The role of proxy advisory firms and how they are regulated has been a hot topic for some time now, and on Thursday, Ted Yu, chief of the SEC's office of M&A, attempted to quell concerns about proposed rules the regulator issued in November 2019. One of the proposed rules that has received the most attention would impose additional regulations on proxy advisory firms that sell research and voting advice to investors.
"We're looking to complete this rulemaking within the year," Yu said during a panel at the Tulane University Law School's 32nd annual Corporate Law Institute.
Yu, who was not physically in attendance and instead participated via video conference, said one of the SEC's main aims is to codify that companies should have the ability to present counter arguments to proposals lodged by proxy firms, noting that shareholders would stand to benefit from receiving more information before they have to vote.
"We think that more disclosure is actually a good thing," Yu said. "There should be an ability for [shareholders] to see the counter argument."
Further, Yu said proxy advisory firms should have an obligation to disclose how they come to the valuations of companies, and explained how investors would benefit from such additional details because it would make for higher quality advice.
"We expect certain responsibilities, a degree of diligence, when it comes to disclosing methodology," he said.
The rule has been pretty controversial, with Yu detailing that the regulator received more than 600 comment letters, some of which were "pretty harsh."
"Folks have pretty strong views on this," he said. "It takes a thick skin to read all these letters sometimes."
Still, he said that overall what's most important is the rule's intention, which is to enhance the quality of disclosure from proxy advisory firms for the benefit of investors.
"We have to recognize it could be done better," he said.
Yu also discussed some of the common misconceptions the SEC has seen in reactions to the proposed proxy advisory rules, and attempted to soothe some of those concerns. For instance, he said he's heard people argue that the proposed rules would force proxy advisers to file reports publicly.
"These are changes to exemptions," he said. "You can continue to operate as you operate today."
Another common misconception is that the new rules could make proxy advisory firms more prone to lawsuits, according to Yu.
"That's not correct," he said. "We don't view this as creating any sort of new liability for proxy advisory firms."
The proposed rules come as Congress is mulling legislation, called the Corporate Governance Fairness Act, that would require proxy firms to register as investment advisers and submit to periodic SEC examinations in order to prevent conflicts of interest or inaccurate communications to investors. That bill was introduced in November 2018 by Sen. Jack Reed, D-Rhode Island. The most recent action on the bill came in December 2018, when there were hearings held in the Committee on Banking, Housing and Urban Affairs, according to Congress' official website.
In addition to going through the proposed rules that the SEC hopes to finalize before the end of this year, Yu touched on concerns related to the coronavirus outbreak, which is causing a lot of global turmoil, including at Tulane, where attendees were encouraged to bump elbows rather than shake hands.
The SEC on Wednesday said that publicly traded companies affected by the coronavirus will have an additional 45 days to file certain materials that would otherwise have been due between March 1 and April 30. The order may apply to U.S. companies located in areas affected by the virus or those with operations in those areas, and will cover a range of materials, including annual reports for companies with different financial calendars, as well as the 6-Ks filed by certain foreign companies and 8-Ks, which signal notable events.
In order to qualify for the relief, companies must submit a report explaining why the relief is needed within 45 days of the original deadline, the SEC said. The SEC could later decide to extend the time frame for the relief, the announcement said.
According to Yu, companies shouldn't fret if they feel the additional 45 days is not going to be enough, saying that the SEC is open to extending the deadline even further depending on what happens with coronavirus going forward.
"We understand that this is potentially disruptive," Yu said.
--Additional reporting by Elise Hansen and Chelsea Naso. Editing by Amy Rowe.
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