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New SEC guidance increases pressure on proxy advisers over disclosures

By Gavin Hinks

SEC, Securities and Exchange Commission

For those who campaigned for tighter regulation, it will be viewed as a victory. The top financial watchdog in the US has issued a document that will up the pressure on proxy advisers to disclose more information about how they undertake their work.

The Securities and Exchange Commission (SEC) has issued the guidance to investment managers after a debate that has raged in US over demands for increased oversight of proxies.

The wrangle has focused on the huge influence proxies now have over corporate governance, the potential conflicts of interest that affect their work, the lack of any rules to govern how they conduct themselves. One analyst has been anonymously quoted describing the proxy adviser debate as a “civil war of capitalism that’s playing out behind the scenes”.

The SEC guidance concentrates on telling investment firms that gathering information from proxies about their methods is part of their fiduciary duties. But the guidance has the potential to have a significant influence on the way proxies reveal information about themselves.

According to Elad Roisman, a commissioner with the SEC: “Advisers who vote proxies must do so in a manner consistent with their fiduciary obligations and, to the extent they rely on voting advice from proxy advisory firms, they must take reasonable steps to ensure the use of that advice is consistent with their fiduciary duties.”

Following public consultation, the SEC signalled some time ago that it would act over the work of proxies. In the US, 97% of the proxy voting market is dominated by just two providers: ISS and Glass Lewis. As well as concerns about market concentration, some commentators have complained that proxies are overly focused on ESG (environmental, social and governance) issues.

There are also claims that investors follow proxy advice blindly. A report from the American Council of Capital Formation (ACCF), a non-for-profit campaign group, says investment firms follow proxy advice 95% of the time. For some managers the figure is 99%.

Such behaviour has led to accusations of “robo-voting”—following proxy advice without subjecting it to evaluation. According to the ACCF’s conclusions, proxies can “drive change in corporate behaviour and practices without being required to provide any meaningful transparency over how their decisions are made”.

Greater engagement

The SEC guidance proposes that investment firms demonstrate a much greater degree of engagement with their proxy advisers and how the voting advice they offer is pieced together.

The guidance says an investment manager should “consider” whether a proxy adviser has “adequately disclosed… its methodologies in formulating voting recommendations”. The investor should “consider the nature” of third-party information sources used by the proxy and “develop a reasonable understanding” of the engagement undertaken by proxies with stock-issuing companies.

The SEC also asks investment firms to undertake a “reasonable review” of a proxy adviser’s general policies and procedures. This should include information on how proxies manage conflicts of interest and whether they are “adequately disclosed”. In July proxy advisers went some way to self-regulate by signing up to a new code of practice developed by an independent review commissioned by the proxy advisers themselves and their Best Practice Principles for Shareholder Voting Research and Analysis Group.

The EU’s Shareholder Rights Directive already calls on proxy advisers to disclose their process and report publicly on any code of conduct they apply.

Despite obvious passion in the criticism of proxy advisers, the SEC has, in the past, been at pains to stress their importance. Indeed, there is wider recognition that they provide a useful service.

One SEC commissioner, Robert J Jackson, has even written that it is “hard to imagine” how organisations providing advice on how to vote should top a list of priorities given “a survey of all the problems that plague corporate America today”.

In a statement, Glass Lewis said it would review the new guidance but had already worked to “enable” companies to understand its “policies and methodologies”, including disclosure of report to issuers for comment, maintaining an “open-door policy” for engagement, and process for allowing companies to feedback their views of the proxy adviser’s analysis.

Katherine Rabin, chief executive at Glass Lewis, said: “It is in the best interest of our investor clients to be able to continue to operate our business and offer services in a manner that doesn’t compromise the independence, quality and timeliness of the research that Glass Lewis provides.”

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