What could proposed changes to SEC rules mean for Canadian pensions?

While it isn’t Canadian, the U.S. Securities and Exchange Commission certainly has plenty of power to affect assets held by Canadian pension plans.

A number of proposed rule changes recently brought forward by the SEC are raising Canadian institutional investors’ eyebrows. The Pension Investment Association of Canada submitted two letters to the SEC addressing potential changes related to proxy voting practices and shareholder rights.

Regarding proxy voting, the SEC has proposed that issuers of stock are more involved in how proxy advisory firms establish their recommendations on their own companies. The PIAC’s letter highlighted that this is an inherent conflict of interest.

Read: What’s the role of the proxy advisor as rules shift?

It also noted institutional investors making use of proxy advisory recommendations make their own independent analyses and don’t necessarily act in harmony with the advice of a third party. “Giving companies the opportunity for additional participation in the recommendations of proxy advisors would detract from, rather than contribute to, the objectivity of those recommendations,” said the letter.

Interacting with proxy advisory firms can be frustrating for corporations, says Andrew Beck, a partner at Torys LLP, noting companies’ further involvement with proxy advisors wouldn’t be a good thing for institutional investors seeking clear, unbiased advice.

Substantial pushback from investors that use these firms is likely to sway the SEC away from its proposed changes, says Beck. “That’s a proposal that I don’t think is going to go anywhere.”

As well, the PIAC addressed the SEC’s proposals to change the eligibility requirements for shareholders to make resolutions on which stock owners can vote, and to introduce a tiered system whereby a shareholder’s right to make resolutions would depend on how long they hold a given stock.

Read: When companies push back on pension engagement, proxy voting

“While we believe that reasonable controls are necessary to prevent frivolous shareholder proposals, increased eligibility thresholds may not be the best approach since proposals put forward by small shareholders may be just as valid as those proposed by larger shareholders,” the letter said. “Proposals should not be excluded solely based on the size of the shareholding. Further, introducing a tiered approach based on the length of holding periods may not accurately capture an investor’s economic stake, since how long a shareholder has held a position in the past is not necessarily indicative of how long they will continue to hold it in the future.”

One reason stakeholders might be interested in discouraging shareholder votes is because it does cost companies money to carry them out, says Beck. “All things being equal, you don’t necessarily like to see the company spending a lot of money.”

The SEC also put forward rules that would restrict previous proposals from being continually proposed when there isn’t significant shareholder interest. Essentially, the regulator is trying to find a balance between allowing shareholders to make useful proposals, while also discouraging shareholder behaviour that’s unlikely to result in any kind of actual change — and in some cases, are simply a long-term nuisance for the vast majority of shareholders.

Read: Lessons from 2019’s proxy voting season

These restrictions aren’t without their detractors, says Beck, and it’s notable that an organization like the PIAC would take a specific stance against them.

As well, the SEC proposed loosening restrictions on who can be considered an accredited investor or an institutional buyer, prompting questions about what it would look like for more players to be allowed in the private capital market space.

“The current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth,” said SEC chairman Jay Clayton, in a press release. “Modernization of this approach is long overdue. The proposal would add additional means for individuals to qualify to participate in our private capital markets based on established, clear measures of financial sophistication.”

But Beck says there isn’t likely to be a massive influx of capital if these investors are allowed to participate. While it will expand access, he notes there aren’t enough individuals who’d want to participate in private capital markets under these new terms to cause a major wave in the market.

Read: Should proxy voting firms be more strictly regulated?