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US Regulations Lag “New Landscape” – SEC Acting Chair

Lee emphasises need to update proxy voting guidance, improve passive investing transparency and continue to push the climate agenda. 

US regulations need to be updated to better support shareholder democracy and help investors hold corporates accountable on ESG-related issues, according to Allison Herren Lee, Acting Chair of the Securities and Exchange Commission (SEC).

“I’m concerned that our regulations haven’t kept up with what is a new landscape of institutional investor-driven corporate governance,” Lee said today at the Investment Company Institute’s (ICI) 2021 Mutual Funds and Investment Management Conference.

Investors play a pivotal role in holding companies and their executives accountable for the decisions they make, particularly with ESG-related issues, she said.

However, issues of transparency around passive index funds have led to doubts as to how well such funds “harness the power of their voting capabilities”, Lee said, adding that US regulatory rules have not kept up with the increasing popularity of the passive vehicle and therefore the discrepancies in voting.

“We know investors are demanding ESG investment strategies and opportunities, but passive index funds may not always reflect those investor preferences in their voting. This is why it’s critical the SEC focuses more attention on fund voting,” Lee said.

Part of the solution will be to update SEC Form N-PX which details the proxy voting record of mutual funds and other registered management investment companies over the most recent 12-month period.

Lee said she wants to update and further clarify the aims of the form. “It’s high time to revisit this critical form and make it useful in creating needed transparency around the fundamental exercise of shareholder voting,” she emphasised.

The Acting Chair also announced her intentions to “revisit” proxy voting guidance initially issued in 2019, saying that current guidance “may have tilted the calculus against shareholder voting without sufficient data or analysis to support the wisdom of doing so”.

The guidance will be revisited in order to ensure fiduciaries know how to weight competing concerns and therefore feel more informed when making the decision whether to and how to cast votes on behalf of their beneficiaries.

“These are not easy decisions, but they should be transparent ones,” she said.

Following the February launch of the Climate and ESG Task Force in the Division of Enforcement, Lee has further called for public input on developing climate change-specific disclosures.

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