The SEC’s Proposal To Suppress Shareholder Votes is Awful — Here’s Why
The SEC has proposed two appalling new rules which would suppress shareholder votes and access to the sole source of independent information on subjects like out-of-control CEO pay and climate change denial. These rules are being supported by corporate insiders through a bunch of dark money front groups masquerading as public interest advocates. One of the most outrageous efforts involved a YouTube video from a Republican operative who fails to disclose that she is getting paid, much less who is paying her, and who makes up ridiculous lies about the links between this rulemaking and the big three topics guaranteed to rile the base.
This may seem in the weeds and arcane to people who are not immersed in this world. But here is why the one percent think it is worth diverting millions of corporate dollars that should be spent on worker salaries and developing better products to a massive lobbying campaign that is contrary to the interests of shareholders, employees, and consumers: CEOs are furious that there is one source of information and oversight that they cannot control. When some shareholder proposals on pay and climate change got substantial votes — EVEN THOUGH THOSE VOTES ARE SYMBOLIC ONLY AND CANNOT FORCE THE COMPANIES TO CHANGE ANYTHING — they went nuts. And so they got the three Republican Commissioners on the SEC to vote contrary to the most fundamental principles of law, economics, and fairness, to make it harder for the people who handle your retirement funds and other investments to look out for your interests.
An excerpt from our comment filed with the SEC:
I agree with the Commission’s own advisory committee and the letters on behalf of investors filed by CII, T. Rowe Price, John Coates and Barbara Roper, and others that this proposal is wrongly conceived. Despite the Commission’s rhetoric of support for proxy voting, this proposed rule would undermine this crucial element of accountability to shareholders by severely hampering the access of investors, including individual investors whose assets are managed by intermediaries to the sole source of independent information. It is wrong in every category.
It is wrong on the facts, based on unsupported, thoroughly and conclusively rebutted, allegations of conflicts and costs and on undervalued benefits. It is based on thinly disguised efforts from corporate executives to insulate themselves from even the mildest and most symbolic investor oversight, plus slightly better disguised efforts from fake dark money front groups funded by the same corporate insiders, trying to look like ordinary investors.
It is wrong on the process because it is based on faked and fraudulent comment letters and slanted and discredited, skewed data.
It is wrong on the law, failing to meet federal and Commission-specific requirements for rigorous, verified cost-benefit analysis. I second the concerns on this point raised in the comment by John Coates and Barbara Roper. It is also unconstitutional, beyond the authority of the Commission and an infringement of First Amendment freedoms of speech and the press.
It is also wrong as a matter of economics, because proxy advisory firms provide research no one is obligated to buy and recommendations no one is obligated to follow. There is a choice of providers with sharply delineated differences, there are no barriers to entry for new competitors, and the buyers are the most financially sophisticated professionals in the country.
This is the very definition of a free market working exactly as it should and there is no possible justification for further regulation, particularly one that would create new barriers to entry. It purports to be based on alleged conflicts of interest/agency costs that may be affecting one of the three proxy advisory firms but ignores the vastly greater conflicts the previous rules were intended to address and those that affect the advocates for this rule.
It is wrong as a matter of regulatory theory and policy. If the Commission has evidence that fund managers are voting proxies for any reason other than the exclusive benefit of clients, we strongly encourage them to bring enforcement actions, as they have in the past. There is no evidence in the record of proxy advisors giving recommendations that are objectively “wrong,” but even if they were, any regulation or enforcement should be directed at those who fail to act as fiduciaries in evaluating those recommendations. This proposal is a disappointing example of regulatory capture, with the agency that is supposed to advocate for investors instead promoting suppression of shareholder votes and access to the sole source of independent advice.
It is wrong as a matter of public integrity and accountability. The widespread distortion of this rulemaking process, including faked “astroturf” comments orchestrated by CEO-funded lobbying firms has irreparably undermined this proposal.
I support the many comments raising concerns about the exceptionally short comment period, given the complexity and unprecedented reach of the proposal, the failure to accumulate reliable data, and the number of questions left for commenters to answer and the open-ended and subjective framing of questions which does not meet the minimum standards for reliable survey responses. There are three reasons that this rulemaking should be handled with the utmost careful consideration and the Commission must extend the truncated timeline for this massive proposal.
First, as discussed above, there is literally no evidence of any problem with proxy advisors, which is why the CEOs who are unhappy with any analysis they do not control, particularly around issues of CEO pay and climate change, had to resort to fake dark money front groups, fraudulent comments, and slanted, instantly discredited “studies” to try to create some. Even so, they have been unable to point to a single actual proxy issue that was wrongly recommended or decided. This proposal is based on obviously “fishy” fake comments, including those cited by the Chairman in announcing this proposal. The entire record must be thoroughly disinfected before any final decision is made, or the rulemaking will make an easy case for being challenged as arbitrary and capricious.
Second, the sharp, party-line division in the vote on this proposal and the substantive, thoughtful objections of two Commissioners and the Commission’s own advisory group make clear the precariousness of the rationale for this proposal and the necessity to rethink it in its most fundamental terms. This is not a partisan issue. Some people might be surprised to find the Democratic Commissioners arguing in favor of a free market, non-regulatory approach to a voluntary transaction between financially sophisticated private enterprises to reduce collective choice costs and conflicts of interest while the Republican Commissioners support a nanny state approach, assuming that major financial institutions are incapable of making market-based choices and meeting their obligation as fiduciaries. But we recognize the power of crafty lobbyists, increasingly deploying avalanches of dark money astroturfing to masquerade as ordinary citizens, distorting the notice and comment process, and we know how difficult it can be to be heard over their sock puppets and fake front groups. This rulemaking requires the most rigorous, skeptical, and careful consideration to bring some credibility to what has been a distressingly abused and skewed process.
Third, the Commission has taken no time to examine the effect of its rescission of the guidance on proxy advisors many of the supporters of this rule claim created the problem. Indeed, when you listen to my debate with Professor Steven Kaplan at the University of Chicago’s Stigler Center on January 13, 2020, which I have submitted as a supplemental comment for this rulemaking, you will see that the foundation of his argument in favor of the rule is that the 2004 guidance interfered with free market forces by effectively requiring fund managers to subscribe to proxy advisor publications. I do not agree with this claim and it is not supported by the data. Many fund managers do not rely on proxy advisors or review their recommendations and come to a contrary decision on voting and 70 percent of those who delegate voting authority to ISS do so under their own in-house-developed proxy policies. But even if he is right, since it has been rescinded, there is no basis for building an extended regulatory structure based on a guidance that no longer exists, at least without analysis of the impact of that decision.
That is especially critical because the decision to rescind the guidance was mysteriously unsupported. Why rescind two 2004 letters about proxy advisory services before the roundtable scheduled for just weeks later to present expert testimony on many elements of the proxy system, including proxy advisors and shareholder proposals? Why act before the evidence was on the record and the Commissioners and staff had a chance to ask questions? At the time, I followed up with the “for more information, contact” email in the very unforthcoming announcement of this decision and the only answer I got from the staff was that rescinding the guidance would “facilitate” the hearing. I then asked how acting without evidence would “facilitate the hearing” and was simply told again that it would facilitate the hearing. Rosanna Landis Weaver of As You Sow filed an FOIA request asking for any memoranda or notes from staff meetings with interested parties concerning the guidelines. She received a reply saying that no such documents existed. The Commission has never explained who asked for withdrawal of the guidelines and there is no information in the record about any analysis that went into the decision, a prima facie case of the decision’s being arbitrary and capricious. There is nothing in the record of this rulemaking about the impact of that decision.
I still have the strongest possible objections to the mysteriously undocumented and unjustified rescinding of those guidelines, but the fact is, they were rescinded and it makes no sense to move forward with this rulemaking without documentation of the impact of that decision, which may in itself have accomplished anything this proposal is intended to achieve.