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Law360: SEC Investigating 'Sham Letters' That Favored Proxy Regs

Updated: Jan 13

This post first appeared on Law360 on December 10, 2019.

Law360 (December 10, 2019, 5:49 PM EST) -- U.S. Securities and Exchange Commission chairman Jay Clayton said Tuesday that the agency is investigating letters he cited in support of a controversial proposal to increase regulation of proxy advisory firms — letters that have since been reported to be dubious.

Clayton told the Senate Banking Committee that the matter has been turned over to the SEC’s general counsel and inspector general’s office. Clayton was responding to questions by Sen. Tina Smith, D-Minn., who was concerned “sham letters” were informing the agency’s thinking.

“We are having an investigation of this issue,” Clayton said, declining to delve into specifics.

The matter stems from rules the SEC proposed last month to increase regulatory scrutiny of proxy advisory firms, which sell research and advice to investors who vote on corporate ballots.

The proposal is under fire by shareholder groups, who argue the SEC is infringing their ability to hold companies accountable. Many business groups favor reining in proxy firms on grounds that such firms exercise vast influence over corporate governance with little oversight.

The SEC proposal would require proxy firms to improve disclosure of conflicts of interests, allow corporations to review and respond to proxy firm recommendations before a shareholders vote, and codify that proxy firms could be liable for fraud if they make materially misleading statements when attempting to influence votes.

The SEC approved submitting the proposal for public comment on Nov. 5 by a 3-2 vote, with Clayton in favor. Before voting on the matter, Clayton said he was struck by comment letters from “Main Street investors” that supported the action, including Army and Marine veterans, a police officer, a retired teacher, a single mother and a couple of retirees saving for retirement.

Smith cited a Bloomberg news report that found, among other things, that the retired teacher said she never wrote the letter and the military veterans cited by Clayton were the brother and cousin of the chairman of the 60 Plus Association, an advocacy group that was paid for by corporate supporters of the proposal.

“I am certainly glad to know that you are investigating this,” Smith said. “If you are basing decisions about what to do on comments and public interactions that end up to be fueled by corporate advocacy groups — that I think is a problem.”

The topic also led to an exchange between Clayton and Sen. Chris Van Hollen, D-Md., who said he was troubled that the SEC chairman sought to create an impression that reining in proxy firms is a priority for “Main Street” investors.

Van Hollen said no investor has expressed concern to him about proxy advisers. He described the SEC’s proposal as a “top priority of corporate CEOs who don’t want to be second guessed by proxy advisors.”

“You got duped when you rolled out that statement,” Van Hollen said.

Van Hollen further asked Clayton if he was aware that letters he cited came from relatives of the head of 60 Plus. Clayton said he was not previously familiar with 60 Plus.

A message to Virginia-based 60 Plus was not immediately returned Tuesday. Van Hollen described 60 Plus as a "dark money front group that corporations use for messaging." The group describes itself as advocating for the interests of senior citizens through a “less government, less taxes approach."

But Clayton stood by the SEC’s proposal, saying its intent is to ensure that investors have the most accurate mix of information available before they vote on matters.

“I am not backing away from the fact that we want to do what is in the interest of our long-term investors,” Clayton said.

The proxy matter and a related proposal that would raise thresholds on shareholders seeking to place an item for vote are now open for public comment through Feb. 3, after which the SEC may vote on final proposals. Clayton said he is interested in hearing from investors.

“During this comment period I encourage as many individual investors as they can to share their thoughts with us,” Clayton said, “and we will be doing town halls where they will have the opportunity to speak directly to me.”


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