Relief and concern: US finance bodies have mixed reactions to final SEC proxy advisory guidance

US regulatory body approves controversial rules but dumps requirement to give companies advance notice of proxy advice

The US Securities and Exchange Commission’s (SEC) new rules for proxy advisors are a “blow to the independence of research” that “shifts power to corporate management and away from investors”, the US SIF has alleged, in the latest twist in a long-standing scuffle. 

Yesterday, the US securities regulator finalised a rule tightening requirements for proxy advisors, codifying that making proxy voting recommendations, research and analysis is “considered to be engaging in a proxy solicitation”. 

The Council of Institutional Investors (CII), meanwhile, said it was “relieved” at the dumping of what it called “the most problematic aspect of [the SEC’s] original proposal for heavy-handed regulation of proxy advisory firms”.

The SEC had previously planned to require proxy advisors to allow companies two rounds of reviews of proxy advice before sending it to their investor clients, but this latest and final rule “appears to eliminate this most damaging aspect…which would have severely weakened important shareholder rights”, the CII said. 

The SEC said on its website that the rule amendments would “provide investors with more transparency, accurate and complete information”. 

Chairman Jay Clayton said: “The majority of our Main Street investors participate in our public markets through ownership of mutual funds and ETFs managed by professional market participants.” 

“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.”  

Clayton came under fire last year after justifying the proposed rule changes with allegedly fake letters, which claimed to be from “Main Street” retail investors, but were later linked to the corporate lobby-funded Main Street Investors Coalition. 

According to the US SIF, though, the rules will “allow corporations to inappropriately influence proxy voting advice and intimidate proxy advisors with the threat of litigation”. The rules subject proxy advisors to Rule 14a-9 liability for materially misleading statements or omissions.

The CII said the rules and guidance could drive up costs and cause uncertainty for investors because of potentially delayed distribution of proxy advice and impaired independence. 

“Just how damaging the new regulatory regime could be isn’t clear because the SEC has acted without providing details of its approach”, the CII said

It said: “The new rules and guidance seem to effectively require investment advisors who vote proxies on behalf of investor clients to consider and evaluate any response from companies to proxy advice before submitting votes. That could cause significant delays in the already constricted proxy voting process.” 

“It also could jeopardise the independence of proxy advice, as proxy advisory firms may feel pressure to tilt voting recommendations in favour of management more often, to avoid critical comments from companies that could draw out the voting process and expose the firms to costly threats of litigation.”

In 2019, proxy advisory firm Institutional Shareholder Services (ISS) filed a lawsuit against the SEC, claiming the proposed rules infringed on its free speech and that the interpretation that proxy advice is “solicitation” under federal securities laws is flawed.

“We believe the SEC should have waited for the legal challenge to play out before issuing final rules,” the CII said.