34 BARRON’S August 3, 2020
OTHER VOICES
SEC Closes
Off Investor
Dissent
S
ince last year, the Secu-
rities and Exchange
Commission has been
swept up in a well-
funded corporate lob-
bying campaign press-
ing for enactment of
onerous regulations that will make it
more difficult for shareholders to
voice disagreement with corporate
management on issues such as pay-
ments to CEOs.
That campaign culminated last
By Lorraine Kelly
Illustration by Martin GeeThe SEC’s new rules for proxy advisors serve
as a blow to institutional investors seeking
to judiciously monitor portfolio companies.
week with the SEC issuing final rule
amendments regarding the provision
of proxy voting advice, as well as
supplemental guidance to investment
advisors regarding their responsibili-
ties with respect to proxy voting.
While the final rules may appear less
draconian than originally envisioned,
they do serve as a blow to institu-
tional investors seeking to judi-
ciously monitor portfolio companies.
Despite reducing the patently uncon-
stitutional burdens the commission
proposed to place on proxy advisors,
the final rule amendments, coupled
with the updated guidance for invest-
ment advisors, will hinder investors’
ability to vote in a timely, cost-effec-
tive, and objective manner.
Critically, the rule package for
proxy advisors, passed along party
lines, is based on the novel view that
the provision of independent proxy
voting advice constitutes a “solicita-
tion,” a premise that my firm, Institu-
tional Shareholder Services, believes
is inconsistent with the plain mean-
ing of the federal securities laws. Al-
though the SEC claims to be moti-
vated by a desire to give investors
more transparent, accurate, and com-
plete information on which to make
their voting decisions, the agency
opted not to apply the fiduciary stan-
dards of the Investment Advisers
Act, which would have governed all
proxy advice rendered to U.S. inves-
tors, and instead chose to regulate
proxy advice only if it relates to a
public company registered with the
SEC—that is, only advice concerning
the companies that, alongside other
business and special interests, helped
fund the campaign for these rules. It
is hard for us to see this action as
anything other than a thinly veiled
effort to chill proxy advisor speech by
forcing such firms to bring public
companies into advisors’ dialogue
with their investor clients, all under
threat of litigation if the corporations
disagree with the advice.
The rules take direct aim at the
objective and impartial work of proxy
advisory firms, which are retained at
the discretion of sophisticated insti-
tutional investors to help analyze
governance matters at their portfolio
companies, as well as the shareholder
meeting proposals on which those
investors vote. One provision would
require a proxy advisor to notify its
clients not just when a corporation
files a rebuttal, but also when it sig-
nals an intent to file a rebuttal to the
proxy advisor’s report.
The thinking appears to be that if
proxy advisors are stymied in doing
their work, so, too, will investors’ abil-
ity to express dissent. Bolstering that
view is the supplemental guidance for
investment advisors issued in tandem
with the rule on proxy advice. This
guidance will potentially hamper in-
vestors’ ability to vote in a timely and
unfettered manner and disrupt current
workflows by making them re-
assess their use of technology to
assist them with their voting activi-
ties, particularly where a corporate
issuer may happen to disagree with a
recommendation that we make. It’s
hard to see how this benefits investors.
Putting aside the flawed substance
of the final rule amendments and
supplemental guidance, the manner
in which the commission arrived at
last week’s rule-making is completely
at odds with the commission’s core
mission to protect investors and
maintain fair, orderly, and efficient
markets. In fact, this process has
been deeply flawed from the outset.
To support this rule-making, the SEC
chairman cited comment letters from
supposed everyday U.S. citizens
clamoring for government interven-
tion against proxy advisory firms.
However, not long after, investigative
journalists revealed that comments
cited by the chairman were appar-
ently fabricated or part of a coordi-
nated, corporate-funded lobbying
effort to solicit and generate a facade
of public support for the proposed
proxy advisor rules. Despite a public
commitment to investigate the astro-
turfing campaign, the commission
now says those letters weren’t that
important and do not form the basis
for the final rules.
The SEC’s decision to move for-
ward with this rule-making is a ma-
jor step backward and nothing short
of tipping the scales in favor of cor-
porate managers, in the process up-
ending the existing balance between
public companies and their investor-
owners.B
Lorraine Kelly is governance business head
at Institutional Shareholder Services, or
ISS, and a current committee member for
the Best Practice Principles Group, formed
in 2013 to promote greater understanding
of corporate governance and other ESG
research. She also serves on the Council
of Institutional Investors’ Markets Advisory
Council.