SEC should “do its homework” before regulating proxy advisors, say investors

In its most stinging riposte yet against reported plans by the Securities and Exchange Commission (SEC) to regulate proxy advisors, the Council of Institutional Investors (CII) has called on the regulator to “do its homework” and not make rules based on false accusations of inaccuracy.

There have been media reports that the SEC will vote in November to propose new rules on the proxy firms, which investors say will limit shareholders’ ability to call for change at companies.

The CII, which represents trillions of dollars in domestic and international investments, says groups representing corporate interests have “used the drumbeat of allegations of pervasive inaccuracies” to persuade the SEC to require pre-clearance of reports with company executives, and to require proxy firms to hand over a portion of their reports or web sites to management of the companies subject to their reports.

“Like other humans, proxy advisory firm employees do make errors,” the CII concedes but says the main proxy firms in the US, ISS and Glass Lewis, “aggressively seek to correct errors” and that actual error rates, at least in recent years, appear to be low.

“In saying this, we observe that most allegations of proxy advisor ‘error’ made from subjects of the reports actually appear to be analytical disagreements.”

The CII says most of the claimed errors are disagreements on analysis and methodologies. In a detailed, 12-page presentation of its case in a letter to SEC Chair Jay Clayton and his fellow Commissioners, the body points to “misinformation” put out by corporate lobby group the American Council on Capital Formation.

CII Executive Director Kenneth Bertsch summarises the body’s position: “If the SEC intends to impose a new regulatory structure on proxy advisory firms, it needs to develop evidence, not just leave it to assertions by the subjects of proxy advisor analysis.”

As Nell Minow, the corporate governance pioneer who’s now Vice Chair at Value Edge Advisors, said in a letter to the Department of Labor this month: “Proxy advisory firms are the essence of and vital to the free market. They produce research no one has to buy and recommendations no one has to follow.”Minow – a former president at ISS – notes that the firms’ clients are “sophisticated financial professionals subject to the strictest fiduciary standards, and those clients have a choice of providers”.

“It is the very definition of prudence for these experts to avail themselves of independent research relating to buying/selling or voting securities.” The current situation was a “textbook example of free market efficiency and the exact opposite of a justification for government intervention”.

Sarah Wilson of Minerva/Manifest, on LinkedIn, posted: “International investors are deeply concerned about the threatening rhetoric emanating from the US.”

These strong words were echoed by Heather Slavkin Corzo, head of US policy at the Principles for Responsible Investment. She said in a statement: “These proposed rules are in direct violation of the SEC’s stated purpose, which is to protect investors. If adopted, they would undermine investors’ ability to engage effectively with corporate management on critical environmental, social and governance matters.”

The PRI has recently made US policy engagement a focus, and Slavkin Corzo added: “They will also undermine investors’ access to independent advice on matters brought to a shareholder vote and increase costs for asset managers and investors. We urge the SEC not to pursue these rules.”

Analysis:

The Council of Institutional Investors and the PRI are going in to bat for the proxy firms like never before as push turns to shove at the SEC. The proxy firms are a straw man for companies to attack while the real target is their own investors, and it’s important that the CII and the PRI are coming out so strongly in their support. The proxy firms have emerged as the fall guys as investors have ratcheted up their efforts to improve governance at companies. If the proxy regulation goes ahead as the investor groups fear, there can be little doubt where the SEC’s priorities lie, especially as jurisdictions elsewhere – such as the UK with its ambitious new Stewardship Code – are forging ahead.