Additional oversight is needed for proxy advisory firms that advise institutional investors on shareholder votes, according to a white paper released Thursday from the Milken Institute, an economic think tank.
The paper, written by Chester S. Spatt, former chief economist of the Securities and Exchange Commission, calls for reforms such as requiring proxy advisory firms to improve disclosure of potential conflicts of interest, enhancing the explanation of the reasoning behind recommendations, and allowing companies to respond to recommendations before investors vote. The reforms could follow several paths, including congressional action, the imposition of regulatory rules or guidance, or through industry-led development of best practices, the paper said.
"The role of the proxy advisory firms is arguably among the most crucial for corporate governance, but they are subject to very little regulation," Mr. Spatt wrote. "Proxy advisory firms should make recommendations that maximize shareholder value, but their advice sometimes reflects other considerations."
Two proxy advisory firms — Institutional Shareholder Services and Glass Lewis — control about 97% of the market.
Mr. Spatt said that because proxy advisory firms have little competition or oversight, their recommendations are vulnerable to conflicts of interest and ideological bias.
In November, a bipartisan group of senators introduced a bill that would "hold proxy advisory firms accountable" by requiring the SEC to regulate major proxy advisory firms under the Investment Advisers Act. A similar bill hasn't been introduced this Congress.
Also in November, the SEC hosted a roundtable discussion seeking industry input on improving the proxy voting system, including an examination of how proxy advisory firms should be regulated.
Patrick McGurn, special counsel and head of strategic research and analysis at ISS, noted that the firm is already a registered investment adviser and welcomes making registration a requirement. But additional reform is unnecessary, he added. "We're not against regulation, we just think that the current regulatory structure in place at the SEC is sufficient," Mr. McGurn said.
SEC Commissioner Elad L. Roisman has been tasked with leading the agency's efforts to revamp the nation's proxy-voting system and is taking a look at how proxy-advisory firms' services are utilized and whether any additional regulation is necessary.
A representative from Glass Lewis could not immediately be reached for comment.
