Analysis: Why did the SEC withdraw proxy advisory ‘advice’ letters?

The SEC’s withdrawal recently of two letters sent to Egan-Jones Proxy Services, 27 May 2004, and ISS, 15 September 2004, which never purported to be regulations just advice, was full of disclaimers.

“This IM [Investment Management] Information Update does not constitute staff legal guidance and is not a rule, regulation, or statement of the Securities and Exchange Commission. The Commission has neither approved nor disapproved its content.”

Then chair Jay Clayton made another announcement at the SEC Investor Advisory Committee (IAC) saying they are “nonbinding and create no enforceable legal rights and obligations”.

With this in mind, it would seem that withdrawing the letters, something the US Chamber of Commerce has sought for some time, was not strictly necessary since they embodied neither rules, nor regulations, nor guidance, but simply information.

These letters have been blamed for an over-reliance on proxy advisors by the entire investment community.

But, in fact, they had been superseded by Staff Legal Bulletin 20, Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms.

Briefly, the letters said that one way investment advisers could ensure they are behaving as proper fiduciaries without being influenced by potential conflicts of interest is to vote their clients’ shares based on the recommendations of a third-party advisor, such as a proxy advisor.

They have been blamed for institutionalising proxy advisors in the proxy voting process.

The SEC line was that the letters had been withdrawn because of the upcoming Roundtable on the Proxy Process, though other subsequent guidance and bulletins have not been withdrawn to “ease discussion”.According to the Wall Street Journal, this action came after a letter from six Republican senators asked the Government Accountability Office to rule whether the SEC overreached in issuing the letters.

It should come as no surprise that the development has been met by statements from both major US proxy advisors.

ISS, while pointing to statements of support from several members of the IAC, provided the following statements from its general counsel Steven Friedman: “The SEC’s withdrawal of the letters does not change the law, does not change the manner in which institutional investors are able to use proxy advisory firms, nor does it change the approach that institutions need to take in performing diligence on their proxy advisory firms.”

Friedman said that “corporate lobbyists have created a mythology surrounding these letters in an attempt to undermine the important work we do for our sophisticated institutional investor clients.”

Glass Lewis said it complies with the interpretation given by the SEC in Staff Legal Bulletin 20 “with respect to what does and does not constitute a solicitation of proxies.”

Its response also notes its exemption to the 1934 securities act [Rule 14a-2(b)(3)] “that extends to the provision of proxy voting advice by any person to another person with whom it has a business relationship provided certain conditions are met”.

These conditions refer to the lack of conflicts of interest in the provision of proxy advice, a distinction it makes several times in its statement.

The withdrawal could be seen as either another chip in the proxy advisory block that could eventually lead to a whole new set of regulations governing them, or simply a clearing of the decks before the re-examination of the proxy process that will be undertaken by the roundtable.