The beginning of February marked the end of the comment period on the SEC's new proposed regulation of proxy advisers — an important milestone in a process that has been flawed from the outset and continues to be fraught with errors and misinformation.
The proposal would regulate proxy advice as though it were a proxy solicitation under the Securities Exchange Act of 1934 and would give the management of U.S. public companies an unprecedented editorial role in the production of the research and vote recommendations that institutional investors hire proxy advisers to provide.
To be clear, this proposal is not being driven by institutional investors that hire proxy advisers; our customers are not asking for the government to intervene in the crafting and publication of corporate governance research and recommendations. In fact, many investors have publicly and vigorously opposed the SEC's proposal.
Rather, it is a faction of corporate America and their well-heeled lobbying organizations in Washington like the Chamber of Commerce and the National Association of Manufacturers that are leading the charge to silence the voices of their shareholders.
By pushing the government to enact these unprecedented and burdensome regulations, certain corporate representatives have brought into plain view their resentment of shareholders' ability to disagree with management. In doing so, they have launched a volley of attacks against proxy advisers based on anecdote, faulty reasoning and fabricated news.
For example, a Bloomberg investigation into comment letters supporting the new rules found that many were the product of a "misleading" and "laughably clumsy" public relations campaign driven by corporate interests. In fact, multiple people whose names appeared on the comments of support said they never even wrote a letter or that their names were used without their consent. At least one of the public comments appears to have come from beyond the grave.
The SEC's proposal rests on the erroneous assertion that there are problems with the accuracy and integrity of proxy voting advice. The reality is that proxy advisory firms like Institutional Shareholder Services go to great lengths to ensure the accuracy of the information that underpins our proxy research. The "errors" alleged by supporters of this proposal are mostly differences over subjective interpretations or differing opinions on methodology, not factual inaccuracies.
Even the SEC's own Investor Advisory Committee made clear last month that the proposed rules "will not reliably achieve their stated goals," and pointed out the need to "establish a link between the actions and clearly identified problems."
Simply put, real investors — not the peddlers of an astroturfing campaign — know that this is a solution in search of a problem.
Beyond the flaws in the process, a critical flaw with the substance of the proposal is that it threatens the independence and objectivity of the advice and analysis shareholders need to make well-informed voting decisions.
Today, with some 44,000 shareholder meetings in 110 markets during proxy season, we endeavor to provide our clients with ample time to review the research and voting recommendations they purchase. That generally equates to about 20 days before votes are due. It is compressed, but functional, and allows investors the time they need to make informed vote decisions. We estimate that the proposed rules risk cutting this time down by half or more, making an already abridged period of time untenable for the institutional investors entrusted with the savings of millions of workers.
While stifling the voice of investors is exactly what some public companies and their Washington lobbyists have wanted all along, it will harm real Main Street investors and hardworking Americans who have invested their financial futures in public companies.
But it is not too late. The SEC can make a course correction. We strongly urge the commission to take its fingers off the issuers' side of the scale, and — in the interests of investors and the capital markets — withdraw these proposed rule amendments.
Lorraine Kelly is the head of governance solutions for Institutional Shareholder Services Inc., New York. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.
