Every effort undertaken at the SEC should focus on whether the Commission is protecting, serving, and empowering investors, Lee said.
Speaking at the Investment Adviser Association’s 2020 Compliance Conference, SEC Commissioner Allison Herren Lee said the Commission should focus on "getting back to basics" by emphasizing its core mission—to protect, serve, and empower investors. This includes revisiting recent Commission initiatives relating to investment adviser advertising, corporate disclosure (and the lack of comparable disclosure about climate risk), and the proxy process, Lee advised.
Investment adviser advertising. First turning to investment adviser advertising, Lee noted that the proposal issued by the Commission in November would be the first real update to its investment advertising rules since 1961. The proposal, according to Lee, would address the presentation of adviser performance in a more holistic fashion than the current "piecemeal approach" of relying on existing staff guidance.
Lee advised that the proposal’s emphasis on a principles-based approach can create flexibility but at the potential cost of certainty about compliance. If rules are too broad or vague, they may result in circumscribing conduct that the Commission did not intend to capture. For example, the proposal would require a performance presentation or the presentation of specific investment advice to be "fair and balanced," which while an agreeable proposition, it is unclear if that standard is specific enough to be applied by advisers on a daily basis, Lee said.
Lee said that she fears that the current proposal may rely too heavily on "high-level principles," which could exacerbate problems of "regulation by enforcement." If the new rules are too vague to render them unenforceable, responsible investment advisers might end up competing against advisers who use performance information that is not fair and balanced at all, she warned.
Climate risk disclosure. Lee also expressed support for improving climate risk disclosures. While the Commission’s Disclosure Effectiveness Initiative was a broad overhaul of the SEC’s disclosure regime intended to improve and modernize disclosure, Lee bemoaned that it did not include disclosure of climate changes and its attendant risks. She noted that investors and asset managers have demanded consistent, reliable, and comparable disclosure around climate risk, and in response, most large public companies now provide some form of sustainability disclosure.
However, Lee pointed out that these disclosures are voluntary and are insufficient to meet investor needs. There is also a lack of comparability and a standardized taxonomy, which means that disclosure will vary among public companies, making it less meaningful for investment analysis, she said.
Proxy reform. Citing the proxy process as a mechanism by which investors can hold companies accountable, Lee reiterated her opposition to the SEC’s recent proposals on the proxy system. Its proposal on shareholder proposal submission and resubmission thresholds would restrict the ability of small retail investors to have their voices heard at companies’ annual meetings, Lee said.
She also echoed concerns that she and former Commissioner Robert Jackson brought up at the open meeting regarding the proposal on proxy advisory firms. Both Lee and Jackson expressed dismay with what they believed was a lack of evidence of any real problem requiring Commission action. Instead of introducing evidence that proxy advisor recommendations contain errors, the proposing release simply uncritically reproduces allegations of these errors, Lee said.
The proposing release also provides no evidence that investment advisers who use proxy advisory firms have failed to uphold their fiduciary duties, according to Lee. She advised that the Commission is required to set out a record to support its rulemakings with evidence, which the Commission failed to do here.
In addition, Lee criticized the notion that the alleged errors cited by the proposal would be reduced by mandating review by the issuer, a plainly conflicted party. While issuers have expertise in this area, they also have a clear stake in the outcome, she advised. The proposal would also introduce cost, delays, and unreliability in the proxy voting process, which could lead to advisers abstaining from voting altogether, hurting shareholder voting rights, she concluded.
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