In July 2020, the U.S. Securities and Exchange Commission (SEC) finalized a rulemaking intended to promote transparency within the proxy advisory industry and increase the quality of vote recommendations received by institutional investors (Proxy Advisor Rule). The SEC also issued Commission-level guidance clarifying the fiduciary duties of SEC-registered investment advisers when voting proxies on behalf of fund shareholders (Commission Guidance).
Proxy advisory firms play an important role in the corporate governance ecosystem. Proxy advisors analyze and develop voting recommendations related to critical governance matters at public companies. Given the thousands of proxy issues that institutional investors may have to consider in any given year, proxy advisors can assist investment advisers in fulfilling their fiduciary duty and ensuring that votes are always cast in the best interests of shareholders.
However, the proxy advisory industry has come under extensive criticism for operating with a startling lack of transparency, rampant conflicts of interest, and a tendency to make factual errors and analytical mistakes when providing voting advice. These deficiencies can lead to misinformed voting decisions, introduce biases into the voting process, and ultimately harm Main Street investors.
The proxy advisory industry also continues to be dominated by only two firms—Institutional Shareholder Services (ISS) and Glass Lewis—which comprise over 95% of the market and whose recommendations can sway a significant portion of the vote at any given public company. Prior to issuance of the Proxy Advisor Rule, these two firms were largely unregulated for years and had in a sense become the de facto standard-setters for corporate governance in the U.S.
Over the last decade, the U.S. Chamber’s Center for Capital Markets Competitiveness (CCMC) has educated members of Congress and the SEC on the problems within the proxy advisory industry and put forward a number of specific ideas for reform. During that same period, congressional hearings were held to examine the practices of proxy advisors, the SEC held roundtables and solicited public feedback on several occasions, and public companies of all sizes became activated on the issue.
The SEC’s recent actions are responsive to many of the concerns raised by market participants and policymakers over the years. The Proxy Advisor Rule will facilitate a “review and feedback” mechanism so that all public companies can correct errors in draft vote recommendations and ensure that shareholders receive the total mix of information prior to casting votes. The final rule will also help investment advisers better understand proxy advisory firm conflicts of interest that could taint the independence of vote recommendations. Additionally, the Commission Guidance will enhance the due diligence conducted by investment advisers and prohibit fund managers from automatically relying on recommendations from proxy advisors.
This report includes a timeline of events that have informed the SEC’s actions, as well as a brief overview of the Proxy Advisor Rule and Commission Guidance, to help public companies understand how the proxy process and their relationship with proxy advisors will likely change in the coming years.
