Feb. 03, 2020
February 3, 2020
Vanessa A. Countryman
Secretary
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549
Re: Comments on Proposed Rule: Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice
Release No. 34-87457; File No. S7-22-19
Dear Ms. Countryman:
I am the founder of Proxy Impact, a small consulting firm that provides proxy voting and shareholder advocacy services to individuals and organizations. Our goal is to help shareholders use their vice to improve corporate governance and risk assessment particularly in regards to environmental and social impacts.
I would like to submit the following comments regarding the Securities and Exchange Commission (SEC) Release No. 34-87457.
Proxy Impact urges the SEC to withdraw the Proposed Rule because it is arbitrary, would negatively impact small businesses thereby reducing competition, and would be costly and burdensome to implement. The Proposed Rule will undermine the ability of long-term investors we have business relationships with, to access skilled support for proxy voting. Furthermore, the rule-making process for the proposed release appears to be partisan based, lacks factual evidence and is unrealistic given the realities of a condensed proxy season.
The Proposed Rule Would Have Unintended Consequences on our Proxy Voting Services
Proxy Impact is a small entity that provides a service to investors who seek a partner to carry out their proxy voting. Our proxy voting clients primarily include values-driven individuals. We provide an affordable option to those investors that may not otherwise have the capacity or resources to vote their proxies in a skilled way with expertise and ensure alignment with their investment priorities and values.
Proxy Impact applies our proprietary voting guidelines which incorporate environmental, social and sustainable governance (ESG) investing principles linked to long-term shareholder value creation. Proxy Impact executes votes for our clients using an electronic voting platform. We do all of our research in-house by reviewing and analyzing proxy statements and other corporate filings. We do not purchase external voting advice or recommendations, as our analysis of corporate filings allows for informed voting decisions about elections of directors, compensation packages, auditors, and other management and shareholder proposals.
Proxy Impact is concerned that the Proposed Rule would have unintended consequences that would place a burden on investors that rely on proxy advisory services such as ours. The Proposed Rule appears to be in conflict with the SEC’s purported objectives to enable investors to receive more accurate, transparent, and complete information or to enhance the accuracy and reliability of the proxy voting advice available to investors at the time they are casting votes. Instead, the Proposed Rule will result in undue costs or delays that could adversely affect the timely provision of proxy voting advice and services. The proposed changes would not improve our clients’ ability to make informed voting decisions. In fact, they would have the opposite effect. We cast votes on behalf of our clients directly, and the additional reporting proposed by the rule would decrease our ability to efficiently cast votes in a timely manner.
The increased reporting burden and proposed feedback and review process may interfere with Proxy Impact’s capacity to sustain our proxy voting service. It will put small entities at a disadvantage, which would ultimately reduce competition of proxy voting services. This limits investors’ ability to seek a provider to vote their proxies, whether they are selecting an entity due to the cost of services or the ability to cast votes in alignment with their values. When faced with fewer options for partners to support their proxy voting, some investors may not vote at all, which will limit shareholder voice and participation in corporate governance.
The proposed changes would have a negative impact on competition in the proxy advisory industry, as it would create disadvantages to existing small entities and barriers to entry for new or other small firms to enter the business in the first place. This would create market concentration in the proxy advisory industry, provide fewer options for investors, and potentially lead to investors refraining from proxy voting altogether due to the large number of votes to be cast in a short period of time, which limits shareholder voice.
Proxy Impact Urges the SEC to Include An Exemption for Small Entities and/or 501(c)(3) organizations
As a small entity these rules would present a significant burden which would adversely impact our clients who rely on our proxy voting service. Proxy Impact urges the SEC to include an exemption for small entities or for non-profit organizations. Small entities would face significant resource and capacity burdens if required to implement the proposed changes. It is not clear how the SEC determined the costs of compliance, and it appears these costs and the time required to implement the changes have been underestimated with respect to small entities with few staff members. The efficiency of our proxy voting process would be significantly reduced if we were required to allow companies a 3 to 5 day advance notice of our vote and if we were to comply with the additional reporting requirements.
Because it appears the rule is primarily focused on five firms identified by the SEC, the applicability to small entities also lacks clarity, leaving room for confusion or misinterpretation. This may complicate the ability of the SEC to achieve compliance with the rule. It appears that the SEC drafted this rule without a complete understanding of the different types of actors who offer proxy voting services, including individual consultants. It has therefore failed to account for its impacts or create guidelines more appropriate for small entities that operate using different processes than the one described in the Proposed Rule. The Proposed Rule was written without consultation with small entities who have a stake in these rules, and may not have taken into account the perspective of other proxy voting advice businesses.
In addition, annual revenues or number of proxy voting clients may be appropriate metrics to consider when considering exemptions or accommodations for small entities. There is no evidence to suggest that institutional investors would be less likely to work with a proxy voting advice business based on whether or not they qualify for an exemption.
We recommend that an exclusion be included so that small entities and entities that are 501(c)(3) tax exempt organizations be provided so that these types of organizations are not required to comply.
Request for Extended Transition Period
While we believe small entities should be exempted from compliance, if they are not, at minimum, small entities should be provided accommodations, such as an extended timeframe for compliance. As a small entity, we do not yet have the systems in place that the Proposed Rule calls for and would face significant challenges in developing systems and processes to implement the proposed amendments within one year. Challenges may include insufficient staffing to fulfill the increased reporting requirements and lack of technology or systems to comply with the proposed review and feedback process. These changes may result in additional costs to our organization and in turn the investors to whom we provide proxy voting services. The proposed transition period of one year is far too short given the magnitude of new requirements proxy voting advice businesses.
Proxy Impact Recommends Removing the Proposed Review and Feedback Process
The Proposed Rule presents logistical challenges for some voting arrangements.
Registrants should not be permitted an opportunity to review and provide feedback on voting advice before it is provided to clients. First and foremost, this is a violation of the right to free speech. I cannot think of any other industry where an outside entity is given the right to comment on a company’s product and that those comments are required to be passed on to the company’s clients.
On a particle level this would create a burdensome process for both registrants and proxy voting advice businesses. The proposed timeframe may prevent proxy voting advice businesses from casting their votes in a timely way, which negatively impacts investors. If investors are unable to vote their proxies on time, this takes away investors’ rights to weigh in on the items to be voted at a company’s annual shareholder meeting, stifling investor voice. It may also result in companies failing to reach a quorum on voting items and require companies to repeat a vote, which would add costs to all stakeholders.
Our Proxy Voting service does not publish voting advice, instead we cast vote automatically in alignment with our guidelines. Therefore, Proxy Impact is not at risk of publishing factual errors about companies. We also disagree with the rationale around factual inaccuracies and do not believe it has merit. While an issuer may not agree with a provider’s voting recommendations or analysis, this does not mean there are factual errors or methodological weaknesses, as much as it suggests there may be differences of opinion or analysis between management and proxy advisors.
Economic Analysis
Institutional investors without the capacity to vote themselves may not have any alternatives to proxy voting advice businesses. Without the support of these businesses, investors may make less informed voting decisions or not be able to vote at all.
The Proposed Rule changes do not benefit investors. Burdensome reporting requirements on top of heavy voting responsibilities within tight timelines, in addition to the review and feedback process would result in a more time-consuming and costly process for the proxy voting advice businesses, which would create delays and costs for investor clients.
Paperwork Reduction Act Analysis
The proposed collections of information do not have practical utility for the SEC. The SEC greatly underestimated the burden of the proposed collection of information. It appears the calculations estimating additional time and cost burdens are not based on data gathered from proxy voting advice businesses, and are therefore not representative of actual impacts.
Proxy Impact Recommends Leaving in Place Existing Filing and Resubmission Thresholds
I am the founder and co-author of an annual Proxy Preview which provides comprehensive data on hundreds of ESG related shareholder proposals. I have also filed hundreds of shareholder proposals myself since 1996. Based on this first hand experience it is clear to me that shareholders have an extraordinary track record of highlighting issues that pose significant financial risk to corporations and their investors such as climate change, diversity issues, toxic products, etc. These issues are often new to the financial community and take time to raise awareness. Changing the resubmission thresholds would eliminate many of these proposals and would delay companies from taking action to reduce these risks. Similarly, raising the ownership thresholds would prevent a majority of these issues from ever being filed.
Conclusion
The Proposed Rule is attempting to address problems which we do not feel are widespread, specifically that proxy voting decisions are being influenced by conflicts of interest and that proxy advisors are producing voting advice that contains inaccuracies. The proposed feedback and review process would result in significant undue costs and delays for proxy voting advice businesses, and would be particularly burdensome for small entities. Therefore we strongly support an exemption for small entities and/or nonprofits that provide a voting service. Increased costs and less timely voting procedures would adversely impact countless investors who rely on proxy voting advice businesses to make informed voting decisions. The proposed threshold changes would greatly reduce the number and effectiveness of shareholder proposals despite their track record in raising key issues for investors and management. Therefore we strongly oppose the Proposed Rule and recommend that it be withdrawn.
Yours,
Michael Passoff
CEO
Proxy Impact
[redacted]
www.proxyimpact.com
www.proxypreview.org