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Royce Questions SEC on OFR Transparency and Proxy Advisor Accountability

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Washington, October 23, 2015 | Saat Alety (202-225-4111) | comments

Today, U.S. Representative Ed Royce (R-Calif.) questioned Mr. David Grim, Director of the Division of Investment Management at the U.S. Securities and Exchange Commission (SEC), on the need for reform at the Office of Financial Research (OFR) and greater accountability at proxy advisory firms. The questioning took place at a Capital Markets and Government Sponsored Enterprises Subcommittee hearing entitled "Oversight of the SEC’s Division of Investment Management."

“Director Grim, the OFR’s Asset Management Report included a number of factual errors. For example, the report listed an incorrect name for Fidelity’s highest level asset manager entity and misreported the amount of its assets under management. The report improperly described Vanguard’s structure. The report misrepresented the amount of assets under management for PIMCO. Thankfully, the SEC provided stakeholders with an opportunity to point out these mistakes along with substantive concerns that the SEC had about the report. Do you think some of these mistakes could have been avoided if the OFR worked more closely with the financial supervisors and regulators, those after all with the expertise in these areas, and maybe also opened up their work for public comment?” asked Rep. Royce.

“With respect to the OFR report… SEC staff provided some comments to the OFR on it. It was the OFR's report, they chose to take some of our comments, they chose not to take some other comments. I think ultimately it was up to OFR to decide how the final report looked,” replied Grim.

“Well you may know that Congressman Patrick Murphy and I have introduced a bipartisan bill, the Office of Financial Research Accountability Act, to address these issues. The bill requires the OFR to submit for public notice and comment an annual report that details the Office’s work for the upcoming year. Additionally, this bill requires the OFR to coordinate with financial regulators when they conduct future studies. While the OFR opposes this extra, what I would call, transparency, I am hopeful we will see widespread support for these balanced changes going forward,” stated Rep. Royce.

“Following up on the staff legal bulletin on proxy voting that Chairman Garrett and Mr. Huizenga raised earlier: Should proxy advisory firms not be held to the same sort of accountability on corporate reporting and transparency as the SEC requires of the publicly traded companies that they advise on?" continued Rep. Royce.

"With respect to proxy advisory firms and the guidance that the staff did issue, I think it was focused on addressing two important issues as a general matter. One is, with respect to the proxy advisory firms themselves, doing what we can to encourage good disclosure of material conflicts of interests by those proxy advisory firms. The second focus of the guidance was on investment advisors and how they use proxy advisory firms, making sure that their oversight of the proxy advisors is robust and appropriate," replied Grim.

"I saw the bulletin, one of the things it brought to mind was whether or not we shouldn't instead be having the Commission have a formal rulemaking on this. And I say it for these reasons: when we get to this question of what are the standards of performance, we've got a situation where you've got two entities, and they dominate here clearly over 90% of the market, and on top of it have a situation where their reports, I would think, would be subject to public scrutiny, after those reports are prepared. But we don't have that. So I think taking it higher than a staff legal bulletin and taking it to basically a question of rulemaking on this by the Commission is something I would suggest," continued Rep. Royce.

"I think where we are right now is after the staff issued that guidance, we have had a proxy season run and we have my colleagues in the examination unit who are planning to do some exams. So we're trying to gather more feedback on the status and then we'll decide whether further action, including potential rulemaking, is necessary," responded Grim.

"The rules of the road seem to change when someone has an interest. And I guarantee you when you have a situation where you have two entities, 90 percent of the market, and the kinds of questions that have been called up over this performance, I think in the end of the day we're going to need rulemaking on it," concluded Rep. Royce.

Watch Rep. Royce's questioning of the witness here or by clicking on the image below:

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