Views on improving the integrity of global capital markets
24 July 2020

What to Make of the SEC’s Proxy Advice Vote

Posted In: Proxy, US SEC

The Security and Exchange Commission voted on Proxy Adviser Rules. The rule will take effect for the 2022 proxy season.

We have not yet read all 246 pages of SEC rulemaking, so we may have more to say. For now, top-line thoughts from CFA Institute are noted here.

  1. Process. We still have significant concerns over the proposed rules — and new Commission-level guidance — that differ vastly from the original proposal and public comments. Further public consultation is important when the proposed rules go against the vast majority of public comments and the data show minor error rates with proxy advice. A cogent justification for this intervention into proxy voting and corporate governance process is missing.
  2. Intimidation of Proxy Advisers. We are pleased to see the SEC back away from mandating preclearance of independent proxy analyst opinions with the issuer. We also support greater transparency about proxy adviser conflicts of interest. We nevertheless are concerned about the Commission using implied legal threats and pointed admonitions about regulatory duties to accomplish what they could not mandate. We believe this is contrary to good public policy. Although not a mandate, specifically implying that proxy advice businesses could lose safe harbor protections and face fraud liability if they don’t invite issuers to vet and rebut the advice constitutes a serious infringement of analyst independence.
  3. Intimidation of Registered Investment Advisers (RIAs). Our greatest concern is the Commission’s move to effectively shift liability and responsibility to the RIA professionals for the accuracy of proxy opinions and advice. Again, through implied liability threats and pointed references to breaches of fiduciary duty, an RIA is “encouraged” to second guess any proxy advice, not automatically vote in accordance with their own proxy voting guidelines, and give stronger weight to any new information the issuer might provide. In effect, it doesn’t matter if the RIA or manager has detailed and elaborate voting policies or uses many sources of advice and research on proxy voting decisions; the issuer gets the last word and the RIA better wait for that or they risk violating fiduciary duties.
  4. Independence of the Proxy Process. CFA Institute fully supports an open and transparent proxy voting process. Both accurate proxy analysis and issuer views are critical to that process. Issuers can easily express disagreements with independent proxy advisers, and provide their own clarifications and objections as needed, through their many channels. They should not be allowed to rig the proxy process through voting delays, threats of fiduciary violations, or maneuvers to suppress independent analysis.

Image Credit @ Getty Images/yingyang

About the Author(s)
Karina Karakulova

Karina Karakulova is Senior Manager, Capital Markets Policy AMER at CFA Institute. The capital markets group develops and promotes policy positions and research that advance market integrity, investor protection, and high ethical standards of professional conduct within the investment community.

3 thoughts on “What to Make of the SEC’s Proxy Advice Vote”

  1. Excellent synopsis. Readers may also want to review Commissioner’s Lee’s statement in opposition. ” The final rules and guidance also introduce delay and uncertainty by effectively requiring proxy advisors to provide their clients with notice of multiple events: first, notice of an issuer’s intent to file a response to proxy advice, regardless of whether the issuer actually files a response; and second, notice of, and a hyperlink to, any actual issuer response, regardless of whether the proxy advisor considers the response to add any new information, and regardless of whether it may contain errors or misstatements.

    At the same time, the guidance instructs investment advisers to consider any issuer response to proxy voting advice prior to exercising voting authority. But how long must investment advisers wait to see if an issuer will respond? And how much time and effort must be afforded these responses before voting?”

    These new rules were opposed by almosst all investors, the supposed beneficiaries of the rules. Reminds me of Abraham Lincoln’s joke: How many legs does a dog have if you count the tail? Four, counting the tail doesn’t make it a leg. Saying investors benefit by placing additional burdens on proxy advisors and RIAs doesn’t make sense. I hope the Biden administration will look at repealing the bulk of this rulemaking.

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