicate with investors about their satisfaction, or lack thereof, with proxy advice; and (2) investors using proxy advisers are surely sophisticated enough to know how to access an issuer’s statement through a generic alert.
As noted in our prior letters, we do not support the proposed requirement to include issuers’ opinions in a side-by-side comparison in the same reports proxy advisers deliver to their investor clients. We believe a generic alert would absolve the need to force the inclusion of an issuer’s full rebuttal in the adviser’s work report. Moreover, unlike the “active hyperlink” mechanism presented in the Proposal, our suggested generic alert has fewer implementation details to resolve and requires less coordination between proxy advisers and issuers, which we welcome.
CFA Institute believes that investors must maintain full control of their proxy voting decisions, including the ability to cast their votes any time they wish. The mere fact that the investor is a client of a proxy adviser should in no way limit the client’s ability to execute and submit proxy votes when and how they wish. Therefore, any contemplated “speed bump” on automatic vote submissions must be time-limited and subject to client override.
CFA Institute also suggests the Commission considers a market-based alternative in which investors can “opt-in” to pre-population and automatic submission of their proxy votes. This approach could be tiered for investors’ automatic votes to be cast as soon as possible, two days after receiving a proxy report, or in “n” number of days after receipt of the report. The default option would be “no automatic vote submissions.” Regardless, we reiterate that investors must be free to exercise (or not) their votes at their discretion.
 Our original comment letter on the Proposal (“Re: Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice,” 3 February 2020) can be found here; our comment letter on the Commission’s Proxy Process Roundtable (“File No. 4-725 Proxy Advisor Regulation,” 4 October 2019) can be found here; the Commission’s complete comment file (Release No. 34-87457; File No. S7-22-19) is available here.
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