August 22, 2018
In previous blog posts, we have explored the announcement of the upcoming Securities and Exchange Commission (SEC) roundtable on the proxy process and Chairman Clayton’s acknowledgement of key issues raised by the Coalition. We’ve also delved into the recent history of SEC actions on proxy advisory firms and how this history connects to the upcoming roundtable. We now think it’s important to examine the general significance of SEC roundtables to demonstrate how they both elevate the issues that are discussed, and how they often lead to additional actions from the SEC or Congress that continue to move the ball forward these issues.
The SEC is more likely to act if there is general agreement amongst a wide range of stakeholders that an issue needs to be addressed. Coinciding with the recent formation of our Coalition, the concentrated power of proxy advisory firms and their ability to influence corporate governance is increasingly gaining attention in the media, with financial publications such as Barron’s and the Wall Street Journal Editorial Board pointing out how Institutional Shareholder Services (ISS) and Glass Lewis are now singlehandedly determining how companies are governed.
The ad hominem attacks on the Main Street Investors Coalition and our members by those invested in concentrated proxy advisory firm influence makes it clear that our detractors have noticed the momentum as well. The Main Street Investors Coalition has faced resistance from Jon Hale, a prominent professional in the ESG industry, Nell Minnow who founded ISS, and Ceres, an activist organization committed to using shareholder resolutions to push a political agenda. Attacks by these vested interests should serve as proof that they are feeling the pressure of potential impending reforms.
SEC Roundtable Background and Subsequent Actions
Since 2012, the SEC has held eight roundtables to solicit input on a variety of issues faced by the Commission. SEC Chairman Jay Clayton has drawn special attention to the first two roundtables under his watch in 2018 by making personal announcements – in April he announced a roundtable during a speech, and more recently he issued a statement announcing the upcoming roundtable on the proxy process. Although SEC actions do not follow every roundtable and certain actions that follow roundtables are not always finalized, roundtables are nonetheless an important step in building the public record to bolster the prospects for reform.
The following examples are also illustrative of the variety of actions the SEC may take to address an issue following a roundtable. The SEC can institute a formal rule-making process that requires the approval of the majority of the Commissioners and public comment, issue guidance, investigate and report on an issue, or step up enforcement of current rules. Information that comes out of SEC roundtables may also prompt members of Congress to act by either introducing legislation, highlighting the issue in Congressional hearings and/or asking a third-party (such as the Government Accountability Office) to investigate and report on the issue.
Roundtables that Resulted in a Rule Change
In 2015, the SEC held a roundtable on proxy voting. Only four months after the roundtable, then SEC Chair Mary Jo White said that the Commission was “working to propose new rules to simplify the voting process for contested corporate board elections by permitting the use of universal proxy ballots.” In the announcement, White specifically cited the previous roundtable discussion as reason for the proposal. In 2016, the Commission voted in favor of proposed rule to allow investors to pick directors from a single ballot and sought public comment on the proposal. However, after receiving comments, the SEC never finalized the rule.
Roundtables that Resulted in Guidance and Action Outside the SEC
As we have noted previously, in 2013 the SEC conducted a roundtable that centered on proxy advisory services. Since the roundtable, the SEC Division of Investment Management has published a Staff Legal Bulletin to provide guidance for investment advisers’ responsibilities related to proxy advisory firms and voting and limited two exemptions to that proxy advisory firms relied on. The SEC also made examinations of proxy advisory firms a priority in 2015. In 2016, Senator Dean Heller asked the Government Accountability Office (GAO) to review the influence of proxy advisory firms, how proxy advisory firms develop their methodologies, and to examine prior SEC oversight within the industry. GAO released their report in November 2016. Shortly thereafter the Corporate Governance Reform and Transparency Act was introduced in the House of Representatives. The bill was re-introduced in October 2017. It has since passed the House and is being reviewed by the Senate Committee on Banking, Housing, and Urban Affairs.
In 2014, the SEC held a roundtable on cybersecurity. Shortly afterwards, the SEC Office of Compliance Inspections and Examinations cited the roundtable as reason to conduct examinations of 50 registered broker-dealers and their handling of cybersecurity risks. This was followed by a second round of examinations to “assess implementation of firm procedures and controls.” All of this work ultimately resulted in interpretative guidance to “assist public companies in preparing disclosures about cybersecurity risks and incidents.”
Roundtables that Resulted in Other Actions
In 2013, the SEC held a roundtable on fixed income markets, which led to additional SEC scrutiny of companies’ transparency, liquidity, and efficiency in said markets. In 2012, the SEC held a roundtable on technology and trading, which resulted in decisive action from the SEC against glitches and errors within private sector trading technologies.
In 2012, the SEC held a roundtable on decimalization which led to a pilot project that implemented recommendations from the roundtable. In 2019, the Commission will receive a report on the results of the pilot project and that could allow them to pursue broader permanent reform.
Of the eight roundtables held by the SEC since 2012, only one of them did not result in some additional action by the SEC or Congress. The upcoming SEC roundtable on the proxy process is a key opportunity for retail investors and others, who are concerned about the conflicted interests of proxy advisory firms and the outsized influence they have over corporate governance procedures, to voice their concerns and push the SEC to take further action.