Proxy advisory firms rose in response to helping shareholders vote their shares at the annual general meetings. As proxy firms have become part of the culture of the marketplace, there has been a growing concern about issues such as transparency and conflicts of interest with proxy advisory firms. Congress and the Securities and Exchange Commission (SEC) have noted issues with proxy advisory firms, but it's not clear which body should be responsible for legal or regulatory changes. It's also not clear what the most appropriate changes should be.
Congress has made some attempt to regulate proxy advisory firms, but they've been unable to pass meaningful legislation through both chambers. The SEC also has ideas on how to make suitable changes, and they seem to be moving in the same general direction as Congress, but they haven't taken any significant steps to date either. The U.S. Senate seems to be waiting for next steps from the SEC before they move again. The SEC continues to explore various approaches to regulatory changes.
Congressional Activity on the Future of Proxy Advisory Firms
In 2017, the U.S. House of Representatives passed two bills related to proxy advisory firms. They were the Financial CHOICE Act and the Corporate Governance Reform and Transparency Act. Both bills died in the Senate. If passed, the bills would have prescribed new requirements for proxy advisory firms. Since then, the U.S. Senate is taking their own look at how best to approach new rules for proxy advisory firms. On November 11, 2018, a bipartisan group from the Senate introduced the Corporate Governance Fairness Act, which is also simply known as the Fairness Act. If the Act moves forward, it would subject large advisory firms such as the ISS and Glass Lewis to the Investment Advisers Act of 1940. The Senate Finance Committee held hearings on the Fairness Act on December 6, 2018, but there hasn't been any further movement on it to date. If the Corporate Governance Fairness Act gets enacted, it would require the following of advisory firms:- Register with the SEC as investment advisers under the Advisers Act.
- Meet the fiduciary duty of care when providing advice to their clients.
- Allow the SEC to inspect their books and records.
- Maintain policies and procedures to address conflicts of interest.
- Maintain and preserve certain books and records.
- Comply with anti-fraud requirements.
- Evaluate the conflict of interest policies and programs of the proxy advisory firms.
- Evaluate registered proxy advisory firms' policies and procedures that address issues regarding those who may knowingly make false statements or omit material facts that would call for making a statement to clients to ensure they're not being misled.
- Examine whether investors need any additional protection.
The SEC's Activity on the Future of Proxy Advisory Firms
In like fashion, the SEC has also taken recent action to regulate proxy advisory firms. The SEC hasn't changed operating models or addressed public companies' concerns as of yet. On November 15, 2018, the same date the Fairness Act was introduced, the SEC started some roundtable discussions about the proxy process and the role of proxy advisory firms. On December 6, 2018, SEC Chair Jay Clayton instructed SEC staff to recommend proposed regulations for proxy advisory firms. The roundtable discussions consisted of three separate panel discussions. One of the panels was composed of a diverse team that focused on proxy advisory firms. The team included:- General Motors
- Atlas Air Worldwide
- American Enterprise Institute (a business-leaning think tank)
- Four institutional investors
- A professor at NYU Law School
- CEOs of two major proxy advisory firms
- A co-founder of Egan-Jones
- A less-prominent advisory firm
- How to fairly divide the labor, responsibility and authority between investment advisors and proxy advisors.
- Establishing a framework for how to address conflicts of interest at proxy advisory firms.
- How to create transparency around proxy advisors' analytical and decision-making processes, as well as whether the analytics are company or industry-specific.
- How investors can access the issuer responses to information provided in the proxy advisory firms' company reports.
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