Center On Exec Comp Urges SEC to Regulate Proxy Advisors, While DOL Takes Steps to Prohibit Worst Conflicts

November 12, 2010

As say on pay requirements take effect in 2011 and companies grow increasingly concerned about the unchecked influence of proxy advisory firms, positive regulatory initiatives at the SEC and DOL have the potential to mitigate the most egregious conflicts of interest and the growth of inaccuracies in research and voting recommendations.

Center’s SEC Comments Focus on Greater Transparency, Prohibition of Conflicts  Our Center On Executive Compensation filed comments with the SEC in response to its concept release seeking input on reform of the proxy voting system, including the role of proxy advisors.  The comments explained the need for greater regulation of proxy advisory firms, including the influence of the proxy advisors as documented in academic studies, the conflicts in their business models, and the growing inaccuracies in reports provided to investors.  To address these problems, the Center recommended that the SEC:

  • prohibit advisors from providing consulting services to companies and proxy voting recommendations to investors;
  • require advisors to disclose all fees received from proponents or issuers in connection with shareholder resolutions filed with or voted on by the advisors’ clients;
  • require institutional investors who submitted shareholder resolutions to disclose the fees paid to proxy advisors and the services they obtained;
  • require corporations to disclose in their annual proxy statements whether they have paid fees for consulting services to a proxy firm and the amount of those fees; and
  • require the SEC to conduct periodic reviews of proxy advisory firm research reports and voting recommendations for accuracy, similar to the reviews of company filings conducted under Sarbanes-Oxley.
    The SEC is expected to propose changes to the proxy voting systems later next year.

    Proposed DOL Rules Would Expand Fiduciary Duties for Proxy Advisors  In a very positive development, regulations recently proposed by the Department of Labor expanding ERISA fiduciary liability to virtually anyone providing investment advice to pension funds would apply to ISS and Proxy Governance. They may also prohibit ISS from providing consulting services.  The proposed regulations cover the two firms because they are “registered investment advisers,” and depending on how the regulations are interpreted, they could apply to all proxy firms.  The regulations impose fiduciary status on those who provide advice or make recommendations on the management of securities or other property owned by pension funds for a fee, and explicitly apply to the “advice and recommendations as to the exercise of rights appurtenant to shares or stock (e.g., voting proxies).”   Under the regulations, proxy advisory firms would become subject to the wide range of fiduciary duties and obligations under ERISA, such as the duties of loyalty and prudence, and would be prohibited from engaging in self-dealing transactions (e.g., providing consulting services and proxy voting recommendations simultaneously).   ERISA imposes significant civil penalties and excise taxes for fiduciary violations.   Responding to criticisms about the breadth of the rule, DOL Assistant Secretary for the Employee Benefits Security Administration, Phyllis Borzi, said, “if it dries up the schlocky advice that . . .  fiduciaries are getting, I don’t have a problem with that.”  The Center will file comments on the proposed regulations urging DOL to cover all proxy advisors and prohibit the worst conflicts of interest.