NIRI Submits Comment Letter to SEC on Proposed Amendments to Its Proxy Advisor Rules

On December 27, 2021, NIRI submitted a comment letter to the SEC opposing the Commission’s proposal to roll back the Final Rule it adopted in 2020 to regulate proxy advisory firms. The SEC Proposed Rule, approved on a 3-2 vote in November 2021, would eliminate any type of corporate review of proxy firm reports before investment managers vote at shareholder meetings. Additionally, the SEC proposal would limit the liability of proxy advisory firms for any statement that is false or misleading with respect to a material fact.

The NIRI comment letter advocates that the SEC keep in place a requirement that proxy advisory firms provide each public company with a copy of its draft report for review and comment in advance of dissemination to their investor clients. This “advance review and comment” process would operate in similar fashion to the procedure that has been used for many years by Institutional Shareholder Services—the largest proxy advisory firm—for companies in the S&P 500 Index. NIRI also recommends that the SEC address the “robo-voting” problem, where investment managers are permitted to completely outsource their shareholder voting responsibilities to a proxy advisory firm without appropriate guidance or oversight.

NIRI, Corporate Groups Defend the SEC's Proxy Advisor Rules

On November 6, 2020, NIRI joined with the U.S. Chamber of Commerce and other business organizations in an amici curiae brief that defends the U.S. Securities and Exchange Commission's new regulations on proxy advisory firms. Institutional Shareholder Services (ISS) has filed a federal court lawsuit in an effort to block the SEC's final rules, which are slated to take effect in December 2021. ISS contends that the SEC exceeded its legal authority when it adopted new rules in July 2020 that seek to address conflicts of interest and the accuracy of proxy research. In response, NIRI and the business groups argue that "the SEC has statutory authority to regulate proxy advisory firms that exert enormous influence on shareholder voting" and that "the SEC’s reforms are reasonably designed to facilitate more transparent and better informed shareholder decisionmaking, consistent with the longstanding objectives of the securities laws."

SEC Approves Final Rules on Proxy Advisors

In July 2020, the SEC voted 3-1 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. 

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." 

Additional Resources on the SEC's Final Rule

U.S. Chamber of Commerce, Center for Capital Markets Competitiveness, "Examining the SEC's Proxy Advisor Rule," November 2020

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

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. 


SEC Approves Updates to Rules on Shareholder Proposals

On September 23, 2020, the SEC voted 3-2 to modernize its rules on shareholder proposals.

The amendments to Rule 14a-8, which will take effect in 2022, should reduce the number of special interest resolutions that reappear on corporate proxy statements each year despite receiving minimal support. The rules also will require resolution proponents to hold a larger economic stake or continuously own their shares for at least three years. The updated rules also should promote more engagement between public companies and resolution proponents. 

“NIRI welcomes the SEC’s efforts to modernize the shareholder proposal rules,” said NIRI President and CEO Gary A. LaBranche. “We believe the SEC has struck the right balance between preventing abuses and ensuring that long-term investors can still use the shareholder proposal process to raise important corporate governance issues.”   

NIRI and other corporate organizations supported the SEC’s modernization of Rule 14a-8, while governance activists opposed these changes.   

“[These] carefully tailored and modest refinements will better ensure that the interests of those who submit, and re-submit, shareholder proposals are appropriately aligned with the interests of their fellow shareholders who must take the time to review, consider, and vote on those proposals,” said SEC Chairman Jay Clayton. 


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 February 2022, NIRI and the Society for Corporate Governance submitted a joint letter to the SEC requesting new rule making to the current NYSE proxy fee schedule to ensure that public companies are not responsible for paying administrative charges that are in excess of the reasonable fees to deliver proxy materials to beneficial owners, and a review of the reasonableness and fairness of current proxy billing practices. Letters submitted by the Investment Company Institute and others advocating similar positions can be found on the related SEC website NYSE rulemaking page.

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