The Council of Institutional Investors sent a letter Tuesday co-signed by 60 investors and investor organizations to the Securities and Exchange Commission urging it to change course on recent guidance and upcoming rule-making on proxy advisory firms.
The letter takes issue with the SEC's actions in August when in a 3-2 vote, it approved a new 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 said.
Proxy voting recommendations constitute a solicitation because they are "designed to influence the client's voting decision," the SEC also said in the guidance.
The institutional investors who signed the letter said they are disappointed the SEC did not ask for public comment on its new guidance and interpretation before it was issued. At the same meeting in August, the commission also approved guidance that clarifies how an investment adviser's fiduciary duty relates to proxy voting on behalf of clients, particularly if the investment adviser retains a proxy advisory firm.
"We would ask that the SEC reconsider that interpretation and guidance, with appropriate opportunity for public comment," the letter said.
Of note, the August-approved guidance prohibits any solicitation from containing any statement that is false or misleading with respect to any material fact. Also, 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 such as the U.S. Chamber of Commerce have said proxy advisory firms have too much influence and myriad conflicts of interest, but the letter signatories disagree.
"Proxy advisors effectively serve as collective research providers for large numbers of institutional investors, providing these investors an affordable alternative to the high costs of individually performing the requisite analysis for literally hundreds of thousands of ballot proposals at thousands of shareholder meetings each proxy season," the letter said.
The letter also took issue with the prospect of proposed rule amendments to address proxy advisers' reliance on the proxy solicitation exemptions in Rule 14a-2(b), which is listed in the SEC's current regulatory agenda.
In the letter, institutional investors asked the SEC that if it moves forward with rule-making on this topic, not to place requirements on proxy advisers that would reduce their independence and effectiveness or reduce competition. There is concern among institutional investors that the SEC, through future rule-making, could require proxy firms to allow the companies on which they're making recommendations to review their reports and provide feedback before the reports are disseminated to clients.
"In our view, any commission regulation intruding on the independence of proxy advisors and their agency relationship to institutional investors would be a profound change in the commission's regulatory policy, without any foundation in the commission's historic role of investor protection, and would severely jeopardize the interests of investors, individual and institutional, in a fair and fully-functioning proxy voting system," the letter said.
Though CII expressed disappointment that there was no public comment on the August guidance, the commission merely provided interpretations of existing SEC rules, said Laura D. Richman, counsel at law firm Mayer Brown. "To the extent that the SEC decides to propose amendments to its proxy solicitation exemptions, there will be an opportunity for public comment before any final rule change is adopted."
The letter was signed by officials from public and union pension funds, religious orders, hedge funds, mutual funds, other asset managers and investor organizations, including signatures from Marcie Frost, CEO of the $381.5 billion California Public Employees' Retirement System, Sacramento; New York City Comptroller Scott M. Stringer, fiduciary for the five pension funds within the $199 billion New York City Retirement Systems; and Brandon Rees, deputy director of corporations and capital markets at AFL-CIO, Washington.
