SEC commissioners approved guidance Wednesday stipulating that proxy advisory firms must disclose how they reach their shareholder recommendations, in a move applauded by the business community.
The SEC issued an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a "solicitation" under the federal proxy rules and said the failure to disclose certain information required under existing law would render the advice materially false or misleading.
The commissioners also approved guidance that clarifies how an investment adviser's fiduciary duty relates to an adviser's proxy voting on behalf of clients, particularly if the investment adviser retains a proxy advisory firm. The guidance follows a question-and-answer format and provides examples to help facilitate compliance.
"It's giving a road map of what can be done to help you navigate the existing rules," said Laura D. Richman, counsel at law firm Mayer Brown, who focuses on corporate governance issues and public disclosure obligations.
Both measures passed in 3-2 votes; Democratic commissioners Robert Jackson Jr. and Allison H. Lee dissented.
Ms. Lee said the guidance introduces "increased costs and time pressure into an already byzantine and highly compressed process." Moreover, it calls for "more issuer involvement in the process despite widespread agreement among institutional investors and investment advisers that greater involvement would undermine the reliability and independence of voting recommendations."
Gary Retelny, president and CEO of Institutional Shareholder Services, a proxy advisory firm that along with Glass Lewis & Co., controls about 97% of the market, said the guidance could hurt business and its clients.
"While we will carefully review the guidance issued today to understand the potential impacts for our clients, upon initial review we are concerned that the guidance will hamper our ability to deliver independent, timely and accurate research, data, insights and perspectives to aid in the discharge of their fiduciary duties, " said Gary Retelny, president and CEO of ISS, in a statement.
Business groups like the U.S. Chamber of Commerce, applauded the SEC's decision.
"Proxy advisory firms have been riddled with conflicts of interest, failed to link advice with economic return or company specific information, and lack process and transparency," said Tom Quaadman, executive vice president of the chamber's Center of Capital Markets Competitiveness, in a statement. "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."
Through its votes Wednesday, the SEC is not building a new regulatory regime but is explaining the contours of an existing one to help investment advisers and proxy advisers carry out their responsibilities, Commissioner Hester M. Peirce said at the meeting.
"The guidance we are issuing today regarding the provision of proxy advice is designed to help proxy advisers think through their role in the proxy process," Ms. Peirce said.
Gail C. Bernstein, general counsel for the Investment Advisers Association, said she is concerned the guidance will increase costs for advisers and also increase barriers to entry for proxy advisory firms. "While the commission stated at the open meeting that its actions do not create new obligations, we believe that as a practical matter they will for investment advisers," Ms. Bernstein said in a statement. "We are disappointed that the guidance was issued without the opportunity for public comment and without the benefit of an economic analysis."
Commissioner Elad L. Roisman, who is leading the commission's efforts to revamp the proxy voting process, indicated that Wednesday's votes will not be the last on this issue.
