US SEC plans to curb power of proxy advisers
The US Securities and Exchange Commission is set to impose new regulatory oversight on proxy advisory firms, increasing legal scrutiny on their methods for offering shareholder voting recommendations.
The changes are a victory for corporate lobby groups, who have argued Institutional Shareholder Services and Glass Lewis wield too much power in battles over corporate governance.
Commissioners are voting at a meeting on Wednesday to approve guidance clarifying that proxy advisers are subject to anti-fraud rules concerning materially false or misleading statements. Current SEC guidance was vague on whether proxy advisers must adhere to anti-fraud provisions, the agency said.
Republican commissioner Elad Roisman said at the meeting that the changes would “help ensure that those who make voting decisions are doing so based on complete and accurate information”.
The change could saddle ISS and Glass Lewis with new legal costs and affect shareholder votes at company’s annual meetings. Additional regulations aimed at proxy advisers are on the SEC’s agenda for the months ahead.
ISS and Glass Lewis give investors advice on how to vote on corporate issues ranging from climate change disclosures to executive compensation, and on the election of board members. While the largest asset managers typically have governance teams deciding on how to vote at shareholder meetings, smaller investors often follow the proxy advisers’ advice.
Shareholder advocates have opposed SEC action. In a letter to the regulator last week the Council of Institutional Investors, which represents big public and private retirement funds, warned the regulator that its guidance for proxy advisers “may make it unnecessarily difficult” for shareholders to get information about companies prior to annual general meetings.
Companies have complained that the advisers’ reports to investors can contain inaccuracies. The new SEC guidance could raise legal liability for the recommendations if errors could now be considered fraud.
The SEC “should specifically make clear whether these anti-fraud provisions apply when proxy advisory firms’ voting reports include information, statements or opinions that have not been included in material filed with the commission”, said the Business Roundtable, a lobby group pushing for new restrictions.
The SEC action is the latest to bring ISS and Glass Lewis under closer scrutiny. Earlier this year, the firms agreed to supervision from an independent committee set up in Europe to oversee proxy advisers.
The SEC’s action could have significant implications for the environmental, social and governance (ESG) investing sector. In recent years, ISS and Glass Lewis have rolled out ESG advice for investors. Critics have argued ISS and Glass Lewis steer investors to vote for proposals, many calling for more disclosures on ESG issues, that would unnecessarily burden companies.
“ISS and Glass Lewis serve as conduits for the spread of ESG political and ideological values,” Benjamin Zycher, a resident scholar at the American Enterprise Institute, a conservative-leaning think-tank in Washington, said in a December 2018 letter to the SEC.
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The SEC’s Wednesday action against proxy advisers could face criticism for not incorporating public input. The US Treasury Department in 2017 recommended that the SEC “avoid imposing substantive new requirements by interpretation or other guidance.” The new guidance is effective immediately without a request for public comments that often precedes agency regulatory action.
That statement from the Trump administration appears “to be in direct conflict” with the SEC’s action on Wednesday, the CII said in an August 15 letter to the agency.