Shortcomings
in SEC proposals exposed

Minerva Analytics has written a no-holds-barred letter to the US Securities and Exchange Commission (SEC) stressing several major issues with the regulator’s proposed proxy adviser rules.

The letter,
penned by Minerva CEO Sarah Wilson, makes clear that the rule amendments would
have “significant, far-reaching and harmful impacts” on the US proxy landscape,
damaging investor rights and harming both service providers and issuers.

The SEC’s proposals have already been criticised for serving the interests of big corporates who want to silence shareholders. Wilson stresses that the proxy rules would, in any normal circumstances, be thrown out of court.

“We contend
that the judge would have no hesitation in terminating the proceedings on the
grounds that the action is nothing less than vexatious litigation brought by a
very powerful constituency designed solely to harass and intimidate a small
handful of hard-working analysts rather than to address a fundamental legal
failing,” she explains.

The letter
documents a long list of compelling objections to the SEC’s short-sighted rule
proposals. These include a belief that the rules would severely limit shareholders’
property rights and interfere with their entitlement to receive research untampered
by third party interference.

The rule changes, if passed, would breach fundamental regulations and principles, the letter asserts, including putting proxy service providers in breach of fiduciary responsibilities to clients.

“We believe
that the highly-charged and well-funded political campaign that has been waged
against proxy advisors (and by extension, their clients) is based not just on
low-quality ‘academic research’ but on a deliberately ill-conceived
understanding of the role of service providers in the stewardship process,”
Wilson says.

The missive boldly
refutes recent claims made against proxy analysts, which CEO Wilson describes
as “entirely without foundation”.

One major claim
dismissed is that investors need “protecting” from their service providers.

“This is
probably the most extraordinary allegation of all,” she says. “Let us not be
squeamish about the real meaning of such statements. Who benefits from the
passage of these regulations?

“Who is
calling for an increased regulatory burden? Certainly not investors who will
end up paying considerably higher fees if these rules are passed.”

Minerva also
puts paid to the myth that ‘proxy research is full of errors’, and that votes
are “incorrect” or “inaccurate”.

“While data
can be inaccurate, if it were true that proxy advisor recommendations were
“full of errors”, that would mean that the 95% of votes that receive upwards of
95% support have also been made in error. How can this be?

“Or is it perhaps that CEOs and boards just simply don’t like to hear the bad news from their providers of capital that their star CEO isn’t worth it. In this regard, Adam Neumann, the founder and lately CEO of WeWork, springs to mind.”

The WeWork
reference pertains to events from September when CEO Neumann was ousted from the company
after its IPO collapsed, in part due to serious questions over his leadership.
A WeWork shareholder subsequently took the company to court over Neumann’s
$1.7bn leaving package.

Minerva also takes
aim at the SEC for not understanding the role of proxy analysts – refuting the
claim that they are investment ‘advisors’.

“Minerva does
not call itself a proxy advisor/adviser as we do not believe this accurately
represents the role we fulfil and is too easily confused with the term
investment advisor/er. Rather we have always called ourselves a proxy voting
agency…because we act on the instructions of our clients rather than a
“Principal” acting on our own account.”

In addition, the
company strongly rebuts the assertion that the SEC’s rules will bolster competition
– warning that it will do the exact opposite.

“The proposed
rules will not, as argued by the pro-regulation lobby, enhance competition;
they will kill it outright.

“As things stand, the proposed regulations will create an even more hostile and lopsided operating environment for proxy research….as such it is highly unlikely that Minerva will establish a presence in the US to create a challenger vendor.”

While the
letter concedes that the proxy market has previously missed the mark in some areas,
Minerva believes these would be better addressed by tackling the real problem
in the US proxy system – namely its ‘dysfunctional plumbing’.

“The proxy
system is indeed broken. That is to say, the proxy plumbing is broken, not
research. Issuers and shareholders collectively pay far too much for
inefficiency; there are multiple layers of obscure and opaque fees;
confidentiality is not assured, and the market has been monopolised by one
dominant intermediary which prevents freedom of choice.

“The SEC is
presented once more with an historic opportunity to bring the US proxy plumbing
into the 21st century and once more it has been misdirected,” the letter
concludes.

These rule
changes include making proxy advisory firms supply companies with advance
copies of their advice before it goes to investors. Companies would be able to
review these documents so they can “identify errors in the proxy voting advice.

The regulator is also proposing to increase the number of years a
shareholder must hold a stock before they can require
a company to include a proposal in its proxy statement, while it’s also aiming
to increase the levels of shareholder support a proposal must receive to be
eligible for resubmission.