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Jul 23, 2020

SEC approves revised proxy adviser reforms

Changes to proposals don't appease ISS or avoid split vote

The SEC yesterday voted to adopt measures governing the proxy advisory industry but drew back from more far-reaching requirements it had initially proposed.

Under the final rule amendments, proxy advisers will have to provide ‘specified conflicts of interest disclosure in their proxy voting advice.’ They will also have to adopt policies and procedures reasonably designed to ensure companies that are the subject of proxy voting advice have the advice made available to them at the same time or before it is disseminated to investors.

In addition, proxy advisers will have to provide a mechanism by which their clients can reasonably be expected to become aware of any written statements regarding the advisers’ voting advice by the companies that are the subject of this advice in a ‘timely manner’ before the shareholder meeting.

The SEC in a statement says the changes are intended to ensure investors ‘have reasonable and timely access to more transparent, accurate and complete information [with] which to make voting decisions.’

The measures are different from the initial plans, under which proxy advisers would have had to adopt policies and procedures to ensure companies that were the subject of proxy voting advice had the opportunity to review and offer feedback on that advice before it was sent to shareholders.

That measure sparked considerable debate. Proponents of the review and feedback element said it would be a means to stamp out errors and deficiencies in proxy advisers’ reports, and that if at present they are given the opportunity to review and comment on those reports, it is often too late.

Some critics have said the changes as initially proposed would have compromised the independence of proxy voting advice businesses. Others have said there is a lack of evidence that errors or significant deficiencies in proxy voting advice are common, and that proxy advisers’ clients are generally happy with the service they receive while companies are typically the ones to complain.

In its final document on the changes, the SEC states that in taking the revised approach ‘we believe we have addressed the concerns raised by commenters regarding the potential unintended consequences of requiring a proxy-voting advice business to engage with a registrant in connection with its proxy voting advice, including those related to timing and the risk of affecting the independence of the advice or diminishing competition in the proxy-voting advice business industry.’

The final version has not been met with unalloyed welcome, however. In a statement, ISS president and CEO Gary Retelny says: ‘While the rules adopted today may appear less draconian than originally envisioned, they nevertheless serve as a blow to institutional investors seeking to judiciously monitor portfolio companies. As [commissioner Allison Herren Lee] noted, these rules are unwarranted, unwanted and unworkable.

‘Despite seemingly reducing the previously contemplated burden on proxy advisers, the new rules, coupled with the new guidance for investment advisers, will hinder investors’ ability to vote in a timely, cost-effective and objective manner.’

In a statement on her dissenting vote, Lee says: ‘At the proposing stage for these rules, I observed that they would harm the governance process and suppress the free and full exercise of shareholder voting rights. Unfortunately, that is still the case with today’s final rules.

‘They are still designed to, and will, increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations.’

She adds that the final rule changes impose ‘significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations.’

Among its initial comments on the more-than 200 pages of rulemaking, CFA Institute says: ‘We are pleased to see the SEC back away from mandating preclearance of independent proxy analyst opinions with the issuer. We also support greater transparency about proxy adviser conflicts of interest.

‘We are nevertheless concerned about the commission using implied legal threats and pointed admonitions about regulatory duties to accomplish what it could not mandate. We believe this is contrary to good public policy. While not a mandate, specifically implying that proxy advice businesses could lose safe harbor protections and face fraud liability if they don’t invite issuers to vet and rebut the advice constitutes a serious infringement on analyst independence.’

Glass Lewis did not respond immediately to a request for comment. In April it announced that unedited feedback from companies on its research would be included with its proxy research papers and delivered to the voting decision-makers at every investor client. Companies would be given up to seven days to submit their feedback, it said.

Representatives from the issuer community were more pleased with the outcome. NIRI president and CEO Gary LaBranche says in a statement: ‘After more than a decade of advocacy work by dozens of members, NIRI applauds the SEC’s rulemaking to modernize proxy adviser regulation and to provide institutional investors with more transparent and complete information.

‘This landmark decision will ensure all issuers and their [investor relations] teams will receive appropriate access to proxy reports before proxy firm clients vote and will be able to provide responses that will be shared with those clients.’ 

Tom Quaadman, executive vice president of the US Chamber of Commerce’s Center for Capital Markets Competitiveness, says in a statement: ‘Today the SEC has acted to protect investors, promote transparency, end conflicts of interest and boost US competitiveness through oversight of proxy advisory firms. These improvements will reorient shareholder proposals and director elections to ensure the long-term success of businesses and provide much needed returns for investors.’

In announcing the vote, SEC chair Jay Clayton said: ‘The majority of our Main Street investors participate in our public markets through ownership of mutual funds and ETFs managed by professional market participants. Today’s actions ensure that those who take on the responsibility of investing and voting on behalf of our Main Street investors have the accurate and decision-useful information necessary to make an informed voting decision for the benefit of those investors.’