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Aug 21, 2017

NIRI seeks SEC action on proxy advisers

US investor relations association is latest organization to put pressure on proxy advisory firms’ practices

The National Investor Relations Institute (NIRI) has joined the list of those asking for greater regulation of proxy advisers’ practices, adding to the focus on the industry with the main 2017 proxy season now in the rearview mirror.

In a seven-page letter to the SEC, NIRI chief executive Gary LaBranche raises concerns about proxy advisers’ use of automated systems to cast votes on behalf of their clients. The letter describes how clients of proxy advisory firms develop custom voting guidelines, which staff at the firms then use to create a list of recommended voting decisions. Clients can manually change their vote if they disagree with an advisory firm’s recommended stance, but LaBranche writes that if the client takes no action, the vote is cast using the default voting instructions.

Under this model, advisory firms have the ‘power to act as a proxy’ for their clients, which is not compliant with Securities Exchange Act Rule 14a-2(b)(1), according to NIRI.

‘If ISS and Glass Lewis are permitted to automatically submit votes for pre-established default positions without any subsequent action or voting decision by a client, then these proxy advisory firms have successfully solicited the power to act as proxy for each of their clients that use these voting systems,’ LaBranche writes.

NIRI is asking the SEC to investigate whether ISS and Glass Lewis are acting in compliance with the Investment Advisers Act. ‘Proxy advisers have a valuable role that they fulfill, but we feel there should some checks and balances there,’ Ted Allen, NIRI’s vice president of strategic communications, tells Corporate Secretary.

Other organizations calling for greater regulation of proxy advisory firms include the NYSE and the US Chamber of Commerce. In July, SEC commissioner Michael Piwowar told attendees at the Society for Corporate Governance national conference that proxy advisory firms have an ‘outsized influence’ and that he is in favor of them having to register with the SEC (, 7/6).

House of Representatives member Sean Duffy, R-Wisconsin, last year introduced the Corporate Governance Reform and Transparency Act, which aims to create more ‘accountability, transparency, responsiveness and competition in the proxy advisory firm industry.’ It passed through the House Financial Services Committee in June 2016 and is now awaiting scheduling on the floor. A committee official said that given the amount of elapsed time, it is unlikely the bill will be heard on the floor.

In a statement sent to Corporate Secretary, ISS general counsel Steven Friedman says: ‘As a registered investment adviser, ISS is very cognizant of its obligations under the Investment Advisers Act and we have implemented extensive policies and procedures designed to comply with all of those requirements. ISS does not provide unsolicited proxy advice, does not engage in the solicitation of proxies and, even if we were viewed as doing so, we are in compliance with available exemptions.’

A spokesperson for Glass Lewis declined to comment.