When Institutional Shareholder Services (ISS) sued the Securities and Exchange Commission (SEC) last week to block guidance issued in August from coming into effect, it was aware that the changes it was combatting were, in the words of SEC Chair Jay Clayton, “a first step.” On Tuesday, the SEC proposed a rule confirming its interpretation of proxy voting advisers as participants in solicitations, imposing a mandatory review period for issuers and shareholder proponents, and allowing the same to tack comments expressing their views onto the proxy adviser recommendations. A 60-day comment period will be held before the rule is finalized and voted on in January.
The SEC Commissioner who led the effort, Elad Roisman, said the goal was to “move toward a sensible modernization of our rules,” while fellow Commissioner Robert Jackson pointed out that corporate insiders would be buoyed: “firms recommending a vote against executives must now give their analysis to management, include executives’ objections in their final report, and risk federal securities litigation over their methodology,” he said.
SEC on 60-day comment period
The grand bargain Republicans – Commissioners Roisman, Clayton and Hester Peirce included – hoped to secure doesn’t look so grand for the proxy advisers, who will have new costs imposed on them with clients further discouraged from signing up. Proxy advisers already provide limited opportunities for feedback to the companies that are the subjects of their reports but there is anguish that the proposed changes would mean a five-day delay to clients receiving their research.
In some cases, that could mean 10 or 11 calendar days to process the information and come to a voting conclusion. Even those investors who say they use proxy advisers only for research may be disturbed by that thought. Investor rights groups will undoubtedly campaign against the changes, but the most influential voices belong to the large institutional investors that have stewardship teams. Any deviation from the Council of Institutional Investors’ line on their part could fracture the coalition.
Other SEC proposals
Separately, the SEC also proposed new thresholds for shareholder proposals: hold the current minimum stake of $2,000 for three years, or a higher $25,000 position for one year. Proponents will also have to meet with management teams between 10 and 30 days after submission – to encourage negotiation over the achievement of their goals by other means. Resubmission thresholds for proposals that fail to gather steadily increasing support or experience falling support over a three-year period will also be stiffened. Again, the proposed rule is out for a 60-day comment period.
Quote of the week comes from Voce Capital Management, which has certainly recovered from any campaign-induced hangover at Argo Group International following an SEC subpoena into the insurance company’s executive compensation and the retirement of CEO Mark Watson. This week, the company announced that Watson would pay back certain undisclosed expenses and put restricted shares in escrow pending an investigation, although he will remain an employee through the end of the year and walk away with vested shares and around $2.5 million in separation payments. Incensed, Voce issued a press release hinting it would continue to push for further board changes and charging:
"The gratuitous $7.6 million windfall for ‘retiring’ under these clouded circumstances is unconscionable and appears designed to serve the interests of the board rather than those of shareholders."