New guidance from the Securities and Exchange Commission could lead to major changes for proxy advisory firms and the institutional investors that utilize their recommendations each proxy season.
On Aug. 21, the commission in two 3-2 votes, approved guidance that represents a step toward greater SEC oversight of proxy advisory firms and investment advisers' reliance on proxy advisers, sources said.
The piece of guidance that is of particular concern to the Council of Institutional Investors and others is a new SEC interpretation that establishes proxy voting advice by proxy advisory firms as a solicitation. Because proxy advisory firms provide recommendations that are "reasonably calculated to result in the procurement, withholding, or revocation of a proxy" — part of the definition of a solicitation under federal regulation — "the furnishing of proxy voting advice constitutes a 'solicitation,'" the SEC guidance stated.
Proxy voting recommendations constitute a solicitation because they are "designed to influence the client's voting decision," the SEC stated in the guidance.
Of note, the guidance prohibits any solicitation from containing any statement that is false or misleading with respect to any material fact. Also, in order to avoid rule violations, a proxy firm must provide an explanation of the methodology used to formulate its voting advice; disclose any third-party information sources and the extent to which the information from these sources differs from the company's public disclosures, if such differences are material; and disclose material conflicts of interest.
Business groups like the U.S. Chamber of Commerce, which have said proxy advisory firms have too much influence and myriad conflicts of interest, applauded the SEC's decision and want more to be done. "We commend the SEC for taking a critical first step in bringing much-needed oversight to proxy advisory firms, and we hope the SEC and other regulators take further action to ensure that proxy advisory firms provide 'decision-useful' information to investors," said Tom Quaadman, executive vice president of the chamber's Center of Capital Markets Competitiveness, in a statement.