SEC Deregulations Diminish Investor Protections, Office of the Investor Advocate Says

The office is also calling on the SEC to establish an ESG framework.

In its “Report on Activities: Fiscal Year 2020,” the Office of the Investor Advocate at the Securities and Exchange Commission (SEC) outlines several areas in which it believes the SEC fell flat this year.

The office’s first objection concerns the change to the Exchange Act that makes it easier for public companies to exclude shareholder proposals from corporate proxy statements. Specifically, the office says it is now harder for shareholders with smaller investments—which it says often have fruitful ideas with respect to governance reforms—to submit proposals.

According to the office, the SEC also amended the proxy rules in a way that requires proxy advisory firms to act as a conduit for company management to rebut the advice given. The office says the SEC made this change based on “the claims of select market participants that proxy voting advice historically had not been transparent, accurate and complete. The commission did not evaluate the substance of these claims or distinguish biased opinion from fact, and these claims remain unsupported by empirical evidence. … We believe investors should be free to seek the services of a third party to provide independent, objective advice about voting their shares—and investors should not be forced to pay for feedback mechanisms that subject them to further lobbying by corporate management.”

The SEC also adopted amendments to several Securities Act registration exemptions.

“A central underpinning of the Securities Act of 1933 is the idea that a company must register its shares with the commission and provide robust disclosures if it wishes to sell its securities to the general public. … However, over the past several decades, the central tenet of securities regulation has eroded as Congress and the commission created ever-expanding exemptions that allow companies to raise increasing amounts of capital with less and less public disclosure,” the office says. It says the new rules make “registration entirely voluntary.”

With respect to amendments to Investment Company Act rules concerning the use of derivatives, the office says “critical investor protection provisions contained in the proposed version of the rule were stripped away prior to adoption.” It would have also required broker/dealers (B/Ds) and investment advisers to exercise due diligence before approving retail investor accounts to invest in such products. The office is recommending that the SEC rescind the rule and reconsider the rule as it was originally written.

The Office of the Investor Advocate also detailed new priorities it would like to see the SEC champion, including environmental, social and governance (ESG) disclosure standards. The office notes that, for many years, investors of all sizes have called on the SEC to require public companies to disclose more ESG data, as is already being done in the European Union and elsewhere. “The information provided by companies tends to vary in quality, and it is not presented in a standard format that enables comparisons between companies,” the office says.

The office is also calling for minimum listing standards on corporate governance standards for exchanges. “The primary listing exchanges are now for-profit entities that, unlike their prior mutual ownership structure, have an inherent conflict of interest between protecting investors and generating business revenue from listed issuer fees,” the report says. Some exchanges, according to the office, have lowered their qualitative corporate governance standards in an effort to attract issuers. The office is calling on Congress to “set, by statute, certain minimum standards to guarantee investor protections.”

The office also says it is time for machine-readable disclosures, through a uniform legal entity identifier, as a way to modernize financial services firms. This, the office says, “would help investors utilize publicly available data from multiple sources.”