Investor groups not happy with proxy advisory revamp

SEC commissioners approved sweeping changes to rules governing proxy advisory firms that were criticized by investor groups but applauded by the business community.

The rule amendments, which passed in a 3-1 vote July 22, make clear that proxy voting advice generally constitutes a solicitation; requires proxy advisory firms to disclose conflicts of interests to clients; allows companies that are the subject of voting advice to be able to access that advice "prior to or at the same time as the advice is disseminated to clients"; and obliges proxy advisory firms to provide clients with access to any response the company provides on voting advice "in a timely manner before those clients vote," said Commissioner Elad L. Roisman, who spearheaded the commission's efforts on this issue.

Also, the rule-making codifies that the failure to disclose material information regarding proxy voting advice, like methodology, sources of information, or conflicts of interest could be misleading, depending on the circumstances, Mr. Roisman noted.

Institutional investors and investor groups have generally opposed the Securities and Exchange Commission's efforts, saying it's a solution in search of a problem and would hurt the independence of proxy recommendations.

The Council of Institutional Investors said in a statement it's concerned the SEC's decision could result in proxy advice distribution delays, driving up costs for investors, impairing the independence of proxy advice and causing uncertainty for institutional investors.

"The SEC has not established a compelling case to tighten regulation of proxy advisory firms, and we are concerned that it has adopted untested and unvetted requirements that could have adverse effects on investors' ability to get the timely and unbiased proxy advice they need to act as stewards of the companies they own," said Amy Borrus, Washington-based executive director at CII.

The CII, a non-partisan organization that represents asset owners with combined global assets that exceed $4 trillion, is disappointed the SEC did not first issue a revised proposal and draft guidance and seek public comment, Ms. Borrus added. "The SEC should regulate based on firm legal grounds and evidence, not pressure from business lobbyists seeking to strengthen corporate control of the proxy voting process," she said.

The CII did say it was relieved to see the pre-review portion of the proposal removed. When the SEC first unveiled the proposal in November, it called for giving companies the opportunity to make revisions to proxy advice before distribution to clients.

The business community, led by the U.S. Chamber of Commerce and the National Association of Manufacturers, has been clamoring for new regulations because they say proxy advisory firms have become too influential and don't sufficiently disclose conflicts of interest.

Jay Timmons, president and CEO of the Washington-based National Association of Manufacturers, called the new rules a "major win" and said in a statement that the SEC's actions "will reduce proxy firms' influence on important business decisions and instead empower manufacturers to prioritize investors' long-term best interests, allowing us to better lead our country's recovery and renewal at this critical time."

Thomas Quaadman, executive vice president of the Chamber's Center for Capital Markets Competitiveness in Washington, had similar thoughts. He said in a statement that the SEC acted to protect investors, promote transparency, end conflicts of interest and boost U.S. competitiveness through oversight of proxy advisory firms. These improvements will reorient shareholder proposals and director elections to ensure the long-term success of businesses and provide much-needed returns for investors."

John Zecca, Rockville, Md.-based executive vice president, global chief legal and regulatory officer at Nasdaq, also commended the SEC's actions. "It is in the best interest of investors, shareholders and the public markets to enhance the integrity of the proxy voting process by ensuring proper disclosure of potential conflicts of interest," Mr. Zecca said.

There was also disagreement among commissioners. In her dissent, Allison Herren Lee, the commission's lone Democrat, called the rules unwarranted, unwanted and unworkable. Among her concerns, Ms. Lee said with respect to the rule-making's central provision — "a forced opportunity for issuers to review and provide feedback on proxy voting advice" — opposition outweighed support by more than a 3-to-1 ratio during the comment period.

While the final rule is better than what was proposed in November, Ms. Lee said it's still problematic. "Compared to the status quo, these rules still raise all of the infirmities that investors identified, including that they increase issuer involvement, and impose significant new costs and delays," Ms. Lee said during the July 22 vote deliberation.

Mr. Roisman said the changes "bring improvements to the status quo for investors and our markets. Proxy voting advice businesses have long relied on different exemptions to our federal proxy rules, resulting in a patchwork of practices for disclosing their conflicts of interest. They have also developed very different practices regarding whether or how they engage with registrants or communicate with clients regarding those registrants' perspectives on voting advice."

The amendments concerning the new policies and procedures will be effective 60 days after publication in the Federal Register, but affected proxy advisory firms are not required to comply until Dec. 1, 2021.

Glass Lewis & Co. and Institutional Shareholder Services Inc. control about 97% of the proxy advisory market. Gary Retelny, New York-based president and CEO at ISS, said in a statement the measures taken by the SEC were "a blow to institutional investors seeking to judiciously monitor portfolio companies." Mr. Retelny added: "Despite seemingly reducing the previously contemplated burden on proxy advisers, the new rules, coupled with the new guidance for investment advisers, will hinder investors' ability to vote in a timely, cost-effective and objective manner."

A Glass Lewis spokesman said he will not comment "until we have a chance to thoroughly review the final rules."

In a separate 3-1 vote July 22, the commission approved additional guidance concerning investment advisers' use of automated voting features offered by proxy advisory firms. The guidance calls on advisers to consider whether they have sufficient procedures in place to address scenarios for which an issuer intends to file or has filed additional soliciting materials with the SEC after the adviser has received the proxy advisory firm's recommendation but before the voting deadline.

By using such features, "A client could effectively 'set it and forget it,' allowing the proxy voting advice business to produce recommendations that determine the client's vote, without further action by the client," Mr. Roisman said.

The guidance also addresses disclosure obligations and client consent when managers use automated services for voting. The final text wasn't immediately posted on the SEC's website or Federal Register but will be effective once the latter happens.

In August, the SEC approved guidance clarifying how a manager's fiduciary duty relates to its proxy voting on behalf of clients, particularly if the manager retains a proxy advisory firm.

Karen L. Barr, president and CEO of the Investment Adviser Association, said in a statement that it was difficult to understand why the commission felt compelled to issue additional guidance for advisers since the guidance it issued last year — "without notice and comment" — is comprehensive.

"While the final proxy voting rules and new guidance adopted by the SEC this morning have been modified from the initial proposal in response to widespread criticism — including from the IAA — we continue to believe that the SEC's actions represent bad policy," Ms. Barr said. "They represent a major step backwards for corporate governance and will make it more difficult for investment advisers to use the services of proxy advisory firms to fulfill their proxy voting responsibilities on behalf of their clients."

Laura D. Richman, a Chicago-based partner at Mayer Brown LLP, said the final rules and supplemental guidance reflect the SEC's balancing of differing views. "Because of those differing perspectives, there may continue to be criticisms of certain aspects of the rules or guidance from some market participants."