On Proxy Advisors and Important Issues for Investors in 2019

Rick A. Fleming is an Investor Advocate with the U.S. Securities and Exchange Commission. This post is based on Mr. Fleming’s recent remarks at SEC Speaks. The views expressed in this post are those of Mr. Fleming and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good afternoon. I hope you are enjoying this year’s edition of SEC Speaks, which gives the public a good overview of all the work that is going on at the Commission. [1] In the Office of the Investor Advocate, we track all of these issues, as well as the activities of the self-regulatory organizations, and this conference can give you some idea of the breadth of issues that are covered by the phenomenal staff in my Office. We also try to provide an important outreach mechanism so that Commissioners and staff can hear directly from investors and their representatives, and I particularly want to commend SEC Ombudsman Tracey McNeil and her counsel, Dan Morris, for putting together an event last week that allowed SEC staff to interact with 60 law students and faculty who represent investors of limited means in law school advocacy clinics.

Like all the speakers at this conference, I remind you that the views I express are my own and do not necessarily reflect the views of the Commission, the Commissioners, or my colleagues on the Commission staff.

This year, there are many important things happening at the Commission, and not just with Regulation Best Interest. In a 15-minute speech, I can’t possibly react to every issue that will be raised during this two-day conference, so I would like to highlight just a few items that are on the Commission’s agenda this year. From an investor’s perspective, there are some really exciting ideas on that agenda, but there are also a few things that are cause for concern.

Let’s start with the good news. And for that I should begin by applauding Brett Redfearn and his staff in the Division of Trading and Markets. With the support of Chairman Clayton and the Commissioners, Brett has taken bold steps to address some complex issues that have frustrated investors for years. And on behalf of investors, I want to thank Brett for standing strong for them in the face of opposition that is sometimes aggressive.

As an example, the Commission has heeded the call of the Investor Advisory Committee, [2] the Equity Market Structure Advisory Committee, [3] and numerous other market participants [4] to construct a transaction fee-and-rebate pilot. [5] This pilot will test whether the 30 mil fee cap adopted in Reg NMS [6] has led to a system of fees and rebates that distort the incentives of market participants, presenting broker-dealers with a potential conflict of interest that could compromise their duty to pursue best execution on behalf of their clients. In addition, Brett has pushed two other important but lesser-known rules across the finish line. The first of these created a new Form ATS-N to require enhanced disclosure about the operations of Alternative Trading Systems, sometimes known as dark pools, that trade NMS equity securities. [7] This new rule will give investors and their intermediaries the information needed to assess the operations and order routing of an ATS and, ultimately, to help achieve best execution of their stock orders. Similarly, amendments to Rule 606 of Reg NMS will require brokers to disclose more information about their equity order routing practices so that institutional investors have better tools to evaluate the level of execution quality they are receiving. [8]

On top of these achievements, the Division of Trading and Markets continues to pursue an agenda that should please investors. [9] For example, amendments to Rule 15c2-11 [10] could help to deter fraud against retail investors by curbing the trading of unlisted, over-the-counter securities when little or no relevant information about the issuer is publicly available. Likewise, updates to the definition of a “penny stock” and the related sales practice rules [11] could strengthen investor protections in a risky corner of the market. And a refresh of the antiquated transfer agent rules [12] could curb abuses such as the improper removal of restrictive legends, a practice that facilitates the illegal public distribution of securities.

The Commission’s anticipated improvements to equity market structure also would benefit retail investors, either directly or as participants in pooled investment vehicles such as mutual funds or pension funds. Investors ultimately bear the costs of the fees that equity exchanges charge their members for market data, so investors would benefit from proposals to enhance the transparency around the exchanges’ proprietary data fees, improve the governance of NMS plans, and update the required “core data” that is widely distributed by central securities processors (or the “SIP”). [13] I am also interested in the idea of suspending the “unlisted trading privileges,” or UTP, of non-listing exchanges in an effort to improve liquidity in thinly traded shares. [14] While I doubt that concentration of trading on one venue will, by itself, solve the problem of illiquidity, I believe it holds promise for the host exchange to experiment with ideas like batch auctions that may further improve the trading environment, particularly for smaller public companies and their investors.

As I have just outlined, investors have reason to hope for positive developments in the coming year at the Commission. And I love the part of my job where I get to be a cheerleader for these types of good ideas. But, as you can imagine, there are other ideas that have been suggested for the Commission to consider, [15] and I am less enthusiastic about some of those things. Let me comment briefly about one of those.

I think it is fair to say that investors are wary about efforts to regulate proxy advisors. As many of you know, asset managers who hold shares in a wide range of companies face a logistical challenge in voting on numerous items each proxy season. Investment advisers are also required to vote shares in a way that is faithful to the fiduciary duties they owe their clients. To satisfy this obligation in a cost-effective way, many asset managers use the services of a proxy advisor. In addition to assisting with vote execution and regulatory reporting across markets globally, the advisors monitor the issues that are up for a vote, collect and analyze information and data, and give asset managers advice on how to vote their shares in accordance with the asset managers’ expressed wishes.

Some have criticized proxy advisors and allege that they have conflicts of interest in their business models, factual errors in their analytical processes, and a political agenda that supports social policies at the expense of investment returns. [16] All of these things would cause me great concern, except for one thing—the investors who are paying for this service are not the ones who are expressing those concerns.

Indeed, at the Roundtable on the Proxy Process that the Commission held last November, I think the investors made it pretty clear that they are relatively happy with the services they receive from proxy advisors. [17] This is not to suggest that proxy advisors are perfect, but to the extent that any problems exist, it seems that their paying customers should be the ones to raise them. Investors certainly don’t want those problems to be “solved” by injecting costly inefficiencies into an already-cumbersome process or by giving companies more opportunities to influence the advice that is given to investors about how they should vote. [18] Investors can already get a company’s response to a shareholder proposal in a company’s amended proxy statement or additional soliciting material. What they want from a proxy advisor, and what they are paying for, is independent advice that fits within the parameters they have established for how they want to vote on various matters.

To be clear, some investors have expressed concerns that fund advisors may cast proxy votes in opposition to the stated objectives of the fund or in ways that are contrary to the interests of the investors in the fund. [19] But, to the extent this is occurring, it involves a question of whether the fund adviser is satisfying its fiduciary duty to the investors in the fund, and the Commission already has authority to deal with that issue. It doesn’t require additional oversight of the proxy advisors who generate advice in accordance with the fund adviser’s instructions.

So, if investors aren’t calling for increased regulation of proxy advisors, what is driving the push for regulation? To me, and to many interested observers, the answer is pretty obvious, as reflected in a few recent headlines:

  • Companies Call for Oversight of Firms That Advise Shareholders (Wall Street Journal) [20]
  • Corporate America Loves Deregulation. Then Why Is It Pushing for These Rules? (CNN Business) [21]
  • What’s Behind a Pitch for the Little-Guy Investor? Big Money Interests (New York Times) [22]

In my view, and as these articles suggest, the simple fact of the matter seems to be that proxy advisors have given asset managers an efficient way to exercise much closer oversight of the companies in their portfolios, and those companies don’t like it. That’s understandable, and it is also understandable that companies, rather than directly asking the SEC to suppress shareholder voting or give companies more of a say in the advice that is given, would try to cloak their arguments under the mantle of investor protection. But the investors themselves—again, the ones paying for proxy advice—are not asking for protection. In fact, I keep hearing opposition from investors to proposals that might lead to interference in the proxy voting process. [23]

There are plenty of things that need to be fixed in the proxy process. For example, there seems to be growing consensus that the basic “plumbing” of the voting system can be made more efficient and reliable by giving greater attention to issues like vote confirmation and reconciliation of records. [24] But, absent a groundswell of concerns expressed by actual investors, I sincerely hope that the Commission will not prioritize a rulemaking that could impair the independence of proxy advice or lead to even greater inefficiencies in proxy voting. As a practical matter, it is hard to imagine, based on the feedback I’ve seen to date, that a serious economic analysis could justify a rulemaking to cure a purported harm when the investors—the supposed victims of the harm—have denied that a significant problem exists.

Again, no one is claiming that proxy advisors are perfect, but in light of all the important things that the Commission could spend its time on—including the initiatives I highlighted earlier—I would respectfully suggest that imposing new regulations on proxy advisers should be given a low priority.

Thank you.


1The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff.(go back)

2See SEC, Recommendation of the Investor Advisory Committee in support of the Transaction Fee Pilot for NMS Stocks (Sept. 13, 2018), https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-transaction-fee-pilot-for-nms-stocks.pdf.(go back)

3See SEC, Recommendation of the Equity Market Structure Advisory Committee for an Access Fee Pilot (July 8, 2016), https://www.sec.gov/spotlight/emsac/recommendation-access-fee-pilot.pdf.(go back)

4See, e.g., Letter from Jeffrey P. Mahoney, General Counsel, Council of Institutional Investors, to Brent J. Fields, Secretary, SEC, dated May 10, 2018, Letter from Joseph Brennan, Principal & Global Head of Equity Investment Group, Vanguard, to Brent J. Fields, Secretary, SEC, dated May 25, 2018, and Letter from Kevin Duggan, Managing Director, Execution & Treasury, Capital Markets, Ontario Teachers’ Pension Plan, et al., to Brent J. Fields, Secretary, SEC, dated May 25, 2018, available at https://www.sec.gov/comments/s7-05-18/s70518.htm.(go back)

5See Final Rule, Transaction Fee Pilot for NMS Stocks, Exchange Act Release No. 84875 (Dec. 19, 2018), 84 Fed. Reg. 5202 (Feb. 20, 2019) (File No. S7-05-18), https://www.federalregister.gov/d/2018-27982.(go back)

617 CFR § 242.610(c).(go back)

7See Final Rule, Regulation of NMS Stock Alternative Trading Systems, Exchange Act Release No. 83663 (July 18, 2018), 83 Fed. Reg. 38768 (Aug. 7, 2018) (File No. S7-23-15), https://www.federalregister.gov/d/2018-15896.(go back)

8See Final Rule, Disclosure of Order Handling Information, Exchange Act Release No. 84528 (Nov. 2, 2018), 83 Fed. Reg. 58338 (Nov. 19, 2018) (File No. S7-14-16), https://www.federalregister.gov/d/2018-24423.(go back)

9See Chairman Jay Clayton and Brett Redfearn, Director, Division of Trading and Markets, SEC, Equity Market Structure 2019: Looking Back and Moving Forward, New York, NY (March 8, 2019), https://www.sec.gov/news/speech/clayton-redfearn-equity-market-structure-2019.(go back)

1017 CFR § 240.15c2-11.(go back)

1117 CFR § 240.3a51-1, 17 CFR § 240.15g-9.(go back)

12See Advance Notice of Proposed Rulemaking and Concept Release, Transfer Agent Regulations, Exchange Act Release No. 76743 (Dec. 22, 2015), 80 Fed. Reg. 81948 (Dec. 31, 2015), https://www.federalregister.gov/d/2015-32755.(go back)

13See supra note 9.(go back)

14Id.(go back)

15See Chairman Jay Clayton, SEC, SEC Rulemaking Over the Past Year, the Road Ahead and Challenges Posed by Brexit, LIBOR Transition and Cybersecurity Risks, New York, NY (Dec. 6, 2018), https://www.sec.gov/news/speech/speech-clayton-120618. See also Tom Quaadman, Executive Vice President, Chamber of Commerce Center for Capital Markets Competitiveness, to Brent J. Fields, Secretary, SEC, dated Nov. 12, 2018, and Timothy M. Doyle, Vice President of Policy and General Counsel, American Council for Capital Formation, to Brent J. Fields, Secretary, SEC, dated Nov. 14, 2018, available at https://www.sec.gov/comments/4-725/4-725.htm.(go back)

16See Testimony of The Hon. Daniel M. Gallagher and Thomas Quaadman before the Senate Committee on Banking, Housing, and Urban Affairs at a hearing entitled “Proxy Process and Rules: Examining Current Practices and Potential Changes,” Dec. 6, 2018, available at https://www.banking.senate.gov/hearings/proxy-process-and-rules-examining-current-practices-and-potential-changes.(go back)

17See the Transcript of the Commission’s Roundtable on the Proxy Process, Nov. 15, 2018, https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf.(go back)

18It has been suggested that companies should be given an opportunity to correct errors in the proxy advisors’ analysis, and at least one commenter has a provided a list of such “errors.” See, for example, Frank M. Placenti, “Are Proxy Advisors Really a Problem?,” Oct. 2018, http://accfcorpgov.org/wp-content/uploads/2018/10/ACCF_ProxyProblemReport_FINAL.pdf. The actual list is available here: http://accfcorpgov.org/wp-content/uploads/2018/10/Analysis-of-Proxy-Advisor-Factual-and-Analytical-Errors_October-2018.pdf. In my view, however, much of what the report author identified as “errors” would more appropriately be characterized as differences of opinion. Moreover, the Commission historically has been reluctant to allow companies to influence the research provided to investors. Consider, for example, the rules currently in place for sell-side research, which generally aim to prevent issuers from influencing the research produced by investment firms. FINRA Rule 2241 requires broker-dealers to adopt and maintain written policies and procedures “reasonably designed to promote objective and reliable research that reflects the truly held opinions of research analysts and to prevent the use of research reports or research analysts to manipulate or condition the market or favor the interests of the member or a current or prospective customer or class of customers.” I ask, why should the principle be any different when it comes to the independence of voting recommendations? See Letter from Donna F. Anderson, Head of Corporate Governance, and Eric Veiel, Co-Head of Global Equity, T. Rowe Price, to Brent J. Fields, Secretary, SEC, https://www.sec.gov/comments/4-725/4725-4792350-176928.pdf (making this argument).(go back)

19See Lewis Braham, “Fund Sustainability Ratings Tell Half the Story,” Barron’s, Oct. 9, 2017, https://www.barrons.com/articles/sustainability-ratings-tell-half-the-story-1507350027.(go back)

20Gabriel T. Rubin, “Companies Call for Oversight of Firms That Advise Shareholders,” The Wall Street Journal, Mar. 19, 2019, https://www.wsj.com/articles/companies-target-firms-that-advise-shareholders-11552987800.(go back)

21Matt Egan, “Corporate America loves deregulation. Then why is it pushing for these rules?,” CNN Business, Mar. 29, 2019, https://www.cnn.com/2019/03/29/investing/regulation-proxy-advisory-reform-sec/index.html?utm_medium=social&utm_term=image&utm_source=twbusiness&utm_content=2019-03-29T11%3A20%3A02.(go back)

22Andrew Ross Sorkin, “What’s Behind a Pitch for the Little-Guy Investor? Big Money Interests,” The New York Times, July 24, 2018, https://www.nytimes.com/2018/07/24/business/dealbook/main-street-investors-coalition.html.(go back)

23See, e.g., Letter from Jeff P. Mahoney, General Counsel, Council of Institutional Investors, to The Honorable Michael Crapo, Chairman, Senate Committee on Banking, Housing, and Urban Affairs et al., Dec. 5, 2018, available at https://www.cii.org/correspondence.(go back)

24See John Coates, Report to SEC Investor Advisory Committee, Dec. 13, 2018, webcast available at https://www.sec.gov/video/webcast-archive-player.shtml?document_id=iac121318 (“The SEC had a full day of proxy-related discussion a few weeks ago, and…there seems to be pretty general consensus that things can be improved in terms of vote confirmations and reconciliation of records to allow for efficient and reliable voting and improving the ability of retail and other shareholders to vote through a universal proxy.”); SEC Roundtable on the Proxy Process, Panel One—Proxy Voting Mechanics and Technology, Nov. 15, 2018, transcript available at https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf.(go back)

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