SEC Proxy Rule Amendments: Are They Constitutional?
On November 2, the Securities and Exchange Commission (SEC) enacted new rules titled Exemptions from the Proxy Rules for Proxy Voting Advice. In the view of CFA Institute, the new rules pose serious risks to the continued availability of timely, high-quality, and independent financial advice and analysis.
Further, it does not appear the SEC has a legal or economic basis to classify proxy advisors as proxy solicitors, which makes them subject to onerous filing rules and results in directly challenging the independence and free speech aspects of the financial analysis that goes into proxy voting advice and opinions.
Free Speech Violation?
CFA Institute is particularly concerned with the First Amendment free speech implications of the SEC’s requirement that proxy analysts disseminate and subsidize companies’ rebuttals of critical voting advice. “It is tantamount to an analyst coming up with independent research on a company, which then demands its objections to the analyst’s report be included,” said James Allen, head of capital markets policy for the Americas at CFA Institute. The SEC claims the rule was to rectify proxy advisor miscommunications and mistakes that pose a significant risk to investor protection as justification for the new proxy regulatory action. Allen added, however, “the SEC has failed to provide any reliable evidence to verify there are material problems with the accuracy of proxy advice.” CFA Institute joined CII and several of its members, including California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS), and the New York City Comptroller’s Office, in filing the amicus.
The CFA Takes Action
CFA Institute and the Council of Institutional Investors (CII) filed an amicus brief in October asking the court to throw out new SEC proxy advisor rules over constitutional concerns. The brief filed with the D.C. District Court comes in support of a lawsuit that Institutional Shareholder Services filed in October 2019 challenging the new proxy rule pronouncements.
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