SEC to Issue Guidance Regarding Proxy Advisory Firms

By Cydney Posner

From the WSJ's CFO Journal comes this report that the SEC plans to issue new guidance on proxy advisers, such as ISS and Glass Lewis.  According to the article, in a speech at the National Investor Relations Institute, Meredith Cross, Corp Fin director, indicated that the SEC will be issuing interpretive guidance to advise investors about their fiduciary duties in assessing the information they receive from proxy advisers and how proxy advisers handle conflicts of interest. As we know all too well, companies have frequently raised issues regarding inaccurate or misleading information published and used by proxy advisors in making recommendations.

The article reports that the SEC is unlikely to address a perceived lack of competition among proxy advisers or otherwise limit the use of proxy advisers. Instead, the guidance will focus on already existing rules about investor fiduciary duty and conflicts of interest: "'In order [for investors] to rely on the advice of proxy advisory firms, it has to be reasonably reliable advice,' Cross said. She told the conference she wants companies to provide more information about real inaccuracies in proxy advisory reports that go beyond basic disagreements. She also said she would like to hear more from companies that say the proxy advisory firms are comparing them to illogical peer groups and would look at how the proxy advisory firms disclose conflicts of interest." In 2010, as part of its "proxy plumbing" concept release, the SEC requested comment on whether proxy advisers should be subject to enhanced oversight, including a requirement for SEC filings by these firms (see my article of 7/14/10), but no rules have yet been adopted.

To address the problems of factual inaccuracies and misstatements in proxy advisers' assumptions and analyses, the article reports, companies would like the SEC to require proxy advisers to provide drafts of reports in advance of distribution to enable companies to verify their accuracy. Currently, only ISS follows that practice and only for a limited group of companies. ISS also publishes its policies each year. Glass Lewis has an "issuer engagement portal" to field corporate complaints and to provide some information about its methodology (although it is otherwise generally a black box).

The Glass Lewis representative at the NIRI conference said that "the proxy firms were open to new regulation or guidance from the SEC, but that they have already done a lot of work to disclose conflicts of interests and quality control issues. ‘We've done basically everything that could be asked of us,' [he] said, saying the firm doesn't do other work for public companies, like the corporate governance advisory work its rival ISS does. He also said the firm discloses conflicts prominently if its parent, Ontario Teachers' Pension Plan, has a stake in a company where Glass Lewis is making a recommendation. ISS is owned by MSCI Inc." He also noted that, while they do talk with companies, there can be discomfort discussing concerns about CEO compensation with the CEO. Nevertheless, he acknowledged that more could be done to open lines of communications with corporate directors. He disagreed about the advisability of providing drafts of recommendations to companies in advance because of the "additional burden to an already short timeframe for the firms to come up with thousands of recommendations. ‘It seems a bit cleaner in theory than in practice,' [he] said. He noted the advisory firm's main role is to provide information to investors and not to negotiate on compensation practices with companies on behalf of investors."

Thanks to Wendy Davis, Partner, Cooley LLP, for the tip regarding this article.

Coincidentally perhaps, this morning's corporate counsel.net blog reported on a recent study  , commissioned by the Investor Responsibility Research Center (IRRC) Institute, regarding the voting decision-making process at 19 North American mutual funds with over $15.4 trillion in assets under management, including the significant impact of proxy advisory firms on voting decisions. Here are some of the findings in the study as reported in the blog:

"- The role of proxy advisory firms as data aggregators has become increasingly important to asset managers.

"- Asset managers find the proxy advisor data particularly useful in Say-on-Pay and international votes.

"- The influence of proxy advisors extends beyond just the voting decisions to the formulation of voting policy.

"- The demand for engagement with investors will continue to grow.

"The study also notes the extent to which proxy advisory firms influence issuer behavior outside of the voting cycle, including changes to the terms of executive pay plans."

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