Proxy advisory firms were among the handful of industries identified by SEC Commissioner Jackson as significant players in the capital markets that are characterized by a dearth of competition or concentration of power to the detriment of the investment community. Others industries/services noted on a no-names basis in his recent remarks: "Competition: The Forgotten Fourth Pillar Of The Sec's Mission" - which called on the SEC to "reclaim its historical role of ensuring competition in our capital markets" - include the stock exchanges, investment banking services for middle market IPO companies, credit rating agencies, accounting firms, and corporate election vote tabulation (i.e., Broadridge).
Here is a key excerpt:
It's not just these three examples, of course: there is concentration across our financial markets. There are only four major accountancies; two major firms advising investors on how to vote their shares; and one company that counts the votes in of the vast majority of corporate elections. Each of these institutions plays a crucial role in our economy as gatekeepers of capitalism. They're vital to how capital—and the opportunity that comes with it—is allocated throughout our economy. Yet each of these critical pathways to our capital markets features, at most, just a few players.
As a result, ordinary investors are driving on roads riddled with tollbooths. You see, when an industry is dominated by just a few players, those players can exploit their market power to extract rents from the broader economy. The bundling, cross-subsidization, exclusive contracts, and price discrimination we see throughout our securities markets aren't free. American investors and entrepreneurs pay for them in the form of higher costs and distorted decisions about the capital allocation that will define our economic future.
Jackson suggested that the lack of meaningful competition should - among other things - inform the SEC's policy choices, e.g., whether and to what extent to regulate in particular areas:
For example, although a fully competitive market might not need conflict of interest rules—because investors can simply choose to work with unconflicted counterparties—a lack of competition might require the SEC to be more aggressive about investor protection. The reason, of course, is that without competition investors have few alternatives--and may find themselves forced to work with agents who have costly conflicts. In short, as regulators, we should recognize that the free market is less able to resolve issues on its own in the absence of real competition for investor dollars.
His other recommendations for the SEC include creating an Office of Competition Economics within DERA to formalize competition economics within the SEC, collaborating more closely with the FTC, and not relying on deregulation to spur competition - which he attributed to unsubstantiated "blind faith in market forces."