Pension funds are pushing to require proxy advisory firms to register with the Securities and Exchange Commission as investment advisers.
Michael McCauley, senior officer-investment programs and governance of the $167.8 billion Florida State Board of Administration, Tallahassee, is among those calling for registration.
“There is very little to no regulation in this space,” Mr. McCauley said in an interview.
Amy Borrus, deputy director of the Council of Institutional Investors, Washington, agreed with registration. “We believe all proxy advisers should register and we've told them that.”
William R. Atwood, executive director of the $12.9 billion Illinois State Board of Investment, Chicago, has a more tempered view. “I don't have a strong opinion” on regulating the firms,” Mr. Atwood said in an interview. “They are obviously not buying and selling securities but they are managing an asset of the fund” — proxy votes, Mr. Atwood said. “They are vested with a great deal of authority over an asset of investors.”
The CII “believes that proxy advisory firms should register as investment advisers under the Investment Advisers Act of 1940,” according to a written statement by Ann Yerger, CII executive director. Ms. Yerger's statement was submitted at a hearing by the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Committee on Financial Services June 5.
In a June 13 letter to the SEC, Ms. Yerger urged the SEC “to gather empirical data on the proxy-voting practices of investment advisers,” aimed to “provide a factual basis for potential consideration of reforms.”
Proxy advisers “are important players in the market and they should be regulated,” Ms. Borrus said. “We don't think their methodology should be regulated, but there should be oversight for their services.”
Lynn Turner, a trustee of the $43 billion Public Employees' Retirement Association of Colorado, Denver, said in testimony to the subcommittee: “I believe proxy advisory services should be subject to SEC oversight. The SEC should establish a regulatory scheme that makes sense and can achieve the desired result.
“While some have called for all proxy advisory services to register as investment advisers, I am not sure that regime is designed to adequately (or smartly) address regulation of proxy advisers who typically do not give investment advice,” said Mr. Turner in prepared remarks. “Rather, regulation of proxy advisers should ensure they fulfill a fiduciary obligation to recommend votes in a manner that is in the best interest of investors” and “remain free of conflicts,” said Mr. Turner, a former SEC chief accountant, former senior executive and head of research of proxy adviser Glass Lewis & Co. LLC and a managing director of LitiNomics Inc., a Los Angeles-based economic and forensic consulting firm. He couldn't be reached for additional comment.
Mr. McCauley, who testified at the hearing, said in the interview that some people “argue (proxy advisory firms) shouldn't be put under that umbrella” of SEC registration because they “don't buy and sell securities for clients.” But because they “provide analysis and recommendations on how to vote,” Mr. McCauley said, “they make recommendations that impact valuation, that are implicitly tied to the underlying shareholder value.”
Registration would help address the issue of conflicts of interests of proxy advisory firm, he said.