May 20, 2016
Center On Executive Compensation CEO Tim Bartl testified this week before Congress in support of legislation requiring proxy advisory firms to register with the SEC and address conflicts of interest, stating that "where the Commission has provided effective oversight, it has had a substantial impact on proxy advisory firm diligence and conduct." During the hearing, Mr. Bartl recounted an example of the overly aggressive tactics of the consulting arm of the largest proxy advisory firm, ISS, that left the impression with a large company that the consulting side had unique knowledge of ISS's research arm and that it had an overwhelming success rate in helping companies rebound from a low say on pay vote. This aggressive example, which is not an isolated occurrence, calls into question ISS's claims that there is an impenetrable firewall between the research and consulting sides. He further explained that while the 2014 SEC interpretive guidance was helpful, it did not go far enough in exposing actual or potential conflicts of interest or how the proxy advisors address those conflicts. The "Proxy Advisory Firm Reform Act," to be introduced by Rep. Sean Duffy (R-WI), would require proxy advisory firms to explain how they address conflicts of interest in ownership when providing consulting services to issuers while also providing research to investors. Similar concerns exist in providing consulting services on shareholder proposals to certain investors while making recommendations on those same proposals. The draft legislation would give the SEC the power to censure the firms or revoke the registration if deemed necessary for the protection of investors. During the hearing, former SEC Commissioner Daniel Gallagher indicated that "nearly two years after [the SEC guidance] was released, it appears that many market participants have simply taken a 'business as usual' approach. This approach is manifest in the continued market dominance of the two largest proxy advisory firms—ISS and Glass, Lewis & Co.—" further reinforcing the advantages of legislation. Kicking off the hearing, Chairman Scott Garrett (R-NJ) indicated that his subcommittee "has led the charge in Congress for reform of the proxy advisory industry, and this draft legislation is the next step in those efforts."