Proposed SEC rules changing the proxy voting system need to be thrown out, write Moses & Singer attorneys, after SEC Chairman Jay Clayton cited letters of support by supposed “Main Street” people, while they were really the product of a misleading public relations campaign by corporate interests. The federal rule-making process was infected and the changes should be stricken, they argue.

On Nov. 5, 2019, Securities & Exchange Commission Chairman Jay Clayton announced a proposal to “modernize” the proxy voting system by adding more limitations on shareholders’ ability to place proposals on a company’s proxy statement, based on the dollar amount of shares held (among other things), as well as additional limits on proxy advisory firms. This was the second in a proposed series of modifications to the proxy architecture.

For the reasons below, the second round of proposed rule changes was proposed in violation of governing law, and should be stricken in their entirety.

Clayton did not justify these changes as something large public companies had been lobbying for over many years. Instead, he professed to have been moved by letters he received from “long-term Main Street investors”—including veterans, a teacher and public servant, a single mom, and retirees, “all of whom expressed concerns about the current proxy process.”

This made the later discovery by Bloomberg News that these, and many other letters cited in support of the SEC proposal, were utterly bogus, somewhat embarrassing. The letters instead sprang from the imaginations of a corporate lobbying group. Several alleged signatories told reporters that they had nothing to do with the missives submitted in their names.

Rulemaking Process Deeply Infected

This is more than simply an embarrassment to the rule-making process, and an affront to the credibility of the SEC. Even though the rules are, at this stage, simply proposals (there is a 60-day public comment period, after which the SEC must again vote whether to approve the rules), the procedural and institutional impropriety occasioned by the reliance on fraudulently procured investor “evidence” so deeply infects the rule-making process as to preclude the adoption of the proposed rules in their current form.

The Administrative Procedure Act allows courts to invalidate rules promulgated by federal agencies that are found to be, among other things, “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”

Under the APA’s “arbitrary and capricious” standard, a court should evaluate whether the agency’s factual determinations were rationally related to the ultimate rule(s). The U.S. Supreme Court has emphasized the importance of a disciplined fact-finding process wherein an agency demonstrates that it “examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.”

Courts have invalidated SEC rules based on an insufficient factual foundation. A previous attempt at modifying proxy rules was struck based on “insufficient empirical data” because the SEC cherry-picked the data it considered by relying upon unpersuasive evidence. See Business Roundtable v. SEC (D.C. Cir. 2011); see also American Equity Inv. Life Ins. Co. v. SEC (D.C. Cir. 2010) (invalidating rule due to “flawed” reasoning based on inadequate fact-finding). American Equity also held that when the SEC purports to rely on something, like the investor letters here, the rule shall be judged based on that reliance—even if it was not required.

Consequently, since the investor letters have proven to be fictitious, approval of the proposed rules in their current state would violate the requirement that SEC rules be based on a rational review of existing evidence. It is also clear if one reads the letters that they are not from actual individual investors—among other things, the address headings contain the phrase “A Coalition of Growth Companies.”

The fact that the SEC relied on these letters but did not pay enough attention to determine they were suspicious also undermines the integrity of the rule-making process.

While these are not yet approved rules, simply proposals, the claimed reliance on the letters has infected the rule-making process. The letters represent not merely statements of fact, but reflect statements about what ordinary investors want and believe—statements that have proven to be false.

Just like a party would not be permitted to present evidence in a civil proceeding purporting to be from a neutral witness but actually supplied by an interested party, we should be repelled when a government agency purports to be presenting rules supposedly motivated by “Main Street” investors that are actually from Wall Street lobbyists. The investing public, investment advisers, and the companies the SEC regulates, deserve better.

Ahead of the 2020 presidential election, the nation’s securities and derivatives watchdogs expect to move ahead with heightened urgency on long-awaited rulemaking proposals that could shape the legacy of the chairmen of both agencies.

The Securities and Exchange Commission and the Commodity Futures Trading Commission expect to tackle a busy regulatory slate in 2020. For the chairs of both agencies — Jay Clayton at the SEC and Heath Tarbert at the CFTC — this year could also be their final opportunity to leave their mark given the looming presidential election and potential change in administration.

While both bodies share certain concerns, including confronting regulatory challenges posed by the growth of digital assets, each have distinct priorities that appear ripe for action in 2020. Lawyers also note that regulators are facing a tight time frame to complete priorities given that the nation’s attention will shift to the presidential campaign by Labor Day.

“It has to be things that they can accomplish in the next eight months,” said Morrison & Foerster LLP counsel Marty Dunn, a former counsel and acting director of the SEC’s Division of Corporate Finance.

Here, Law360 looks at regulatory matters to watch.

The SEC Could Rein in Proxy Firms

The SEC has signaled its 2020 priorities in recent months through proposals it has released for public comment, plus numerous speeches by Clayton and the agency’s recent submission of its short-term regulatory agenda filed with the federal Office of Management and Budget.

Among the more contested battles on the SEC’s menu is a proposal that would increase regulation of proxy advisory firms, which are third parties that sell voting advice to asset managers who own stakes in hundreds of public companies or more. Proxy firms like Institutional Shareholder Services Inc. and Glass & Co. have become influential in recent decades, given the growth in share ownership by institutional investors.

Critics argue that ISS and Glass-Lewis have become powerful players in corporate governance with little regulatory oversight, while defenders say proxy firms are simply selling non-binding advice to their clients on how to hold corporations accountable. Proxy firms offer voting advice on matters of board of director elections, executive pay and merger proposals, plus hot-button topics including climate policies and corporate diversity.

An SEC divided on party lines approved a proposal on Nov. 5 that would require proxy firms to improve disclosure of conflicts of interests, allow corporations to review and respond to proxy firm recommendations before a shareholder vote, and codify that proxy firms could be liable for fraud if they make materially misleading statements when attempting to influence votes. The SEC on the same day also submitted a plan to raise thresholds on shareholder proposals, increasing minimum requirements that haven’t been adjusted for decades.

“The proposals are pretty middle of the road and I think they will be helpful,” said Skadden Arps Slate Meagher & Flom LLP partner Brian Breheny, who previously served in the SEC’s Division of Corporation Finance. “Clearly there are lots of people who don’t agree.”

Depending on one’s view, the SEC’s proposals are either sensible changes to reflect current market realities or concessions to corporate interests that object to the influence of proxy firms and shareholder advocates. The proposals also come as ISS is suing the agency, alleging that guidance that the SEC published before the agency’s rule proposals on proxy advisory firms could impede its ability to deliver independent research.

Regardless, SEC action appears imminent. Comments on both proposals are due by Feb. 3, after which the agency could take action.

“My bet is that these [proposals] will become final rules in some sort of form next year,” Haynes and Boone LLP partner Bruce Newsome said.

More Investors Could Gain Access to Private Offerings

The SEC wants to expand the definition of an accredited investor, which determines who can invest in private securities offerings not registered with the agency. The agency on Dec. 18 proposed adding various measures of sophistication to the definition beyond existing income and wealth tests.

Under an SEC proposal, people who hold Series 7, 65 and 82 licenses — credentials that allow individuals to do things like sell securities or provide financial advice — would be deemed accredited investors. The proposals would also expand the accredited investor definition to include individuals considered a “knowledgeable employee” at a money management firm, plus registered investment advisers, family offices and other entities would also qualify.

These changes would mark a departure from the current definition of an accredited investor, set in 1982, which currently rely solely on income and wealth criteria. A person must have at least $200,000 annual income or a net worth of at least $1 million, not including the value of their home, to be considered an accredited investor. The SEC is not proposing any changes to those levels, which have not been adjusted for inflation in 37 years.

The SEC is currently accepting comments on the proposal, which could be voted in 2020. The topic has become more controversial as the market for private offerings has grown to outstrip the public markets, though only certain investors can participate in this riskier segment.

The debate pits advocates who want wider access to private offerings on the premise that early-stage companies are now achieving most of their growth before they go public, versus skeptics who point out that private markets provide little disclosure and lack the investor protections of public markets.

However the SEC defines an accredited investor, lawyers expect there will be changes.

“The definition requires a refresh,” Breheny said. “It’s been the same for a long time.”

The SEC asked whether it should revise the accredited investor definition as part of a 211-page “concept release” issued last June that sought public comment on whether changes are needed to simplify its regime for regulating private offerings.

The release also asked whether retail investors who are not accredited investors should be granted access to private offerings through “pooled investment vehicles,” which could provide them opportunities to invest in private equity or other unregistered offerings on similar terms as institutional investors. Clayton recently told the Senate that SEC staff is examining whether “appropriately structured funds can facilitate Main Street investor access to private investments.”

“That’s a laudable objective,” said Ropes & Gray LLP partner Keith Higgins, who is a former director of the Division of Corporate Finance. “Working out the details of it will be hard. But I do see that as something that the commission will work on.”

The SEC Could Scale Back Quarterly Reporting

President Donald Trump in August 2018 recommended in a tweet that the SEC end quarterly reporting requirements for public companies and switch to a six-month system, saying that top CEOs advised him that the move would save them money complying with regulations.

The SEC has not committed to doing away with quarterly reporting requirements for public companies, which has been standard practice since 1970. Investor groups quickly came out against the idea on grounds that investors need timely, accurate information to make informed decisions.

However, the SEC requested public comment in December 2018 on whether quarterly reporting rules should be eased and whether its current system encourages companies to spend too much energy on achieving short-term results. The agency followed up last year by hosting a roundtable on the topic. Clayton has said he wants to foster more long-term perspective in public markets.

Regulators have yet to propose anything, though potential changes to rules governing earnings releases and quarterly reports are listed on the SEC’s short-term agenda of priorities. Lawyers say they are not expecting the SEC to end quarterly reporting, though there may be ways to eliminate redundancies under current disclosure rules, especially for smaller public companies.

“I don’t think there is a lot of momentum, by and large, for less frequent reporting by companies,” Higgins said, adding that “you could look at streamlining the quarterly reports.”

New Derivatives Rules for Funds Are Likely

The SEC in November revived efforts to regulate how mutual funds and other investment companies can use derivatives, which are complex financial instruments that can increase returns, albeit at increased risk, in their portfolio strategies.

The agency said it wants to replace a patchwork system long in place whereby market participants have relied on SEC guidance or industry practice on a case-by-case basis. Adding urgency to the proposal is the fact that derivatives have grown in volume in recent decades.

“For a practice and market that is so important, we need a robust and evergreen regulatory framework,” SEC Director of Investment Management Dalia Blass said at a recent conference before securities lawyers.

The 459-page proposal would apply to registered funds, including mutual funds, exchange-traded funds and business development companies. Such funds would be permitted to use derivatives, such as futures, swaps and options, under certain conditions, including that the funds adopt a written derivatives risk management program and accept limits on the amount of leverage-related risk they can assume.

The SEC’s latest stab at regulating funds’ use of derivatives follows a 2015 proposal that would have allowed them to do so under stricter caps. But that effort never passed following complaints from industry groups that argued the proposed rules were too restrictive.

The CFTC May Finally Decide Position Limits

The CFTC, the nation’s principal regulator on derivatives, is also entering the year hoping to resolve lingering matters. Topping that list could be a proposal on position limits for certain speculative futures contracts.

The CFTC has sought to enact position limits since the 2010 passage of the Dodd-Frank law, which increased the agency’s regulatory powers in the wake of the financial crisis, but previous proposals have either been rejected by the courts or failed to pass. Position limits would prevent traders from cornering the market on certain physical commodities, while allowing “bona fide hedging” exemptions for legitimate business needs of producers, such as farmers.

Striking that balance has bedeviled the agency in the past.

“Defining that hedging concept has been contentious,” said Eversheds Sutherland counsel Ray Ramirez. “It gets pretty nitty gritty pretty quickly.”

That said, Tarbert has recently told industry groups that the CFTC plans to propose a position limits rule in the coming months that ensures that “bona fide hedging is not restricted.” Additional CFTC commissioners have also stated their intent to move forward on the matter.

“Position limits have been hanging over the industry for a very long time,” Foley & Lardner LLP partner Kathryn Trkla said. “There is perhaps an element of position limits fatigue and wanting to get that wrapped up.”

The CFTC Could Enact Cross-Border Swaps Rules

The CFTC is also moving forward on a proposal to regulate cross-border swaps, another unfinished priority that was mandated by the Dodd-Frank legislation a decade ago.

By a 3-2 vote, the CFTC on Dec. 18 proposed a rule that would govern when cross-border swaps should be registered with the agency. Swaps are a type of derivative by which parties exchange cash flows on a given asset, such as interest rates or currencies, in order to manage risk. Abuse of swaps is widely blamed for contributing to the global financial crisis.

The CFTC’s proposal sets ground rules on when its regulations should apply to swaps booked abroad, such as through a foreign-based subsidiary of a U.S. bank, in order to protect American markets and taxpayers. The proposal also refrains from imposing CFTC regulations in foreign jurisdictions that have comparable rules to the U.S.

The CFTC proposal includes other exemptions, such as not applying additional regulations to firms that are already governed by the Federal Reserve. Tarbert said the proposal seeks to provide rule-based clarity to a market that until now has relied on informal guidance. However two CFTC commissioners, Rostin Behnam and Dan Berkovitz, dissented, citing concerns that the proposal would make it too easy for firms to evade U.S. regulations.

The proposal could be voted on in early 2020.

“The commission is trying to thread the needle of registration that is not over-reaching beyond our borders, yet sufficiently protects the interests of the U.S. and U.S. markets,” Covington & Burling LLP counsel Anne Termine said. “This approach is not without controversy as the supporting and dissenting statements of each of the commissioners shows. And whether this approach of comity will be reciprocated by foreign regulators remains an open question.”

For all the lip service that corporate executives pay to the principle of honoring shareholder rights and interests, it’s not uncommon for them to signal that their lives would be easier if they didn’t have to deal with busybody investors.

That’s the subtext of a pair of rules the Securities and Exchange Commission is pondering that would “limit public-company investors’ ability to hold corporate insiders accountable,” according to SEC Commissioner Robert J. Jackson Jr.

So said Jackson, one of the two Democratic members of the commission, when he voted against the proposed rules in November.

The SEC majority doesn’t see the rules the same way. They describe the rules as “modernizing” the process by which shareholders can submit proposals for votes at corporate annual meetings, and ensuring that institutional investors get the most accurate and objective information from proxy advisory firms they hire to guide them on how to vote on the measures. Both rules are open for public comment through Feb. 3.

One point is indisputable: Many corporate managements desperately want the rules to pass, and shareholder activists are solidly against them.

That’s not too surprising. The rules would make it much harder for activists to place proposals on the agendas, or proxy statements, of annual meetings. The SEC’s analysis states that the proxy proposal rule would reduce the number of proposals by about 37% and save public companies tens of millions of dollars a year in corporate expenses.

The rules also would put a leash on proxy advisory firms — especially the two big firms, Institutional Shareholder Services and Glass Lewis & Co. — by requiring them, among other mandates, to share their advisory opinions with company managements for comment before submitting them to clients.

The shareholder resolutions most often at issue for corporate managements cover such issues as separating the chairman and CEO jobs to improve accountability, disclosing potential environmental issues, or complying with social principles on subjects such as firearm or tobacco sales.

Activist shareholders argue that these are legitimate, even essential, topics to raise with managements. But executives sometimes complain that they interfere with the proper management of their companies and don’t often win over a majority of shareholders even when they’re repeatedly resubmitted year after year.

That’s a false standard, says Sanford Lewis, director of the Shareholder Rights Group, which has submitted comments to the SEC criticizing the rule changes. Although shareholder resolutions are advisory only, any sign of shareholder discontent can prompt managements to take them seriously.

“A lot of engagements between shareholders and managements happen when there’s a 10% vote,” Lewis says. “Some managements might think that means enough shareholders want them to address an issue.”

As for the proxy advisory firms, although they recommend voting with management some 90% of the time, they can generate sizable votes in opposition to management initiatives or pay when they recommend “no” votes.

We last reported on the proposals to limit shareholder resolutions and tighten regulations on advisory firms in 2018. Although the rules were then still in the formative stage, corporate America had launched an aggressive and markedly sleazy campaign in their favor. This involved the creation of something called the Main Street Investors Coalition.

Although the group identified itself as a protector of the small investor’s interests, in fact it was a front for the National Assn. of Manufacturers, the board of which bristles with executives from corporations such as Exxon Mobil, General Electric, General Motors and Koch Industries.

Another backer was the 60 Plus Assn. That organization might sound like a grass-roots group, but it’s a right-wing advocacy organization that has been associated with the Koch brothers’ network and has promoted pharmaceutical industry interests and advocated against the Affordable Care Act.

The Main Street Investors Coalition seems to have disappeared — its website is effectively blanked out — but its style of behavior hasn’t disappeared. In November, when the SEC voted to place the rule changes up for comment, SEC Chairman Jay Clayton boasted of the support for the measures the agency had received from “long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.”

As Bloomberg subsequently reported, many of the letters bore signatures of people who said they hadn’t written them, or came from relatives of officers of, yes, 60 Plus. This caused some discomfiture for Clayton when he aired out the same “Main Street” spiel at a hearing before the Senate Banking Committee on Dec. 10.

“You got duped,” Sen. Chris Van Hollen (D-Md.) lectured Clayton. “You should be cautious before you say this is the top priority of Main Street investors; this is the top priority of a lot of corporate CEOs who don’t want to be second-guessed.”

“I still believe we’re looking out for Main Street investors,” Clayton replied sheepishly.

There may be reasons to tighten regulations on proxy advisory firms, whose recommendations are sometimes followed slavishly by institutional investors such as pension agencies and index funds unwilling or unable to research every shareholder proposal submitted to thousands of public companies.

“It’s time for the SEC to take a deep dive on the proxy advisory industry,” David F. Larcker, a governance expert at Stanford’s Graduate School of Business, told me. “Do they have practices and processes that really enable them to render expert advice? It’s hard to tell whether their recommendations are correct or not.” He notes that there is little research examining whether their past recommendations have been borne out in the performance of their target companies.

As for shareholder proposals, Larcker says it may make sense to find a way to “distinguish nuisance proposals from really substantive ones. Let’s make sure that the people bringing these proposals forward have an economic interest in the outcomes.”

Yet there’s little evidence that the proxy advisors have systematically advanced erroneous judgments, and no evidence of a surge in shareholder proposals that would warrant erecting new barriers. “These are solutions in search of a problem,” says John Chevedden, a veteran shareholder activist.

Nevertheless, the SEC’s rule changes would knock many activist shareholders off the field. First, they would sharply raise the required ownership of those proposing shareholder resolutions. Under the existing rule, anyone who has held 1% or $2,000 in a company’s stock for at least a year is eligible to submit a proposal. The new rule would raise that to $25,000 if held one year, $15,000 if held for two years, and $2,000 if held for three. It would also prevent small shareholders from aggregating their holdings to meet the thresholds.

The proposed rule also would raise the bar for resubmitting shareholder resolutions by increasing the level of support they must show to be accepted in subsequent years. Currently, resolutions must win approval of 3% of shareholders to be accepted a second year, 6% for a third year and 10% for a fourth or fifth year.

The new rule would set the thresholds at 5%, 15% and 25%, and allow managements to exclude a resolution in the fourth year or thereafter if it failed to win a majority of votes and also suffered a decline of 10% or more from the previous year.

Shareholder activists say those terms fail to recognize what it takes to build a head of steam behind many resolutions over time. At the troubled Wells Fargo, for example, a shareholder proposal urging the separation of the CEO and chairman posts was resubmitted for more than eight years under the old rules, peaking at 37.8% approval in 2012 and floated down to 17.2% in 2016 — but the bank actually followed the recommendation in 2017. Under the new rules, the shareholder proposal would have failed to appear on the proxy after 2013.

At Chevron, Lewis points out, a shareholder resolution seeking corporate disclosure of leaks of methane, a greenhouse gas, reached 45% approval in 2018. Its rising approval over several years helped to prompt the company to announce “new measures to address methane management,” according to the Shareholder Rights Group comment to the SEC. But under the new rules, it would have been excluded from the proxy after 2014, potentially reducing an incentive for Chevron to meet the challenge of climate change.

Sociopolitical, legislative, regulatory and even moral concerns for those in the retirement plan and money management industry were the most notable themes in Pensions & Investments’ top 10 stories of 2019.

The top story this year as chosen by P&I’s editors was the impact of the ongoing trade war with China, including potential limits of the investments allowed in the $599.5 billion Federal Thrift Savings Plan, Washington, the largest U.S. retirement plan.

Other big stories of the year reflected the sometimes contentious debate of what the future of retirement and institutional money management should look like: The U.S. Congress debated the vital topics of retirement security and multiemployer pension plan reform, the SEC courted controversy with several key regulatory changes, a prominent money manager wiped out billions of his firm’s assets under management with the utterance of a few sentences and Yu Ben Meng took over as the new chief investment officer of the largest U.S. defined benefit plan.

Here’s a look back at the headlines that drove Pensions & Investments’ coverage in 2019:

1. The impact of the ongoing trade war with China

Continuing fears surrounding the threat of protectionism and a trade war between the U.S. and China reached its peak in September 2019 when officials in the administration of President Donald Trump began to consider limiting U.S. investors’ portfolio flows into China. Those deliberations were taking place even as China’s gradual removal of limits on foreign investments had accelerated the flow of institutional money into the economic behemoth due primarily to index inclusions.

In November, a conflict arose between the U.S. Senate and the $599.5 billion Thrift Savings Plan, Washington, when Sens. Marco Rubio, R-Fla., and Jeanne Shaheen, D-N.H., introduced a bill that would prevent the largest U.S. retirement plan from directing billions of dollars of its assets to China through the shift of its I Fund benchmark to the MSCI ACWI ex-U.S. Investable Market index from the MSCI EAFE index.

The new index is made up of about 8% Chinese companies. As of year-end 2018, the I Fund had $40.7 billion in assets and the savings plan’s board on Nov. 13 upheld its 2017 decision to shift to that index.

The board sent a memo to Senate staff that the bill “discriminates against 5.8 million employees, retirees and service members by restricting their ability to direct their money and save for their retirement. This prohibition does not apply to any other 401(k) or IRA that the more than 60 million Americans use to save for their retirement.”

Broadly, both asset owners and money managers felt it necessary in 2019 to either implement or consider more defensive postures if global economic indicators worsened following further escalation of the trade war. For example, Christopher Ailman, CIO of the $246 billion California State Teachers’ Retirement System, West Sacramento, said in a September report to his board that his staff has its “leg out to shift to a very defensive strategy” should economic indicators worsen, saying at the time that the equity bull market looked as if it were running out of steam.

That said, the S&P 500 and MSCI EAFE indexes still returned 27.39% and 17.99% respectively, year-to-date as of Dec. 18.

2. Retirement legislation slowly pushes ahead

In March, the U.S. House of Representatives introduced the Setting Every Community up for Retirement Enhancement Act of 2019, known as the SECURE Act. The measure included the core provisions of the previous year’s failed bill, the Retirement Enhancement Savings Act, such as making it easier for smaller employers to join open multiple employer plans, easing non-discrimination rules for frozen defined benefit plans and adding a safe harbor for selecting lifetime income providers in defined contribution plans.

After the House approved the bill in May, three lawmakers placed a hold on the bill in the Senate, objecting to the removal of provisions that, among other things, would have allowed funds in 529 college savings plans to be used for home schooling costs and supplies for K-12 students. For months, the bill seemed hopelessly stalled until it was attached in December to an eight-bill spending package and passed by the House on Dec. 17 and then the Senate on Dec. 19. Mr. Trump was expected to sign it at press time.

While the SECURE Act of 2019 seems to have jumped its considerable hurdles, federal action on multiemployer reform is still pending. In November, a Senate Republican proposal to help critically underfunded multiemployer pension funds and prevent more was introduced by Finance Committee Chairman Chuck Grassley of Iowa and Health, Education, Labor and Pensions Committee Chairman Lamar Alexander of Tennessee.

The Pension Benefit Guaranty Corp.’s multiemployer program is projected to be insolvent by 2025.

Meanwhile, individual states continued to establish their own programs to bolster retirement security.

New Jersey Gov. Phil Murphy signed legislation in March creating the New Jersey Secure Choice Savings Program, designed to help workers whose employers don’t provide defined contribution plans establish retirement savings accounts. Similar programs targeting private sector workers already have launched in Oregon and Illinois.

On July 1, the CalSavers Retirement Savings program launched following the dismissal on March 28 by a U.S. District Court of a lawsuit filed by the Howard Jarvis Taxpayers Association alleging the Employee Retirement Income Security Act preempts the program.

U.S. District Judge Morrison C. England Jr. in Sacramento said because the program only applies to employers without existing retirement plans, no ERISA plans are “governed” or “interfered” with.

The Department of Justice in September issued a statement of interest in getting involved somehow with the dismissed lawsuit.

3. Controversial SEC actions stir debate on several fronts

The third top story of the year involved the SEC, which rarely stirs up as much of a furor as it did in 2019.

The year began with controversy over the SEC’s December 2018 approval of the implementation of a two-year transaction fee pilot program to measure the effects of maker-taker rebates on equity trade execution.

In February, the New York Stock Exchange, Nasdaq and Cboe all filed petitions with federal courts to stop the program. The NYSE, for one, asked to have the program ruled unlawful, saying that it is “arbitrary and capricious,” does not promote competition and exceeds the agency’s authority.

Nasdaq said in a statement at the time that it believed the SEC’s pilot “will harm capital formation, severely damage market participation with wider spreads, and increase the cost of capital for corporate issuers.”

Under pressure from court challenges, the SEC put the program on hold in March.

In June, SEC commissioners approved a standards-of-conduct package, commonly known as Reg BI, which features a best-interest standard that compels brokers to put clients’ financial interests ahead of their own and requires them to mitigate financial conflicts. Consumer advocacy groups including AARP said the regulation was too ambiguous and doesn’t mitigate conflicts of interest. Other critics said the action was too vague and was not legally enforceable.

The U.S. House of Representatives passed an amendment attached to a larger spending bill later in June to prohibit enforcement of the rule, and eight attorneys general filed a federal lawsuit in September challenging the rule.

Finally, in August, the SEC approved guidance stipulating that proxy advisory firms must disclose how they reach their shareholder recommendations. The new rules also include changes to the shareholder proposal process, raising the minimum amount of stock held and the time held — currently $2,000 and one year — before shareholders could file resolutions at annual corporate meetings. The new proposal calls for a minimum of $2,000 and three years, $15,000 and two years or $25,000 for one year. While the business community applauded the move, others were less enthusiastic.

The Council of Institutional Investors urged the agency in October to change course, and proxy advisory firm Institutional Shareholder Services Inc. went a step further later that month, suing the SEC for what it termed as exceeding the agency’s authority. Both were in response to the SEC’s decision that proxy-voting advice generally constitutes a “solicitation” under the federal proxy rules and said the failure to disclose certain information required under existing law would render the advice materially false or misleading.

4. Kenneth Fisher’s comments lead to redemptions

The fourth top story of the year began on Oct. 8 at the Tiburon CEO Summit in San Francisco, when Kenneth Fisher, Fisher Investments’ founder, executive chairman and co-CIO, uttered a few sentences that cost his firm mightily.

Mr. Fisher’s comments about genitalia and his comparison of winning asset management clients to “trying to get into a girl’s pants” inflamed both the public and Fisher Investments’ institutional clients.

The $74.5 billion Michigan Retirement Systems was the firstFisher Investmentserminate Fisher Investments on Oct. 10, where it had managed a $600 million U.S. midcap equity strategy. Jon M. Braeutigam, CIO of the Michigan Bureau of Investments, which manages the state pension funds, termed Mr. Fisher’s comments “completely unacceptable” in a memo and that “prompt termination was the correct course of action.”

Multiple asset owners followed, costing his firm nearly $4 billion in assets under management.

The firm had managed a total of $112 billion as of Sept. 30, $35 billion of which was institutional investors and subadvisory assignments, according to its website.

5. Yu Ben Meng becomes the new CIO at CalPERS

The fifth top story of the year was Mr. Meng’s ascension to the role of CIO at CalPERS. The appointment of a new head of investment management at the U.S.’s largest defined benefit plan is always news, but in 2019 the change in leadership was particularly notable because the pension fund had not achieved its assumed rate of return for the 10- and 20-year periods ended June 30, 2018.

The $388.9 billion California Public Employees’ Retirement System, Sacramento, had to embrace change.

“We have to be nimble, dynamic,” Mr. Meng said in an interview following his first presentation to CalPERS’ board on Jan. 22. “If the market dictates to be more opportunistic, we should be more opportunistic. If the market dictates to be more tactical, we should be more tactical.”

In February, Mr. Meng promoted the idea of raising CalPERS’ private equity allocation, sharing a chart at a CalPERS’ investment committee meeting showing that raising private equity to 16% target would increase the total fund’s expected return to 7.3%, compared to 7% with the current 8% private equity target allocation. Also this year, Mr. Meng shifted more investment discretion to staff, continued developing CalPERS’ more direct model with private equity, and shifted more equity assets in-house and cut its emerging manager program. The latter moves are the most dramatic in a year full of change. P&I reported in December CalPERS will now have $500 million with equity emerging managers, down from $3.5 billion invested with equity emerging managers as of June 30 and only $5 billion in the hands of external managers, down from around $30 billion.

6. The continuing growth of investing in China

Institutional investors’ money continued to pour into China as asset owners invested more in Chinese strategies and more money managers launched onshore funds in China. MSCI announced in February it would increase MSCI China A large-cap and midcap securities to 20% from 5% of their respective free float-adjusted market capital izations in three stages in 2019, and in April, Chinese bonds were added to the Bloomberg Barclays Global Aggregate benchmark.

7. The Federal Reserve lowers interest rates

The Fed cut rates three times in 2019 at three straight meetings concluding on Oct. 30 when the Federal Open Markets Committee cut the federal funds rate to a range of 1.5% to 1.75%. “Weakness in global growth and trade developments weighed on the economy and pose ongoing risks,” Federal Reserve Chairman Jerome Powell said at an Oct. 30 press conference. “These factors, in conjunction with muted inflation pressures have led us to lower our assessment of the appropriate level of the federal funds rate over the past year.” The shift was in stark contrast to 2018, when the Fed raised rates a total of four times, as well as Mr. Powell’s comments at the American Economic Association’s annual meeting in January, when he said the committee projected the federal funds rate would rise to 2.9% by the end of 2019.

The lower rates are expected to put more pressure on U.S. corporate pension plan liabilities and fixed-income investments.

8. GPIF continues fee push, launches governance effort

The ¥161.8 trillion ($1.5 trillion) Government Pension Investment Fund, Tokyo, launched a performance fee strategy in 2018, where active managers are only paid active management fees if they outperform passive strategies. Data in 2019 show the enormous impact on the change in strategy, which Hiromichi Mizuno, GPIF’s executive managing director and CIO, touted in August as a possible industry standard. The annual report for the world’s largest pension fund July 5 showed GPIF’s payments to managers for the fiscal year ended March 31 plunged 40% to ¥29.5 billion from a record ¥48.7 billion the year before.

In expanding its interest in ESG issues, the pension fund earlier this year expanded its partnership with the World Bank by investing in World Bank-issued green, social and sustainable development bonds, and announced its plans to request ESG indexes for non-Japanese equities, integrating ESG factors in selecting and weighting index constituents. GPIF also raised the bar on fiduciary stewardship standards with its Dec. 3 decision to suspend the stock-lending program it introduced in 2014 for international equities.

9. FedEx and General Electric head for the DB exit

Two of the larger sponsors of U.S. corporate defined benefit plans joined their brethren in closing or freezing their plans. In October, General Electric Co., Boston, announced it plans to freeze its U.S. pension plan for about 20,000 salaried employees and its U.S. supplementary pension plan for some 700 employees. Employees affected by the freeze will move into the firm’s 401(k) plan effective Jan. 1, 2021.

GE had a total of $50 billion in DB assets and $68.5 billion in liabilities as of Dec. 31, for a funding ratio of 73%, according to the company’s most recent 10-K filing. In November, FedEx Corp., Memphis, Tenn., announced plans to close its U.S. defined benefit plan to new hires effective Jan. 1 and increase the company match in its 401(k) plan a year later. Employees hired or rehired after Jan. 1 will be automatically enrolled into the 401(k) plan, which will have “enhanced” benefits effective Jan. 1, 2021. As of May 31, FedEx’s U.S. defined benefit plan assets totaled $22.3 billion, while projected benefit obligations totaled $26.6 billion, for a funding ratio of 83.8%, according to the company’s most recent 10-K filing.

10. John C. ‘Jack’ Bogle leaves a financial legacy

Mr. Bogle, creator of the indexed mutual fund and the founder of Vanguard Group in 1974, died on Jan. 16 at age 89. Less than two months before his death, Mr. Bogle’s continuing influence as a contrarian could still be felt when he challenged his peers to look beyond the success of indexing in a Wall Street Journal op-ed. “Jack Bogle democratized investing. Through his creation of the first index mutual fund he made it possible for individual investors to gain exposure to the broad stock market, thus acquiring a diversified portfolio at low cost. Though derided as ‘Bogle’s folly’ initially, the index fund has made 401(k) plans suitable as retirement vehicles for millions of workers because of that low cost,” P&I’s former Editor Michael J. Clowes said in a January interview.

For decades, fund managers making investment decisions have focused on financial performance to the exclusion of almost everything else.

In the good times they reaped sizeable dividends from the likes of oil and tobacco companies, with little concern about the potential long-term impacts of the businesses they financed.

But a change of heart about investing that looks beyond cold hard profits has taken hold to such an extent this year that Anne Richards, the boss of fund management behemoth Fidelity International, told a room full of 200 financial executives in November that the industry had to change.

“We as investors . . . must adapt to the realities of today. To slow this rapid destruction of our shared home, we will need to rethink the very purpose of our economic systems,” she said.

“The pressure is coming from all around. It’s hard to find voices that defend ‘business as usual’ and actually even capitalism as a concept.”

ASSET AGITATORS

Although there was always a small band of fund managers who were interested in whether the businesses they bought shares in were part of the “doing good while doing well” category, many of the big names have now tuned into these questions too in response to pressure from politicians, the public and, most of all, their clients.

Pension funds, which are by far the biggest clients of asset managers, are increasingly asking them tough questions about the businesses where they have shareholdings. In the UK, new rules were introduced in October this year that in effect require pension funds to consider ESG — environmental, social and governance — questions in their investment decisions.

Because of this pressure from clients, asset managers in turn have become the main agitators for businesses to change their ways in recent years, pushing chief executives for reform on everything from high pay to environmental disclosures.

“The investor voice has been key” to changes, particularly on questions of sustainability, said Tim Smith, director of ESG shareholder engagement at Walden Asset Management.

Andreas Utermann, chief executive of Allianz Global Investors, the €557bn asset management business of German insurer Allianz, said: “Clients have changed their tune. They have said we need to take this more seriously and that has sharpened the minds of the asset managers.”

The changing priorities of younger age groups is also driving the change in focus. According to data from research company Cerulli Associates, more than two-thirds of investors under 30 would prefer their investments to have a positive social or environmental impact.

With rising demand from clients, asset managers have spent the year pouring money into hiring staff and upgrading their technology systems in a bid to gain an edge in ethical investing.

They have also done more to make their views known to company boards and are more willing than ever to use their votes at annual meetings to signal disapproval. At the same time, a number of investor groups have sprung up, with the aim of improving standards in areas like workers’ rights and environmental disclosure.

HIGH PAY AND OTHER PRESSURE POINTS

What all of this means is that listed businesses face shareholder scrutiny like never before and so far the biggest battles have been about pay.

There were shareholder revolts against pay at 33 of the UK’s 350 biggest listed companies this year, up from 22 in 2014. At the same time, average shareholder support for executive pay packages at UK-listed medium and large public companies has come down every year since 2014, according to data provider Proxy Insight.

A number of top executives at British banks have also been forced to accept cuts to their pension payments to bring them more in line with their wider workforce, after pressure from shareholders.

A similar trend has played out across the S&P 500 in the US, with shareholder revolts over pay rising from 46 to 61 since 2014.

Investors have also been more involved this year in putting pressure on fossil fuel companies such as BP to improve their environmental disclosures.

“The financial markets are becoming a powerful force in the drive towards sustainability,” said Anne Simpson, investment director at Calpers, the US’s largest public pension fund. “The reason is simple. The long-term drivers of risk and return ride on companies’ ability to manage their human capital, their physical resources. It is not enough simply to deploy finance with flair.”

Ms Simpson said employee and human rights had also moved up the agenda. Calpers is a founder of the Human Capital Management Coalition, which put pressure on fast-food and retail companies to tackle low pay this year. Companies including McDonald’s and Target raised wages in response.

In the US, a human rights resolution also won the backing of a majority of shareholders for the first time ever, according to Proxy Insight. Just over half of shareholders at Microchip Technology’s annual meeting in August supported a motion calling for a report on human rights risks to employees in the company and across its supply chain.

There are also signs that investors are becoming more willing to dump companies with bad ESG records. Union Investment, Germany’s third-largest asset manager, sold its bonds and shares in mining company Vale after a dam collapse in Brazil that killed 272 people in January, as did the Church of England’s Pensions Board.

Elsewhere, Norway’s $1tn oil fund, the world’s largest sovereign wealth fund, sold out of security company G4S this year on ethical grounds, after it said it found that the company’s migrant workers in the Middle East were being harassed, had their passports confiscated and were being paid lower wages than agreed.

BUT IS DOING GOOD HERE TO STAY?

The question now is whether 2019 marked a clear shift in how the asset management industry operates. Ajit Dayal, founder of Quantum Asset Management Company, said ESG investing was not high on the agenda in Asia. “It does not exist in India. Fund managers just want to make money.”

Talking at an event in London this month, fund industry veteran Helena Morrissey said she worried that some asset managers were paying only “lip service” to sustainable investing.

“There is a lot of marketing of [funds] with ESG considerations but [some asset managers] aren’t following through with this in engagements with companies.” According to a global Edelman study of 600 investors published this year that looked at the most important attributes for a company’s long-term valuation, fund managers ranked ESG fairly low, far behind growth strategy. But others believe the change will persist and spread. Sarah Wilson, chief executive of Minerva, a proxy advisory company that provides services to shareholders, said that since the financial crisis there had been an “absolute paradigm shift” in how fund managers thought about investing.

“There are pockets of resistance, people who don’t believe these things make a difference. The way fund managers were taught to think about fund management was very narrow, but that particular paradigm has been broken,” she said.

Mr Utermann agreed that the focus from investors on ESG had changed the investment industry. “When shareholders started engaging with companies on these issues, environmental or other ESG issues, that gave them an opportunity to take their gaze away from short-term metrics and look at how they could differentiate themselves,” he said.

Sustainable investing and the pressure on companies to do good is here to stay, he believes. “[It] is really a matter of survival. There is a realisation and a conviction that if asset managers don’t address those broader concerns that stakeholders have, you won’t survive. And most leaders in this industry know that now.”

SEC Chairman Jay Clayton said Tuesday the agency is investigating suspicious comment letters it received in support of proxy rule changes that the commission proposed last month over the objections of investor advocates.

“We’re having an investigation done of this issue, so I’m just going to leave the specifics of that,” Clayton said in response to a question from Sen. Tina Smith (D-Minn.) at a Senate Banking Committee oversight hearing.

“I am very interested in hearing directly from individual investors — in particular directly — not filtered, by groups,” Clayton added.

His announcement comes after two public interest groups sent multiple letters on Monday calling on agencies to investigate why Clayton referred specifically to the letters at the beginning of a Nov. 5 meeting called to consider the proposal, citing them to show that ordinary investors backed the changes.

A Bloomberg report revealed that some of those letters were signed by people who didn’t recall writing them. Several others were signed by relatives of a lobbyist for 60 Plus, an affiliate of the Main Street Investors Coalition, which is funded in part by the National Association of Manufacturers, according to the report.

Many companies favor the new rules since they rein in the power of proxy advisers, which make recommendations to shareholders on controversial proposals such as on climate change and corporate governance issues.

“I’m certainly glad to know that you’re investigating this, I think that that’s really important. And if you’re basing decisions about what to do on comments and public interactions that end up to be fueled by corporate advocacy groups, that I think is a problem,” Smith said.

Clayton came under withering criticism from Sen. Chris Van Hollen (D-Md.), who said the letter writers supporting the proxy changes had used him as a “vehicle” to deceive the public.

“I did not have a mainstream investor ever come to me and say that this is a concern of theirs,” Van Hollen said. “Now, if there are I look forward to it. But you got duped when you rolled out that statement.”

“I hope you will make it very clear that you find it outrageous that the people who hope you’re going to do this … you became the vehicle for their fraudulent attempts to make it sound like it was all about main street investors,” Van Hollen said.

“Regardless of this colloquy, I still believe we’re looking out for main street investors,” Clayton said in response to Van Hollen.

Clayton said he is “open for discussion” on the rules. “If people think what we are proposing is too onerous … I’m open,” he said.

Still, he wouldn’t commit to delaying the rules in any way related to the outcome of a lawsuit filed against the new rules by Institutional Shareholder Services, one of two firms that dominate the proxy advisory business.

In describing how the investigation came about, Clayton told Smith: “Very shortly after the Bloomberg article came out, we contacted our general counsel and the Office of Inspector General.”

But he didn’t directly answer another question from Smith as to whether the types of letters subject to the SEC investigation should be illegal.

“The comment process is an open process, to the extent things happen, I don’t think that — well, I’m just going to leave it at that for now, let’s see what happens with the investigation,” Clayton said.

U.S. Securities and Exchange Commission chairman Jay Clayton said Tuesday that the agency is investigating letters he cited in support of a controversial proposal to increase regulation of proxy advisory firms — letters that have since been reported to be dubious.

Clayton told the Senate Banking Committee that the matter has been turned over to the SEC’s general counsel and inspector general’s office. Clayton was responding to questions by Sen. Tina Smith, D-Minn., who was concerned “sham letters” were informing the agency’s thinking.

“We are having an investigation of this issue,” Clayton said, declining to delve into specifics.

The matter stems from rules the SEC proposed last month to increase regulatory scrutiny of proxy advisory firms, which sell research and advice to investors who vote on corporate ballots.

The proposal is under fire by shareholder groups, who argue the SEC is infringing their ability to hold companies accountable. Many business groups favor reining in proxy firms on grounds that such firms exercise vast influence over corporate governance with little oversight.

The SEC proposal would require proxy firms to improve disclosure of conflicts of interests, allow corporations to review and respond to proxy firm recommendations before a shareholders vote, and codify that proxy firms could be liable for fraud if they make materially misleading statements when attempting to influence votes.

The SEC approved submitting the proposal for public comment on Nov. 5 by a 3-2 vote, with Clayton in favor. Before voting on the matter, Clayton said he was struck by comment letters from “Main Street investors” that supported the action, including Army and Marine veterans, a police officer, a retired teacher, a single mother and a couple of retirees saving for retirement.

Smith cited a Bloomberg news report that found, among other things, that the retired teacher said she never wrote the letter and the military veterans cited by Clayton were the brother and cousin of the chairman of the 60 Plus Association, an advocacy group that was paid for by corporate supporters of the proposal.

“I am certainly glad to know that you are investigating this,” Smith said. “If you are basing decisions about what to do on comments and public interactions that end up to be fueled by corporate advocacy groups — that I think is a problem.”

The topic also led to an exchange between Clayton and Sen. Chris Van Hollen, D-Md., who said he was troubled that the SEC chairman sought to create an impression that reining in proxy firms is a priority for “Main Street” investors.

Van Hollen said no investor has expressed concern to him about proxy advisers. He described the SEC’s proposal as a “top priority of corporate CEOs who don’t want to be second guessed by proxy advisors.”

“You got duped when you rolled out that statement,” Van Hollen said.

Van Hollen further asked Clayton if he was aware that letters he cited came from relatives of the head of 60 Plus. Clayton said he was not previously familiar with 60 Plus.

A message to Virginia-based 60 Plus was not immediately returned Tuesday. Van Hollen described 60 Plus as a “dark money front group that corporations use for messaging.” The group describes itself as advocating for the interests of senior citizens through a “less government, less taxes approach.”

But Clayton stood by the SEC’s proposal, saying its intent is to ensure that investors have the most accurate mix of information available before they vote on matters.

“I am not backing away from the fact that we want to do what is in the interest of our long-term investors,” Clayton said.

The proxy matter and a related proposal that would raise thresholds on shareholders seeking to place an item for vote are now open for public comment through Feb. 3, after which the SEC may vote on final proposals. Clayton said he is interested in hearing from investors.

“During this comment period I encourage as many individual investors as they can to share their thoughts with us,” Clayton said, “and we will be doing town halls where they will have the opportunity to speak directly to me.”

Glass Lewis and Institutional Shareholder Services have a stranglehold on a booming industry: advising investors on how to cast their votes at companies’ annual meetings.

This has given the two privately owned companies considerable sway on everything from executive pay to environmental policies, just as issues of governance race up the corporate agenda.

Yet early next year, the two are likely to find themselves the subject of a Securities and Exchange Commission vote that is designed to cut them down to size, but which they warn risks damaging corporate governance across America.

US regulators are one step away from passing new rules governing proxy advisers, as Glass Lewis, ISS and their smaller competitors are known. They include forcing them to reveal their voting recommendations to a company’s management before they are sent to its shareholders.

The SEC vote would cap a lengthy fight that has simmered for several years but recently erupted. It pits proxy advisers and many large asset managers against some of America’s biggest companies, including ExxonMobil and Chevron, who claim the groups are too powerful and beset by conflicts of interest.

While heartening those who have championed the proposals such as the US Chamber of Commerce and the National Association of Manufacturers, the prospect of the new rules passing early in 2020 has galvanised some institutional investors who rely on proxy advisers.

“People are pretty agitated about this,” said Ken Bertsch, executive director at the Council of Institutional Investors, which is based in Washington and represents shareholders with $40tn in assets. “The SEC seems to be rushing to do this. It may be politically geared. The evidence [for the new rules] is very shaky.”

The rise of proxy advisers dates back to the turn of the century when a wave of corporate scandals, including Enron and WorldCom, turned the spotlight on the failings of shareholders in helping to police companies. Their influence was further strengthened after the SEC adopted a rule in 2003 that required investment advisers to have voting procedures in place on how to vote on the issues at AGMs.

ISS, which was founded in 1985, has been one of the biggest winners and was acquired by private equity firm Genstar Capital in 2017. It makes millions of voting recommendations a year, and its clients include large and small asset managers, including BlackRock, Allianz Global Investors and Legal & General Investment Management.

Glass Lewis, which was established in 2003, is owned by the Ontario Teachers’ Pension Plan Board and Alberta Investment Management Corporation.

However, their growing clout began to attract the scrutiny of US business lobby groups, as well as some of corporate America’s best-known leaders. In 2013, Jamie Dimon, chief executive of JPMorgan Chase, blasted shareholders who rely on proxy advisers as “lazy”, after Glass Lewis and ISS advised the bank’s investors to vote against his pay and to appoint an independent chairman.

Industry observers say the arrival of Donald Trump in the White House injected new momentum into the lobbying against proxy advisers, giving the SEC a more pro-business tilt.

The SEC’s commissioners split along political lines last month when they proposed the proxy adviser regulations — a prelude to the final vote next year.

To critics, such as those at the US Chamber of Commerce, the charge sheet against proxy advisers is simple. First, the proxy process at shareholder meetings has become far too costly for companies. Second, ISS and Glass Lewis both have conflicts of interest, they say, particularly as ISS sells consulting services through a subsidiary to public companies to help them improve their corporate governance. Finally, there are concerns about factual errors and misplaced accusations in the voting reports they produce.

Tom Quaadman, executive vice-president at the US Chamber of Commerce, said many private businesses had told him that the power wielded by ISS and Glass Lewis was one of the reasons private companies were reluctant to go public.

As the battle has intensified over the past 18 months, the US Chamber of Commerce and the NAM paid for a six-figure advertising campaign about the “growing risk” proxy advisers pose. NAM was also one of the founding members last year of Main Street Investors Coalition, a group that has been critical of proxy advisers.

The accusations are rejected by proxy advisers, who say that moves to tighten regulation stem from the uncomfortable spotlight their voting recommendations have put on executive pay as well as social and environmental issues.

“There would naturally be some tension between companies and organisations that write about them,” said Lorraine Kelly, head of governance solutions at ISS, but pay and environmental votes “seemed to galvanise lobby groups”.

Ms Kelly rebuts claims of a conflict of interest, arguing that there is a “very rigorous firewall” between the two divisions at ISS, while dismissing criticism that its reports are error-strewn.

Last year, a report commissioned by the American Council for Capital Formation, a non-profit, found 139 purported “proxy adviser errors” across 94 different companies. But in a letter to the SEC last month, the CII said that when it delved into the ACCF report, it found that “most of the claimed errors were actually disagreements on analysis and methodologies.”

A spokesperson for Glass Lewis said: “We believe the conditions the SEC is attempting to impose on proxy advisers are averse to the interests of shareholders.”

With the battle set to reach a climax early next year, some asset managers say it is the public whose savings are tied up in the stock market who will ultimately be the losers if the rules are passed.

“We think [the proposed rule] is not helpful to us as institutional investors when holding companies to account,” said Euan Stirling, head of stewardship at Aberdeen Standard Investments, the $669.1bn UK asset manager. “It will make the job more difficult and add costs. It will be the ordinary savers who have to pay the costs.”

It is a view echoed by Nell Minow, vice-chair of ValueEdge Advisors and a co-founder of ISS. She said SEC rules should be based on a cost-benefit analysis that the regulator has failed to provide in this case.

“It is completely counter to everything that the SEC should be doing. There is no benefit to investors whatsoever,” said Ms Minow.

In a statement, SEC spokeswoman Natalie Strom said the agency’s proposal “was designed to bring greater accuracy and transparency to investors who rely on proxy voting advice businesses”.

There is also concern that the higher costs that new regulations would bring will hurt smaller players such as Minerva and Pircharder, and deter new entrants to a market in need of competition. ISS and Glass Lewis have more than 90 per cent of the market.

With public consultation on the proposed rules open until early February, the next two months are expected to unleash a final frenzy of lobbying from both sides. Several big investors, such as the head of New York City’s $207bn retirement funds, have already petitioned the SEC to abandon its plans.

In a letter to the SEC last month, Scott Stringer, City of New York comptroller, said: “In light of the harm and costs that the Proposal is likely to impose on investors, and the benefits it will bestow upon the corporate management who have aggressively lobbied for it, investors are left to wonder as to the problems that the SEC is seeking to remedy with its proposal.”

Sarah Wilson, chief executive of Minerva, a UK-based proxy adviser, said: “It is now down to asset owners and asset managers who take governance seriously to voice their views.”

But business lobby groups are already quietly celebrating. “We anticipate this is going to be completed early next year,” said Mr Quaadman.

U.S. Securities and Exchange Commission Chairman Jay Clayton says his agency is investigating claims that a Virginia-based advocacy group was behind suspicious comment letters submitted in support of a rule change sought by large corporations.

“We’re having an investigation done of this issue,” Clayton said Tuesday in response to a question at a Senate Banking Committee hearing in Washington.

Lawmakers sought answers from Clayton on what the SEC was doing to address revelations in a Nov. 19 Bloomberg News story that some people whose names appeared on comment letters in support of changes to shareholder-voting rules said they hadn’t submitted them. A Democratic watchdog group last week called on the agency to investigate the role played by the 60 Plus Association, a Virginia advocacy group.

“Very shortly after the Bloomberg article came out, we contacted our general counsel and office of inspector general,” Clayton said in response to a question from Senator Tina Smith, a Minnesota Democrat.

Saul Anuzis, the president of 60 Plus, said last week that although his group helped draft and submit letters, all of the people whose names were used gave permission, “and they will be willing to sign an affidavit to testify as such.” He said people who told Bloomberg News that they didn’t know about their letters may have forgotten.

Clayton declined to respond when asked whether he thought it should be illegal for groups to submit comment letters in the name of individuals.

“The comment process is an open process,” he said. “Let’s see what happens with the investigation.”

Two groups of nuns, including one that puts living a life of peacemaking at the centre of its work, are gearing up for a fight with the US financial regulator over proposed shareholder rules.

The Ursuline Convent of the Sacred Heart in Toledo and the Dominican Sisters of Peace based in Columbus, Ohio, want the Securities and Exchange Commission to reverse its plans to introduce rules that would make it harder for smaller shareholders to submit proposals at annual meetings of public businesses in the US.

In a letter addressed to SEC chair Jay Clayton, Sister Barbara Kane, justice promoter at the Dominican Sisters of Peace, which has about $300m in assets, said: “Changing the rules governing shareholder resolutions is a solution without a problem.”

She added: “I understand that the SEC must balance the needs of shareholders with those of businesses but these changes are putting the scale on the side of business which puts our investments in danger.”

A divided SEC voted along political lines in November to require investors to hold more shares for longer before they can submit proposals. Currently shareholders must hold $2,000 worth of shares for a year, but the SEC plans to change this to a $25,000 holding for at least a year, declining to $2,000 for three-year holdings. It also wants to raise the thresholds for resubmitting unsuccessful proposals.

Sister Sandra Sherman, president of Ursuline Convent of the Sacred Heart in Toledo, which has an investment pot of about $20.6m, warned in a letter to the SEC that the proposed rule changes could leave congregations such as hers “without a voice” at corporate meetings.

She said the $2,000 ownership threshold enabled a variety of investors to have their voices heard. “These smaller investors have had great impacts on corporate practice throughout the history of the proposal process.”

She pointed out that small shareholders through their proposals have been instrumental in encouraging many companies to consider climate change, human rights assessments and governance reforms. “The proposed changes could prevent significant topics from even being suggested and considered, a loss to all shareholders,” said Sr Sherman. “We strongly urge the SEC to reconsider the proposed rule changes.”

According to data from the Interfaith Center on Corporate Responsibility, a coalition of investors with $400bn in assets, more than a third of ICCR members’ 277 proposals during the 2019 annual meeting season resulted in changes to corporate policies and practices.

The figures also show that of the 114 shareholder proposals that went to a vote this year, 10 achieved majority backing, while more than 60 per cent received at least 25 per cent support.

Sr Sherman said shareholders engaged on environmental, social and governance risks “precisely because we are concerned about the long-term health of the companies in which we are invested”.

“Engagement enables them to mitigate reputational, legal and financial risks, and build value. The filing of shareholders resolutions by investors big and small is a crucial part of the engagement process,” she said.