Jan. 31, 2020
Comments on Proposed Rule S7-23-19 Eric Miller, Rideau Potomac Strategy Group Attn.: Vanessa A. Countryman, Secretary, Securities and Exchange Commission (SEC) I am currently President of Rideau Potomac Strategy Group and a Global Fellow at the Woodrow Wilson Center. I work on corporate governance and financial regulatory policy domestically and internationally and have written previously on the issue of proxy advisory firms and practices. The SEC’s proposed actions in this rulemaking are crucially important to the medium-term competitiveness of U.S. capital markets and the U.S. economy more broadly. I therefore wanted to share for the record the conclusions of a recent article I published in The Hill on the SEC assessment of the role and conduct of proxy advisory firms for consideration in this process. -- Capital markets are the fuel that make the American economy run. Markets work best when there are clear rules of the road and accountabilities for how investors, advisors and companies raising capital should acquit themselves. One of the most significant processes underway in Washington at present is the move by the Securities and Exchange Commission (SEC) to overhaul the rules governing the conduct of proxy advisory firms. These firms play an important role in providing institutional investors with data, research, analysis and, importantly, recommendations on how to vote on management and shareholder proposals at the annual meetings of public companies. This gives proxy advisory firms a significant role in influencing many aspects of corporate governance. The emergence of proxy advisory firms over the past two decades stems in largest part from a desire by institutional investors to better understand the companies they are investing in. While proxy advisors have fulfilled this function, there have also been substantial concerns about errors and a lack of transparency in their reports and conflicts of interest in their recommendations. Prominent groups such as the U.S. Chamber of Commerce have urged the SEC to bring in new rules governing proxy advisory firms. They have lamented that their advice is not linked to with shareholder returns and is not providing “decision useful” information to investors. In August, the SEC heeded this call and adopted new guidance designed to deal with the ethical and quality concerns around proxy advisors. Its guidance covered a variety of practices. For example, it made proxy advisors liable for false or misleading statements in their advice to investors. It clarified that asset managers must take steps to ensure that proxy advisors’ advice is in line with their clients’ interests before voting with the recommendations. The guidance also urged proxy advisors to disclose more information about how they craft their recommendations. While policies such as prohibiting one from knowingly making false statements seem basic and something that all market players should embrace, certain large proxy advisors are fighting this vigorously. ISS, for example, stated that the requirements in the guidance would “hamper (its) ability to deliver independent, timely and accurate research, data, insights and perspectives to aid in the discharge of their fiduciary duties.” This certain appears to be a call to be able to operate free of all scrutiny and legal liability. Another area of SEC consideration is the ability of companies to provide feedback and correct errors in proxy advisory reports. This seems so basic, but still some proxy advisors are fighting it. Ironically, large American proxy advisors already comply with similar rules in France, where proxy firms are required to give companies an opportunity to review the factual accuracy of the data used in pending proxy analysis. One such firm publicly stated that it “believes (the) review process helps improving the accuracy and quality of its analyses, an outcome that is in the best interests of (everyone).” Their French subsidiary has this right. Moreover, Glass Lewis, the second largest U.S. proxy advisory firm, has proactively launched a pilot Report Feedback Statement (RFS) service to allow companies and shareholder proponents to comment on their analysis and flag any errors or inconsistencies. Glass Lewis seems to be taking the view that feedback and transparency lead to a better product. Proxy advisors can usefully contribute to the vitality of American capital markets. Yet, the substantial conflicts of interest and a willingness to fight for a right to impunity, including by suing their regulator, undermines this role. All actors in a functional financial system must be accountable. -- I would be pleased to meet with SEC staff and/or commissioners if they have questions or would otherwise like to discuss the points set forth above. Regards, Eric Miller President, Rideau Potomac Strategy Group Global Fellow, Woodrow Wilson Center