Together with most executive compensation professionals, this blog has been closely following the multi-year saga of attempts by the SEC and Congress to reign in the proxy voting advice businesses (PVABs) such as ISS and Glass Lewis (which control more than 95% of the market). Readers will recall that in November 2019, the SEC proposed rules on proxy advisory firms, similar to the terms of the interpretive guidance (SEC Proposes Rules on Proxy Advisory Firms). Today, the SEC voted 3-1 to approve and adopt the final rules to “provide investors who use proxy voting advice with more transparent, accurate, and complete information on which to make voting decisions, without imposing undue costs or delays.”
I will provide more detail on the final rules as soon as they are published. However, from the descriptions of the rules provided during the open meeting, it appears that the rules are more flexible and less restrictive in the requirements they impose on the PVABs. The proposal for two levels of issuer/corporation review in advance of publication is gone. Instead, a PVAB must provide its voting recommendations to an affected corporation before or at the same time it provides that recommendation to its investment advisor clients. Additionally, the PVAB must provide to its investment advisor clients (i) notice of an affected corporation’s intent to file a response to the PVAB’s proxy advice, regardless of whether the corporation actually files a response, and (ii) a hyperlink to any actual issuer response.
Commissioner Roisman’s statement in support begins:
Out of all the feedback we received, one point seemed to be universally acknowledged: proxy voting advice businesses play a significant role in the proxy voting system as it has developed. Their voting advice is used by many investment advisers and institutional investors who manage money and vote on behalf of Main Street investors. Proxy voting advice businesses’ clients believe their advice is material and market-moving. The fact that these few businesses have assumed such a far-reaching role in our markets as they do today compelled us to look to see whether our current rules continue to further our mission or whether updates are appropriate given these changes in our markets. Our review demonstrates that Commission action is not only appropriate, but perhaps overdue.
Commissioner Lee delivered a spirited statement in opposition to the final rules, titled Paying More For Less: Higher Costs for Shareholders, Less Accountability for Management, which seemed designed to provide ammunition to the proxy advisory businesses for their ongoing or future litigation to stop the rules.
They are still designed to, and will, increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations. The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.
These rules may not be the last act in the saga. Readers will recall that ISS previously filed a lawsuit in federal court challenging the SEC’s authority to regulate it, and the SEC and Chairman Clayton filed an unopposed motion to hold the ISS’s lawsuit in abeyance “until the earlier of January 1, 2021 or the promulgation of final rules.” Now that the rules are final, ISS may continue to pursue its lawsuit. Additionally, the rules were adopted by a 3-2 vote, with all three Republican-appointed commissioners voting in favor and both of the Democratic-appointed commissioner voting against. Although none of the rules approved by a 3-2 vote during the Obama administration were reversed by the current administration, in these contentious political times, one could imagine further revision under a new/different administration.