SEC guidance on proxy advisers a ‘first step’

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The Securities and Exchange Commission (SEC) has published new guidance on asset managers’ use of proxy voting advisers.

SEC Chairman Jay Clayton declared the guidance “the first step,” with a fresh look at the rules exempting proxy voting advisers from filing requirements under federal proxy rules also under consideration.

Commissioner Elad Roisman, who led the effort in recent months, said that the SEC would not be considering restricting asset managers’ use of proxy advisers but would help them to properly weigh their recommendations.

Proxy voting advisers, which include Institutional Shareholder Services and Glass Lewis, have been a target for issuer groups like the U.S. Chamber of Commerce and National Association of Manufacturers. The Council of Institutional Investors, which represents major shareholders, has defended the status quo.

Guidance published online Wednesday addresses the obligations of both proxy voting advisers and investment advisers that use their services. The former says proxy adviser voting recommendations are “generally” solicitations under the Securities Exchange Act 1934, which may not require the advisers to file proxy statements but must not omit material facts such as the methodology for arriving at a voting recommendation, sources, and conflicts of interest “in reasonably sufficient detail.”

Meanwhile, asset managers should periodically review their proxy voting advisers, including the rate and impact of factual errors, and conflicts of interest, the SEC said.

The guidance passed a vote of the Commission 3-2, with the two Democratic members, Allison Lee and Robert Jackson, dissenting.

In a statement, Lee said the guidance “creates significant risks to the free and full exercise of shareholder voting rights,” by introducing costs and time pressure and greater issuer involvement in the process.

Jackson added that introducing new burdens on proxy voting advisers would reduce competition and might cause smaller investors to vote less, increasing the influence of large institutions.

However, Hester Pierce said the guidance was far from the catastrophic intervention that some advocates for proxy voting advisers had feared.

“The guidance we are considering today will not live up to the dire expectations of some people who have had their ears pressed up against the Commission’s door in recent weeks,” she said in a statement. “These guidance documents do not prescribe what investment advisers and proxy advisors must do to carry out their responsibilities, but they describe some things these firms might consider to help them accomplish those goals.”