To: The Chairman, Commissioners, and Staff of the SEC
From: Nell Minow, Vice Chair, ValueEdge Advisors
Many thanks for the opportunity to comment on your thoughtful draft five-year strategic plan. The SEC plays a critical role in the stability and credibility of our financial markets. It is the robust transparency and accountability of our corporate structure that has made the United States’ opportunities for investors, entrepreneurs, and employees the best in the world, and we are confident that the SEC is committed to upholding those standards.
We strongly endorse your statements of mission, vision, and values, which set exactly the right parameters for the plan, and we support the focus on investors, innovation, and performance. We would hope to see integrity listed explicitly in that top tier as well, because one of the SEC’s most important functions is the promulgation and enforcement of rules that protect the integrity of the markets. If investors have even the smallest reason to doubt whether they can rely on investment advisors, financial institutions, and issuers, all of the goals of the SEC’s mission, vision, and values will be critically damaged. And we are not convinced that the rest of the plan supports the mission, goals, and values as well as it should.
In particular, we are confused and concerned about the first priority listed in the draft: “Focus on the long-term interests of our Main Street investors.” This causes particular alarm because it tracks the language of the instantly discredited, industry-funded front group, the “Main Street Investors Coalition,” which purports to be on the side of small investors but in reality is not a membership organization, provides no services to individual investors, and circulates biased, shabby research to support its goal of suppressing the votes of institutional investors. This comment incorporates by reference the essay published in the Harvard Law School Forum on Corporate Governance and Financial Regulation with more information and is appended to this note.
It is not at all clear from your draft exactly whom you are referring to as “Main Street Investors,” and so we suggest a more descriptive term and definition. As the SEC knows better than anyone else and acknowledges in the draft, individual investors very seldom buy, sell, or vote individual stocks. We completely support investor education efforts by the Commission for those who want to have more control over their investments, but recognize that most people reasonably recognize that they do not have the time, the resources, or the expertise to compete with the sophisticated, multi-billion dollar professionals. For most individuals, investments are managed by financial advisors in 401(k)s, IRAs, mutual funds, and pension funds.
If, indeed, the SEC wants to make protection of the “Main Street” or individual/beneficial holder investor a priority, the focus should be on strengthening the fiduciary obligation of the financial advisors and making their fees, voting records, and potential conflicts of interest transparent to individuals in a clear, accessible manner, which will provide an opportunity for the beneficial holders to either switch advisors or replace the advisors’ directors, and cast an advisory vote on their compensation as well. We incorporate by reference an interview with Professor William Birdthistle about the conflicts and obfuscations of fund managers, also appended to this comment.
We do not believe any additional regulation is needed for proxy advisors, who publish reports with analysis and recommendations that no one is required to buy or follow. There is no evidence that they have disproportionate influence, especially since even a 100 percent vote according to their recommendation is almost never binding on the issuer. Furthermore, we caution that any effort to restrict or direct the content of published material may be an unconstitutional infringement of First Amendment rights, especially under the standards of the recent Supreme Court decision in the NIFLA case.
We also recommend that the SEC itself undertake more comprehensive research into the data about individual investors, especially more information about gaining the trust of the under-saving millennial generation, who grew up watching the 2008 financial meltdown with little personal responsibility from those involved. The SEC should do a thorough evaluation of the options for addressing the collective choice and rational ignorance problems that have interfered with prudent planning for retirement so it can better assist pension plan beneficiaries and other individuals faced with daunting investment decisions.
Perhaps in cooperation with the Department of Labor, the SEC should also study the impact on the capital markets of the switch from defined benefit to defined contribution pension plans, which has not been fully recognized. We recommend that the SEC examine the proxy voting procedures of financial advisors, to make clear that proxy voting is as much a fiduciary obligation as buy and sell decisions. If pro-management votes are cast more often for portfolio companies that are also clients (as has been shown in past independent studies), this raises conflict of interest questions that the SEC should resolve on behalf of investors.
The SEC should also conduct a comprehensive review of the SRO system of delegated rulemaking. The Exchanges and the world have changed very fundamentally since the SRO system was instituted, and the justification for delegating rulemaking authority to what are now for-profit entities should be thoroughly re-evaluated for its impact on investors.
We concur with the draft’s emphasis on long-term returns and encourage the Commission to consider better ways to realize that goal. The global efforts to update a 19th-century based system of accounting principles more appropriate for the era of mechanical equipment as a company’s primary asset rather than intellectual property provide an excellent opportunity for coordination. We believe a primary driver of short-termism is the structure of incentive compensation, and we urge the Commission to review that as a factor.
We would like to see more emphasis on enforcement, as noted above. In particular, we would like to see directors debarred from serving on public company boards as a part of the settlement of major cases.
We support the draft’s initiatives on cyber and other risks, and encourage the SEC to adopt a permanent Y2K-style disclosure requirement about the assessment of cyber-risk, with detailed information about the procedures for oversight by the board. We would also include climate risk as a separate disclosure.
As the so-called Main Street Investors Coalition shows, issuers are using shareholder money to fight shareholder interests. This is yet another reason that we need more transparency on political and lobbying expenditures, especially dark money. The diversion of shareholder money raises serious conflict of interest/agency cost issues and presents as serious a risk as cyber and climate. In Citizens United, the Court said that corporate political spending is protected because it represents the concerns of the shareholders. That can only be true if shareholders see and can respond to it.
We thank you for this opportunity to comment, and would be glad to meet with staff or present testimony at any hearings you plan to hold to consider these issues.