SEC Pushes Back On Power of Proxy Advisors

In a move seen to be the first in a series of steps to curtail the power of proxy advisory firms, the SEC today reiterated its stance that providing advice on voting is “solicitation” under federal law and will be governed by stringent anti-fraud rules.

In a 3-2 vote, the commission decided to issue the guidelines, clarifying the responsibilities of fund managers when they deal with proxy advisory firms. “An important first step,” said SEC  commissioner Elad Roisman, who has led the push to develop new rules for overseeing proxy advisors.

“I am aware that, for some, this is a controversial topic,” said Roisman. “I have heard the warnings that any action, regulation, or oversight that directly or indirectly constrains proxy advisory firms will be viewed by some as a gift to the management and directors of public companies, resulting in harm to investors.

“To be clear, in this context, I do not consider asset managers to be the “investors” that the SEC is charged to protect.  Rather, the investors that I believe today’s recommendations aim to protect are the ultimate retail investors, who may have their life savings invested in our stock markets.  These Main Street investors who invest their money in funds are the ones who will benefit from—or bear the cost of—these advisers’ voting decisions. In essence, I believe it is our job as regulators to help ensure that such advisers vote proxies in a manner consistent with their fiduciary obligations and that the proxy voting advice upon which they rely is complete and based on accurate information.” (Read his full statement)

Proxy advisors such as Institutional Shareholder Services and Glass Lewis have drawn the scorn of many CEOs and directors in recent years for what they contend is an outsized ability to influence the proxy voting process and set standards for corporate behavior and governance. The firms say that they are a critical part of the investing community, providing much-needed insight and information about the activities of public companies that would be hard to discover otherwise.

SEC commissioner Robert Jackson, a Democrat appointment to the committee, voted against the guidance. He said he worried about curtailing the ability of anyone to provide information about companies to investors that “can help hold insiders accountable for how they run America’s public companies.”

“I’m concerned that today’s guidance may alter the competitive landscape for the production and use of that advice—without addressing whether doing so might make it harder for investors to oversee management,” he said. (Read his full statement)

Still, the move was unlikely a surprise for either ISS or Glass Lewis. Speaking at Corporate Board Member’s annual Boardroom Summit in April, both Retelny and KT Rabin, CEO of Glass Lewis, said they expected some form of SEC regulation to address potential conflicts of interest where the firms sold services to public companies that they also reviewed, and were already working to bolster transparency around their methods and business models.

They also pushed back on the idea that they had become too influential in the investment community. “The biggest misconception is that our institutional investors, which exceed 1,500 globally, just follow ISS blindly,” Retelny said during a session at the Boardroom Summit. “Nothing could be further from the truth.”

In a statement, Gary Retelny, president and CEO of ISS, said he was “deeply concerned that aspects of the guidance may significantly undermine our ability to deliver independent, timely and accurate data, research, insights and perspectives to aid in the discharge of our clients’ fiduciary duties.”

As expected, the move was immediately cheered by the business community, which has had an increasingly antagonistic relationship with the firms in recent years.

“Proxy advisory firms have been riddled with conflicts of interest, failed to link advice with economic return or company specific information, and lack process and transparency,” said Tom Quaadman, Executive Vice President of the U.S. Chamber’s of Commerce’s Center for Capital Markets Competitiveness. “We commend the SEC for taking a critical first step in bringing much-needed oversight to proxy advisory firms, and we hope the SEC and other regulators take further action to ensure that proxy advisory firms provide ‘decision useful’ information to investors.”