Speech by Commissioner Elad Roisman on Myths and Realities: Modernizing the Proxy Rules

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent speech. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I. Introduction

Thank you, Dean [Steven] Payne and David [Blass] for the kind introduction and for the concise summary of the recent SEC proposals to update the rules governing the solicitation of proxies and submission of shareholder proposals. Thank you also to the Catholic University Columbus School of Law for hosting me and, in particular, to the students, who have come to hear me speak. Before I dive in, I want to make clear that my remarks are my own and do not represent those of the Securities and Exchange Commission (“SEC”) or its other commissioners.

Giving further context to the summary you just heard, some of the rules we have been discussing date back to 1954. You can imagine how much has changed in our markets since these particular rules were last amended: including shifts in how public company shares are held and voted and changes in who relies on the SEC’s exemptions to the proxy solicitation rules. From my perspective, the SEC’s proposals to modernize these rules were not only necessary, but long overdue. Yet the reaction from the loudest voices came swiftly and furiously. Even before the Commission voted on these proposals, the agency was accused of serving as a shill for corporate interests, suppressing shareholder votes, and sheltering CEOs of big corporations from accountability. [1]

Today, I hope to address some of the most common myths these criticisms invoke, and describe what I see as the reality of the situation. My intention in doing this is not only to further clarify my own views on the SEC’s proposals, but also to dispel an atmosphere of negativity that might dissuade interested people from offering valuable feedback on their content.

II. Materially False or Misleading Statements of Fact

Myth: The SEC’s proxy modernization agenda is driven by the lobbying efforts of corporate interests.

I want to address this myth first by making one thing clear to anyone who may not know: the Commission does not act at the behest of lobbyists. No one commenter or group of market participants dictates the agency’s agenda or approach to an issue. We receive input from and listen to the concerns of all market participants and the public. That is our job. In fact, the law generally requires us to consider comments we receive from the public when we propose to make changes to our regulations. [2] In the case of the two proposals here, the staff had the benefit of public comments that were submitted in connection with the 2018 Proxy Roundtable as well as input from several other requests for comment on similar issues, raised over the last two decades. [3] Anyone who reads our two proxy proposals will see that they do not reflect wholesale acceptance of any particular market participant’s ideas for reform or change. [4] Rather, they demonstrate a good faith attempt to serve the interests of all market participants through a careful combination of policy and pragmatic questions about how the current rules can be improved.

For my own part, since joining the Commission, I have had more discussions (internally and externally) on proxy reform than almost any other topic. I have not turned down a single meeting request on this topic, and I have benefitted from hearing perspectives on all sides. In particular, many of these meetings were with representatives of institutional investors and asset managers, who expressed concerns about the SEC pursuing large-scale reforms to the proxy voting process. Their concerns resonated with me, and—based on my read of the proposals—I would venture to say that this input informed the staff’s thinking as well, as they aimed to achieve the proposals’ objectives in a very tailored manner, using practices and strategies already accepted in the marketplace.

Myth: The SEC is suppressing shareholder votes.

This one is easy to address. Neither of the Commission’s proposals alters a shareholder’s right to vote in any way, either in person at a company’s annual meeting or by proxy. The SEC’s proposals address (1) the requirements for shareholders to submit voting proposals on the corporate ballot, and (2) the requirements of third-party service providers relying on SEC exemptions to provide recommendations to shareholders about how those shareholders should vote their shares, to rely on exemptions from the SEC’s rules regarding proxy solicitation.

Myth: The SEC is making it prohibitively expensive for retail investors to submit shareholder proposals.

Some have decried that the proposal to amend the initial submission thresholds raises the minimum ownership requirement from $2,000 to $25,000. [5] Were that statement made by someone subject to our antifraud rules, I would characterize it as “materially misleading,” as it omits a key element of the proposal: time. The intent of the proposed changes to submission thresholds is not to exclude smaller retail investors. Rather, the goal is to ensure that those submitting proposals have demonstrated more than a short-term interest in a company. Specifically, for those who hold $2,000 worth of shares in a company, our proposal would not raise the monetary threshold at all. Instead, it would require that such an investor hold this amount of stock for longer than is currently required—three years, instead of one year—before submitting a proposal.

I would be interested to hear from retail investors whether they want the money they have invested in a company to be spent by other shareholders with a limited, short-term interest in that company. Wouldn’t they want the shareholder proposal process utilized by those who have a demonstrated interest in the company’s continued success? The fact is that most proposals today come from a miniscule fraction of shareholders. [6] While some are undoubtedly well intentioned, some proponents appear to be using this system to promote their own social or political agenda without any regard for the specific company funding the ballot and its long-term success. Their efforts to broadcast their views to corporate America through the proxy process impose costs on all other shareholders. I, for one, would like to close loopholes that currently allow people to do this.

Myth: The SEC is making it easier for CEOs to spend shareholder money.

I must admit, this assertion confused me. But, I heard it, so I will respond. Neither of the Commission’s proposals reallocates any money. The irony of this myth is that the Shareholder Proposal Rule amendments, in particular, aim to preserve company (and therefore shareholder) money. Changing the resubmission thresholds as proposed would curb the ability of a small subset of shareholders to spend the money of all other shareholders in furtherance of causes that the vast majority of other shareholders have repeatedly rejected. This happens far too often today. Our Shareholder Proposal Rule has been amended many times since it was initially adopted, with changes specifically designed to address concerns of abuse by shareholders with limited interests in the company. For anyone today to pretend that our current proposal is unprecedented ignores the rule’s history. This history has been extensively written about, most recently in the lengthy background and history section of the proposal itself.

Myth: Under the proposed rules, CEOs could now sue Proxy Voting Advice Businesses if they criticize the company.

This is wrong for at least two reasons. First, antifraud liability under the SEC’s Rule 14a-9 is not new. Second, the standard of 14a-9 liability is “materially false or misleading,” not “I don’t like it.” Allow me to elaborate. As the Commission explained in the guidance we released this past August, we reiterated our longstanding view that generally, proxy voting advice is a solicitation. If you are interested in the history and consistency of that interpretation, I encourage you to read that release, as well as the proposing release which goes into further detail. [7]

To my second point on materiality, any cause of action against a proxy voting advice business under Rule 14a-9 would have to be based on more than a company’s dissatisfaction with any particular recommendation. These businesses’ recommendations are held to the same standard as solicitations from companies, activist investors, or anyone else who is soliciting proxies. None of these entities may make any “statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.”

I see no reason why proxy voting advice businesses should be treated differently from every other soliciting party. And, for those who vehemently oppose this view, I ask: Why in the world would we want investors making voting decisions based on advice that is false or misleading with respect to a material fact? Or worse, why would we grant someone a license to make such statements without liability?

Myth: By allowing companies to review proxy voting advice businesses’ solicitations before publication, you will compromise the independence of these businesses.

I have taken a keen interest in hearing from commenters suggesting this, mainly because the Rule 14a-2(b) proposal has been modeled after current market practices. The two proxy voting advice businesses who have held the vast majority of this market both currently offer opportunities for certain issuers to engage with them and respond to their final voting advice. (ISS has for years granted this opportunity to the largest companies in our markets, [8] and Glass Lewis recently instituted programs to obtain feedback from issuers on the data underlying their reports and the reports themselves. [9]) These practices were not driven by regulatory requirements, but by the firms’ own impetus. The proposal aims to make sure that they are available to all issuers (including smaller ones, who might not have as great a research following as the S&P 500) and other soliciting parties, such as activist investors in a proxy contest, and in a more timely manner.

I believe such a measure could offer investors the opportunity to make more informed decisions when they vote. In one place, they would have access to the voting advice and the soliciting party’s perspective for ready consideration. To the extent an issuer or other soliciting party believes the firm’s voting advice contains errors or methodological biases, it would have a time and place to note that in a way that voting advice business clients can more easily access than they can today. For these reasons, I cannot understand how anyone would argue that this proposal is anything but an improvement upon the status quo.

I will also note that the proposal was careful to preserve the boundaries between proxy voting advice businesses and the companies they review. The proposal made clear that voting advice businesses would not have to make any changes to their reports in response to the companies’ feedback. The voting advice business would only be required to include a hyperlink in its report to the company’s response statement, rather than including such content in the report itself. In this way, the proposal seeks to maintain separation between the perspectives of the proxy voting advice businesses and companies. If anyone has feedback on whether there is a better way to accomplish our goals and preserve the independence of voting advice businesses, I would be glad to hear it.

I will circle back to this concept of independence toward the end of my remarks.

Myth: These proposed rules are so burdensome that they will stifle competition in the proxy voting advice business market.

As a believer in the positive power of free markets, I am always concerned about overly burdensome regulation that entrenches incumbent market participants and freezes out others. I believe the proposals try to avoid this by taking a light-touch approach to the SEC’s oversight of proxy voting advice businesses. For example, rather than require voting advice businesses to follow onerous regulatory procedures to have the Commission review their voting procedures and methodologies (as some policy-makers have advocated for [10]), the proposals are modeled after current market practices—calling for such businesses to disclose their conflicts of interests and allow time for company review and response before publication. Additionally, since competition in the industry is an important concern, we have taken care to provide an alternative proposal for public comment, specifically asking whether we should exempt smaller proxy voting advice businesses from these requirements. Everyone has the opportunity to respond to this question, and I hope we receive constructive feedback.

Myth: The SEC is attempting to solve a problem that does not exist.

I have heard some institutional investors and asset managers ask why we felt the need to propose any changes to the proxy solicitation rules. They have stated that the proxy voting advice businesses’ clients are happy with their voting advice and don’t worry so much about any errors or methodological weaknesses in these reports.

But institutional investors and asset managers are not the only investors that the SEC is charged to protect. And, in this context, I worry much more about the ultimate retail investors, who may have a substantial portion of their life savings invested in our stock markets. These Main Street investors increasingly invest their money in funds and will benefit from (or bear the cost of) institutional investors’ or asset managers’ voting decisions. In essence, I believe it is our job as regulators to help ensure that such advisers—fiduciaries, who take on voting authority for their clients—vote proxies in a manner consistent with their fiduciary obligations and that the proxy voting advice upon which they rely is complete and based on accurate information.

For many years, institutional investors and asset managers relied extensively on proxy voting advice businesses to tell them how to vote shares held by their underlying clients. [11] In the past year, the Commission clarified that investment advisers cannot outsource their voting decision-making to these third parties. [12] But, it is clear that many do and will continue to rely on their advice as inputs in voting decisions, so much so that a large group of institutional investors recently characterized proxy voting advice businesses’ recommendations as “market-moving.” [13]

In light of this, how could anyone argue that the SEC should not care about proxy voting advice businesses’ recommendations, or whether they are influenced by the types of conflicts of interest, errors, or methodological biases that have been brought to the SEC’s attention?

III. Independence: Myth or Reality?

Before I conclude, I will tell you about a particular concern I have about the independence of proxy voting advice businesses, which I can only hope is a myth. I have been told that some asset manager clients of these businesses use them as a “fig leaf.” As it was explained to me, everything in proxy voting advice business reports is in there because certain asset managers get together and decide, for instance, that they do not like a particular member of a company’s board of directors. They then instruct the proxy voting advice business to recommend a vote against the director. The term I heard for this practice is “social arbitrage,” a way for an asset manager to vote against a company, while maintaining its relationship with management so that it can sell products to that company such as providing 401(k) services. A coordinated effort along the lines I just described is deeply troubling to me.

This is exactly the type of conflict of interest I worry about—that a proxy voting advice business might base its general proxy voting advice to all its clients on the preferences of a select group of its own clients, whether they are asset managers or shareholders themselves. I believe that this type of conflict should be disclosed to all consumers of proxy voting advice businesses’ reports. Also, I think this type of behavior could represent a potential Section 13D violation. [14]

IV. Conclusion

The impetus for this speech was not to convince you that the SEC’s proposed rules to modernize the proxy process are perfect as-is. People have questioned certain aspects of them, and I am open to changing my mind on anything and everything the Commission has proposed.

My goal, however, is to encourage constructive feedback. For two decades, the Commission has sought comment and deliberated in general terms about how to modernize our proxy rules. During this time, many commenters submitted general arguments about how they thought the system should change or not change. On November 5 of last year, the Commission put forward specific rule proposals. In voting to support them, I held out hope that all those who have expressed so much interest over the years would now comment on these specific proposals, and offer particular feedback on how they could improve.

Yet, in some of the reporting and the comment file, I have seen many generalities, recycled from comment letters predating the recent proposals. More disturbingly though, I have also seen comments suggesting dissatisfaction, based entirely on misinformation. Thus, today, I have aimed to dispel some of the myths that I have heard, which might prevent constructive dialogue, from which we can all benefit.

I remain hopeful that, as we progress through the comment period, we will receive feedback on the specifics of the proposals which will help us determine how—not if—to move forward.

Thank you.


1See, e.g., Letter from Sanford Lewis, Director, Shareholder Rights Group, and Josh Zinner, CEO, Interfaith Center on Corporate Responsibility (Nov. 1, 2019). I have also received phone calls in response to action campaigns asking me not to side with “big business” only to find out that the callers did not read, know about, or have familiarity with the proposals—or even, in some cases, the SEC.(go back)

25 U.S.C. 553(c).(go back)

3See Roundtable on the Proxy Process (Nov. 15, 2018), comments available at https://www.sec.gov/proxy-roundtable-2018; Proxy Voting Roundtable (Feb. 19, 2015), comments available at https://www.sec.gov/comments/4-681/4-681.shtml; Roundtable on Proxy Advisory Services (Dec. 5, 2013), comments available at https://www.sec.gov/spotlight/proxy-advisory-services.shtml; Concept Release on the U.S. Proxy System, Release No. 34-62495 (Jul. 14, 2010), comments available at https://www.sec.gov/comments/s7-14-10/s71410.shtml; Roundtable Discussions Regarding Proxy Process (May 24, 2007), https://www.sec.gov/spotlight/proxyprocess.htm. These issues have also been the subject of public debate over the last twenty years. Congress has held several hearings, asked for GAO reports, and even proposed legislation. See, e.g., U.S. Government Accountability Office. (Jun. 2007). Corporate Shareholder Meetings: Issues Relating to Firms That Advise Institutional Investors on Proxy Voting. (Publication No. GAO-07-765). Retrieved from https://www.gao.gov/assets/270/263233.pdf; U.S. Government Accountability Office. (Nov. 2016). Corporate Shareholder Meetings: Proxy Advisory Firms’ Role in Voting and Corporate Governance Practices. (Publication No. GAO-17-47). Retrieved from https://www.gao.gov/assets/690/681050.pdf; Corporate Governance Reform and Transparency Act, H.R. 5311, 114th Cong. (2016); Corporate Governance Reform and Transparency Act of 2017, H.R. 2015, 115th Cong. (2017); Corporate Governance Fairness Act, S. 3614, 115th Congress (2018); Proxy Process and Rules: Examining Current Practices and Potential Changes: Hearing before Committee on Banking, Housing, and Urban Affairs, Senate, 115th Cong. (2018).(go back)

4For instance, we are proposing to eliminate the current 1% threshold rather than requiring a sliding scale of ownership percentage based on a particular company’s market capitalization. See Business Roundtable, “Responsible Shareholder Engagement and Long-Term Value Creation” (Oct. 2016), https://www.businessroundtable.org/archive/resources/responsible-shareholder-engagement-long-term-value-creation.(go back)

5See, e.g., The Action Network, “Tell the SEC to stop undermining shareholder activism!” available at https://actionnetwork.org/petitions/tell-the-sec-to-stop-undermining-shareholder-activism?nowrapper=true&referrer=group-credo-action&source=direct_link.(go back)

6Exchange Act Rel. No. 34-87457 “Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8” (Nov. 5, 2019) (“We estimate that there were 170 proponents—38 individual proponents and 132 institutional proponents—that submitted a shareholder proposal that was included in a proxy statement and was subsequently voted on as a lead proponent or co-proponent during calendar year 2018.”)(go back)

7Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Release No. 34-86721 (Aug. 21, 2019).(go back)

8See Letter from Gary Retelny, President and CEO of Institutional Shareholder Services, Inc. (Nov. 7, 2018).(go back)

9Glass Lewis refers to this as its Issuer Data Report service. See Issuer Data Report, Glass Lewis, https://www.glasslewis.com/issuer-data-report/ (last visited Nov. 4, 2019). In addition, Glass Lewis implemented a pilot program for the 2019 proxy season, known as its Report Feedback Statement service, which offers U.S. public companies and shareholder proponents the opportunity to express differences of opinion they may have with Glass Lewis’ research. See Report Feedback Statement—Frequently Asked Questions, Glass Lewis (May 2019), available at https://www.glasslewis.com/report-feedback-statement-service/.(go back)

10 See H.R.4015 – Corporate Governance Reform and Transparency Act of 2017, 115th Congress, https://www.congress.gov/bill/115th-congress/house-bill/4015.(go back)

11 Division of Investment Management, “Statement Regarding Staff Proxy Advisory Letters,” (Sept. 13, 2018), https://www.sec.gov/news/public-statement/statement-regarding-staff-proxy-advisory-letters.(go back)

12 Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No IA-5325 (Aug. 21, 2019).(go back)

13 See Letter from Jeffrey P. Mahoney, General Counsel, and Kenneth A. Bertsch, Executive Director, Council of Institutional Investors (Nov. 14, 2019).(go back)

14 See, e.g., Institutional Investor, “The Mysterious Private Company Controlling Corporate America” by Michelle Celarier (Jan. 29, 2018) (“One activist attorney goes so far as to say that ISS has solved the ‘shareholder collective-action problem.’ By letting ISS be the quasi-judge, ‘it avoids shareholders being a group and busting a poison pill or having to file a 13D,’ he says.”).(go back)

Both comments and trackbacks are currently closed.