PIAC to SEC: No clear benefits to increased proxy advisory firm regulations

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Group of Business People Meeting © rawpixel /123RF Stock PhotosThe Pension Investment Association of Canada has written the United States Securities and Exchange Commission, noting there shouldn’t be increased regulations on proxy advisory firms as this could cost pension plans without having clear benefits.

This comes in response to a roundtable the SEC held on the topic in November 2018. Topics on the agenda included proxy voting mechanics and technology, shareholder proposals and the current and future landscape for proxy advisory firms.

“The integrity of the U.S. proxy process is critical to effective public company governance, and we welcome the Commission’s recognition that certain elements of the process may need to be reformed,” the PIAC said in the letter. “It is PIAC’s view that these reforms involve the proxy voting infrastructure and that the SEC should not make changes to current ownership requirements or resubmission thresholds for shareholder proposals or impose additional regulations for proxy advisory firms.”

In addition to the November roundtable, proxy firm regulation has been a longstanding topic of discussion says Kevin Thomas, executive director of the Shareholder Association for Research and Excellence, highlighting there has been an ongoing push to try to get the SEC to regulate proxy advisory firms.

In the PIAC’s open letter, it cited calls for the SEC to require proxy advisory firms to give issuers more opportunity to comment and review vote recommendations and collect and share issuers’ responses to proxy advisory firm recommendations.

“Issuers do have channels to communicate their views on matters put forward for a vote, most notably through proxy materials,” the PIAC said. “They can also voice their objections to proxy advisory firm reports through supplemental proxy filings or direct communication with shareholders. Given already compressed proxy voting timelines, we are wary of changes that would most certainly reduce time we can allocate to our voting analysis and decisions and increase logistical complexity.”

While investors rely on proxy advisory firms to differing degrees, the PIAC noted that the responsibility for using these firms in an appropriate manner rests with investors themselves. “We certainly do not believe that using these services constitute an abdication of a fund’s responsibility for its voting decisions, as some have argued,” the PIAC said.

Proxy advisory services are used as guidelines by investors, not as the final judgement, says Thomas. “They can make their own decisions,” he says. “These are adults and we have to respect their right to make those decisions using available information.”

Higher regulatory costs could potentially lead to a risk of reducing competition among an already limited number of proxy research firms and impose new constraints for entry, noted the PIAC.

Increased regulation can also lead to higher costs for pension plans, the PIAC said. “By providing cost-efficient, quality independent research, analysis and informed proxy voting advice, proxy advisory firms allow large institutional shareholders to efficiently manage proxy voting for thousands of companies in their investment portfolios. More regulation of proxy research firms could increase costs for pension plans, with no clear benefits.”

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