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Opening Statement at the Proxy Advisory Services Roundtable

Commissioner Michael S. Piwowar

Dec. 5, 2013

Good morning everyone and thank you for joining us to discuss the role of proxy advisory firms in our capital markets.  Thank you, Chair White, for convening this roundtable. 

I am also grateful to Commissioner Gallagher for his determined efforts to return this important subject to the forefront of our agenda.  In July 2010, we sought public comment on the role of proxy advisory firms within a broad concept release on the proxy system,[1] but subsequent consideration was pushed aside after passage of the Dodd-Frank Act later that month.  Yet, Dodd-Frank provisions, such as mandatory say-on-pay votes, make proxy advisory firms potentially even more influential, and thus the time is right for us to engage in today’s discussion. 

During my first tour at the Commission, I became aware of the role played by proxy voting advice from a research project conducted by four Commission economists, including one of our distinguished panelists, Mark Chen, who returns to the Commission today from Georgia State.[2]  From their research, I learned that a proxy advisory firm vote recommendation is a strong predictor of vote outcome.  Since that time, I have become increasingly concerned that proxy advisory firms may exercise outsized influence on shareholder voting.  As an economist, my concern is heightened by the lack of competition in the proxy advisory market, which appears to be a stable duopoly preserved by near-impenetrable barriers for new entrants. 

In addition to the lack of competition in this market, I am also concerned by the potential over-reliance on proxy advisory firms.  I see many similarities between the current situation with proxy advisory firms and the pre-crisis situation with credit rating agencies, including an unhealthy over-reliance on their recommendations by investors.  I look forward to hearing our panelists’ views on the extent to which the Commission’s own actions have unintentionally led to this over-reliance. In particular, I hope participants will express their views on two related Commission actions in this area.  First, the Commission issued a release in 2003 stating that “the duty of care requires an adviser with voting authority to monitor corporate actions and vote proxies,” which may have created a regulatory compliance mandate, absent extra-ordinary circumstances, to vote every share.[3]  Second, Commission staff subsequently issued no-action letters that seem to have had the unintended effect of institutionalizing the use of proxy advisory firms to vote shares in compliance with this perceived mandate.[4]

By requiring advisers to vote on every single matter – irrespective of whether such vote would impact the performance of investment portfolios – our previous actions may have unintentionally turned shareholding voting into a regulatory compliance issue, rather than one focused on the benefits for investors.  This is an unfortunate result, not merely because it may have served to entrench an anti-competitive duopoly, but more importantly because it is inconsistent with our investor protection mandate.  For these reasons, we should rectify this situation immediately.

Today’s roundtable – and the public comment file that will be opened in conjunction with it – will provide key facts to inform our future decision-making regarding needed reforms in this area.  I would like to work with my fellow Commissioners and the staff to continue our momentum on this topic and other important topics – such as the tick-size pilot program for small cap stocks – that are crucial to our capital markets, even if not mandated by Dodd-Frank.

Thank you.   

[1]  Concept Release on the U.S. Proxy System, Exchange Act Rel. No. 62495, 75 FR 42982 (Jul. 22, 2010).

[2]  Cindy R. Alexander, Mark A. Chen, Duane J. Seppi, and Chester S. Spatt, Interim News and the Role of Proxy Voting Advice, 23 The Review of Financial Studies 4419 (2010).

[3]  Proxy Voting by Investment Advisers, Advisers Act Rel. No. 2106, 68 FR 6585 (Feb. 7, 2003).

[4]  Egan-Jones Proxy Services, SEC Staff No-Action Letter (May 27, 2004); Institutional Shareholder Services, Inc., SEC Staff No-Action Letter (Sep. 15, 2004).

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