The FT is reporting that the SEC is abandoning a key component of its proposal to add new disclosure and engagement requirements for proxy advisory firms, such as ISS and Glass Lewis. (See this PubCo post.) According to the report, the SEC has "scrapped the portion of the proposal that would have forced proxy advisers—led by Institutional Shareholder Services and Glass Lewis—to submit their voting recommendations to companies for checking before distributing them to investors in advance of shareholder meetings." The proposal had received substantial pushback, including from the Council of Institutional Investors and even the SEC's own Investor Advisory Committee. However, the FT appears to point the finger, or attribute the victory, depending on your point of view, primarily to hedge fund activists "who court proxy advisers' support when fighting for board seats."
Many companies, as well as business lobbies such as the Business Roundtable and the National Association of Manufacturers, have raised concerns about proxy advisory firms' concentrated power and significant influence over corporate elections and other matters put to shareholder votes, which has led some to question whether they should be subject to more regulation and accountability. (See, e.g., this PubCo post, this PubCo post and this PubCo post.) In particular, companies had expressed concerns that the analyses of proxy advisory firms were rife with factual errors, omissions and methodological weaknesses that "could materially affect the reliability of their voting recommendations and could affect voting outcomes, and that processes currently in place to mitigate these risks are insufficient." What's more, some companies contended that they did not have adequate opportunities to review the advice, engage with the firm and correct the errors on a timely basis. Although proxy advisory firms have taken some steps to share information with companies (see this PubCo post), those opportunities have been limited in some cases to larger companies, were not timely or were otherwise inadequate to address company concerns.
On the other hand, the Council of Institutional Investors has expressed concern that the requirement that proxy advisors share advance copies of their recommendations with issuers could interfere with the relationship between institutional investors and proxy advisory firms as their agents. As CII understands it, proxy advisory firms are agents of institutional investors, not of issuers. And, according to CII, there is no reason to believe that institutional investors feel the need for prior review by issuers of the work product of their agents, the proxy advisors. Rather, investors would prefer that the proxy advisory firms be completely independent of companies. The SEC's Investor Advisory Committee recommendation was highly critical of the proposal as unlikely to reliably achieve the SEC's own stated goals, ultimately advising the SEC to rethink and republish the proposal. The committee contended that the proposal was almost futile without addressing in parallel more basic proxy plumbing issues (as the Committee had previously recommended) (see this PubCo post), that none of the SEC's actions at issue adequately identified the underlying problems that are intended to be remedied, provided a sufficient cost/benefit analysis or discussed reasonable alternatives that might have been proposed. (See this PubCo post.)
The SEC proposal was designed to build on market processes currently in place, providing a mechanism for enhanced engagement between proxy advisory firms and companies. The proposal clarified that the term "solicitation" includes any proxy advisor voting recommendations, and it conditioned exemptions from the filing and information requirements of the proxy rules for those solicitations on the proxy advisory firm's making specified disclosures about conflicts of interest and compliance with an issuer review and feedback process regarding the firm's advice. More specifically, the proposal required, as a condition to reliance on the exemptions, that the proxy advisory firm provide companies (and certain other soliciting persons) with at least two opportunities to review and provide feedback on the advice before dissemination to the firm's clients, with the review time varying based on how far in advance of the shareholder meeting the definitive proxy is filed. (See this PubCo post.)
The FT cites the ubiquitous "[p]eople familiar with the matter," who "said the SEC had shifted its focus instead to a 'speed bump' that would make it less likely shareholders would blindly follow the proxy advisers' recommendations...." The "speed bump" delay "would give companies time after publication to rebut a recommendation they do not like."
SideBar
What is a "speed bump"? In a speech in March, SEC Commissioner Elad Roisman, who has honchoed the SEC's effort to address the proxy-advisor issue, said that he was sensitive to the negative feedback and was "open to considering other ways to accomplish the policy goals of improving the total mix of information available to the marketplace and enhancing fairness and transparency in the voting process." One alternative, he said, that had been offered by some commenters was "to provide a contemporaneous review period for companies, wherein a proxy voting advice business would (1) send its report to the issuer at the same time it distributes the report to its clients and then (2) notify its clients if the issuer raises objections to the report within a short time period (e.g., some have suggested two days)." However, that alternative might be problematic in light of the service offered by proxy advisory firms "of pre-populating their clients' electronic ballots with voting recommendations and automatically submitting them for counting. Do these 'set-it-and-forget-it' mechanisms tie clients' votes to the proxy voting advice businesses' recommendations? If so, would a concurrent review period for companies come too late to allow information generated by the review period to be considered by investors? More generally, I ask whether these ex-ante 'set-it-and-forget-it' mechanisms are well understood by the ultimate investors and whether, particularly in idiosyncratic and contested matters, they are consistent with the duties undertaken by an investment adviser." One way to address that issue, he suggested, might be by introducing the concept of a "speed bump: a time period during which the proxy voting advice business would have to disable any automatic submission features, in order to be eligible for the relevant exemptions."
Apparently, there is a dispute raised by one of the hedge fund activists as to whether the speed bump alternative would require a reproposal. The fund contended that the speed bump idea was new to the proposal—a point that Roisman disputes—and could not be adopted without a reproposal. The NAM representative weighed in that "there is 'absolutely, definitively' no need for the SEC to repropose the rule."
A Glass Lewis representative told the FT that they were pleased that the SEC was moving away from company pre-review, but concerned about some of the alternatives under consideration. (Interestingly, however, as discussed in this PubCo post, Glass Lewis has announced that it will now include "unedited company feedback on its research...with all its proxy research papers" and will deliver that information "directly to the voting decision makers at every investor client.") On the other side, the NAM representative viewed a speed bump as welcome but inadequate. According to the FT, the "SEC said the agency's 'staff is considering all comments received as it prepares recommendations' to the regulator's four commissioners. People familiar with the discussions cautioned that the rulemaking is in flux and could change in the weeks ahead."
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