Testimony on “Oversight of the Securities and Exchange Commission” Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs

Washington D.C.
Dec. 10, 2019
Jay Clayton

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Improving the Proxy Process

Improving the transparency, accountability and functionality of the proxy process is another significant Commission initiative designed to serve the interests of our long-term Main Street investors.  In the past two decades, the proxy process has become one of both (1) increased complexity and (2) importance to investors, issuers and investment advisers.  Commission rule changes, state law changes, corporate governance practices, technology and other factors have all increased the interest in, and significance of, shareholder engagement and shareholder voting in our public capital markets.  During this time, investment advisers have also assumed a much greater role in our marketplace and, consequently, a greater role in the area of beneficial owner- shareholder-company engagement. [10]  Last fall, the Commission held a roundtable on improving the proxy process that brought together investors, issuers and other market participants who raised and discussed many issues in this area. [11]  We have also received significant public comment and helpful suggestions to improve our proxy voting system. [12]  While there are a wide range of viewpoints on these topics, one thing is clear—there is significant interest in modernizing and improving the proxy process.  The Commission has taken a number of concrete steps during this year to increase transparency, accountability and functionality in the area of proxy voting.

Building on decades of experience and extensive engagement, in August 2019, the Commission took an important first step in strengthening the integrity of the proxy voting process. [13]  Specifically, the Commission issued guidance to assist investment advisers in establishing and fulfilling their proxy voting responsibilities.  Voting is a key component of shareholder engagement and investing generally.  Investment advisers are fiduciaries and owe each of their clients duties of care and loyalty with respect to actions taken on the clients’ behalf, including proxy voting.  The guidance clarifies how an investment adviser’s fiduciary duty and Rule 206(4)-6 under the Advisers Act relate to an adviser’s proxy voting on behalf of clients, including if the investment adviser retains a proxy voting advice business.  On the same date, the Commission issued an interpretation that proxy voting advice provided by proxy voting advice businesses generally constitutes a “solicitation” under the federal proxy rules and provided related guidance about the application of the proxy antifraud rule to proxy voting advice.

Last month, the Commission continued its efforts to improve the proxy voting system by proposing amendments to the rules governing proxy solicitations to help ensure that investors who use proxy voting advice businesses receive accurate, transparent and complete information on which to base their voting decisions. [14]  The proposed amendments would, among other things, enhance the quality of the disclosure about material conflicts of interests that proxy voting advice businesses provide their clients.  The proposal would also provide registrants and other soliciting persons an opportunity to review and provide feedback on proxy voting advice before it is issued.  Importantly, though, the proposed process would leave the content of the proxy voting advice entirely within the discretion of the proxy voting advice business, which will be under no obligation to make any revisions to the proxy voting advice simply because an issuer provides comments on the advice.  Additionally, the proposal would not create a new liability regime for proxy voting advice businesses.

On the same date, the Commission also proposed amendments to modernize the rule that governs the process for shareholder proposals to be included in the company’s proxy statement. [15]   The proposed amendments would replace the current ownership requirements with a tiered approach that would provide three options for demonstrating an ownership stake through a combination of the amount of securities owned and length of time held.  The proposal maintains the long-standing $2,000 minimum ownership threshold for shareholders provided they have owned their shares for three or more years.  The proposed amendments also would amend the current resubmission thresholds of 3, 6, and 10 percent—which have not been updated since 1954—to 5, 15, and 25 percent, respectively, and allow companies to exclude shareholder proposals under certain circumstances where shareholder support for the matter has declined.  Said another way, if a shareholder cannot get more than 1 in 20—or 5 percent—of its fellow shareholders to support its proposal in the first year, or more than 1 in 4 shareholders after three years of proxy inclusion within a five-year period, that shareholder proposal would be subject to a limited, company-specific time out under the proposed rules. [16]

Our proposals are based on fundamental tenets of our federal securities laws, including providing investors with information that is accurate, not misleading and decision useful. [17]  Commission attention, as well as increased transparency and accountability, are long overdue.  We welcome additional input on these matters, including suggestions for improving our proposals.  More generally, I expect our work to modernize and improve the proxy process to continue. [18]

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[10] For example, there are now over 13,000 SEC-registered investment advisers with over $84 trillion in assets under management, and over 8,000 of these investment advisers provide services to retail investors.

[11] See Spotlight on the Proxy Process, available at  https://www.sec.gov/proxy-roundtable-2018.

[12] See Comments on Statement Announcing SEC Staff Roundtable on the Proxy Process, available at  https://www.sec.gov/comments/4-725/4-725.htm.

[13] See Press Release 2019-158, SEC Clarifies Investment Advisers’ Proxy Voting Responsibilities and Application of Proxy Rules to Voting Advice (Aug. 21, 2019), available at  https://www.sec.gov/news/press-release/2019-158.

[14] See Press Release 2019-231, SEC Proposes Rule Amendments to Improve Accuracy and Transparency of Proxy Voting Advice (Nov. 5, 2019), available at  https://www.sec.gov/news/press-release/2019-231.

[15] See Press Release 2019-232, SEC Proposes Amendments to Modernize Shareholder Proposal Rule (Nov. 5, 2019), available at  https://www.sec.gov/news/press-release/2019-232.

[16] Please note that this “time out” does not mean that the shareholder proposal cannot come up again in the future or be submitted to a different company.

[17] See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (“An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.).

[18] See U.S. Sec. and Exch. Comm’n Agency Rule List (Fall 2019), available at  https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=3235. [hereinafter Fall 2019 Regulatory Flexibility Agenda].

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