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Kurt Schacht: Is The SEC Proxy Proposal Analyst Retaliation?

This opinion piece by Kurt Schact, the Managing Director for the CFA Institute's advocacy group, first appeared on Nasdaq on December 3, 2019.


In recent weeks the SEC has introduced proposals that will undermine analyst independence. As an organization with long-standing credibility on ethical financial analysis and professional independence, we see great danger to markets and shareholder governance with the release of its proposed Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice. Of specific concern are the provisions that would require analysts that provide proxy-voting recommendations to pre-clear their opinions with the target companies.


As proposed, the rule would give all public companies authority to review proxy analyst opinions and recommendations prior to their dissemination to clients and investors. It also would force proxy analysts to include a target company’s rebuttal to any negative vote recommendations within the analysts’ own reports.


The intended consequences of this are stated as clarity and truthfulness of proxy recommendations. We feel the unintended effects of this are far more serious.


First, this process of preclearing analysis and recommendations would be a clear violation of long-standing professional standards of analyst independence set nearly two decades ago. The specific point was to address analysts’ conflicts of interest in their dealings with issuers. Not only does this new proposal subvert analyst independence, it very clearly violates the right of investors to contract for such independent advice services. We would go so far as to say it infringes on free speech.


The proxy process is the heart-beat of shareowner rights and key to a balanced corporate governance system. Honest and unfettered analyses and opinions from expert proxy analysts have become essential to this framework. We should never confuse proxy-voting analyses and recommendations that the target company doesn’t like with fraudulent or misleading facts as the issuer community would have us believe.


Since 1789, Americans’ right to their own views — and maybe even their own facts today — has been guaranteed by the Constitution. Free speech demands nothing less in these proxy circumstances, as well. Yet, here we are, with the SEC effectively forcing proxy analysts and advisers to give issuers the opportunity to review their research and propose revisions. While investors support the correcting of factual errors, the extra time, resources and outcomes one may reasonably expect when every no-vote recommendation is challenged will potentially create enormous costs for proxy advisers, as well as for issuers and investors. This is something the SEC’s cost-benefit analysis only glosses over. And interested stakeholders will have just 60 days to respond, potentially forcing them to contemplate its provisions throughout the holiday season.


We encourage Congress to require the SEC to correct these deficiencies in rolling back long-standing corporate governance rights of investors.


CFA Institute and our members take pride in the integrity and independence of their financial analyses, opinions and recommendations. We therefore do not support any effort to stymie proxy analysts and their research or attempts by company executives to silence proxy dissenters, including no-vote recommendations on say-on-executive pay proposals.


This is not a rule that investors wanted. In fact, there was near-unanimous investor rejection, many of who implored the SEC and others to keep their hands off the independent advice they purchase. They pay for this advice so they are aware of disparate views on these issues, all with the goal of better serving their investment clients, including millions of pensioners.


It goes without saying we do enormous damage to the honesty and integrity of markets when we let issuers try to modulate negative advice or subvert opinions in the guise of fact-checking. It is dangerously close to regulating an analyst’s buy/ sell opinions on a stock. It is as much a Constitutional right for investment managers to hear the unexpurgated views of professional analysts as it is for the issuers to state their own case. We wish it were not so, but this proxy proposal by any other name is analyst retaliation.

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