SEC Approves Final Rules on Proxy Advisors

In a long-awaited victory for public companies, the U.S. Securities and Exchange Commission voted 3-1 on July 22 to approve new regulations on proxy advisory firms and to issue additional guidance for the institutional investors who hire them. 

While the SEC did not mandate a formal pre-publication draft review process, the final rules will require a proxy firm to provide all issuers a copy of its proxy voting advice, at no charge, no later than the time it is disseminated to the proxy firm's clients. The rules also will require proxy advisors to provide notice to their clients that an issuer has filed, or has informed the proxy advisor, that it intends to submit a response to that proxy advice. 

These new standards are a significant improvement over current practice, whereby one of the major proxy advisory firms (ISS) provides a review opportunity only to S&P 500 companies, while the other major proxy advisor (Glass Lewis) has charged issuers for access to its proxy voting advice. 

"Today's actions ensure that those who take on the responsibility of investing and voting on behalf of our Main Street investors have the accurate and decision useful information necessary to make an informed voting decision for the benefit of those investors," SEC Chairman Jay Clayton said during an open meeting. 

The rules, which take effect in December 2021, require proxy firms to provide more disclosure of conflicts of interest. The Commission also reaffirmed its longstanding view that proxy voting advice generally constitutes a solicitation under the SEC's proxy rules, and made clear that a proxy advisor's failure to disclose material information about its proxy voting advice may violate the antifraud provision of the proxy rules. 

In addition to the new proxy rules, the SEC's Investment Management Division issued new guidance to the institutional investment advisors who hire proxy firms regarding the use of automated voting platforms. These automated systems allow for the pre-population of voting instructions without clients taking any additional action; a 2018 research paper reported that 175 institutions with $5 trillion in assets under management voted with ISS more than 95 percent of the time. The new SEC guidance calls on investment advisers to provide additional disclosures to their retail investor beneficiaries and to review procedures for voting when an issuer provides a response. 

"After more than a decade of advocacy work by dozens of members, NIRI applauds the SEC's rulemaking to modernize proxy advisor regulation and to provide institutional investors with more transparent and complete information," said NIRI President and CEO Gary LaBranche, FASAE, CAE. "This landmark decision will ensure that all issuers and their IR teams will receive appropriate access to proxy reports before proxy firm clients vote and will be able to provide responses that will be shared with those clients." 

"NIRI is also grateful that the SEC is providing guidance to address investment managers' growing use of automated proxy voting platforms owned by the proxy advice firms, a concern that NIRI first raised in 2017," LaBranche said. "We are pleased that the SEC shares our concern that investment managers owe a fiduciary duty to their retail investor beneficiaries to make informed voting decisions that include consideration of issuer responses." 


Additional Resources on the SEC's Final Rule

Investment News, "SEC approves rules expected to limit activist investors," July 22, 2020.

The Wall Street Journal, SEC Votes to Regulate Proxy Advisers More Closely, July 22, 2020

Reuters, "U.S. markets watchdog finalizes rules on shareholder voting advice," July 22, 2020.

Cooley PubCo blog, "SEC adopts amendments regarding proxy advisory firms," July 22, 2020


Earlier Advocacy Efforts

In May 2020, the Shareholder Communications Coalition, an issuer coalition that includes NIRI, submitted a supplemental letter that reaffirms support for a pre-publication draft review process.

In November 2018, NIRI submitted a letter to the SEC that outlined how the Commission could use its existing authority to provide more oversight over proxy advisors. 

In an August 2017 comment letter, NIRI expressed concern over the automated proxy voting systems used by investment managers and asked the SEC to investigate whether those systems are consistent with agency guidance.  In October 2018, the American Council for Capital Formation (ACCF) published a report that indicates that a significant number of ISS clients are using automated voting platforms to vote soon after ISS reports are published. In November 2018, ACCF published a second report that provides more evidence of the prevalence of "robo-voting." 

In a December 2015 comment letter, NIRI expressed concern over the selective disclosure of excerpts from proxy advisory reports and asked the SEC to require the public disclosure of full proxy advisor reports when excerpts are leaked into the public domain.

Educational Efforts on Capitol Hill 

NIRI also has urged lawmakers to address proxy advisors. Along with a broad coalition of corporate groups, NIRI has supported H.R. 4015, "The Corporate Governance Reform and Transparency Act," a bill sponsored by Rep. Sean Duffy (R-WI) and Rep. Gregory Meeks (D-NY), that would have directed the SEC to regulate proxy advisors and mandate a review process so all issuers can review draft proxy reports. This bill passed U.S. House in December 2017, but did not pass the Senate before the 2018 midterm elections. The Senate Banking Committee held a hearing on this bill and other governance bills in June 2018, and NIRI submitted a statement in support of proxy advisor reform. 

In addition, dozens of NIRI members personally shared their concerns over proxy advisors during meetings with House and Senate staffers as part of NIRI's Leadership Week events in September 2017 and September 2018. 

Additional Resources
Here are links to comment letters, testimony, and reports that NIRI, NIRI chapters, and other corporate groups have prepared on proxy advisory firms:

Tom Quaadmann, U.S. Chamber of Commerce, "The SEC’s Long Approach to Proxy Reform," May 12, 2020.

David Dragics, NIRI Capital Area, "Proposed SEC Rules Will Provide the Modern Governance Our Markets Need," May 8, 2020

Shareholder Communications Coalition, "Supplemental Letter on the SEC's Proposed Amendments to the Proxy Rules for Proxy Voting Advice," May 1, 2020

Prateek Patel, Morning Consult, "Public Pension Funds Gamble Retirement Savings Through Robo-Voting," April 29, 2020.

NIRI, Comment Letter on Proposed Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, February 2020

Shareholder Communications Coalition, Letter re Proposed Rule on Proxy Advisory Firms, February 2020

U.S. Chamber of Commerce, Letter re Amendments to Exemptions from the Proxy Rules for
Proxy Voting Advice, January 2020

Tim Doyle, "Proxy Firms’ Independence Is Undermined by Their Own Shadow Reports," Morning Consult, July 2019.

Shareholder Communications Coalition, Letter to Commissioner Elad Roisman: Recommendations -- Oversight of Proxy Advisory Firms, April 2019

Milken Institute, "Proxy Advisory Firms, Governance, Market Failure, and Regulation," June 2019

Business Roundtable, Letter re: File Number 4-725 (Roundtable on the Proxy Process), June 2019

Nasdaq (with 318 Public Companies), Letter to SEC Chair Jay Clayton Re: Roundtable on the Proxy Process, February 2019

American Council for Capital Formation, "The Realities of Robo-Voting," November 2018.

American Council for Capital Formation, "Are Proxy Advisors Really a Problem?" October 2018.

U.S. Chamber of Commerce-Nasdaq, 2018 Proxy Season Survey, October 2018.  

NIRI Briefing Paper: The Case for Proxy Advisor Reform, September 2018

NIRI, Letter in Support of H.R. 4015, November 2017.

Shareholder Communications Coalition, Comment Letter on the SEC's Proxy Advisory Services Roundtable, December 2013.

NIRI Testimony to the House Financial Services Committee on Proxy System Reforms and Proxy Advisors, June 2013.

In November 2016, the U.S. Government Accountability Office (GAO) issued a report on proxy advisory firms. NIRI was one of the organizations that provided input to the GAO researchers who prepared this report. 


Proxy System Modernization

NIRI and the Shareholder Communications Coalition also have asked the SEC to address the outdated U.S. proxy system. In NIRI's 2018 member survey on advocacy, 58 percent of respondents said that proxy system modernization was “important” or “extremely important.”  Various IR practitioners have expressed frustration in NIRI's eGroups forum over the proxy fees they pay and the cumbersome proxy rules, which make it more difficult and costly for companies to communicate with their "street name" shareholders.  

In April 2019, NIRI and the coalition submitted a letter to the SEC that outlined interim steps that the agency could take to improve the proxy system. In November 2018, the SEC hosted a roundtable on proxy issues; NIRI wrote a comment letter that included various suggested improvements to the proxy system (see pp. 4-7). 

In an April 2015 comment letter, NIRI and the coalition called on the SEC to repeal its outdated OBO-NOBO (Objecting Beneficial Owner/Non-Objecting Beneficial Owner) rules that make it more difficult and costly for companies to communicate with their shareholders. The coalition reiterated these points in an April 2016 comment letter in response to the SEC's rulemaking on transfer agents.  

NIRI also wrote a commentary for in 2014 on the need for these important reforms: "Shareholder Engagement Should Be a Two-Way Street," April 2014. In June 2013, NIRI's CEO testified before the House Financial Services Committee on proxy reform issues.

In 2010, the SEC published a concept release on the U.S. proxy system that addressed OBO-NOBO, "empty voting" and "over voting," vote confirmation, and other proxy voting issues. Here is a link to the comment letter that NIRI submitted on these issues. NIRI also prepared a comment letter in 2013 regarding proposed changes to proxy distribution fees. 

Additional Resources
Here are links to comment letters, testimony, and reports that other organizations have prepared on proxy system reform:

Investment Company Institute, Letter re SEC Roundtable on the Proxy Process, June 2019.

Shareholder Communications Coalition, Recommendations for Interim Improvements to the U.S. Proxy System, SEC File No. 4-725, April 2019.  

Computershare, Letter re: SEC Roundtable on the Proxy Process (File No. 4-725), April 2019.  

Society for Corporate Governance, Letter re: SEC File Number 4-725 on Roundtable on the Proxy Process – Voting Process and Retail Shareholder Participation, November 2018.  

Securities Transfer Association, Letter re SEC Roundtable on the Proxy Process, September 2018