Yesterday, the SEC came out with two salvos against “informal” staff guidance. First, there was this statement from SEC Chair Jay Clayton reminding us that all Staff guidance is non-binding (ie. creates no enforceable legal rights or obligations for the SEC or other parties) because it hasn’t been subject to notice & comment under the Administrative Procedures Act. That statement noted that the SEC “will continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented in light of market or other developments.”
A few moments later, the Division of Investment Management issued this statement that – ahead of the upcoming “proxy plumbing” roundtable – it was withdrawing two no-action letters granted in 2004 to ISS and Egan-Jones Proxy Services. This Cooley blog does a nice job of explaining what the letters were about – here’s an excerpt:
By way of background, as fiduciaries, investment advisers owe their clients duties of care and loyalty with respect to services provided, including proxy voting. Accordingly, in voting client securities, an investment adviser must adopt and implement policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interest of its clients.
The two now-withdrawn no-action letters indicated that one way advisers could demonstrate that proxies were voted in their clients’ best interest was to vote client securities based on the recommendations of an independent third party—including a proxy advisory firm—which served to “cleanse” the vote of any conflict on the part of the investment adviser. Historically, investment advisers have frequently looked to proxy advisory firms to fill this role. As a result, the staff’s guidance was often criticized for having “institutionalized” the role of—and, arguably, the over-reliance of investment advisers on—proxy advisory firms, in effect transforming them into faux regulators.
IM’s statement noted that the withdrawal would “facilitate” discussion at the roundtable. Based on some of the reactions to the withdrawal (see Commissioner Jackson’s statement), it may do more than “facilitate” – it may lead to “fisticuffs”…
My Ten Cents: What to Do With “Informal” Staff Guidance?
The movement against “informal” Staff guidance has been growing over the past decade. And it’s not just at the SEC – the GOP-led attacks have focused on all of the federal agencies. Here’s a few quick thoughts:
1. Government-Wide Movement – The DOJ was the first to emphasize it wouldn’t conduct “rulemaking by guidance” late last year – see this blog. As noted in this Cooley blog, a bunch of the banking regulators issued something along these lines earlier this week.
2. Chamber’s Influence – Having these proxy advisor no-action positions overturned has been a plank in the US Chamber’s platform for some time (for example, see pages 10-11 of this Chamber letter for their arguments about why the Staff should have never granted those letters). It wasn’t that long ago that I blogged that the Chamber seemed to be losing influence. Spoke too soon?
3. Impact on You – In practice, we rely heavily on the guidance that Corp Fin provides us – CDIs, no-action letters, Staff Legal Bulletins, FAQs, speeches and even informal comments at conferences. What does our world look like if we need to rely on a small group of SEC Commissioners to perform that function? Remember that the Commissioners are not even allowed to meet as a group except in very limited circumstances due to the Sunshine Act.
4. Shorter Adopting Releases Too? – As noted in this blog, it wasn’t even that long ago that one SEC Commissioner wanted the guidance provided by the Commissioners in the SEC’s adopting releases to be shorter!
5. Collector’s Items – This one is completely an “aside.” It’s hard to find the Egan-Jones and ISS letters online – these letters were issued by the Division of Investment Management. And I believe by withdrawing them, IM might have pulled them from their list of posted letters. Which makes sense since they are withdrawn. So the letters are now officially a “collector’s item.”
Poll: What Will You Do Without “Informal” Staff Guidance?
Please take a moment for this anonymous poll about a lack of informal SEC Staff guidance:
– Broc Romanek