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Aug 27, 2019

SEC clarifies firmer regime for proxy advisory firms

Proxy advisers subject to anti-fraud rules

In what has proven to be a divided decision, the SEC has clarified its approach to proxy advisory firms involving greater oversight of their approaches in recommending shareholder-voting advice. 

A five-member commission voted 3-2 – with the Republican majority winning the day – to approve the rules, which clarify that proxy advisers are subject to anti-fraud rules on materially false or misleading statements.

The commission issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a ‘solicitation’ under federal proxy rules and provided related guidance about the application of the proxy anti-fraud rule to proxy voting advice. 

SEC chairman Jay Clayton said: ‘Investment advisers are fiduciaries that owe each of their clients duties of care and loyalty with respect to services undertaken on their clients’ behalf, including voting. These are the same duties that apply to their investment advice generally.

‘The Advisers Act and our rules accommodate a variety of voting arrangements – for example, focusing the investment adviser’s resources on voting only on certain types of proposals – as well as the ability for investment advisers to seek input and assistance from third parties, including proxy advisory firms, in fulfilling these important fiduciary duties. These are matters to be agreed upon between the investment adviser and the client, with full and fair disclosure and informed consent.

‘[But] the relationship in all cases remains that of a fiduciary to the client, and while investment advisers can engage others to assist them with their work, they retain their fiduciary obligations of care and loyalty.’

Republican commissioner Elad Roisman added: ‘The releases reiterate the commission’s views on the importance of investment advisers voting responsibly on behalf of their clients and the applicability of our proxy rules to proxy voting advice. 

‘Advisers who vote proxies must do so in a manner consistent with their fiduciary obligations and, to the extent they rely on voting advice from proxy advisory firms, they must take reasonable steps to ensure the use of that advice is consistent with their fiduciary duties. In addition, proxy advisory firms, to the extent they engage in solicitations, must comply with applicable law.’

But the SEC’s two Democratic members – Robert Jackson, a senator from New York, and Allison Lee, a former enforcement attorney at the SEC – were the two opposing voices, arguing that the approach would impose additional costs, encouraging even greater concentration in the proxy advisory industry.

Lee said on the day of the SEC proposal: ‘The policy choices reflected in today’s releases create serious risks to our system of corporate democracy by adding cost, adding time pressure and potentially compromising the independence of voting recommendations.’

In response to the SEC move, Gary Retelny, ISS president and CEO, says in a statement: ‘We are 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. We will have more to say once we have the opportunity to closely study the guidance.’

Retelny further reveals that ISS has a more than 99 percent accuracy rate for its research. ‘In addition, when there is a factual error reported, there is an established process to correct any inaccuracies before votes are cast via an alert that is sent to clients,’ he says. 

‘And the false narrative about errors has been debunked by corporations themselves, as reflected in a 2016 Government Accountability Office (GAO) report, which notes that both corporate issuers and institutional investors that [the GAO] interviewed said the data errors they found in the proxy reports were mostly minor.

‘Calls for proxy adviser reform often point to examples involving shareholder proposals, specifically shareholder proposals related to environmental and/or social issues, as a reason for the SEC or US Congress to reform the current system.

‘Meanwhile, the number of shareholder proposals pales in comparison to management proposals. According to data from the Investment Company Institute, in the 2017 proxy season there were 25,377 management proposals and only 482 shareholder proposals. Of those 482, only 240 were environmental/social in nature. This represents a mere 0.93 percent of all votes in 2017.’

Glass Lewis CEO Katherine Rabin also has points to make with regard to the ruling. ‘In recent years, Glass Lewis has implemented processes and procedures that enable public companies to understand [our] policies and methodologies and engage with Glass Lewis,’ she says, listing the following as evidence:

– Glass Lewis offers for free to all companies under coverage a fact-only version of the report for their review and comment prior to Glass Lewis completing and publishing the final version of its analysis to investor clients

– Glass Lewis has an open-door policy for engaging with companies – for free – outside the solicitation period. In 2018 Glass Lewis conducted engagements with 1,500 companies

– In 2019 Glass Lewis launched the Report Feedback Statement service to provide companies with a mechanism for directly communicating their perspectives regarding our analysis to Glass Lewis investor clients.

‘It is in the best interest of our investor clients to be able to continue to operate our business and offer services in a manner that doesn’t compromise the independence, quality and timeliness of the research Glass Lewis provides,’ adds Rabin.