The newest SEC Commissioner, Elad Roisman, who has reportedly gotten the nod to head up the SEC’s efforts regarding proxy advisory firms, told the U.S. Chamber of Commerce in late March that he expects the SEC to issue new guidance, sometime after proxy season this year, regarding the use by institutional investors of proxy advisory firm recommendations, as reported in The Deal. And, according to the WSJ, Roisman has “also questioned whether it was appropriate for the SEC to exempt proxy advisers from some regulations on investment advice, including whether they can both advise a company and make recommendations to its shareholders at the same time.” However, as discussed in this PubCo post, the question of whether proxy advisory firms, such as ISS and Glass Lewis, have undue influence over the voting process and should be reined in has long been something of a political donnybrook. With the issue of proxy advisory firm regulation so politically freighted, will the SEC limit the scope of its effort to guidance to institutional investors or, more controversially, go further and impose regulation on proxy advisors, as many companies have advocated?
In 2004, the staff of the Division of Investment Management issued two no-action letters, Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004), which provided staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms. Frequently disparaged (see this PubCo post), those two letters were withdrawn by the staff in September 2018, in anticipation of the SEC’s proxy roundtable.
In the staff statement, the staff indicated that the notice of withdrawal of the two letters was provided to facilitate the discussion at the SEC’s 2018 Proxy Roundtable and that it intended to use information and feedback learned at the Roundtable in making recommendations to the SEC with respect to proxy advisory firms, including with regard to SLB 20 (discussed in the SideBar above). (Note that, in remarks yesterday to the SEC Speaks conference, SEC Commissioner Hester Peirce indicated that, with respect to those two no-action letters, in her view, “the letters should never have been issued, and it certainly is time to reassess the industry that grew up around those no-action letters with their purportedly limited reach.”)
As it turned out, the panel’s discussion at the Proxy Roundtable regarding the power of proxy advisors was remarkably tepid. Surprisingly, there did not seem to be much call for registration or other regulation of proxy advisors, possibly because of the fear of rising costs associated with registration and further regulation. (See this PubCo post.) (Note, however, that, legislators seem to regularly introduce legislation, to no avail, that would require the SEC to regulate proxy advisers. See, for example, the Corporate Governance Fairness Act, introduced in 2018.)
Of course, beyond the Roundtable, others have expressed strong views advocating proxy advisor regulation. As discussed in the WSJ, lobbyists such as the U.S. Chamber of Commerce and the National Association of Manufacturers, as well as Nasdaq and the NYSE have “mounted a well-funded offensive against the industry.” In addition, the WSJ reported, over 300 companies “signed on to a February Nasdaq, Inc. letter calling for the SEC to take ‘strong action to regulate proxy advisory firms.’” These corporate groups, the WSJ reported, “are pushing the SEC to allow companies more leeway to address the firms’ recommendations before they are sent to shareholders, a process that would also allow them to flag any errors in the recommendations. Some corporate groups, including NAM, want the SEC to consider new registration requirements for proxy advisers and add new disclosure requirements related to possible conflicts of interest.”
There is, however, prominent opposition to that position. In remarks yesterday at the same SEC Speaks conference, Investor Advocate Rick Fleming identified proxy advisory firm regulation as one of ideas percolating at the SEC that he was “less enthusiastic about” (to put it mildly):
“I think it is fair to say that investors are wary about efforts to regulate proxy advisors. As many of you know, asset managers who hold shares in a wide range of companies face a logistical challenge in voting on numerous items each proxy season. Investment advisers are also required to vote shares in a way that is faithful to the fiduciary duties they owe their clients. To satisfy this obligation in a cost-effective way, many asset managers use the services of a proxy advisor. In addition to assisting with vote execution and regulatory reporting across markets globally, the advisors monitor the issues that are up for a vote, collect and analyze information and data, and give asset managers advice on how to vote their shares in accordance with the asset managers’ expressed wishes.
“Some have criticized proxy advisors and allege that they have conflicts of interest in their business models, factual errors in their analytical processes, and a political agenda that supports social policies at the expense of investment returns. All of these things would cause me great concern, except for one thing—the investors who are paying for this service are not the ones who are expressing those concerns. Indeed, at the Roundtable on the Proxy Process that the Commission held last November, I think the investors made it pretty clear that they are relatively happy with the services they receive from proxy advisors. This is not to suggest that proxy advisors are perfect, but to the extent that any problems exist, it seems that their paying customers should be the ones to raise them….
“To be clear, some investors have expressed concerns that fund advisors may cast proxy votes in opposition to the stated objectives of the fund or in ways that are contrary to the interests of the investors in the fund. But, to the extent this is occurring, it involves a question of whether the fund adviser is satisfying its fiduciary duty to the investors in the fund, and the Commission already has authority to deal with that issue. It doesn’t require additional oversight of the proxy advisors who generate advice in accordance with the fund adviser’s instructions.
“So, if investors aren’t calling for increased regulation of proxy advisors, what is driving the push for regulation?… In my view,… the simple fact of the matter seems to be that proxy advisors have given asset managers an efficient way to exercise much closer oversight of the companies in their portfolios, and those companies don’t like it. That’s understandable, and it is also understandable that companies, rather than directly asking the SEC to suppress shareholder voting or give companies more of a say in the advice that is given, would try to cloak their arguments under the mantle of investor protection. But the investors themselves—again, the ones paying for proxy advice—are not asking for protection. In fact, I keep hearing opposition from investors to proposals that might lead to interference in the proxy voting process.”
Fleming’s views echo those of SEC Commissioner Robert Jackson, who has indicated that he feared that the SEC’s “efforts to fix corporate democracy will be stymied by misguided and controversial efforts to regulate proxy advisors.” In effect, he was concerned that the focus on regulating proxy advisors was a shiny object that might well deflect attention from the serious problems affecting the corporate voting system. (See this PubCo post.)
According to The Deal, while the precise kind of guidance the SEC would issue is not yet known, the SEC “generally wants to make it easier for investors lacking resources to research voting topics at their portfolio companies, to be permitted not to vote altogether. In an interview with The Deal after his comments, Roisman expressed his concern about “the use of proxy advisers by some investors, suggesting that some shareholders appear to be adopting policies set by proxy advisers, rather than coming up with their metrics….It is also possible that the SEC could move forward with a regulatory proposal imposing tougher restrictions on proxy advisers. The agency could require proxy advisers to provide draft recommendation reports to companies before publication for clients, so that businesses can submit comments and criticism, to accompany the initial recommendation report publication.”