December 17, 2018
NASDAQ is calling on public companies to sign a letter it penned to the Securities and Exchange Commission (SEC) that advocates for proxy reform. In an email sent this morning, Nelson Griggs, President of NASDAQ, asked companies to add their name to a letter that calls for increasing transparency and fairness in the proxy process. Griggs noted that the letter is part of NASDAQ’s broader effort to reform U.S. capital markets.
The letter echoed concerns discussed at length during last month’s SEC roundtable on the proxy process and at two separate Senate hearings held this month. In the comment to SEC Chairman Jay Clayton, NASDAQ criticized proxy advisory firms on three specific grounds: conflicts of interest, accuracy of recommendations, and lack of transparency.
Nasdaq first noted that conflicts of interest may motivate some recommendations, but that these conflicts are hidden from the public eye:
“The SEC should adopt strong protections for both companies and users of proxy advisory services to ensure that conflicts of interest are eliminated where possible, minimized and/or mitigated where appropriate, and transparent to the users and subjects of reports.” (Emphasis added)
The letter also criticized the absence of a framework that would allow companies to engage with proxy advisors on recommendations containing errors. Currently, companies have little time and no standard method with which to correct errors in proxy recommendations. This often leads to inaccurate, and sometimes factually incorrect, recommendations.
“The SEC should require transparent processes and practices that allow ALL public companies, regardless of their market capitalization, to engage with proxy advisory firms on matters of mistakes, misstatements of fact and other significant disputes so that timely resolution of those disputes and corrections to the record can be made to minimize the negative impacts that such mistakes can have on the subject company’s proxy voting outreach and its shareholders. Such policies and procedures are absolutely critical to any reforms considered by the SEC.” (Emphasis added; capitalization is NASDAQ’s)
The third theme highlighted in Nasdaq’s letter is the transparency of voting standards. NASDAQ suggests requiring proxy advisory firms to disclose their currently “opaque” rules that are incomprehensible to many shareholders:
“The SEC should require public transparency, including a formal public comment period, when a proxy advisory firm intends to change its voting policies from one proxy season to the next and ensure that companies have the ability to determine, on their own, whether they can satisfy those policies… in the absence of transparent policies, neither the proxy advisory firms’ clients, nor the companies they report on, can determine whether a policy is applied correctly or if a recommendation is based on factual errors.” (Emphasis added)
The consequence of the current proxy environment, what NASDAQ describes as a “poorly-calibrated regulatory ecosystem,” has led to the worrisome trend of fewer and fewer IPOs and, consequently, fewer options for the retail investor.
With its letter, NASDAQ adds to the long list of comments submitted to the SEC calling for proxy reform. These comments advocating for change have come from business groups, academia, and even institutional investors. Between hearings and new bill proposals, Congress is demonstrating growing bipartisan support in examining the proxy process. The Main Street Investors Coalition applauds this accelerating momentum toward revising the system to put Main Street investors and their interests first.