Impressions on SEC Roundtable

The Securities and Exchange Commission held a Staff Roundtable on the proxy process on November 15, 2018, which John Baker and I attended. The Roundtable consisted of three panels on each of the following topics: 1. Proxy Voting Mechanics and Technology; 2. Shareholder Proposals; 3. The Role of Proxy Advisory Firms. Panelists consisted of corporate issuers, asset managers, institutional investors, academics, interest groups and proxy advisory firm representatives. The following is a summary of the third panel’s discussion on proxy advisory firms.

Chairman Clayton opened the discussion by expressing his personal goal to improve the quality of the voting process for long term investors, such that they can make more informed, company specific voting decisions. The Chairman requested that the panel continue to work on and present recommendations for change to the SEC. Notably, the Chairman did not make the same request after the other two panel discussions. Also notable was the absence of any discussion at all about the two no-action letters from 2004 which were recently withdrawn by the SEC.

Much of the panel’s time was spent discussing how proxy advisory firms operated, what services they provide, and how those services are used by asset managers, investment advisers, and issuers. The asset managers and institutional investors emphasized their fiduciary obligations owed to shareholders when voting proxies and they all spoke to the large operational efficiencies they realize by using proxy advisory firms. The asset managers were of the opinion that they likely could not meet their fiduciary obligations with regard to proxy voting without the information provided by proxy advisory firms, because they do not have the resources to perform the vast amounts of research and data aggregation entailed in the process.

Some discussion was spent questioning the potential conflicts of interest which may arise when proxy advisory firms advise both issuers and investment advisers. The investment advisers expressed little concern over such conflicts of interest, commenting that they make their own voting determinations based upon their own internal guidelines, not the guidelines of the advisory firm, and that information provided by proxy advisory firms is merely one factor among many factors used in consideration of how to vote. One issuer recommended that issuers be given the opportunity to review proxy advisory firm’s recommendations in advance of their dissemination, however this recommendation received a negative reception from the proxy advisory firms and investment advisers.

One of the last questions asked by the moderator was whether anyone saw a need for any SEC regulations to improve the process of how proxy advisory firms are used. No panelist expressed any desire for increased regulation over how proxy advisory firms are used, with the exception of one panelist, a CEO of a small proxy services firm, who thought there should be regulation to allow easier market access for new companies to compete in the proxy advisory business. Likewise, panelists expressed no desire to see Staff Legal Bulletin No. 20 changed. Chairman Clayton closed the panel with a remark where he again emphasized the importance of investors being able to make informed, company specific voting decisions and invited comments from interested parties.