Proxy firm Institutional Shareholder Services facing potential SEC action over kickbacks

But company does not anticipate action from Department of Justice

Institutional Shareholder Services, the proxy advisory firm that is owned by indices and ESG firm MSCI, could be facing enforcement action from the Securities and Exchange Commission over allegations of kickbacks for client voting data.

MSCI says it has received notice from the SEC’s Division of Enforcement that it will recommend proceedings against ISS for violations of the Investment Advisers Act.

The company says in a filing that the basis for the action will be that it did not have policies and procedures specifically addressing communications with proxy solicitors, and that it did not “adequately train and supervise” staff.

The issue blew up in February when MSCI disclosed that it had suspended an ISS employee after a whistle-blower had made a complaint to the SEC.
The firm subsequently said it was cooperating with the SEC and the Department of Justice on the matter.In March the company disclosed that the employee, who was subsequently fired, had provided client voting data to a proxy solicitor “over a number of years”.

MSCI said it does not anticipate that the DOJ will take any action against ISS; it adds that the matter won’t have a “material adverse effect” on its business or operations.

The development comes an awkward time for ISS and the proxy advisory sector more widely, which is facing increasing calls for regulation.

Earlier this year, rival firm Glass Lewis was forced to deny that its voting advice during a boardroom battle at Canadian Pacific Railways was influenced by its owner, the Ontario Teachers’ Pension Plan.

In a further blow to MSCI, fund management giant Vanguard has switched to rival FTSE as its index benchmark provider for six international equity index funds with aggregate assets of $170bn.