Washington, DC – The Securities and Exchange Commission is holding an open meeting today to finalize a rule to enhance transparency, improve disclosures, and increase confidence in the proxy advisory process. The rule under consideration could bring the proxy advisory industry in line with every other financial service by ensuring they are registered as fiduciaries – and can be regulated as such by the SEC. These efforts would ultimately provide investors with more transparency and accurate information on which to make voting decisions.
The deliberation over these proposed regulations is much needed and long overdue. As far back as 2013, SEC commissioner Dan Gallagher has been outspoken on inherent problems with the proxy advisory industry, noting that the status quo is not set up to increase company value or operate on behalf of shareholders, but rather to serve the interests of the proxy companies themselves. The SEC conducted an extensive rulemaking process, starting with the 2018 Roundtable on the Proxy Process, numerous meetings with interested parties, and finally a sixty-day plus comment period on the proposed rule. As such, the rule under consideration is the end product of years of effort from investors, regulators, policymakers, academics, and others to ensure there is proper oversight of the proxy advisor industry.
In anticipation of today’s meeting, IPFI President Christopher Burnham notes “Proxy advisory firms have a major impact on the proxy process, but are not obligated to make recommendations with investors and pensioners best interests in mind. Reform to produce greater transparency and require proxy advisory firms maintain fiduciary duty is a positive development.”
In a recent report, the Institute for Pension Fund Integrity (IPFI) provided a critical evaluation of the underlying problems inherent in the proxy advisory firm market. These firms play a critical role in determining how institutional investors, such as those who manage public pensions, vote on shareholder resolutions. As fiduciaries, these individuals are obligated to prioritize fiscal returns above all else. However, proxy advisory firms compromise that duty in several ways.
Factual inaccuracies and automatic voting are two things that we hope the Commission addresses with the final rule and guidance. Currently, there is no mechanism for companies to address factual inaccuracies in the reports produced by proxy advisory firms. The American Council for Capital Formation (ACCF) recently released a report that shows “proxy advisors are still committing errors or basing recommendations on flawed methodologies during the 2020 proxy season.” The report identifies at least 42 instances of recommendations based on faulty information or errors during the 2020 proxy season alone.
“Under the current rules, there is no mechanism to ensure that proxy advisory firms are analyzing accurate information and making recommendations based on reality,” added Burnham. “What makes matters worse is the existence of ‘automatic voting’ allows proxy ballots to immediately be cast before inaccuracies can be identified. ‘Automatic voting’ allows proxy votes to be cast on faulty information well before the inaccuracies have the opportunity to be identified. A process for review and a rectifying flaws in the research and recommendations by proxy voters better legitimizes the proxy process and ensures that shareholders are voting with accurate information.”
As it exists today, the proxy advisory system is rife with simplistic strategies which cannot possibly fulfill the individual needs of the thousands of funds and investors who rely on ISS and Glass Lewis. Conflicts of interest impede the two firms’ ability to adequately provide the services they promise to their clients, and leave them focused more on increasing their own value than that of their clients’ investments. Robust changes to the proxy advisory system would deliver a positive service to the marketplace.
We are hopeful that today’s SEC meeting finalizing the rule around proxy advisors will produce greater transparency over the proxy process, which will be a big win for pension beneficiaries.