December 6, 2018
Today, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the current proxy process and needed changes to improve the system. The event comes on the heels of last month’s roundtable at the Securities and Exchange Commission (SEC) on the proxy process and the introduction of a new bipartisan bill in the Senate designed to address the lack of transparency and rampant conflicts of interest surrounding the current practices of proxy advisory firms. All three highlight the growing consensus across the political spectrum to address critical flaws in the proxy system. Notably, none of the witnesses outright opposed further regulation of proxy advisory firms.
Chairman Crapo kicked off the hearing with a statement noting that the current proxy regulation is archaic. Echoing concerns voiced by SEC Chairman Jay Clayton last month that the interests of main street investors fall by the wayside in the current system, the Chairman said:
“It is not always clear whether the proxy rules promote the long-term financial interests of those retail investors, many of whose interests are expressed through intermediaries.”
Senators and hearing witnesses agreed about several defects regarding the current practices of proxy advisory firms that disadvantage main street investors, including a lack of transparency. Former SEC Commissioner Honorable Daniel Gallagher noted in his opening statement that the SEC looked to increase transparency in the sector for the past decade and “the time is ripe for meaningful Congressional attention.”
Michael Garland, Assistant Comptroller, New York City, and Thomas Quaadman, Executive Vice President, U.S. Chamber Center of Capital Markets Competitiveness, also expressed support for increasing transparency. This agreement comes shortly after BlackRock told the SEC that everyone would benefit from more robust disclosure from proxy advisors.
Senators were also keen to hear about issues surrounding conflicts of interest. Senators Kennedy (R-LA) and Cortez-Masto (D-NV) expressed concern over conflicts of interest in proxy advisory firms and questioned what regulatory actions could promote transparency. All three witnesses agreed that conflicts of interest exist and supported greater disclosure of these issues.
The room also broadly supported the fiduciary duty the system owes to main street investors. When prompted by a question from Senator Kennedy over whether they would support the creation of explicit fiduciary responsibility guidelines, all three witnesses said yes. In his opening statement, the Chamber’s Quaadman said, “Proxy advice should correlate to the fiduciary responsibility of their clients,” and the proxy system is currently failing in this respect. Sen. Toomey (R-PA) also pointed out that “there are a lot of shareholder proposals that are not fundamentally about the operation of the company.”
Similarly, Chairman Crapo pointed out that the existing rules do little to address the increasing number of shareholder resolutions submitted on political motivations that “have little or nothing to do with a company’s financial performance or shareholder value.”
These statements of support from Senators and witnesses add to the growing array of people across the board calling for additional scrutiny of proxy advisory firms. The Main Street Investors Coalition is optimistic that this growing consensus will add to continued momentum and additional oversight over proxy advisory firms by the SEC.