Paying More For Less: Higher Costs for Shareholders, Less Accountability for Management
Commissioner Allison Lee photo
Commissioner Allison Herren Lee
July 22, 2020
At the proposing stage for these rules, I observed that they would harm the governance process and suppress the free and full exercise of shareholder voting rights. Unfortunately, that is still the case with today’s final rules.
They are still designed to, and will, increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations. The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.
It’s true that the final rules have been adjusted from the proposal in response to public outcry. While I appreciate the thought and effort by my colleagues that went into some of the changes, making the final rules less objectionable than the proposal does not relieve the Commission of its fundamental obligation to identify the need for this rulemaking and to explain how the rules we are adopting will meet this need. Unfortunately, we have done neither.
The final rules are unwarranted, unwanted, and unworkable.
The proposal justified increased issuer involvement by citing concerns regarding the accuracy and soundness of proxy voting advice, stating an intent to “reduce the likelihood of factual errors or methodological weaknesses in proxy voting advice.” This failed as a justification for the proposal because there simply was not evidence of any significant error rate in proxy voting advice. That was clear enough at the time of the proposal, and it is even clearer now after ample public comment on this subject.
Now, the adopting release backs away from citing factual errors as a specific basis for the rulemaking, stating that “the proposed amendments were not motivated solely by the Commission’s interest in the factual accuracy of proxy voting advice.” Instead, the release is now replete with references to the need to provide shareholders with “a more complete mix of information.” Inherent in this new rationale is the suggestion that the current mix of information is incomplete without more input from issuers. But the release does not even attempt to make that case. It just says “more is better.” That broad principle, very often rejected by the Commission in other contexts, is not sufficient to justify the forced consideration of issuer views that these rules require, particularly over the objection of investors.
This brings me to my second point. These rules are not wanted by those they purport to benefit. With respect to the central provisions of the proposal—a forced opportunity for issuers to review and provide feedback on proxy voting advice—opposition outweighed support by more than three to one. Most notably, there was almost universal opposition from investors, the supposed beneficiaries of this rulemaking.
The rulemaking purports to respond to commenters by switching to a more flexible principles-based approach that still requires issuer intervention but permits a lesser degree than the proposal. Yes, we have revised certain provisions in the proposal to make them less prescriptive in terms of issuer intervention. Much of that flexibility, however, is abrogated by the safe harbors which, as is well understood, will become the de facto rules.
In any event, the question is not whether the final rules are better than proposed. If the proposal were the correct baseline against which to assess the final rules, that would create a perverse incentive to propose extreme rules, and then proclaim a balanced outcome when the final rules are merely less objectionable. Instead, we must measure the new rules against the status quo. Compared to the status quo, these rules still raise all of the infirmities that investors identified—including that they increase issuer involvement, and impose significant new costs and delays.
Just how significant will these costs and delays be? We don’t know—and the economic analysis does not tell us. Because the final rules take such a different approach from the proposal, commenters have not had an opportunity to weigh in on the approach we’ve settled on, so we do not know the extent of the disruption it will cause. But we do know there will be disruption.
This raises my third point: the rules are unworkable. While the new rules purport to address many of the specific concerns raised by commenters, in fact those problems persist. The proposal included a requirement for two levels of issuer pre-review of proxy voting advice, potentially delaying the client’s review, delaying voting, and risking the independence of the advice. This provision prompted some of the most strenuous objection in the comment file. The adopting release claims that, because the final rules no longer specifically require pre-review, they no longer create the risk that advice will be delayed or independence impaired. This is simply not so.
Today’s release still explicitly encourages pre-review, not just contemporaneous delivery of proxy voting advice. The final rules and guidance also introduce delay and uncertainty by effectively requiring proxy advisors to provide their clients with notice of multiple events: first, notice of an issuer’s intent to file a response to proxy advice, regardless of whether the issuer actually files a response; and second, notice of, and a hyperlink to, any actual issuer response, regardless of whether the proxy advisor considers the response to add any new information, and regardless of whether it may contain errors or misstatements.
At the same time, the guidance instructs investment advisers to consider any issuer response to proxy voting advice prior to exercising voting authority. But how long must investment advisers wait to see if an issuer will respond? And how much time and effort must be afforded these responses before voting? Taken together, the final rules and guidance introduce uncertainty and delays, force proxy advisors to convey management views, and effectively require consideration of those views before voting occurs. All to solve a problem that we have not established exists, and ostensibly to benefit proxy advisor clients who have emphatically stated that no rule is needed or wanted.
The bottom line is this: even if certain defects in the proposal have been mitigated, the final rules will still make it harder and more costly for shareholders to cast their votes, and to do so in reliance on independent advice. That means it will be harder for shareholders to make their voices heard—and harder for them to hold management accountable. That’s less accountability on climate risk, less accountability on executive pay, less accountability on diversity, on human capital, worker safety, and the list goes on. That is not an outcome I can support. I must respectfully dissent.
 See Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Proposed Rule, Rel. No. 34-87457, at 27 (Nov. 5, 2019) (Proposing Release).
 The Proposing Release itself included a table setting forth instances where issuers had identified concerns with proxy voting advice, including alleged factual errors, which demonstrated that the number of factual errors identified by companies—a number that is disputed—was exceedingly small. See Recommendation of the SEC Investor Advisory Committee Relating to SEC Guidance and Rule Proposals on Proxy Advisors and Shareholder Proposals (Jan. 24, 2020) (“From over 17,000 shareholder votes over three years, the number of possible factual errors identified by companies themselves in their proxy supplements amounts to 0.3% of proxy statements – and none of those is shown to be material or to have affected the outcome of the related vote.”) (emphasis in original).
 See Exemptions from the Proxy Rules for Proxy Voting Advice, Final Rule, Rel. No. 34-, at 91 (July 22, 2020) (Adopting Release).
 See, e.g., id. at 72-73 (“[A] number of commenters, particularly within the registrant community, have expressed concern about the current system for providing proxy voting advice under the Commission’s rules, and the resulting effect on the mix of information available to shareholders.”); 87-88 (“…a means to improve the overall mix of information available to investors”); 94 (“… ensuring that clients of proxy voting advice businesses have timely access to a more complete mix of relevant information and exchange of views”); 100 (“…the Commission’s interest in improving the mix of information available to shareholders”); 112 (“…shareholders should have ready access to a more complete mix of information to make informed voting decisions”); 193 (“…enhancing the overall mix of information available to those clients”); and 195 (“…enhancing the total mix of information available to proxy voting advice business clients”).
 Many of our recent efforts related to disclosure appear to be animated by the opposite principle: that we should not overwhelm investors with too much information and that more tailored disclosure will permit better decision-making. In other words, elsewhere we employ a “less is better” approach. See, e.g., Amendments to Financial Disclosures about Acquired and Disposed Businesses, Rel. No. 33-10786 (May 20, 2020) (“The amendments should improve the salience of the information for investors by reducing the volume of information presented about acquired businesses and focusing the disclosures on more decision-relevant information.”); see also Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, Rel. No. 33-10762 (Mar. 2, 2020) (expanding the circumstances in which issuers of registered debt securities offerings that are guaranteed or collateralized by affiliates may skip the requirement to provide audited financial statements for those affiliates and reducing the amount of alternative disclosure that companies must provide in lieu of financial statements); Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, Rel. No. 33-10750 (Jan. 30, 2020) (proposing to eliminate disclosure items 301(Selected Financial Data), 302 (Supplementary Financial Information), 303(a)(4) (Off-balance sheet arrangements), and 303(a)(5) (Tabular disclosure of contractual obligations)); Disclosure of Payments by Resource Extraction Issuers, Rel. No. 34-87783 (Dec. 18, 2019) (proposing to dramatically reduce the disclosure required by resource extraction issuers, compared the requirements of the Commission’s 2016 rule and compared to international standards, by eliminating the requirement for contract-level disclosure, raising the de minimis threshold below which reporting is not required, and expanding other exemptions from compliance, including fully exempting smaller reporting companies and emerging growth companies from the rule); Reporting Threshold for Institutional Investment Managers, Rel. No. 34-89290 (July 10, 2020) (reducing the information available to investors and others for $2.3 trillion in holdings of institutional managers); Investment Company Liquidity Disclosure, Rel. No. IC-33142 (June 28, 2018) (rescinding before implementation the requirement in Form N-PORT that funds publicly disclose aggregate liquidity classification information about their portfolios).
 Issuer views are important and valuable, but issuers are not impartial when it comes to their own proposals, and they have ample means to communicate those views. Proxy advisors and their clients can decide for themselves whether and when to wait for or consider any additional views an issuer may have. Today’s rule per se assumes that these views are so valuable we should add cost, complexity, and delay into the process in order to ensure that they are considered. There is simply no evidence for this premise.
 As for conflicts of interest, I generally view transparency in this area to serve markets well. Here again, however, we have not made the case that there is a lack of transparency to be remedied. Clients of proxy advisory firms have consistently stated that they support conflicts disclosure generally, but they maintain that the current disclosure is adequate and the Commission has not established a need for further regulation. See, e.g., comment letter from California State Teachers’ Retirement System (Feb. 3, 2020) (stating that while it is generally supportive of conflict of interest disclosure, “proxy advisors are currently providing adequate disclosures that meet the needs of investors”). Moreover, enhanced conflicts disclosure could have been accomplished without rulemaking, such as through the issuance of further guidance regarding investment advisers’ duty to ensure they have sufficient information on conflicts, or through examinations or enforcement actions if either proxy advisors or investment advisers are not meeting their duties. While enhanced conflicts disclosure is generally a laudable goal, it does not justify this specific rulemaking, and in fact may function more as a fig leaf for a rule that is otherwise unsupported and strenuously opposed by investors.
 A review of the comment file indicates that 46 comment letters supported the provision for issuer review and feedback, compared to 159 comment letters in opposition.
 As I have said before, it stretches credulity to assert to investors that we act in their best interests by making policy choices they fervently oppose. See Commissioner Allison Herren Lee, Statement on the Rollback of Auditor Attestation Requirements (Mar. 12, 2020) (compiling recent releases where there has been a clear division of views between investors and other commenters, and the Commission has disfavored or even disregarded investor views). For today’s rule, each and every provision is adopted over investor objection. Investors and their fiduciaries opposed the codification of the solicitation interpretation. See Adopting Release at n.92. Investors and their fiduciaries argued that existing conflicts disclosure is adequate and opposed further regulation in that area. See id. at nn.195-97. Investors and their fiduciaries opposed forcing proxy advisors to provide their voting recommendations to issuers, contending that there was not sufficient evidence of deficiencies with proxy advisor recommendations to warrant such a requirement. See id. at nn.264-65. Investors and their fiduciaries opposed the amendments to Rule 14a-9, expressing concerns it would heighten legal uncertainty and litigation risk. See id. at n.442.
 I do not object to the use of safe harbors, only to characterizing them as mere suggestions. They can be very useful in many circumstances to bring clarity and assurance to compliance. But it is inconsistent with historical market practices to consider them nothing more than one of many potential methods for compliance.
 In addition to these concerns, the final rules codify a new interpretation of what it means to solicit a proxy under Exchange Act Section 14(a) that departs from the Commission’s historical interpretation of that term. The interpretation largely ignores the significance the Commission has traditionally given to the distinction between solicited and unsolicited advice. See Broker-Dealer Participation in Proxy Solicitations, Rel. No. 34-7208 (Jan. 7, 1964) (“In our view a broker normally is not engaged in solicitation where he merely responds, whether orally or in writing, to an unsolicited request from a customer for advice as to how to vote.”). Though proxy advisors are providing voting recommendations at the request of their clients, the interpretation maintains that such requests are solicited merely by virtue of the fact that proxy advisors market themselves as such. As a result of this expansion of the definition, we have had to include in the rule further clarification that advice furnished in response to “unprompted” requests—a new standard—is not a solicitation to avoid capturing other actors who provide advice in response to client requests. The codification goes so far as to include in the definition of solicitation proxy voting advice provided pursuant to a client’s custom voting policy, which is merely an application of the client’s specific voting preferences. Moreover, the interpretation also newly expands the term solicitation to capture advice provided by parties with no interest in the outcome of particular votes. The release argues that whether a party is interested is not relevant, citing a single case that provides that “relying on the ‘subjective intent of the person furnishing the communication’ to determine whether a particular communication constitutes a solicitation ‘is at odds with the plain and unambiguous meaning of the regulation.’” See Adopting Release at 43. But whether a party has an interest in the outcome of a vote is not based on their subjective intent; it is based on whether they stand to benefit from the outcome. Management may want to influence an outcome when they solicit a proxy, but their status as an interested party flows not from that intent but from the fact that the outcome of a vote will or will not serve their purposes. Proxy advisors do not stand to benefit from the outcome of any particular vote. They are merely providing a service in response to a request from their client.
 Indeed the economic analysis does not quantify costs at all. The Paperwork Reduction Act analysis provides that the increased burden on proxy advisors could be anywhere “from 50 hours to 5,690 hours per year per proxy voting advice business,” a startlingly wide range. See Adopting Release at 238.
 See id. at 108 (“Specifically, because Rule 14a-2(b)(9)(ii) does not require proxy voting advice businesses to adopt policies that would provide registrants with the opportunity to review and provide feedback on their proxy voting advice before such advice is disseminated to clients, the rule does not create the risk that such advice would be delayed or that the independence thereof would be tainted as a result of a registrant’s pre-dissemination involvement.”).
 See id. at 98-99 (“The rule does not require that proxy voting advice businesses provide registrants or other soliciting persons with the opportunity to review proxy voting advice in advance of its dissemination to the businesses’ clients, although providing registrants with the opportunity to review their proxy voting advice in advance would satisfy the principle and is encouraged to the extent feasible.”).
 See id. at n.381 (“If a registrant notifies a proxy voting advice business that the registrant intends to file additional soliciting materials setting forth its views regarding the proxy voting advice business’s advice, then proxy voting advice business should consider whether, for purposes of complying with this safe harbor requirement, it needs to send two separate notices to the business’s clients: (1) one notice regarding the registrant’s intent to file and (2) another notice regarding the registrant’s actual filing.”).
 There is further uncertainty with respect to the carve-out for custom policies. Today’s rules purport to exempt the custom policies of proxy advisor clients—that is, the voting advice that reflects the particular preferences and methodologies of the client—from the notice and response requirements of the rules. Such an exemption could mitigate some of the ill effects of the notice requirements. However, it is unclear whether the definition of custom policies in the release excludes policies that that are customized but based in part on a proxy advisor’s benchmark and specialty policies—a practice the comment file suggests is not uncommon. See comment letter from Glass Lewis (Feb. 3, 2020) (“During the [custom] policy formulation process, an institution will review Glass Lewis’ policies to assess the similarities and differences between the institution’s views and Glass Lewis’ ‘house policy.’ Glass Lewis engages extensively with institutional investors and aims to have policies that reflect the views of its clients. Accordingly, it is not uncommon for an investor client to elect to implement the same policy as Glass Lewis for some or all of the issues up for vote.”). And therefore it is unclear whether the rule actually exempts the policies that proxy advisors and their clients consider custom.
 The guidance provides that “if an issuer files such additional information sufficiently in advance of the submission deadline and such information would reasonably be expected to affect the investment adviser’s voting determination, the investment adviser would likely need to consider such information prior to exercising voting authority in order to demonstrate that it is voting in its client’s best interest.” Problematically, we do not know what “sufficiently in advance of the submission deadline” means. Moreover, an investment adviser cannot know whether the information in the filing “would reasonably be expected to affect the investment adviser’s voting determination” without waiting to see what is in the supplemental filing. This also, as a practical matter, impairs the ability of investment advisers to rely on automated voting, to the extent such voting may occur prior to an issuer filing supplemental materials. In practice, an investment adviser may change its final vote if new information comes to light after it votes, but prior to the submission deadline, but the guidance does not acknowledge this. Instead, it specifically provides that investment advisers need to consider issuer responses prior to exercising voting authority, rather than prior to the submission deadline.
 While we pay less heed to opposition from investors, we are emphasizing other questionable sources of support for the rules. First, without expressly relying on factual errors as a basis for the rulemaking, we continue to cite unsupported claims of errors in proxy voting advice. See Adopting Release at 74-75. Second, we cite to letters relying on surveys with apparent methodological errors. See id. at n.93. This includes citations to surveys that, for example, use “push poll” type questions that state as fact unproven allegations such as “How concerned are you about proxy advisors lacking transparency in their recommendation process?” and “How concerned are you with errors within proxy advisor reports?” See Reclaiming Main Street: SEC Hears Retail Investors’ Cries for Proxy Advisory Oversight, available at https://spectrem.com/Content_Whitepaper/white-paper-reclaiming-main-street.aspx. While it may not be the business of the Commission to evaluate the soundness of every survey or comment we receive, we should be mindful of placing emphasis on submissions without sufficient consideration of their soundness or authenticity, especially when obvious methodological concerns have been identified. See comment letter from John Coates and Barbara Roper (Jan. 30, 2020).
 Of course, to the extent that today’s final rules and associated guidance increase the burden on investment advisers of voting client securities, our actions today may serve as a disincentive from advisers’ agreeing to take on proxy voting authority at all. See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Rel. No. IA-5325 at 9 (Aug. 21, 2019) (“[A]n investment adviser is not required to accept the authority to vote client securities, regardless of whether the client undertakes to vote the proxies itself.”). The uncharacteristically prescriptive requirement for advisers to wait for and review the views of a particular party threatens to add significant complexity, delay, and costs to an already complicated undertaking. Those costs will be borne by advisers directly and by their clients indirectly, and advisers may determine instead to refrain from accepting authority to vote client securities. This outcome would significantly undermine investor participation and representation in the governance of public companies.
 My opposition to these rules is not a criticism of the staff of this agency, who have consistently and for months done remarkable work under very difficult circumstances. I have the deepest respect and gratitude for their work. My concern lies with the Commission’s policy choice in finalizing these rules without a sound rationale and in the face of overwhelming opposition from investors and their fiduciaries.