T. Rowe Price has filed one of the best comments we’ve seen on the SEC’s proposed rule on proxy advisory firms. The full comment is below. An excerpt:
We join others in noting that the Proposal appears to be a solution in search of a problem. Its stated objective is to improve the accuracy, transparency and completeness of proxy advice, yet it does not identify a single verified instance of inaccurate or incomplete information being provided to investors by proxy advisory firms. It is our informed belief, based on years of experience working with proxy advisory firms as both an issuer and an institutional investor, that proxy advisors do not need oversight by issuers in order to provide accurate research reports. The Commission should base its rulemaking on clear evidence of the existence or likelihood of a market failure, and not solely on the concerns expressed by some market participants. The Commission should also carefully consider that it is not the investor clients of proxy advisory firms calling for reform, but the corporate issuers who are held accountable to shareholders through the proxy voting process.
We believe that, rather than meeting the Commission’s stated objectives, the Proposal will effectively provide companies with a mechanism to influence proxy advisory firms’ voting recommendations. The Proposal would grant public companies the right to review proxy advisory firm research and recommendations before they can be shared with investor clients of proxy advisory firms, for the express purpose of ensuring the accuracy of proxy reports. Notwithstanding the absence of data showing a prevalence of factual errors to support this type of regulatory solution, we find three flaws in this approach.
First, the Proposal assumes that companies will review proxy reports in order to identify and communicate the existence of factual errors to proxy advisory firms, but there is no requirement for them to do so. It is not clear, and the Proposal does not indicate, how many companies the Commission expects would take advantage of the ability to review proxy recommendations, but evidence suggests that the number would be shockingly low. According to a 2019 survey of public company experiences with proxy advisory firms, of 172 companies surveyed, only 17% (29 companies) requested that proxy advisory firms provide them.
Given the lack of empirical evidence of widespread market abuse or failure, the low interest shown by public companies to review proxy research for factual accuracy, and the potential for companies to use the review process in a way that could influence valuable independent research, we strongly oppose the two review periods contemplated by the Proposal. In fact, we see enormous potential for the Proposal to do more harm than good when we consider the impediments that the proposed procedural changes would impose on proxy advisory firms, their clients, and ultimately the shareholders who would be left with inadequate time to make informed voting decisions. [footnotes omitted]