Institutional Shareholder Services Inc., the nation's largest proxy advisory firm, could be forced to revise its business plan if the Labor Department adopts a new proposed regulation expanding the definition of what companies are fiduciaries.
ISS, Rockville, Md., a registered investment adviser with the SEC, also provides corporate governance consulting services through its wholly owned ISS Corporate Services Inc. ISS' corporate consulting services could be interpreted under the proposed regulation to be in conflict with the proxy advisory services ISS offers institutional investors such as pension funds, ERISA attorneys said.
“The department opened a Pandora's box by providing that any SEC-registered investment adviser may be a fiduciary, even if they only offer occasional incidental and generalized advice,” said A. Richard “Brick” Susko, an ERISA attorney with the law firm Cleary Gottlieb Steen & Hamilton LLP, New York.
Gary Hewitt, an ISS spokesman, said it is unclear exactly how the DOL's proposed rule would affect his company.
“We've managed these potential conflicts for years with a firewall between our corporate and institutional businesses,” Mr. Hewitt said in an interview. “A critical component of the firewall is the research team not knowing the identity of the corporate-issuer clients. Our proxy advisory clients do have access to the identities of our corporate clients.”
“The open question is what the DOL is contemplating requiring us to do, and it's premature to speculate,” Mr. Hewitt added.
The DOL's proposed rule would extend fiduciary obligations to other proxy advisory firms — at least to firms registered with the SEC as investment advisers, ERISA attorneys said.
The fact that the rule could single out SEC-registered investment advisers is a sore point with Proxy Governance Inc., a McLean, Va.-based proxy advisory firm that is registered as an adviser at the SEC.
“If you've got two entities doing the same thing, they should be subject to the same rules, regardless of whether one is registered with another agency or not,” said Steven Wallman, founder and CEO of FOLIOfn Inc., the parent firm of Proxy Governance. Mr. Wallman was an SEC commissioner from 1994 through 1997.
Egan-Jones Ratings Co., Haverford, Pa., and Glass Lewis & Co. LLC, San Francisco, also offer proxy advisory services. But the SEC's website did not list the companies as agency-registered investment advisers.
Kent Hughes, managing director of Egan-Jones, said the company did not comment on regulatory matters. Bob McCormick, chief policy officer for Glass Lewis, had not returned numerous phone calls at deadline.