Monthly Archives: July 2020

Statement by Commissioner Peirce at Open Meeting to Adopt Amendments to the Proxy Solicitation Rules

Hester 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.


Statement by Commissioner Lee at Open Meeting to Adopt Amendments to the Proxy Solicitation Rules

Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

At the proposing stage for these rules, I observed that they would harm the governance process and suppress the free and full exercise of shareholder voting rights. Unfortunately, that is still the case with today’s final rules.

They are still designed to, and will, increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations. The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.

It’s true that the final rules have been adjusted from the proposal in response to public outcry. While I appreciate the thought and effort by my colleagues that went into some of the changes, making the final rules less objectionable than the proposal does not relieve the Commission of its fundamental obligation to identify the need for this rulemaking and to explain how the rules we are adopting will meet this need. Unfortunately, we have done neither.

The final rules are unwarranted, unwanted, and unworkable.


Statement by Chairman Clayton at Open Meeting to Adopt Amendments to the Proxy Solicitation Rules

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent statement at an open meeting of the SEC. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act. Today we have two items on the agenda, both continuations of our ongoing work to modernize and enhance the accuracy, transparency and effectiveness of our proxy voting system. [1]

I want to make two general observations. First, today’s recommendations are the fruits of a rigorous and well-functioning rulemaking process where final rules reflect and benefit from the input of a wide array of market participants with a myriad of interests and perspectives. The proposing release that the Commission issued for public comment last November was informed by, among other things, SEC initiatives that spanned almost a decade—from the Commission’s 2010 Concept Release on the U.S. Proxy System to the more recent 2018 roundtable that brought together, and engendered robust discussion from, investors, issuers, investment advisors, proxy voting advice businesses and other market participants. [2] A review of the 2010 Concept Release, the 2018 roundtable and the comments received in response to our November proposing release demonstrates longstanding concerns regarding, and the need for Commission action with respect to, the use of proxy voting advice by investment advisers and other market participants.


Testimony by Commissioner Pierce for Senate Nomination Hearing

Hester M. Peirce is Commissioner at the U.S. Securities and Exchange Commission. This post is based on her testimony for her nomination hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

Chairman Crapo, Ranking Member Brown, and members of the Committee, thank you for considering my nomination to be a member of the Securities and Exchange Commission. Having served as a Commissioner for two and a half years, I am honored that the President has nominated me to serve another term. If confirmed, I look forward to using the next five years—alongside the dedicated, experienced SEC staff—to unleash the power of our securities markets in order to brighten more children’s futures, build more Americans’ retirement nest eggs, transform more communities across the nation, and rebuild an economy weakened by COVID. I am delighted about the possibility of serving with Caroline Crenshaw, whose experience at the Commission, in the military, and in private practice would enrich our deliberations as a Commission.

I have spent the last twenty years working on financial regulation. Part of that time was spent working for Senator Shelby on this Committee, and more than half of that time has been at the SEC. The agency has been extremely productive under the effective leadership of Chairman Jay Clayton. I have enjoyed helping to carry out his regulatory, compliance, and enforcement agenda.


Statement by Caroline Crenshaw for Senate Nomination Hearing

Caroline A. Crenshaw is currently senior counsel at the U.S. Securities and Exchange Commission and a nominee for Commissioner. This post is based on her written statement for her nomination hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

Chairman Crapo, Ranking Member Brown and distinguished Senators of the committee:

Thank you for the opportunity to appear here today. It is an honor to testify before you regarding my nomination to be a Commissioner of the Securities and Exchange Commission, where I have worked for the past seven years, and in whose mission I deeply believe.

To begin, I want to thank all those who have encouraged and supported me through this process: family, friends, colleagues, Members of Congress and their talented staff, and many others whom I did not know prior to my nomination. It has been an educational and memorable journey.

America’s capital markets have powered the largest, most vibrant economy in the world. But our economy is facing unprecedented challenges and, now more than ever, I believe we must do all we can to keep our markets transparent, competitive, and safe. All Americans must have the confidence to invest their hard-earned savings in their futures.


A Thoughtful Approach in Uncertain Times

Greg Arnold and Mark Emanuel are Managing Directors at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The coronavirus pandemic gave the global economy an unprecedented shock that has raised the stakes for one of the compensation committee’s most challenging tasks—determining when and how to apply discretion to adjust executives’ incentive pay for circumstances outside their control.

The question of when to make discretionary adjustments is always a tricky one. Although the impacts of COVID-19 have been sudden, significant and unexpected, it is important to remember that 2020 was already shaping up as a particularly challenging year for incentive goal-setting. The U.S. economy was marching toward its 11th year of economic expansion and the potential for tariff wars, Brexit and an upcoming U.S. election all added to a heightened level of uncertainty. The pandemic has simply accelerated the urgency to establish a framework for what compensation committees will and won’t do to apply discretion. Without forethought—and forewarning to executives—decisions on compensation adjustments can create unintended consequences. The heightened emphasis on corporate social responsibility in today’s environment and focus on how a company’s actions affect its broader stakeholders mean that now more than ever, committees need a thoughtful process for considering discretionary adjustments.


Behavioral Biases of Analysts and Investors

David Hirshleifer is the Paul Merage Chair in Business Growth at the University of California at Irvine Paul Merage School of Business. This post is based on his recent paper.

Financial analysts and stock market investors alike are subject to behavioral biases. Objective analyst forecasts can potentially help correct investor misperceptions. On the other hand, biased forecasts can reinforce or incite investor misperceptions. Furthermore, data on analyst behavior provide a rich window of insight into the nature of psychological bias among an important and incentivized group of professionals, since ex post information is available about the accuracy of analyst forecasts under different conditions. Analyst behavior also provides insights into the sources of stock market mispricing.

As a possible example of analyst psychological bias, consider decision fatigue, defined as the tendency for decision quality to decline after an extensive session of decision-making. Whether decision fatigue exists has been a topic of controversy as part of the greater replication crisis in experimental psychology. My collaborators Yaron Levi, Ben Lourie, Siew Hong Teoh, and I provide a test of whether decision fatigue affects a set of skilled financial professionals in the field. Specifically, we test whether decision fatigue causes stock market analysts to be more heuristic in their forecasting.


SEC Enforcement Actions Against Companies for Misleading COVID-19 Claims

Kenneth M. Silverman is a partner and Morgan E. Spina and Robert C. Gagne are associates at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum.

The U.S. Securities and Exchange Commission (the “SEC”) filed enforcement actions on May 14, 2020, against two unrelated companies, Turbo Global Partners, Inc. (“Turbo”) and Applied BioSciences Corp. (“APPB”). The SEC charged both companies with securities fraud based on alleged materially misleading statements that the companies were offering and shipping products to combat the coronavirus (COVID-19). These actions taken by the SEC are consistent with approaches taken by other regulators, including the Federal Trade Commission and Food and Drug Administration (the “FDA”), with regard to misleading statements made in connection with coronavirus-related products. On the whole, regulators appear to be particularly cognizant of businesses and individuals seeking to take improper advantage of the circumstances created by the global pandemic, and as such are taking action against such companies and individuals.


Comment Letter on Proposed Regulation of ESG Standards in ERISA Plans

Jon Lukomnik is Managing Director of Sinclair Capital, LLC. This post is based on his comment letter submitted to the Department of Labor, with input from Keith Johnson and signed by 30 people, including various experts in the field. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).

To Whom It May Concern:

We are writing in opposition to proposed rule RIN 1210-AB95. We believe the rule is not only unnecessary, but

  1. Is based on a woefully incorrect understanding of the current state of investing knowledge and theory,
  2. Endangers the retirement security of Americans rather than protects it,
  3. Is Internally inconsistent,
  4. Applies an inadequate analysis of ERISA fiduciary duties by ignoring the duty of impartiality, and
  5. Would violate Federal cost-benefit regulations.

The proposed rule is based on a woefully incorrect understanding of the current state of investing knowledge and theory: An “eye singular” towards retirement security is not the same as encouraging willful blindness.

The major goal of investing for retirement is to create a desirable risk/return portfolio over time, so as to offset retirement expenses. As the Department of Labor wrote in the background to the rule, “Courts have interpreted the exclusive purpose rule of ERISA Section 404(a)(i)(A) to require fiduciaries to act with “complete and undivided loyalty to the beneficiaries,” The Supreme Court as recently as 2014 unanimously held in the context of ERISA retirement plans that such interests must be understood to refer to “financial” rather than “nonpecuniary” benefits… plan fiduciaries when making decisions on investments and investment courses of action must be focused solely on the plan’s financial returns and the interests of plan participants and beneficiaries in their plan benefits must be paramount.”


Firm-Level Climate Change Exposure

Zacharias Sautner is Professor of Finance at Frankfurt School of Finance & Management. This post is based on a recent paper authored by Professor Sautner; Laurence van Lent, Professor of Accounting and Economics at Frankfurt School of Finance and Management; Grigory Vilkov, Professor of Finance at Frankfurt School of Finance & Management; and Ruishen Zhang, Ph.D. candidate at the Accounting Department of Frankfurt School of Finance and Management.

Climate change has started to significantly affect a large number of firms in the economy. A challenge for investors, regulators, and policy makers lies in the difficulty to properly quantify firm-level exposure to climate change, with respect to the associated risks but also in terms of the opportunities that come with it. Complications stem from different sources.

  • First, the effects of climate change on firms are highly uncertain.
  • Second, the effects of climate change are likely to be heterogeneous across firms, even among firms within the same industry.
  • Third, there exists no common understanding about how to reliably quantify firm-level climate change exposure.

While a firm’s voluntarily disclosed carbon emissions are gaining some traction as an exposure measure, this data exists only for a limited and selected sample. What’s more, disclosed emissions reflect historic rather than future business models of firms, and they do not allow the distinction between “good” and “bad” emissions. These challenges are severe and they have the potential to impede the reallocation of resources from “brown” to “green” firms. Furthermore, the lack of a firm-level exposure measure may contribute to the potential mispricing of climate risks and opportunities, and it complicates the development of financial instruments that allow market participants to hedge the effects of climate change.


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