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E-MailHester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent statement at an open meeting of the SEC. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.
Proxy voting advice businesses play an important role in our marketplace, a role that carries with it tremendous power. One root of that power is a 2003 Commission rule that required funds to publish their votes. [1] That rule pushed voting to the front burner for fund advisers, regardless of whether voting was a task that the funds and their shareholders wanted advisers to spend a lot of time on. Advisers looking to check the voting compliance box with as little headache as possible turned to proxy voting advice businesses for help, [2] a move enabled by staff no-action positions. [3] What followed was an outsourcing of the vote; funds’ voting decisions were handed over to proxy advisors, whose consequent power over public companies grew.
Two years ago, the Division of Investment Management took the commendable step of pulling back the no-action letters upon which this multi-tiered voting delegation edifice was constructed. [4] This action helped to facilitate a discussion about proxy voting, a discussion that has continued for the intervening two years with a lot of input from roundtable participants and commenters. That conversation is not over, but today’s releases are an important step toward modernizing the proxy voting system.
Today’s final amendments to our rules governing proxy solicitations are a measured and appropriate change to the proxy process designed to improve the adequacy of information available to clients of proxy voting advice businesses when making voting decisions. The accompanying supplemental guidance clarifies how investment advisers, who have assumed voting authority on behalf of their clients, can take into account the enhanced information. Of course, as the Commission affirmed last year, an investment adviser is not required to accept the authority to vote client securities. [5]
I am pleased that we are adopting principles-based requirements, a regulatory approach that has proven effective in other contexts within our securities laws. The final rules achieve the Commission’s objective of ensuring that investors and their advisers who rely upon proxy voting advice are provided with more transparent, accurate, and complete information. The rules achieve this goal without imposing unduly burdensome requirements on proxy voting advice businesses given the significant time constraints of the proxy voting process. We were able to strike that appropriate balance because of the constructive feedback and engagement from commenters. Indeed, careful consideration of the comments made it clear that the objectives of the proposal could be achieved by a less prescriptive and more principles-based approach.
The final rules require proxy voting advice businesses to hold themselves to a standard appropriate for the power they exercise. Specifically, they must disclose material conflicts of interest to facilitate an assessment of the objectivity and independence of the proxy voting advice. This common sense measure should add transparency, while preserving proxy voting advice business’s flexibility to exercise judgment informed by their experience and expertise.
In a modification from the proposal’s review and feedback mechanism, the final rules require proxy voting advice businesses to make their proxy voting advice available to registrants and to provide clients with a way to learn of a registrant’s written response to that proxy voting advice. These principles-based procedural requirements provide proxy voting advice businesses flexibility to determine the best way to meet the rulemaking’s objectives, while respecting the value of the service that proxy voting advice businesses offer and the compressed time periods within which they operate. The safe harbors are just that—proxy voting advice businesses should not feel tethered to the safe harbors when developing their policies and procedures.
I am eager to see how proxy voting advice businesses meet the rules’ objectives with policies and procedures that build on what they are already doing and reflect their own circumstances. Admittedly, we will only see a limited range of approaches, as there are only three major proxy voting advice businesses in the United States. This lack of competition in the industry concerns me, but I hope that the principles-based framework we are adopting today offers the combination of certainty and flexibility that will invite new entrants into the market.
Issues related to proxy voting are complicated by the fact that many public company shares are held by funds. Many of these funds are advised by asset managers, who may be tempted to view the voting of those shares as an opportunity to express the asset managers’ own preferences. Any such temptation must fall away at the sound of two words—fiduciary duty. An adviser to a fund owes a duty to that fund and must stay true to the objectives of the fund in voting those shares. Does, for example, activist voting accord with a fund marketed as a passive index fund? Today’s supplemental guidance, while focused on investment advisers’ consideration of additional information generated by today’s amendments, underscores that investment advisers must use voting advice they receive and registrants’ responses to further their clients’ interests, not their own.
Thank you to the Chairman, Commissioner Roisman, and the staff in the Divisions of Corporation Finance, Investment Management, Economic and Risk Analysis, and the Office of General Counsel for your hard work on today’s matters. I particularly commend Commissioner Roisman for his steadfast and pragmatic leadership, open mind, hard work, and commitment to transparency throughout the process.
Endnotes
1See Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, 68 Fed. Reg. 6,563 (Feb. 7, 2003) (codified at 17 C.F.R. §§ 239, 249, 270 & 274), https://www.sec.gov/rules/final/33-8188.htm. The Commission also adopted the Proxy Voting Rule in 2003 requiring an investment adviser that exercises voting authority over client proxies to adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of clients. See Proxy Voting by Investment Advisers, 68 Fed. Reg. 6,585 (Jan. 31, 2003) (codified at 17 C.F.R. § 275), https://www.sec.gov/rules/final/ia-2106.htm.(go back)
2As one commenter noted, advisers looking to minimize their investment in voting may have found hiring proxy voting advice businesses as a useful way to discharge fiduciary voting obligations at low cost. See Letter from James R. Copland, Senior Fellow and Director, Legal Policy, Manhattan Institute for Policy Research, to the SEC (Feb. 3, 2020), https://www.sec.gov/comments/s7-22-19/s72219-6742842-207818.pdf.(go back)
3See Institutional Shareholder Services, Inc., No-Action Letter (Sept. 15, 2004), withdrawn Sept. 13, 2018; Egan-Jones, Inc., No-Action Letter (May 27, 2004), withdrawn Sept. 13, 2018.(go back)
4See SEC 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)
5See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, 84 Fed. Reg. 47,420 (Sept. 10, 2019) (codified at 17 C.F.R. §§ 271 & 276), https://www.sec.gov/rules/interp/2019/ia-5325.pdf. See also SEC Staff Legal Bulletin No. 20, Question 2 (June 30, 2014), https://www.sec.gov/interps/legal/cfslb20.htm.(go back)
