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Apr 18, 2019

SEC investor advocate cautions on proxy adviser controls

Rick Fleming sees little desire among shareholders for change

The SEC’s investor advocate has urged the commission not to focus on reforms of the proxy advisory industry, amid growing pressure for the agency to impose additional regulatory controls.

‘I think it is fair to say that investors are wary about efforts to regulate proxy advisers,’ Rick Fleming told attendees at the annual ‘SEC Speaks’ conference earlier this month.

‘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 advisers,’ he added. ‘This is not to suggest that proxy advisers are perfect, but to the extent that any problems exist, it seems that their paying customers should be the ones to raise them.

‘Investors certainly don’t want those problems to be solved by injecting costly inefficiencies into an already-cumbersome process or by giving companies more opportunities to influence the advice that is given to investors about how they should vote.’

Investors seeking a company’s stance on a shareholder proposal can already access its arguments in the board’s recommendations to vote against the measure that are included in the publicly available proxy materials, Fleming noted. Such arguments may also be available in public correspondence with the SEC if the company seeks to have the proposal excluded.

‘What [investors] want from a proxy adviser, and what they are paying for, is independent advice that fits within the parameters they have established for how they want to vote on various matters,’ Fleming said.

Critics suggest the proxy advisory business lacks transparency, is prone to inaccuracies in its reports, could be susceptible to conflicts of interest and has a political agenda that supports social policies at the expense of investment returns.

Legislation looked at during the last Congress would require proxy advisers to register with the SEC. As registered firms they would have to, among other things, employ an ombudsman, designate a compliance officer and file certain documents with the SEC. The legislation would also prohibit ‘unfair, coercive or abusive practices.’

Proxy advisory firms reject this criticism and say they do not need further regulation. For example, ISS points out that it is already registered with the SEC as an investment adviser. 

Speaking to IR Magazine in response to criticism the company faced at a recent congressional hearing, an ISS spokesperson said: ‘ISS is not an activist organization. Rather, we are a policy-based research firm that is fully transparent with regard to how we analyze matters on proxy ballots. Firms such as ISS neither propose shareholder initiatives nor decide what is on the proxy ballot. That’s a decision for company management and, in some limited cases, the company’s shareholders.’

On the extent of ISS’s influence, the spokesperson said: ‘While ISS recommended against roughly 14 percent of say-on-pay resolutions for the top 3,000 US companies in 2018, just 2 percent failed to pass. These numbers underscore that investors make up their own minds.’

In regard to criticism of proxy advisers, Fleming said: ‘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.’

He acknowledged that some investors have expressed concerns that fund advisers may cast proxy votes that are contrary to the stated objectives of the fund or in ways that are contrary to the interests of the fund’s investors. But this would be a matter of whether the fund adviser is meeting its fiduciary duty to the investors in the fund, and the SEC has authority to deal with such matters without needing additional oversight of proxy advisers that produce advice under instruction from a fund adviser, he added.

‘[T]he simple fact of the matter seems to be that proxy advisers 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,’ Fleming said. ‘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.’

He noted that there is broad agreement that the proxy process needs maintenance – for example, by making the basic ‘plumbing’ of the voting system more efficient and reliable by looking into vote confirmation and records reconciliation.

‘But, absent a groundswell of concerns expressed by actual investors, I sincerely hope that the commission will not prioritize a rulemaking that could impair the independence of proxy advice or lead to even greater inefficiencies in proxy voting,’ Fleming said.

He added: ‘Again, no one is claiming that proxy advisers are perfect, but in light of all the important things that the commission could spend its time on…I would respectfully suggest that imposing new regulations on proxy advisers should be given a low priority.’


Ben Maiden

Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...