Todd Sirras is a Managing Director; Austin Vanbastelaer is a Senior Consultant and Justin Beck is a Consultant at Semler Brossy. This post is based on a Semler Brossy memorandum by Mr. Sirras, Mr. Vanbastelaer, Mr. Beck, Alexandria Agee, Sarah Hartman, and Kyle McCarthy.
Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) and The Illusory Promise of Stakeholder Governance (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto Tallarita; and Does Enlightened Shareholder Value add Value (discuss on the Forum here) and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) both by Lucian A. Bebchuk, Kobi Kastiel and Roberto Tallarita.
Large companies are receiving lower shareholder support for Say on Pay proposals than ever before. Average Say on Pay vote support for S&P 500 companies declined for a fifth consecutive year in 2022. Meanwhile, the average vote for Russell 3000 companies not in the S&P 500 (“R3000x”) stayed constant over the same five-year period. The 2.6 percentage point gap between average vote support in the S&P 500 (87.5%) and the R3000x (90.1%) in 2022 is the widest since Say on Pay voting began in 2011.
Importantly, this observation is driven by lower support more broadly across the index rather than just a materially higher failure rate or a few isolated cases that drag the average down. A third of S&P 500 companies received lower than 90% support thus far in 2022, compared to an average of 24% over the prior five years.
Vote results between the two indices have diverged due to a fractured governance landscape and differentiated expectations for “good” governance at large- and small-cap companies. Institutional investors and proxy advisors are signaling increased expectations through policy expansion. Their company evaluations now consider a broader set of financial metrics beyond total shareholder return, and their stewardship priorities now focus heavily on environmental, social, and governance (ESG) topics. These are often introduced and applied most firmly to large companies. In some cases, investors have added proxy voting policies on ESG topics that apply only to companies in the S&P 500.
This evolving landscape makes it more difficult to anticipate an individual shareholder’s vote, which creates ambiguous expectations for large-cap companies, given the number of diverse institutional investors that hold stakes in the largest US companies. A combination of the pandemic, dynamic sociopolitical environment, and common large non-annual CEO awards in the tech and IPO space have impacted how investors interpret the appropriateness of CEO pay magnitude relative to performance and the broader stakeholder experience.
Statement by Chair Gensler on Re-Proposed Amendments Regarding Exemption from National Securities Association Membership
More from: Gary Gensler, U.S. Securities and Exchange Commission
Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.
Today, the Commission unanimously voted to re-propose amendments to Rule 15b9-1 regarding when broker-dealers are required to register with the Financial Industry Regulatory Authority (FINRA). These amendments would cause some of the most active participants in our equity and fixed-income markets to be required to register with FINRA. I was pleased to support these amendments because, if adopted, they would modernize and improve market oversight for regulators.
Rule 15b9-1 was first put in place in 1965 and expanded in 1976, 46 years ago. The rule set forth an exemption designed for certain exchange floor members and other regional, specialized broker-dealers, allowing them not to register with the National Association of Stock Dealers (NASD), the predecessor to FINRA. The exemption applied to broker-dealers who typically were registered with the single exchange where they operated and met certain other criteria.
Nearly half a century later, our markets have drastically changed. The floor-based trading environment that existed when this exemption was adopted has given way to complex, high-volume, and cross-exchange electronic trading. Yet such complex and often high-frequency activity, made possible by highly-sophisticated technology, is regulated by a rule nearly as old as the first-ever cell phone. [1] Several currently-exempt firms have monthly trading volume valued in the tens of billions of dollars that is not subject to direct FINRA oversight. [2] Thus, today’s proposal updates and narrows the circumstances in which broker-dealers do not need to register with FINRA.
Currently, many broker-dealers conduct significant cross-exchange or off-exchange activity using the latest technology. Compared with the oversight that individual exchanges conduct on their own members, FINRA has the expertise for cross-market oversight. Thus, required FINRA membership for many of these currently-exempt firms would help enhance robust and consistent oversight. Furthermore, requiring firms to join FINRA helps to ensure that these firms report their activities in U.S. treasury markets.
In 2015, the Commission proposed changes to Rule 15b9-1. Informed by public comment, and in light of current markets, we have updated and re-proposed these amendments.
By extending FINRA oversight to potentially dozens of broker-dealers, the proposed amendments would strengthen oversight of firms trading securities across several markets, helping to protect investors and maintain fair, orderly, and efficient markets.
I’d like to thank the staff for their diligent work in preparing these amendments, including:
Endnotes
1https://www.pcmag.com/news/the-golden-age-of-motorola-cell-phones(go back)
2See Exemption for Certain Exchange Members, Securities Exchange Act Release No. 34-95388 (July 29, 2022) (e.g., pp. 26-27) (“For example, of the estimated 66 broker-dealers that were exchange members but not FINRA members as of the end of 2021, 47 initiated orders in listed equities in September 2021 that were executed on or off an exchange. These firms’ September 2021 off-exchange listed equities dollar volume executed was approximately $789 billion, which was approximately 9.8% of total off-exchange volume of listed equities executed that month. Moreover, these firms’ September 2021 listed equities dollar volume executed on exchanges of which they are not a member was approximately $592 billion.”), available at https://www.sec.gov/rules/proposed/2022/34-95388.pdf.(go back)