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Automatic Voting, Investor Protection, and the SEC’s Proxy Firm Rule

Job Title: Director, Tax & Domestic Economic Policy

Current Employer: National Association of Manufacturers

Bio: Charles Crain is the Director of Tax & Domestic Economic Policy at the National Association of Manufacturers. The NAM is the largest manufacturing trade association in the United States, representing small and large manufacturers in every industrial sector and in all 50 states. In his role at the NAM, Charles leads the organization’s policy and advocacy work on corporate governance and financial services issues; particular areas of focus include the proxy process, shareholder engagement, capital formation, and public company reporting.

The Securities and Exchange Commission has been wrestling with how to bring transparency and accountability to the proxy advisory firm industry—and in so doing protect investors and companies alike from their outsized influence—for more than a decade. Now that the SEC is on the cusp of finalizing the groundbreaking rule it proposed last November, three major themes have emerged:

  1. Proxy firms should be required to disclose information about their substantial conflicts of interest and unregulated methodologies so the market can fairly judge their advice.
  2. Companies should have an opportunity to review proxy firm reports and provide feedback to correct errors, highlight methodological weaknesses, and notify investors of significant disagreements that could impact voting decisions.
  3. Consistent with their fiduciary duty to investors, asset managers should make proactive, informed proxy voting decisions based on the data available to them.

The SEC’s proposed rule provides for robust disclosure of proxy firm conflicts of interest and methodologies—vital information for investors and issuers to understand the firms’ recommendations. These disclosures are an important cornerstone of the proposed rule, and there have not been any indications that the Commission is re-thinking these requirements.

Reports have surfaced, however, that the SEC is considering how its proposed mechanism for issuer review and feedback will work once the proxy firm rule is finalized. According to a speech given by SEC Commissioner Elad Roisman in early March, the timing of issuer review may change in response to feedback received during the SEC’s notice-and-comment process. While the review timeline laid out in the proposed rule was designed to alleviate timing pressures during the busy proxy season (and even included specific incentives for companies to file their proxy statements as early as possible), the timing of the process matters far less than its substance.

All market actors (proxy firms, issuers, asset managers, and investors) will benefit from companies having the opportunity to both review proxy firm reports and communicate any concerns to investors. Under the proposed rule, this review would take place prior to the proxy firm report being published; any company feedback would be distributed to investors via hyperlink along with the proxy firm’s recommendations. If the commission moves to contemporaneous review instead (in other words, if investors and issuers receive the proxy firm report at the same time and review it concurrently), the SEC must allow for (A.) a process by which a company’s response statement can be distributed to investors before votes are cast and (B.) voting reforms that allow investors to review a company’s response alongside the proxy firm’s recommendation. The former is easily accomplished—similar to the hyperlink requirement in the proposed rule, an issuer’s response statement could simply be distributed to investors via email or the proxy firm’s voting platform before votes are cast. The latter raises a variety of issues related to the all-too-common practice of “robo-voting;” thankfully, the SEC is considering several “speed bump” proposals to address these problematic voting procedures.

“Robo-voting” is the unofficial term for the practice by which proxy advisory firms automatically cast votes on their clients’ behalf—in line with the proxy firm’s recommendations, and without any review by the asset manager. As Roisman has noted, these “set-it-and-forget-it” mechanisms are generally not well understood by the investors whose shares are being voted, nor are they always consistent with an investment adviser’s fiduciary duties, particularly in “idiosyncratic and contested” matters.

Robo-voting is damaging enough at present, depriving investors of the opportunity to review proxy firm recommendations and company responses before votes are cast. But the problem would be exponentially worse if it were not addressed in the context of the SEC’s proxy firm rule. The proposed rule includes a variety of important disclosures about proxy firms’ conflicts of interest and methodologies, as well as a process for companies to share with investors their responses to the firms’ recommendations. As discussed, these reforms seem likely to be included in the final rule as well. But set-it-and-forget-it voting undercuts these vital reforms by ensuring that proxy votes will continue to be cast before investors have the opportunity to review any of the new disclosures. This will be especially true if the Commission moves to contemporaneous review—if investors and issuers are reviewing proxy firm reports at the same time, there must be reforms to the automatic submission process to allow for fulsome review to take place and informed voting decisions to be made.

The proposed rule contemplates these necessary reforms, versions of which Commissioner Roisman referred to in his speech as a “speed bump.” The SEC’s proposing release requested comment on three distinct robo-voting reforms:

  • Requiring proxy voting advice businesses to structure their voting platforms to disable the automatic submission of votes in instances where a registrant has submitted a response to the voting advice
  • Requiring proxy voting advice businesses to disable the automatic submission of votes unless a client of a proxy voting advice business clicks on the hyperlink and/or accesses the registrant’s (or certain other soliciting persons’) response, if one has been provided
  • Requiring proxy voting advice businesses to refrain from pre-populating voting choices for clients once a registrant or other soliciting person has submitted a response

Any of these reforms, or a combination thereof, would be a welcome change from the robo-voting status quo. As the NAM said in our comment letter in response to the proposed rule, “A targeted limitation on automatic voting that ensures that asset managers actually review the new information made available to them by the proposal—particularly in contested and controversial cases—would significantly strengthen the proposed rule’s investor protections.” Combined with the new disclosures around conflicts and methodologies and the proposed issuer review and feedback process, targeted changes to proxy firms’ set-it-and-forget-it voting mechanisms would protect investors by ensuring that asset managers have the time and ability to review material information and are encouraged to cast an informed vote on behalf of the investors they represent.

The SEC is on the cusp of finalizing its rule to rein in proxy advisory firms’ outsized influence and protect the everyday investors whose shares are voted based on their advice. Returning to the themes discussed above, it seems clear that the final rule will include new disclosures relating to the firms’ conflicts of interest and one-size-fits-all methodologies, as well as a robust process for issuer engagement and feedback—both significant, vital reforms that are responsive to the input the SEC has received over the last decade. The SEC has also made clear that asset managers should make informed proxy voting decisions, both through its August 2019 guidance on the subject and in the proposed rule itself. Finalizing the disclosure and feedback reforms in the rule, and bolstering them via the proposing release’s robo-voting recommendations, would represent a significant step forward in enhancing the transparency, accuracy, and reliability of the proxy process.

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