March 20, 2019
On Monday, Elad Roisman, the newest Commissioner at the Securities and Exchange Commission (SEC), spoke at the Investment Company Institute’s (ICI) Mutual Funds and Investment Management Conference in San Diego, California. In his role as Commissioner, Chairman Jay Clayton has tasked Roisman with leading the SEC’s efforts to reform the proxy advisory system.
In his keynote speech to an audience of fund advisors and asset managers, Roisman recognized that funds play an integral role in today’s capital markets, owning a third of all U.S. issued shares. The investors of those funds include over 100 million Americans, who represent 45 percent of U.S. households:
“It is an understatement to say that your voting has a direct impact on the economic returns of countless investors.”
The Commissioner highlighted the importance of maximizing returns for these individual investors:
“[..] shareholders demand economic value from the companies they own and vote in ways that can influence their corporate management to deliver that value. This shareholder-company dynamic drives productivity in our economy and helps investors grow their wealth.”
The Commissioner posed an important question in his remarks: “What is the best interest of a fund in the context of proxy voting?” Roisman then dove into the role of proxy advisory firms and called upon fund advisors to use their services wisely.
Roisman outlined certain practices within the proxy system that are damaging to the shareholder voting process. He described how many fund managers are automatically voting in line with proxy advisory recommendations (even if these recommendations negatively impact returns), a trend now referred to as “robo-voting”. Roisman also stated that he was concerned about factual errors being used to justify these voting recommendations and noted the potential for conflicts of interest to arise between proxy firms and the firms they provide consulting services to:
“I am interested in exploring how advisers handle these types of conflicting interests…Have advisers found voting policies that are flexible enough to apply to all funds, yet account for differences between them—in other words, can one size fit all?”
Commissioner Roisman also addressed the need to update thresholds for submissions and resubmissions of shareholder proposals. Roisman stated that the time is ripe for reform:
“In light of this history and the questions I posed earlier, I believe it is a good time for the Commission to consider whether guidance would be helpful to asset managers as they consider how to utilize the services of proxy advisory firms.”
In his closing remarks, the Commissioner expressed his desire for thoughtful and comprehensive reform that takes advantage of new technology:
“I believe the Commission needs to consider not only “quick-fixes” that could marginally improve some aspects of how the system works, but also comprehensive solutions based on modern technology.”
In his first formal speech since assuming the role, Commissioner Roisman demonstrated his awareness of the many issues that exist in today’s proxy advisory system. His focus on topics such as robo-voting and conflicts of interest make it clear that the SEC has taken note of the specific problems that are hampering the shareholder voting process at the expense of retail investors. His calls for input on these issues and potential reforms prove that he and his team at the SEC are actively working to find long-term solutions that will benefit American investors.