SEC's Five Most Anti-Investor Actions of 2007
J. Robert Brown | Wednesday, January 2, 2008 at 06:15AM With the advent of the new year, we look back on the decisions of the SEC during 2007. As wehave written, the Commission has played and will continue to play an active role in the corporate governance process. But over the year, the Commission has made some really bad decisions, inconsistent with that mission. We provide a top 5 but invite readers to suggest any additions to the list.
#5 The efforts to use the SEC to promote a political agenda by highlighting companies with operations in countries designated as "state sponsors of terrorism."
This was an effort by the Commission topublicize the companies doing business in these countries. Leaving aside that the effort was executed poorly (the information came from annual reports and did not take into account any changes disclosed in subsequent reports) and that it involved information readily available to anyone or any interest group that wanted it, the Commission essentially made a loud political statement by opting to use terrorism as the template for disclosure. The effort damaged the appearance of the Commission as "independent" and motivated by a desire to protect investors.
#4 Chairman Cox' efforts to demonize hedge funds.
In connection with the much discussed access proposals, the Chairman spoke at anopen meeting and testifiedbefore Congress, decrying the potential harm that might come if the Commission did not take steps with respect to access. He used as an example of the evil that might befall the US securities markets the possibility that off shore hedge funds might seek to nominate directors as part of a plan to strip assets from a company. The example was silly (any shareholder using access as part of a scheme would require at least two years, face an uncertain response from shareholders, and at most get a short slate of directors elected to the board). Instead, it was as if the mere mention of hedge funds would somehow cause paroxysms of fear and justify the position taken by the Chairman. In short, he used the phrase as a substitute for analysis.
It was, plain and simple, an attack on a category of activist shareholders. And, while hedge funds may often have short term investment strategies, so do plenty of other investors in the marketplace. As much as the Chairman tried to limit his criticism to a specific type of investor, in fact he cannot mask discomfort with, and perhaps opposition to, activist shareholders in general.
#3 The Commission's inactivity in areas of critical importance to investors, particularly direct communication between street name owners and the company. The shareholder communication rules are a mess. For an article on the subject go here. Back in 2004, the Business Roundtable submitted a petition to reform these rules. In 2007, the Commission still has not acted on these proposals. At the same time, however, apetition to discuss reforms of (read limitations on) shareholder litigation received almost immediate action, with the Commission planning a roundtable on the subject in the spring.
#2 The decision to approve the merger between the NYSE and Euronext (and the merger between the NYSE and NASD) without ensuring adequate enforcement of listing standards. As we have discussed on this Blog, both the NYSE and Nasdaq have become for profit institutions. Yet they retain a critical regulatory function, the enforcement of listing standards, an increasingly important source of corporate governance. Profit maximization and regulatory enforcement will not, however,always be compatible.
For better or for worse, the primary method used to ensure adequate enforcement has been through director independence. Yet principals of director independence were weakened as a byproduct of thedecision by the NYSE to merge with Euronext. The NYSE needed to allow industry representatives on the exchange board in order to appease Euronext and get the merger done. It is easy to understand the motives of the NYSE, the merger appears to have been an enormous success (from a profit maximizing point of view). It is less easy to understand why the Commission did not go to greater lengths to ensure the independence of the body responsible for the enforcement of listing standards.
#1 Denying shareholders access for proposals that would sometimes require the inclusion of shareholder nominees in the company's proxy statement. This is a topic that we have explored on this Blog at great length.
There is little doubt that shareholders have the right under state law to propose these bylaws. There is also little doubt that shareholders cannot effectively do so because of the costs imposed by federal regulation, specifically the proxy rules. In denying access, therefore, the Commission effectively denied shareholders rights that exist under state law. The rational for doing so -- that, in the words of the Chairman, a "law of the jungle" would reign -- was hyperbolic, inaccurate and disappointing. In the end, it placed the Commission squarely against the rights of shareholders.
Reader Comments (1)
Les Greenberg, who teamed together with me in restarting the proxy access movement in the summer of 2002, may soon be getting some traction in his battle to revoke mandatory arbitration. Please write to your Congressional Representatives in support of Senator Russ Feingold's Arbitration Fairness Act of 2007. Also needed is your support for a Congressional investigation of the links between the SEC and SROs (self-regulating organizations like the stock exchanges) they regulate. Join with Greenberg in demanding Congress throw off the bedcovers.
Public customers of securities brokerage firms are required to agree to arbitrate disputes. Although arbitration can be a fair and efficient way resolving disputes when both parties choose it after the dispute arises, high administrative fees, a lack of discovery protections, and a lack of meaningful judicial review of arbitrators’ decisions all act as barriers to the fair and just resolution of an individual’s claim. When arbitration is required rather than voluntarily chosen, customers lose.
For example, in a survey of 100 financial advisers by Vestment Advisors, nearly 20% said they knew of someone who knowingly had violated compliance rules and regulations. Cited were cheating on computerized training, signing account forms for clients, not sending e-mail to the compliance officer for review and not processing checks the day they were received. (Advisers often skirt compliance rules, survey finds, Investment News, 5/29/07)
Brokers have the upper hand in arbitrations. That's the conclusion of a 10 year study. The bigger the claim and the bigger the broker, the less likely the recovery. (Advisors Score Big in Arbitration Study, OWS Magazine, 6/2007)
Public Citizen, a Washington-based consumer watchdog group, reported that consumers won 4% of 19,000 California cases decided by one arbitration firm between January 2003 and March 2007. The study found one arbitrator who rendered 68 decisions in one day -- "one every eight minutes," said Laura MacCleery, director of the consumer advocacy group Public Citizen's Congress Watch. "Consumers won zero." Bills aim to get consumers their day in court, LATimes, 12/17/07)
Drawing on 30 years of experience serving as an NASD arbitrator and as legal counsel for either claimants or respondents, Greenberg's filed a rulemaking petition in May 2005 to the SEC and Supplement that would have required a number of reforms: Others picked up on the cause. For example, in June of 2007 Daniel R. Solin petitioned the SEC to prohibit broker-dealers from requiring investors to accept mandatory arbitration clauses and Greenberg filed a letter in support.
As indicated above, Senator Russ Feingold introduced the Arbitration Fairness Act of 2007. Passage of that bill now appears more likely than enactment of SEC rules, so we ask for your support in that effort. However, Greenberg's investigation also led down another even more disturbing path -- the relationship between the SEC and SROs.
Through FOIA requests, which sought all communications between the industry dominated Securities Industry Conference on Arbitration (SICA) and the SEC, including SICA Meeting Minutes, Greenberg determined why the SEC didn't comply with rules requiring them to respond to rulemaking petitions. Such petitions, which often deal with conflicts of interests within the SROs, are sent to the SROs for recommendation. That's fine, but It turns out the SEC has essentially rewritten the rules because they don't set a return deadline and if the SRO fails to take up the public Petitions, the SEC Staff takes no action at all.
Greenberg filed a Complaint for Declaratory and Injunctive Relief with the United States Securities and Exchange Commission (USDC Case No. CV 06-7878-GHK(CTx) alleging violation of the Federal Advisory Committee Act. Additionally, Greenberg wrote to Barney Frank, Chairman of the House Committee on Financial Services, requesting a Congressional investigation of the above-described egregious conduct of the SEC Staff, which stifles the legitimate rights of the investing public. Please join with us in writing to Rep. Frank in support of Greenberg's request. Ask Frank to open a Congressional investigation into the relationships between the SEC, SROs, and SICA to determine what reforms are needed to ensure the best interests of the investing public will be served.