The Securities and Exchange Commission (SEC) has finalized its rules on proxy voting advisers, confirming that their recommendations will be treated as solicitations and requiring them to disclose more information about potential conflicts of interests.
At an open meeting in Washington D.C., SEC Commissioners voted three to one in favor of new rules governing proxy voting advisers, bringing to an end a regulatory effort that has lasted a decade but was supercharged by Donald Trump’s election in 2016 and subsequent changes at the regulator. The Commission is currently comprised of three Republicans and one Democrat.
The dissenting Commissioner, Allison Lee, said the rule was better than what was originally proposed but worse than the status quo.
In November, the SEC proposed stripping proxy voting advisers of their exemption from regulations governing the solicitation of proxy votes, a move that some observers feared would increase their exposure to lawsuits from disappointed issuers.
The SEC also wanted to give issuers and proponents time to review recommendations before they were provided to clients, particularly the institutional investors that typically incorporate the reports into their voting decisions.
In March, SEC Commissioner Elad Roisman appeared to offer hopes of a compromise that would incorporate a “speed bump” between the publication of a recommendation and investors’ voting decisions. That proposal, as well as the contemporaneous review period for participants, has been dropped. Instead, proxy voting advisers will give participants a right of response and inform their clients of these disagreements. Glass Lewis has already rolled out a feature that incorporates this requirement.
Institutional Shareholder Services (ISS), the largest proxy voting adviser, sued the SEC in October, before the rules were announced, to prevent the changes from coming into effect. In January, the lawsuit was placed on hold until final rules were promulgated.
“The rule, passed today along party lines, is based on the view that the provision of proxy voting advice constitutes a solicitation, a premise which we believe is inconsistent with the plain meaning of the federal securities laws,” said ISS CEO Gary Retelny. “This issue was at the heart of the lawsuit which we initiated against the SEC last year and it continues to be of concern to ISS.”
Critics of proxy voting advisers charge that many of their clients vote solely based on their recommendations, a claim denied by the proxy voting advisers and many institutional investors, who say that the reports are just one piece of information employed in research. Proxy voting advisers have also been criticized for alleged conflicts of interests, including consulting arms that advise issuers, and prioritizing some clients’ views when they formulate policies, as well as the factual accuracy of their reports.
The U.S. Chamber of Commerce, National Association of Manufacturers, and Manhattan Institute had all recommended enhanced regulation.
Shareholder rights proponents were disappointed by the regulatory drive, however. On Wednesday, the Council of Institutional Investors said it was “disappointed that the Commission did not first issue a revised proposal and draft guidance and seek public comment.”
Executive Director Amy Borrus added, ”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.”
The SEC on Thursday also voted in favor of new rules to discourage investment advisers from “robo-voting,” instead recommending that any response from issuers or proponents be considered alongside the proxy voting adviser recommendation and clarifying that a fiduciary duty cannot be outsourced.
The final proposals mark a significant achievement for SEC Chairman Jay Clayton, who has sought a return to New York to lead the Southern District of New York prosecutorial office. The SEC has been working on rulemaking on proxy voting advisers for over a decade and it has been an important plank of Clayton’s agenda to benefit retail or “Main Street investors” – an agenda that has often seen the Commission suggest that asset managers may be putting environmental, social, and governance (ESG) issues above returns. Outside of the SEC, the Department of Labor has sought to weaken pension funds’ commitment to ESG.
While Commissioners Roisman and Hester Pierce voted for the new rules, Lee said they would add costs with no material evidence of a problem. “The final rules are unwarranted, unwanted, and unworkable,” she said in a prepared statement at the meeting.
In particular, Lee said that by requiring proxy voting advisers to notify investors of a forthcoming dissent, the process would still incorporate delays, while the costs of compliance with the new rules could not be fully known. She also said that factual accuracy, an initial plank of the rulemaking, had been dropped because “there simply was not evidence of any significant error rate in proxy voting advice.”
“While the rules adopted today may appear less draconian than originally envisioned, they nevertheless serve as a blow to institutional investors seeking to judiciously monitor portfolio companies,” Retelny added.