SEC Investor Advocate Ignores Key Criticisms of Proxy Advisors, Concerns of Retail Investors

April 19, 2019

Earlier this month, the U.S. Securities and Exchange Commission’s (SEC) investor advocate, Rick Fleming, expressed doubt about the push to regulate proxy advisors. His comments on the topic ignored the need for proxy reform and failed to address the valid arguments that have made the case for change in the industry. The Main Street Investors Coalition supports regulation of proxy advisors because it would protect retail investors’ assets. Fleming’s argument focused on whether institutional investors clients are satisfied with the services provided by proxy advisors to date.

In a speech, Fleming made the case against reform and stated his belief that the wrong people are raising issues with proxy advisors:

“Some have criticized proxy advisors and allege that they have conflicts of interest in their business models, factual errors in their analytical processes, and a political agenda that supports social policies at the expense of investment returns. All of these things would cause me great concern, except for one thing – the investors who are paying for this service are not the ones who are expressing those concerns.” (emphasis added)

Fleming delivered his remarks just a few days before a new study was published by the Spectrum Group which concluded, “retail shareholders are too often being used as a poster child by institutional intermediaries to support practices in shareholder voting that retail investors do not support.” The survey also found that 85 percent of investors support increased SEC oversight after being made aware of issues with proxy advisors.

In addition to retail investors, large institutional investors who do pay for proxy advisory services have acknowledged issues with proxy advisors. These concerns have led many investment firms to conduct more corporate governance research in-house and Blackrock has even stated that all stakeholders would benefit from additional transparency of proxy advisors in their comment to the SEC:

“Resolving the existing inefficiencies and opacity would be consistent with our collective desire to enhance the quality of the proxy process research and promote competition within the industry.”

Fleming also glazed over the concern that some investment advisors are “robo-voting” in line with proxy advisors as an easy and cheap way to check the box and fulfill SEC created fiduciary requirements and even endorsed this practice:

“As many of you know, asset managers who hold shares in a wide range of companies face a logistical challenge in voting on numerous items each proxy season. Investment advisers are also required to vote shares in a way that is faithful to the fiduciary duties they owe their clients. To satisfy this obligation in a cost-effective way, many asset managers use the services of a proxy advisor.”

In other words, Fleming is not concerned about investment advisors outsourcing their responsibilities to the dominant two proxy advisory firms, who are not required to disclose the methodology behind their votes and do not employ company specific analysis to reach their recommendations.

This message undermines the good work of the SEC staff earlier this year when they withdrew the ISS and Egan-Jones no action letters, which rubber-stamped this practice by allowing investment advisors to wash their hands of their fiduciary duties by following proxy advisors’ recommendations.

Alternatively, Fleming should consider a proposal by the National Association of Manufacturers to address the issue of investment advisers voting on more issues than they can analyze each proxy season and have the SEC:

“…emphasize that investment advisers are always required to act in a client’s best interests, including in situations where choosing not to exercise their proxy voting authority is the best choice for an investor.”

Perhaps it is time for Investor Advocate Rick Fleming to review the mandate of his office, which is to provide a voice for investors and assist retail investors. Unfortunately, Fleming’s speech shows that he is only siding with certain investors and largely ignoring the arguments of others. The Main Street Investors Coalition invites Fleming to actually examine criticisms of proxy advisors and engage in a more substantive debate about how to best protect all investors.

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