More than six decades ago, the late Professor Marver H. Bernstein published his theory of regulatory capture in Regulating Business By Independent Commission (Greenwood Press 1955). According to his theory, agencies follow a life cycle of birth, maturity and old age. As an agency enters senescence, it inevitably becomes captive to the groups that it regulates.

The Securities and Exchange Commission’s recently issued universal proxy proposal appears to provide some support for the notion that a small cadre of institutional investors has captured the agency.  According to the SEC, the proposal’s genesis was a 2013 recommendation of the Investor Advisory Committee followed by a rulemaking petition submitted by the Council of Institutional Investors. What isn’t apparent from the SEC’s release is the substantial overlap between these two groups.  In fact, the following members of the CII are associated with individuals serving on the IAC.

AFL-CIO

California Public Employees’ Retirement System (CalPERS)

California State Teachers Retirement System (CalSTRS)

CFA Institute

Readers of the SEC’s proposal also wouldn’t know that when the IAC made its recommendation, Joseph Dear was CalPERS’ Chief Investment Officer as well as a former Chair of the CII.  Anne Simpson, a CalPERS officer, currently serves as a member of the IAC.  Thus, it is no surprise that the SEC’s proposal also cites a letter from CalPERS in support of support for SEC action. The IAC’s current Vice Chair, Anne Sheehan, serves as Director of Corporate Governance at CalSTRS.  She was married to Mr. Dear and also served twice as Chair of the CII.

It is also worth observing that the CII’s 2014 rulemaking petition has attracted only two letters of comment, one from the CII’s own advisory counsel and another from an individual investor.

While it may be overstatement to asseverate that the SEC has been captured, it is clear that the SEC is hearing the voices of a small, interconnected group.