The Hill: The SEC's Suggested 'Speed Bump' is an Affront tO Institutional Investors
Updated: May 21
After significant opposition from institutional investors across the country, the SEC appears to be moving away from a key provision of a proposed rule that would have granted public companies a first look at independent proxy advice before it is delivered to the institutional investors for whom it is intended.
Following months of rulemaking tainted by efforts to flood the agency with fabricated comments, the misguided effort to tip the scales in favor of public company management has been revealed as little more than a 'solution' to a non-existent problem.
While this apparent change should be a welcome development for working Americans and the investment firms responsible for managing their retirement plans, the agency often vaunted as the “investors’ advocate” reportedly still intends to move forward with an approach that favors corporate managers and undermines the system through which institutional investors receive objective, independent analysis before voting on the key meeting proposals that affect savings for millions.
More than a month after the rule’s comment period closed, SEC Commissioner Elad Roisman publicly acknowledged that investors had expressed serious concerns about the initial proposal. Rather than concede that the system is not broken, he advanced an alternative approach — a so-called "speed bump" — that reportedly would impose an arbitrary delay in, and changes to, the process by which many institutions exercise their voting rights.
Ostensibly, this is being done based on the presumption that institutional investors are not voting thoughtfully and therefore a regulator needs to impose an impediment to stall their workflow if a proxy adviser analyzing a slate of ballot items, such as approving corporate CEO pay, disagrees with management and recommends as such to its investor clients.
The seeming hope, under this thinking, is that recommendations adverse to corporate management won’t so easily be translated into votes when the review process is paused in the face of a contentious proxy adviser recommendation. The reality, however, is that the overwhelming majority of Institutional Shareholder Services’ (ISS) largest institutional investor clients craft their own guidelines and criteria for vote recommendations, and therefore the recommendations they receive are consistent with their perspectives on various issues.
Time and again the SEC has gone on record urging financial services firms to leverage technology to better serve investors. Voting-enabled by technology is completely consistent with this approach. The assertion that such technology equates to voting on auto-pilot without investors’ input has been debunked by investors repeatedly at the SEC and in the media as both inaccurate and offensive. The proxy voting season is compressed and virtually all of its parts move rapidly, including investor voting.
Aside from the fact that this alternative proposal is so markedly different from the original rule proposal that it should require the rulemaking process to start anew, it continues a trend in which the SEC seems to embrace the insulting view that institutional investors are not thinking, much less voting, for themselves. As institutional investors have made abundantly clear, the opposite is true.
The current pandemic has exposed a dissonance among policymakers in Washington on how public company management should be held accountable. While Congress was intent on including extensive accountability measures to oversee the $500 billion corporate relief fund included in the CARES Act, including limits on executive compensation and prohibitions on stock buybacks, the SEC appears to be going in the opposite direction.
At a time when shareholders and taxpayers alike are demanding accountability in corporate decision-making, institutional and main street investors around the country should take notice and continue to hold the SEC accountable for pushing forward with measures to stifle the voice of shareholders in the public companies they own. While some at the SEC may feel compelled to move ahead in light of the time and energy invested in this proposed rulemaking, there are ample reasons to shelve these proposed rules entirely.
Lorraine Kelly is head of Governance Research & Voting at Institutional Shareholder Services. She is a current member for the Best Practice Principles Group, formed in 2013 to promote greater understanding of corporate governance research and serves on the Council of Institutional Investors’ Markets Advisory Council.