Global investors condemn US attempt to undermine voting decisions

Moves to regulate proxy research would undermine relationships with shareholders, compromise research integrity and eliminate competition say global investors.

Proposed regulation contradicts moves to improve objectivity in sell-side space.

The US House of Representatives’ Finance Services Committee last week passed a series of  Bills which seek to repeal large chunks of the Dodd-Frank Act which was passed in response to the 2008 financial crash.

The bills would amend the mandate on public companies to provide shareholders with a vote on executive compensation to occur only when the company has made a material change to the executive compensation; repeal the Security and Exchange Commission’s (SEC) authority to issue rules on proxy access and repeal the mandate that publicly-traded companies disclose the ratio of median versus chief executive officer pay.

Part of the package of legislative proposals is the Corporate Governance Reform & Transparency Act of 2016 would, if passed by Congress and signed by President Obama, require mandatory SEC registration for proxy advisory firms such as Manifest wishing to operate in the US.

Registration would not only require disclosure of potential conflicts of interest and a code of ethics, but very controversially, would require advisors to give priority access to unpublished reports to companies before their clients, as well as the appointment of an ombudsman and compliance officer to address issuer concerns with recommendation “accuracy”.

The moves to regulate proxy advisors have been condemned by the Council of Institutional Investors (CII) and International Corporate Governance network (ICGN). In a letter to the Committee, the CII and 27 members and other institutional investors, warned leaders of the House Financial Services Committee that the bill could eliminate effective and cost-efficient independent research, analysis and informed proxy voting advice. Co-signers include representatives of U.S. and European public pension funds and asset managers. The bill “would give companies the right to preview proxy advisory firm reports and lobby the report writer(s) to change their recommendations,” CII Executive Director Ken Bertsch said in the letter. “Financial Industry Regulatory Authority (FINRA) rules specifically prohibit the same type of pre-review of financial analyst reports. We believe this right of pre-review will give company managements substantial editorial influence on reports on their companies.”

Erik Breen, chairman of ICGN said: “We are fundamentally concerned that this legislation places undue emphasis on company relations with proxy advisors, and hence too little emphasis on a company’s relationships with its investors.” Breen also observed that the US is acting out of step with other markets such as Canada and Europe where regulation has been  ruled out.

Cydney Posner writing on the blog of Cooleys, a US corporate law firm, noted that the legislation would be unlikely to pass through Congress prior to the presidential election, although the issues it raises could form part of the presidential campaign.

The Finance Services Committee also passed the SEC Regulatory Act which has been criticised by the CII. The bill requires the SEC to undertake enhanced cost-benefit analysis and a review of existing regulations. In another letter to the committee the CII said the Act included “provisions that we believe would in practice paralyse the Securities and Exchange Commission’s (SEC) regulatory activities. Effective SEC regulation is critical to ensuring appropriate investor protection and well-functioning capital markets. We believe the proposed bill is unnecessary and could undermine effective investor safeguards and regulation of capital markets.” The CII urged the Committee to consider the costs and unintended consequences of the Act.

Broc Romonek, editor of the Corporatecounsel, endorsed this view in his blog, saying the bill’s provisions would paralyse the SEC’s ability to adopt new rules or modify old ones. For example, the bill contains the requirement for the SEC to revisit a rule within one year of it’s passage – and then every five years after that.

Romonek wrote, “On its face, I know this sounds reasonable – but it would require more resources than you think to undertake this task. Resources that the SEC doesn’t have. Remember that the SEC already is conducting extensive cost-benefit analyses, etc. And bear in mind that all of this doesn’t protect us from stupid laws that Congress passes that requires the SEC to adopt stupid new rules. The bulk of the rule making conducted by the SEC over the past decade has been mandated by Congress. So if Congress has a beef with the rules that the SEC is adopting, it should look in the mirror…”

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