The UK’s largest pension fund has added its voice to those expressing concern about rule changes proposed by the US securities regulator that affect the shareholder voting process.

In a letter submitted last week to the Securities and Exchange Commission (SEC), the £70.1bn (€78.2bn) Universities Superannuation Scheme (USS) criticised a proposed requirement that proxy advisors share advance copies of voting recommendations with companies before passing them on to the investors that are their clients.

“In our view, any Commission regulation that has the potential to compromise the independence of the research produced by proxy advisors and impinge upon the agency relationship with institutional investors would be detrimental to the execution of shareholder rights and would be incompatible with SEC’s historic role of investor protection,” wrote Patrick O’Hara, senior responsible investment analyst at USS.

Large US institutional investors have been concerned about the SEC’s actions with regard to the shareholder voting process for some time, and O’Hara expressed USS’s support for the views set out in an October letter from the Council of Institutional Investors (CII), a US asset owner association, and a coalition of investors including major US pension funds such as CalPERS and CalSTRS.

A group of large Dutch and Nordic pension investors has also backed this letter, expressing “strong” support for the views it contained.

“It is important to remind the SEC that as asset owners we take the final decision on how to vote”

“It is important to remind the SEC that as asset owners we take the final decision on how to vote,” added senior representatives of APG, MN and PGGM in the Netherlands, and of Swedish buffer funds AP1, AP2, AP3 and AP4.

“We have developed detailed custom voting policies and proxy advisors provide independent research that feeds into our independent decision making process,” they wrote in a comment submitted last month.

Kempen Capital Management, another Dutch investor, also registered concerns about the rules, calling on the SEC to reconsider them.

Unveiled in November, the SEC’s proposed rule amendments, and the lead-up to them, are complex and controversial.

For example, the CII has argued that there is scant evidence for claims of errors in proxy advisors’ voting recommendations, which champions of the SEC’s proposals have made. Most of the alleged errors are cases where the company disagrees with the analysis and methodologies, it argues.

The association recently appealed for dispute resolution services regarding its request for copies of SEC staff analysis and related documents pertaining to a presentation of data on proxy advisor errors included in the SEC’s November proposal.

Konstantin Sergakis, professor of capital markets law and corporate governance at the University of Glasgow, said the objectives of the proposed reform were laudable but that the SEC’s proposals “frame the dialogue with investee companies in a formalistic, stringent and counter-producive fashion”, which would reduce their overall utility and efficiency.

The proposals would have negative implications for competition in a market that was already “largely” dominated by two firms, according to the academic.

Shareholder resolution ESG brake

USS also registered its concerns about proposed changes to a rule governing shareholder resolutions, citing their role with regard to environmental, social and governance (ESG) matters.

“If finalised, the SEC’s proposed amendments would in many cases hinder discussion of emerging ESG issues”

Patrick O’Hara, senior responsible investment analyst at USS

“We consider that such shareholder resolutions have played an important role in encouraging better corporate disclosure on material ESG issues and if finalised, the SEC’s proposed amendments […] would in many cases hinder discussion of emerging ESG issues,” wrote senior analyst O’Hara.

A group of 15 of the most frequent filers of shareholder proposals this week argued that the SEC’s “dramatic” proposed rule changes would undermine shareholders’ rights to hold companies accountable for “risk mitigation and crisis management”.

“The proposed rule changes would make the path of investor engagement steeper and more convoluted, adding unnecessary costs and red tape, and making it more difficult for investors to foster sustainability, risk management, and governance improvements at their companies,” wrote Sanford Lewis, director of the Shareholder Rights Group in a letter to the SEC.

“It would block the most established and effective path for improving ESG disclosure and performance of the market.”

The regulator’s proposed rule changes would increase the stock ownership requirements for submitting a resolution and increase the level of support the proposal must have received in order for it to be resubmitted in subsequent years.

The Shareholder Rights Group is made up of smaller US asset managers such as Arjuna Capital and Boston Common Asset Management, which have a strong sustainability stance.

The deadline for feedback to the SEC is 3 February, which several institutional investors have said does not give enough time.