SEC Commissioner Criticizes Recent SEC Actions Relating to Proxy Advisors

SEC Commissioner Robert J. Jackson Jr. urged the SEC to preserve the current role of proxy advisors in shareholder voting. He asserted that the SEC should focus on the low rate of proxy votes by retail investors and the need for improved technology around proxy voting.

In a public statement, Mr. Jackson criticized the SEC’s recent decision to withdraw two no-action letters providing protection to investment advisers that receive or use proxy advice (see previous coverage). Mr. Jackson contended that there is “little proof” that proxy advisors hold “too much power,” which has been a frequent argument for reform of proxy advisor regulation. The decline of retail investor participation in corporate elections over the last decade is far more worrisome, he said, and should be addressed.

Lofchie Comment: Commissioner Jackson’s statement on proxy advisors raises many questions, particularly when compared to his position on proposed Regulation Best Interest.

In the context of arguing that proposed Regulation Best Interest was insufficiently tough, Mr. Jackson asks: “Will investors understand the implications of what they [read?] . . . To what degree will investors actually use that information when making the crucial decision as to who to trust with their money?”

These concerns seem absent from the Commissioner’s statement on proxy advisors.

If retail investors are essentially not capable of making investment decisions based on recommendations from full-service broker-dealers, as Commissioner Jackson implies, why would these same investors be capable of making informed and significant votes in proxy contests? Put more bluntly, why does it matter whether retail investors vote in proxy contests given their very limited ability to make investment decisions?

As to proxy advisors, Commissioner Jackson says the following: “It’s hard to imagine . . . that investors receiving too much advice about how to vote their shares—advice they are free to, and often do, disregard—should be at the top of our [worries] list.” If the provision of too much proxy advisor advice is not a problem, and investors are readily capable of disregarding it, then why would recommendations provided by full service brokers be problematic?

If full-service broker-dealers are not capable of providing useful recommendations due to their conflicts of interest, why would proxy advisors who may have conflicts of interests be capable of giving impartial investment advice? What conflicts of interest are acceptable for proxy advisors?

Some clarification may be needed to address these apparent inconsistencies.