David N. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.
The latest developments in the SEC regulation of proxy advisory firms are good news for ISS and Glass Lewis, but they are a disappointment for proponents of conscientious and consistent rulemaking. The 2020 updates to proxy advisory rules were the result of a thorough process that was conducted by Commission staff across ten years and two politically distinct administrations, yet the framework implemented by the 2020 rules has been substantially gutted in the span of just a few months—without ever having taken effect. This unwelcome instability in the regulatory environment casts unfortunate doubt on the SEC’s commitment to being a nonpartisan, market-oriented regulator. It is likely to create uncertainty regarding future rulemaking, as to proxy advisory services specifically and as to potentially controversial areas in general.
The 2020 Rules
As we have previously observed, the SEC’s 2020 proxy advisory rulemaking effort met with a predictable mix of responses. There was opposition from the proxy advisory firms and the Council of Institutional Investors, and there was approval and support from public companies and other market participants who share the concern that proxy advisory firms wield disproportionate power and influence in the proxy voting process.
From the standpoint of regulatory stability, the important feature of the 2020 rule amendments was that they were a decade in the making. The outsized role of proxy advisory firms was first addressed in a 2010 SEC concept release on the proxy voting process, and a 2014 Staff Legal Bulletin warned investment advisors that their fiduciary duties precluded over-reliance on proxy advisory firms. In 2018, the SEC held a roundtable on the proxy process and in 2019 issued interpretation and guidance that confirmed the applicability of the federal proxy solicitation rules to proxy voting advice by proxy advisory firms and elaborated the SEC’s position regarding the responsibilities of investment advisers that chose to rely on proxy advisory firms. Continued work by Commission staff under the leadership of Chair Jay Clayton led to the adoption of rules and guidance in 2020 that represented the most significant steps the SEC had taken to date in regulating the provision of proxy voting services by proxy advisory firms. The prevailing view among market participants—other than proxy advisors and some of their clients—was that the 2020 rule amendments made meaningful improvements to the proxy voting process that would promote accountability and increase transparency regarding the advice of proxy advisory firms.
The Proposed SEC Climate Disclosure Rule: A Comment from Bernard Sharfman and James Copland
More from: Bernard Sharfman, Jim Copland
James R. Copland is the director of the Manhattan Institute’s Center for Legal Policy and Bernard S. Sharfman is Senior Corporate Governance Fellow at the RealClearFoundation. This post is based on their comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule.
Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed 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; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.
This post is based on a comment letter submitted to the SEC regarding the Proposed SEC Climate Disclosure Rule by James R. Copland and Bernard S. Sharfman. Below is the text of the letter with minor adjustments to eliminate the correspondence-related parts.
We respectfully submit this letter as a means to bring to the Commission’s attention deficiencies that we have found in its proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors (“the Proposed Rule”). In our view, the Proposed Rule fails to comply with Congress’s demand that agency actions not be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” as interpreted by the Supreme Court to require an agency to “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choices made.” Nor does the Proposed Rule comport with the “unique obligation” Congress has given the SEC to “to consider or determine whether an action . . . will promote efficiency, competition, and capital formation.” The Proposed Rule also runs afoul of the Constitution’s commitment to federalism and separation of powers, both by substantially interfering with corporate governance, a creature of state law, without an express Congressional mandate, and by resolving a “major question” of policy clearly within the province of the legislative branch. Because the Proposed Rule’s disclosure requirements are not “purely factual and uncontroversial,” they also implicate the First Amendment’s prohibition against government-compelled speech. Although our analysis can apply more broadly to much of the Proposed Rule, we are providing comments clarifying this critique in significant detail as to two Sections of Part II of the Proposed Rule: Section G: GHG Emissions Metrics Disclosure (“Section G”) and Section D: Governance Disclosure (“Section D”).
I. Section G: GHG Emissions Metrics Disclosure
Our analysis of Section G focuses on how the Proposed Rule fits within the statutory requirements laid down by Congress in the Administrative Procedures Act (“APA”) and the securities laws. We divide our analysis into three Parts. Part A focuses on the Proposed Rule’s required disclosures for Scope 1 and 2 emissions, which are not limited by a materiality standard. Part B focuses on the required disclosures for Scope 3 emissions, which purportedly do face a materiality requirement. Part C focuses on deficiencies in the Proposed Rule’s articulation of “investor demand” purporting to justify the need for Section G disclosures.
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