Who benefits and who suffers from the SEC’s proposed proxy-advisory rules?
BY Martha Porado | November 28, 2019
The debate surrounding how institutional investors use proxy voting is heating up.
The contention hinges on guidance the Securities and Exchange Commission released earlier this year on the activities of proxy-advisory firms. It says that when proxy-advisory firms provide proxy-voting advice to their investor clients, it counts as proxy solicitations. That, in turn, means those recommendations need to abide by securities law prohibitions on making false or misleading statements or omissions, according to a release from Torys LLP.
The guidance, while technically not legally binding, carries significant weight for stakeholders in financial markets, according to the release.
Institutional Shareholder Services, a major proxy firm, didn’t take kindly to the guidance and, in late October, moved to sue the SEC over it. The suit alleges that the SEC’s guidance is essentially “rule-making in disguise,” Torys noted. The suit also says that proxy voting advice isn’t solicitation under securities law because investor clients seek out and pay for the proxy firm’s advice and the firm itself has no interest in the outcome of a shareholder vote on which it’s advising. Further, the suit alleges that proxy firms already adhere to regulations for investment advisors in adhering to fiduciary standard of conduct to their clients, making further regulation by the SEC inappropriate.
Just a few days after the ISS launched its lawsuit, the SEC proposed rule amendments to codify the interpretive guidance. Those amendments defined specific instances of proxy voting advice that would count as solicitation, namely advice that makes a recommendation to a shareholder regarding a vote, consent or authorization on a particular issue for which shareholder approval is requested. Further advice counts as solicitation if it’s provided by someone marketing services and expertise as an advisor of pertinent advice, separate from other forms of investment advice they might provide, and if that person sells the advice for a fee.
As of today, the SEC is still seeking comment on these proposed changes, which can be submitted until 60 days after the proposal is published in the Federal Register, which has yet to take place.
Seeking to tighten regulations for proxy advisory firms would imply that these firms are doing something wrong, says Kevin Thomas chief executive officer of the Shareholder Association for Research and Education. He says this isn’t the case.
“There isn’t really a problem here to be solved by the SEC. We’re seeing a solution in search of a problem,” says Thomas. “There’s no evidence of wide-spread misinformation by proxy advisors or that there are factual problems in the material that they’re providing, or that there’s any problem that investors — the clients of these services— have indicated they have an issue with. So in terms of who’s being protected from what, I’m not at all clear on what the SEC thinks they’re doing.”
Thomas says corporate lobbyists, however, do have a clear interest to protect here: their ability to act as they would prefer, regardless of shareholder opinion. “That’s not a positive thing, but it’s clear there’s a strong and fairly well-funded lobby from executives that are pushing this kind of agenda.”
U.S. companies have had problems with how proxy-advisory firms conduct themselves for years, says Chris Bornhorst, senior associate at Torys LLP. Just in the last year or so, however, the SEC has started to make serious moves on the matter, he says.
For institutional investors on this side of the border, the new regulations would make things take longer for investors using proxy-advisory firms, he says.
“One of the components of the new rule is that in order for a proxy-advisory firm to not have to be filing things with the SEC in respect of its advice, it needs to meet certain criteria,” says Bornhorst. “One of them is, for example, once it prepares a particular recommendation, it would need to share that with a company. And then that company would potentially have the opportunity to comment on that. And that all takes time. If you’re an institutional investor that relies on a proxy-advisory firm to provide a recommendation as to how to vote, and now the proxy-advisory firm has all these hoops it has to jump through before formally issuing its advice, that may delay the time an investment advisor has to understand what the proxy advisory’s position is on a particular issue and then how it wants to react to that.”
These moves by the SEC could prompt Canada to follow suit in terms of tightening restrictions on proxy advice, he says. Either that, or the new rules, once finally adopted for U.S. companies, could migrate north and become considered best practice, while not strictly being legally binding. He notes that Canadian regulators are paying attention to the issue, it’s just that their U.S. counterparts are a little further ahead.