Statements of Commissioner Hester Peirce on Proposed Amendments to Improve Accuracy and Transparency of Proxy Voting Advice, and on Proposed Amendments to Modernize Shareholder Proposal Rule

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent statements at an open meeting of the SEC, available here and here. The views expressed in this post are those of Ms. Pierce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. Thank you to the Chairman, Commissioner Roisman, the staff in the Divisions of Corporation Finance and Economic and Risk Analysis, and other staff throughout the building for today’s effort to address weaknesses in the existing proxy process. I am looking forward to hearing the views of commenters in response to today’s proposal.

Both in this proposal and the next one we will consider nuanced and technical areas of our regulations, and there are several competing—and important—interests that must be balanced. In taking the lead on this set of issues, Commissioner Roisman has put his considerable talent into forging what I believe to be a workable solution for all parties.

Proxy voting advice businesses play a valuable role in the proxy process. Today’s proposal recognizes that fact with proposed transparency and accountability measures. Firms that provide proxy voting advice offer valuable help to investors and their advisers, who are faced with many voting decisions. Today’s proposed amendments should help to ensure that proxy voting advice businesses disclose conflicts of interest which might color their recommendations. The proposals also respond to concerns that issuers have raised with us about their difficulty in timely flagging and responding to factual errors contained in proxy voting recommendations. The proposals seek to ensure that all registrants, not just the biggest firms, have the opportunity to identify these factual inaccuracies in time for them to be corrected.

These changes are only part of the solution, however. Earlier this year we issued guidance clarifying fiduciaries’ duties when voting shareholder proxies. [1] We affirmed that “an investment adviser is not required to accept the authority to vote client securities,” and that, whatever the agreement between adviser and client, “the relationship in all cases remains that of a fiduciary to the client.” [2] Much of the mischief in this area has arisen from the misperception—perpetuated in part by the SEC—that the fiduciary duty included an obligation to vote each and every proxy. Advisers, particularly small ones, overwhelmed with the number of proxies to be voted each season, reasonably sought third party assistance in wading through the workload. Indeed, this agency, through staff no-action letters, encouraged them to do just that.

Hiring assistance in researching and analyzing proxies of course does not relieve the adviser of its fiduciary duty; the adviser must still weigh the advice and vote according to its clients’ interests, which might be inconsistent with its own. Yet our staff guidance seemed to encourage carefree outsourcing of the voting function without much thought about how those third-party voting advisors were coming up with their recommendations. Our guidance earlier this year, in addition to reassuring advisers that they could scope their responsibilities, was meant to remind them of their duty to do some basic due diligence on third-parties they look to for voting advice. [3]

Today’s proposal continues the same theme. Recognizing that proxy voting advice falls under the proxy solicitation umbrella, [4] we are proposing to set forth a way for proxy voting advice businesses to provide their services without being subject to all of the obligations to which proxy solicitors are typically subject. The objective of today’s proposal is to make sure that these businesses can continue to play an important role in the proxy voting process while protecting the integrity of that process. I look forward to the public feedback we will undoubtedly get on these proposals.

* * *

Proposed Amendments to Modernize Shareholder Proposal Rule

I would like to again thank the Chairman, Commissioner Roisman, the staff in the Divisions of Corporation Finance and Economic and Risk Analysis, and other staff throughout the building.

It is human nature to want other people to pay for things that matter to you. I live in a condo building, so I have lots of opportunities to observe attempts to make the collective pay for things that only matter to a few. I, for example, love that the building bought and maintains a rowing machine in our little gym. I think that I and one other person are the only ones who use it. Other residents in my building with electric cars sought less successfully to get the building to put in electric charging ports for them. Still other residents loved it when the building put in a free coffee machine, which allowed me to subsidize their astonishing caffeine habits. Many of the thirstiest residents were renters, so they had little interest in keeping costs down. More recently, there was a campaign to ban smoking in the building. There were some very zealous advocates who managed to get the building (i.e., me and my fellow residents) to pay for, among other elements of the campaign, copying and distributing anti-smoking literature to all of the residents.

This last example is a bit like the situation we are considering today. When should one shareholder be able to force other shareholders to pay for including the proponent shareholder’s proposal in the company’s proxy materials? Rule 14a-8, which we are proposing to amend today, governs that process. The proposed changes would help to weed out proposals whose proponents do not have a real interest in the company and proposals for which other shareholders do not share the proponent’s enthusiasm. The proposal would make reasonable changes to the rule, and I am looking forward to hearing from a wide range of commenters about those changes.

Current resubmission thresholds allow shareholder proposals with little support to remain on proxy ballots for years, costing the majority of shareholders money on an issue they have repeatedly and clearly opposed. Ownership requirements have allowed shareholders with only a small stake in the company—both in terms of the size of their holdings as a percentage of the company’s voting shares and in terms of the shareholder’s own personal interest in the particular company—to use company money to vote on matters that may be of little interest to the remaining shareholders.

Today’s proposed changes strike a balance between ensuring that shareholders who have demonstrated an interest in the company, either by the size or duration of their investments, to submit proposals while ensuring that the company and its other shareholders do not bear unnecessary costs. They also will permit shareholders to build support for proposals over time and to resubmit on the basis of growing shareholder interest.

The proposal largely preserves the existing system, in which the SEC and our staff play an active role in deciding whether shareholder proposals are on or off the ballot. There might be alternative, better approaches. Should these decisions instead be left to the states to regulate? If the SEC is to be involved in deciding what is and is not on the proxy, should it be the Commission, rather than the staff in the Division of Corporation Finance, that weighs in?

I again want to thank my colleague, Commissioner Roisman, for his work on both of today’s proposals. They require threading a very fine needle, and he has done the work admirably. I support the recommendation.

Endnotes

1See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019) [82 FR 47420 (Sep. 10, 2019)].(go back)

2Id.(go back)

3See generally id.(go back)

4See Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Release No. 34-86721 (Aug. 21, 2019) [84 FR 47416 (Sep. 10, 2019)](go back)

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