Examining the SEC's Proxy Advisor Rule
Report for U.S. Chamber of Commerce, November 2020
47 Pages Posted: 16 Nov 2020 Last revised: 17 Nov 2020
Date Written: November 9, 2020
Proxy advisors, which provide advice on corporate voting matters for institutional investor clients, are an increasingly important fixture in modern corporate governance. As proxy advisors have taken on greater visibility and importance in markets in the United States and around the world, scrutiny of the power and influence of proxy advisors has increased commensurately. After a decade-long review and analysis of the role and regulation of proxy advisory businesses, the Securities and Exchange Commission (SEC) promulgated a new rule in July 2020 that is designed to increase the transparency, accuracy, and completeness of the information proxy advisors provide to investors making proxy voting decisions (Final Rule).
This Report for the U.S. Chamber of Commerce examines the SEC’s rulemaking process that led to the Final Rule and how the SEC responded to concerns aired during the public comment period to narrow the scope of the Proposed Rule and shift the regulatory approach to a more flexible, principles-based framework. In Part I, we briefly describe the history of the proxy advisory industry in the United States, as well as the criticisms that have accompanied its rise in significance. Part II turns to the SEC’s efforts to address these criticisms through the Proposed Rule noticed in November 2019. Part III discusses the intense response to this rulemaking from both supporters and critics of the proxy advisory industry. Part IV outlines the various modifications the SEC made in the Final Rule, adopted after careful review of the many comments on the Proposed Rule. Finally, Part V surveys the potential legal challenges to the Final Rule.
The Report concludes that the SEC’s Final Rule is a step in the right direction to address deficiencies of the proxy advisory system. Due to the SEC’s decision to embrace a middle-ground regulatory approach, the strong proponents and strong opponents to the Proposed Rule are likely both dissatisfied with the Final Rule as a matter of policy. As a matter of law, however, it is difficult to argue that the SEC failed to engage in reasoned decisionmaking or otherwise acted outside its statutory mandate in promulgating the Final Rule.
Keywords: SEC, financial regulation, proxy advisor, administrative law
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