SEC's Investor Advocate Speaks Against Proxy Advisory Firm Regulation

Executive Pay Legislation and Regulation, Proxy Advisory Firms

At the recent annual SEC Speaks conference, SEC Investor Advocate Rick Fleming expressed his opposition to Commission efforts to address concerns regarding proxy advisory firms (such as conflicts of interest) stating that “the investors who are paying for [proxy advisory firm] service[s] are not the ones who are expressing those concerns.”

Mandated by Dodd-Frank, the Office of Investor Advocate ensures the needs of investors are considered in SEC decision-making.  Mr. Fleming is the first Investor Advocate.  Although he reports to SEC Chair Jay Clayton, the Office also submits reports directly to Congress without the Commission's review.

Investors "wary" of changes advocated by companies:  In his remarks, Mr. Fleming noted that many investors are “wary” about efforts to regulate proxy advisory firms because they rely on them to satisfy fiduciary voting obligations “in a cost-effective way.”  Further, Mr. Fleming emphasized that investors are not the ones calling for proxy advisory firm regulation.  Rather, he stated that companies are doing so because “proxy advisors have given asset managers an efficient way to exercise much closer oversight of the companies in their portfolios, and those companies don’t like it.”

Proxy advisory firms are not perfect, Mr. Fleming admits, but he states that the SEC should be spending its time on other priorities.  Mr. Fleming did not address conflicts of interest or the myriad of other issues plaguing the proxy advisory firm industry.  Although he acknowledged the allegations of failure of investors to discharge their fiduciary duties by using the recommendations of proxy advisory firms without sufficient oversight, he argued that SEC rules already provide sufficient relief, an argument advocates for reform have challenged.

Comments underscore importance of business and investor voices in the debate:  As the Association's Center On Executive Compensation commented in its submission to SEC on the issue, the extreme demands of proxy season, as well as procedural and structural defects in the proxy advisory firm industry, make it difficult for institutional investors and investment advisors to hold proxy advisory firms accountable for conflicts of interest, errors, and procedural shortcomings.  The fact that the Investor Advocate chose to highlight the issue reinforces the well-reported notion that the SEC is considering action in this area.