The currently pending SEC proposals to regulate proxy advisory firms and to limit shareholder proposals together represent the biggest attack on shareholder rights by the SEC since it was created in 1934. 

The Council of Institutional Investors (CII) believes Rule 14a-8 is working well. Shareholder proposals make up less than 2 percent of voting items facing investors at U.S. companies, and the number of proposals has, if anything, declined in recent years. The fact that proposals get higher voting support than in earlier decades shows the strength of the process, rather than it being a problem as management lobbyists seem to believe. 

If anything, CII is even more concerned with the proposed heavy-handed regulatory structure for proxy advisory firms. The regulations, ostensibly aimed at “protecting” investors, have been prompted by a multi-million dollar lobbying campaign by company managers and their representatives. As the SEC’s November 2018 proxy roundtable and comment letters on the proposal have made clear, investors strongly oppose the ideas incorporated into the SEC proposal, including establishing a right of management to pre-review proxy advisor regulations.

The extreme SEC proposal actually would give management two rounds of review, delaying proxy reports by more than one full week. The compressed time for voting, particularly during the spring proxy season, already is a huge challenge, and the SEC proposal would make the process unmanageable for most institutional investors in the absence of simply deferring to proxy advisor recommendations. The SEC regulations also would create new barriers to entry, and likely drive out of business one or more existing firms, in a proxy advice industry that already is too concentrated. We believe that some advocates for onerous regulation hope to drive all proxy advisory firms out of business, but the more likely outcome is to establish a monopoly.

The SEC data analysis in its proxy advisor proposal is notably poor. The Commission did not even access its own data regarding, for example, when companies file their proxy materials, instead relying on inaccurate anecdotal accounts. In proposing a requirement for management pre-review and preview of reports, the Commission relied on assertions of pervasive errors in proxy advisor reports—assertions that are unsubstantiated. CII asked the SEC for underlying analysis for a key table on purported errors, but the SEC declined to show its work. One example of the SEC’s weak economic analysis: The SEC assumed for purposes of cost estimates that only about one-third of companies will be the subject of proxy advisor reports each year. But larger proxy advisors have reported on virtually all publicly listed companies every year for the last 15 years or more. The SEC provides no explanation for why it thinks this will change.

A wide range of investors has been vocal in opposing this intrusive regulatory approach and supporting a market-based approach to proxy advice. I am hopeful that the SEC may see reason here and back off a proposal that would be highly damaging to corporate governance in the United States.

Ken Bertsch
Executive Director, Council of Institutional Investors