Commissioner Daniel M. Gallagher of the Securities and Exchange Commission (“SEC”) authored a working paper, published last month by the Washington Legal Foundation, regarding the outsized power and influence of proxy advisory firms.  In his paper, Commissioner Gallagher provides his view of the most important aspects of Staff Legal Bulletin No. 20 (“SLB 20”), in which the SEC staff recently “moved toward addressing some of the serious issues” resulting from the emergence of proxy advisory firms as a dominant player in American corporate governance. Notably, Gallagher also offers some critical advice to public companies engaging with proxy advisory firms.
Posts Tagged ‘Daniel Gallagher’
Shareholder voting has undergone a remarkable transformation over the past few decades. Institutional ownership of shares was once negligible; now, it predominates. This is important because individual investors are generally rationally apathetic when it comes to shareholder voting: value potentially gained through voting is outweighed by the burden of determining how to vote and actually casting that vote. By contrast, institutional investors possess economies of scale, and so regularly vote billions of shares each year on thousands of ballot items for the thousands of companies in which they invest.
The SEC is first and foremost a disclosure agency. As stated on the Commission’s website: “[t]he laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.”  The federal corporate disclosure regime was established by Congress and serves as a cornerstone of the Commission’s tripartite mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The underlying premise of the Commission’s disclosure regime is that if investors have the appropriate information, they can make rational and informed investment decisions. This is not to say that the disclosure regime was meant to guarantee that investors receive all information known to a public company, much less to eliminate all risk from investing in that company. Instead, the point has always been to ensure that they have access to material investment information. One of the underpinnings of this approach is the expectation that through this disclosure regime, companies and their management benefit from the oversight and interaction with the companies’ owners. President Franklin D. Roosevelt, in a message to Congress encouraging the enactment of the Securities Act, also noted that a mandatory disclosure regime “adds to the ancient rule of caveat emptor, the further doctrine, ‘let the seller also beware.’ It puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence.” 
I am delighted to be able to participate in this conference, and especially proud as an Irish-American that it is being held in conjunction with Ireland’s Presidency of the Council of the European Union. This conference is particularly valuable because it provides a forum for executives, directors, investors, and policy makers to have a frank and productive dialogue on important corporate governance issues.
I would like to talk about the increasing role that governments – particularly, in the United States, the federal government – play in corporate governance as well as the increasingly prominent influence of proxy advisory firms on how companies are governed and on how shareholders vote. These changes have led to, among other things, new limitations and requirements being imposed on boards of directors and companies. And while the resulting costs to investors are easily apparent, the purported benefits are harder to discern. Although today I will for the most part discuss these issues as they apply to U.S. companies, I note that there is a related trend in Europe. As such, I hope that my comments may help inform your approach to regulating corporate governance as well.
First, let me thank you all for taking part in today’s program. Events like this are an invaluable tool for regulators and market participants alike — not least of all because we get to see who the early frontrunners are for the next America’s Funniest Compliance Officer contest. As I’m sure you all know, that’s a real contest that was last held in 2011, although, given that there were only a handful of contestants who turned out to compete, maybe it’s more likely that none of you knew. In case you missed it, the winner brought down the house with a joke about a priest, an Irishman, a Frenchman and Rule 15a-6. It was hysterical — not Reg. M hysterical, but still hysterical.
All joking aside, it is essential that we as regulators and you as compliance officials continue to engage in this type of open dialogue and coordination to promote a robust culture of compliance across the securities industry. Indeed, your work is key to enhancing the Commission’s ability to protect investors and ensure that the markets in which they put their capital to work remain fair and efficient, a result which is in all of our best interests.
We in America have been blessed with a wonderful combination of geography, natural resources, and free market principles. These and other factors have allowed our economy and our financial system, including our capital markets, to thrive in the post-World War II era.
Although the United States has suffered its share of financial crises, most recently the one that erupted in 2008, our free market economy and robust capital markets have conferred an enviable prosperity on our people over a period of many years, and few in America can remember a time when the United States did not have strong and competitive capital markets.
However, the very strength and resilience of our capital markets could lead us to fall into the trap of believing that we are somehow entitled to such prosperity. Indeed, such a sense of complacency may well have taken root in our government and may threaten to jeopardize that prosperity. The reality is that we live in a world in which we must be constantly vigilant — sometimes taking affirmative action, but more often choosing not to act — in order to preserve the vitality of our markets.
An important part of my job, and that of my colleagues on the Commission, is to ensure that America’s capital markets remain strong, vibrant, and competitive. That’s not just good for U.S. investors, but also for other investors around the world. And, conversely, the rise of robust capital markets in other parts of the world has the potential to benefit the United States and the American people as well.
On a number of occasions since returning to the SEC as a Commissioner, I’ve spoken about the Commission’s priorities, both in terms of what the Commission is doing and what it should be doing in order effectively to carry out its mandate to protect investors, ensure fair and efficient markets, and facilitate capital formation. Needless to say, the Commission does not operate in a vacuum, and for various reasons, it’s not always easy to execute those priorities as we see fit. The constant stream of external influences on the Commission’s work serves as a significant impediment to its ability to focus on the core mission, including the vital, basic “blocking and tackling” of securities regulation. Therefore, I’d like to talk about the Commission’s origin and role as an expert, independent agency — as well as the challenges to that independence — in what has become in recent years a difficult environment for independent agencies.
We in America often remark that we are blessed by our geography. And there is no doubt that Qataris feel the same about this incredibly unique and beautiful country. In the United States during the post World War II era, our geographical position and natural resources helped our economy develop while others experienced severe disruptions, particularly in Europe. That promoted the development of our capital markets to the great benefit of our citizens, as well as investors foreign and domestic and our partners-in-trade around the world.
It is certainly true that we have suffered our share of economic and financial crises, most recently the crisis that erupted in 2008. Even so, our free market economy and robust capital markets have conferred an enviable prosperity on our people over many years. Indeed, notwithstanding financial crises large and small, it is fair to point out that few in America can remember a time when the United States did not have strong and competitive capital markets.
The risk, however, is that the very resilience of our capital markets has, over time, fostered a latent complacency — a tendency to think strong and competitive markets are, somehow, ours by right — that we are entitled to them when, in reality, we must constantly act — and sometimes decide not to act — in order to preserve the vitality of our markets.
An important part of my job, and that of my colleagues on the Commission, is to ensure that America’s capital markets remain strong and competitive. That’s not just good for U.S. investors, I submit, but equally good for others — for all of you. And, of course, rising global markets are good for the United States.
In January 2011, the Commission, with Commissioners Casey and Paredes dissenting, issued a staff report on a study, conducted pursuant to Section 913 of the Dodd-Frank Act, of the effectiveness of the existing regulatory standards of care that apply when brokers and investment advisers provide personalized investment advice to retail customers. In addition to mandating that study, Section 913 authorized, but did not require, the Commission to adopt rules establishing a duty of care for brokers identical to that which applies to investment advisors — in other words, a uniform fiduciary duty for brokers and investment advisors — and to undertake further efforts to harmonize the two regulatory regimes.
In order to address the pressing market structure issues we face today, it’s important to understand not just where we are now, but also how we got here. Over the past several decades, our capital markets have undergone a series of extraordinary changes. Some of those changes have come about organically, that is, as the result of market participants innovating with new products and ideas. Other changes, however — many others — have been imposed by the SEC and Congress. Or, they were developed by market participants in order to respond to and comply with new and constantly changing laws and regulations. In short, understanding the structure of our capital markets today requires acknowledging that in recent years, changes to the structure of our equities markets have been driven as much, if not more by legislative and regulatory action than by the private sector.
As you well know, this wasn’t always the case. From the earliest days of our nation to the Great Depression, self-regulation, rather than government regulation, played the primary role in growing and shaping the markets, with little or no federal regulation and limited state regulation. Indeed, the origins of U.S. capital market self-regulation can be traced back a long time ago but not so far away — about a ten-minute walk from here to 68 Wall Street, where in 1792, 24 traders signed the famous Buttonwood Agreement. In the Agreement, those traders pledged to conduct their stock trading directly with one another, rather than through an auctioneer, and to limit their commissions to one quarter of a percent. Within three decades of those humble beginnings, the organization that grew out of the Buttonwood Agreement — then referred to as the New York Stock & Exchange Board — had in place a constitution and detailed by-laws. Our capital markets began, and then grew and flourished, on the back of self-regulation.