Most of us in Washington are breathing a collective sigh of relief now that Donald Trump is no longer president and we look forward to a government that operates outside the bounds of tweets and impetuous executive actions. President Biden’s day one action of issuing a number of executive orders to pause or end various Trump Administration initiatives is a hopeful manifestation of the return to normalcy.
Q4 2020 hedge fund letters, conferences and more
ERISA Fiduciary Rule 2.0 Was A Right Move
While no one is more anxious to see all evidence of Trump disappear from this city than myself, the new administration should avoid reflexively undoing each and every rule that its predecessor put into law without considering each action on its own merits, because it did manage to get a few things right.
One of those is a 2020 Securities and Exchange Commission rule that requires proxy advisory funds to be more transparent about their activities and to ensure that the data they use to make recommendations is accurate.
While there are numerous rules and executive orders issued in the waning days of the Trump administration that deserved to be paused or pulled back, this rule is not one of them. It represents an attempt to protect ordinary investors from having the management of their retirement funds affected by political exigencies, and ending it could ultimately reduce the wealth of millions of retirees.
Proxy advisors help investment managers determine how to vote their proxies for the hundreds of companies in which they hold stock. Many of these votes are routine--confirming a board of directors is the most common task at most companies’ annual meetings.
However, in recent years activists, frustrated by legislative inertia and a Trump presidency that was almost wholly unconcerned with actually governing, have carried a variety of political battles into the world of corporate governance by proposing resolutions at corporations’ annual meetings that frequently have little to do with value maximization. Any investor who holds a few thousand dollars of stock can offer a resolution, so the barrier to entry is negligible.
Reliance Upon Proxy Advisory Firms
As these proxy votes have become more numerous and more complex--and controversial--investment management firms have come to rely on proxy advisory firms to assist them with these votes. Two entities--Institutional Shareholder Services, or ISS, and Glass, Lewis--have nearly all of the market.
However, some economists have argued that the proxy advisory firms are riddled with conflicts of interest; for instance, ISS has a second business unit that provides governance consulting services to the same companies it rates. The potential for conflicts of interest is not hard to see.
The SEC’s rule requires proxy advisors to disclose possible conflicts of interests. Other non-controversial changes included allowing companies to respond to errors in proxy reports, in order to improve the quality of information received by investors before they vote.
Because the rule was only finalized late in the tenure of the previous administration, Congress now has 60 legislative days to effectively repeal it via the Congressional Review Act. But the CRA is a very blunt tool that should be reserved for regulations with few or no redeeming features to it, since rescission via the act would preclude the SEC from issuing any rule that resembles that one in the future.
Pursue An Amendment
Those who have an issue with some facet of the rule would be better served to pursue some sort of amendment via the ordinary rule process once commissioner nominee Gary Gensler gets confirmed. The alternative is for the industry to return to being effectively unregulated.
What’s more, there is already a lawsuit challenging a part of this rule regarding whether a proxy advisor’s recommendations constitute a “solicitation” to their investor clients. It would be more practical to wait for the lawsuit to be settled, so we know what the final rule will actually do, before embarking on efforts to modify it.
Repealing the rule will do nothing to advance any of the Administration’s climate or social justice goals, and the rule’s move towards improving disclosure by investors should be something all investors welcome. In a period where Congress has a veritable laundry list of urgent tasks it needs to accomplish, rushing to repeal a rule that protects middle class investors would have numerous unintended consequences, including harming the average American investor.
About the Author
Hassan Tyler is a former Legislative Assistant to Senator Joseph Lieberman and an analyst for Capital Policy Analytics, a consulting firm in Washington, DC.
