Proposed SEC Rules Will Hurt Institutions, Main Street Investors

As our nation is grappling with the effects of the COVID-19 pandemic, the financial futures of many — if not most — Americans are also top of mind as the markets experience volatility and declines. Moreover, we are approaching the time of year during which the vast majority of public companies hold annual shareholder meetings that allow investors to vote on critical issues affecting millions of Americans’ savings.

At the same time, and of course unrelated to the pandemic, the Securities and Exchange Commission (SEC) is still mulling new and burdensome regulations on proxy advisory firms that will disadvantage the pension and investment fund companies most working Americans rely on when it comes to saving in a 401(k), IRA or 529 college savings account. Lobbying aimed at the SEC to approve these rules has been heavy and, unfortunately, riddled with half-truths and misinformation in a bid to push through these corporate-friendly regulations.

This campaign by the lobby representing corporate interests attacks and undermines the system that has been working for many years to protect the voice of institutions and the millions of Main Street investors they serve in holding public company management accountable to their shareholder owners. If given their way, both the independence and timeliness of our research could be compromised.

Indeed, proxy advisory firms like Institutional Shareholder Services (ISS) endeavor to provide our institutional investor clients with independent research, analysis, and recommendations approximately 20 days before an annual shareholders meeting. While this is a compressed period, it gives our clients time to review the research, engage with issuers, and make well-informed voting decisions.

The SEC’s proposed rules will upend this process, requiring proxy advisory firms like ISS to hand our reports first to the public companies that we analyze — not just once, but twice — before the reports are delivered to our subscribing clients. This arrangement will stall the reports from getting to our clients, cutting in half or more the already limited time they have to review the information before voting. For example, if management disagrees with an adverse ISS recommendation on a CEO’s pay raise, the company can delay the report or inject its own dissent, undermining the traditionally independent and unbiased information we provide to investors.

Institutional investors and associations that represent them have rightfully expressed concern to the SEC about these proposed rules and the new costs that would come with forcing their proxy advisers to do more work with less time. Ultimately, these new costs could very well fall on workers saving for their future, constituting a new tax on retirement savings.

In calling for these new regulations, some public companies and their Washington lobbyists have called into question the accuracy of our work, even though ISS has a 99.3 percent accuracy rate for its research. In the rare instances when a mistake is made, we work immediately to fix it. Ironically, the SEC’s own data for 2018 show that the number of factual errors reported by public companies in their own proxy materials exceeded that of ISS. The “inaccuracy” myth has been spun to justify new regulations to benefit company management over their shareholders.

Despite false claims from critics, it happens that proxy advisory firms agree with corporate management the vast majority of the time. In 2019, ISS’ benchmark voting recommendations for shareholder meetings of U.S. companies were aligned with those of management nearly 80 percent of the time. And where we differ, they were well-formed differences of opinion involving substantive matters to investors, such as director qualifications, board oversight failures, and CEO pay.

Simply put, the leadership at some companies would prefer shareholders be seen and not heard. Meanwhile, U.S. law affords shareholders a voice in a set of fundamental matters — a voice the SEC’s proposed rules will stifle.

Although the comment period on the new SEC regulations closed last month, the aggressive campaign against proxy advisers has continued to flood the airwaves with the same misinformation used to justify this intrusive and disruptive new regulatory regime. Meanwhile, investors and asset managers have spoken out against the new regulations in droves because they know the proposed rules are simply a solution in search of a problem. The SEC should heed the warnings presented by the many 401(k) and pension fund companies entrusted by millions of savers to help them achieve their future financial goals.

The only question that remains is whether the SEC will heed the outcry from real Main Street and institutional investors to reboot or recast these flawed proposed rules, or will it fall victim to a contrived corporate effort to silence them?


Lorraine Kelly is managing director at Institutional Shareholder Services Inc.

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