SEC ignores investor objections to implement new proxy rules

Despite claims from some of the world’s largest investors that moves to impose new proxy voting regulations would increase costs, the US financial regulator has pressed ahead with a series of new laws governing shareholder voting rights.

On July 22, The Securities and Exchange Commission voted 3-1 to pass a raft of new measures focusing on how investors and their investment managers vote the shares of companies held in their funds.

The SEC said: “The amendments aim to facilitate the ability of those who use proxy voting advice—investors and others who vote on investors’ behalf—to make informed voting decisions without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice.”

A 246-page document outlined the changes investors in US companies should expect to see in the 2022 voting season, due to the time that will need to be taken to implement the changes.

Robo-voting under the spotlight

Amongst the changes is the requirement for investment managers to disable their automatic voting systems – so-called “robo-voting” – in certain circumstances, in favour of implementing a manual process.

This, the SEC said, would prevent managers from running a “set and forget” regime for voting on shares of companies within their portfolios.

Commissioner Elad L Roisman said he was “sceptical of how heavy reliance on such mechanistic features, in many instances, can be consistent with the duties investment advisers undertake as fiduciaries to their clients”.

He also questioned whether “the operations and effects of automated voting mechanisms are understood by the underlying investors who hire investment advisers to vote on their behalf”.

Therefore, the amendments would see more frequent updates from proxy advice firms – including responses to their initial recommendations from the company – that would need to be fed into a manager’s decision on how to vote.

The SEC’s new rules also require managers to fully inform their clients on how they came to the decision on how to vote the several hundreds of thousands of shares within their portfolios.

Investors call foul on SEC proxy proposals

Several of the amendments were called out by leading investors who had responded to a consultation on the then-proposals.

Both the largest Californian public retirement systems (CalPERS), along with several others from around the country, said the new rules would create more cost for them and other end investors.

Based on the SEC’s documentation, these investors said the amendments would “interfere with the relationship between investors and proxy voting advice businesses in a way that would increase costs and complexity”.

Additionally, CalPERS and Washington State Investment Board expressed concern that some of the amendments could have “a chilling effect on shareholder communication”.

Proxy rules are “unwarranted, unwanted, and unworkable”

The only commissioner to vote against the raft of new amendments was the sole Democrat on the committee Allison Herren Lee.

In her published comment responding to the pass, she said shareholders faced higher costs for less management accountability.

While she conceded that some of the proposed rules had been reconsidered, following “public outcry”, she concluded they were ultimately “unwarranted, unwanted, and unworkable”.

“The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations,” she said. “No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.”

One of Herren Lee’s major objections was to how the new system would work.

Additional layers of scrutiny and back-and-forth between proxy advisers, companies and investment managers would slow down the system and ultimately increase the cost to those paying for the service.

“The bottom line is this: even if certain defects in the proposal have been mitigated, the final rules will still make it harder and more costly for shareholders to cast their votes, and to do so in reliance on independent advice,” she said. “That means it will be harder for shareholders to make their voices heard—and harder for them to hold management accountable.”