Securities and Exchange Commission Open Meeting
Securities and Exchange Commission
Wednesday, July 22, 2020
Chairman Jay Clayton
In his opening statement, Clayton noted that the recommendations under consideration were the result of a well-functioning rulemaking process, the input of a wide array of market participants, and more than a decade of work at the Securities and Exchange Commission (SEC). He said there have been longstanding concerns regarding the need for SEC action on the use of proxy advice, adding that the SEC received substantial feedback and suggestions for improving the proposed rule which are reflected in the recommendations. Clayton highlighted that SEC staff have focused on ensuring that as markets evolve, the SEC continues to work for the wellbeing of long-term Main Street investors, many of whom, he noted, participate in the markets through intermediaries. He continued that proxy voting is very important to fund performance and retail investor welfare, and to the extent investment professionals rely on this advice, it is important they do so consistent with their fiduciary obligations and that they have access to transparent and complete information.
Exemptions from the Proxy Rules for Proxy Voting Advice
- William Hinman, Division of Corporate Finance
- Michele Anderson, Division of Corporate Finance
- Ted Yu, Division of Corporate Finance
- Luna Bloom, Division of Corporate Finance
- Daniel Greenspan, Division of Corporate Finance
- Valian Afshar, Division of Corporate Finance
Hinman said that markets are more efficient when market participants have accurate and timely information when making investment and voting decisions. He noted that many institutional investors look to two sources for actionable information: proxy statements and the information received from proxy businesses, highlighting that over the years a number of concerns have been raised about the rules governing proxy voting advice, particularly whether clients receive all the information they need to make a decision in a timely and efficient manner. He said the proposal represents measured changes to improve the accuracy of this information and will allow clients to continue utilizing this advice while improving their ability to receive it in a timely manner. He continued that the proposal will result in greater engagement and level the current playing field for smaller companies. He highlighted that the amendments are modeled after current market practices and provide considerable flexibility in how to satisfy the principles outlined in the new rules, including providing safe harbors for companies that want greater certainty.
Afshar highlighted key features of the proposal, including that it would require proxy businesses to disclose their conflicts of interest as well as adopt and publicly disclose their policies and procedures to ensure advice is made available to all participants at the time it is disseminated. He noted it also includes a nonexclusive list of safe harbors.
Supplement to Commission Guidance Regarding Proxy Voting Responsibilities
- Dalia Blass, Division of Investment Management
- Paul Cellupica, Division of Investment Management
- David Bartels, Division of Investment Management
- Holly Hunter-Ceci, Division of Investment Management
- Thankam Varghese, Division of Investment Management
Blass explained that in August 2019 the SEC issued guidance for investment professionals regarding their responsibilities in voting proxies on behalf of their clients, saying the rule amendments provide additional information to market participants that retain proxy advice.
Varghese noted that the supplementary guidance will codify amendments to proxy solicitation rules and addresses considerations for making full and fair disclosures so clients can make informed consent, particularly in the context of automated voting.
Commissioner Elad Roisman
Roisman said that proxy voting advice businesses play a significant role in the financial system, and their advice is used by many advisors and institutional investors to vote on behalf of Main Street investors. He continued that this far-reaching role in the markets necessitated the SEC examining whether action was necessary. He expressed his support for both proposals and said he believes they will bring much-needed improvements to the proxy voting system and foster transparency and accountability in the process. He highlighted that the rules require the disclosure of material conflicts of interest, saying this will allow for more informed voting. He also noted the inclusion of consideration regarding the use of automated voting features. Roisman said that the final rules offer a tailored approach that minimizes disruptions and provides for more transparent, accurate and materially complete proxy advice.
Commissioner Hester Peirce
Peirce noted that proxy businesses play an important role in the markets and carry significant power, calling the rules an important step towards modernizing the proxy voting system. She continued that these measured and appropriate changes to the process are intended to improve the information available to clients and clarify how investment advisors can take that information into account. Peirce said the final rules achieve the objective of ensuring investors and advisors have transparent and complete information and highlighted that this was achieved via a less prescriptive and more principles-based approach. She continued that the “commonsense” measure to require disclosure of material conflicts of interest will add transparency while preserving the ability of businesses to exercise their judgement. She expressed her eagerness to see how businesses meet the rules’ objectives with policies and procedures that build on what they are already doing and reflecting their own unique circumstances.
Commissioner Allison Herren Lee
Lee expressed her concerns about the proposal, citing “overwhelming opposition” from investors. She said the rules would harm the governance process as well as the free and fair exercise of shareholder voting rights, increase issuer involvement in what is intended to be an independent process, and add complexity and cost into a system that “just isn’t broken.” She said the Commission has not demonstrated that there are problems with the current system and making the final rules less objectionable than the original proposal does not relieve the Commission of its obligation to demonstrate the need for rulemaking and how the rulemaking will meet this need. She called the final rules “unwarranted, unwanted and unworkable,” saying that the proposal justified increased involvement of issuers by citing concerns about the accuracy of proxy voting advice without providing evidence of a significant error rate in current proxy advice. Lee highlighted that the final rules will make it harder and most costly for shareholders to cast their vote, make their voices heard, and hold management accountable for the decisions they make, leading to less accountability, expressing her dissent.
Chairman Jay Clayton
Clayton acknowledged that these issues are complex and have been in existence for some time. He noted that the staff understands the complexities of these markets and have crafted a rule set that codifies best practices in a way that increases transparency and the mix of material information available to market participants when making voting decisions.
The recommendations were approved in a 3-1 vote, with Commissioner Lee dissenting.
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