February 04, 2011
As Glass Lewis attacked rival ISS in comments to DOL, the Association’s Center On Executive Compensation urged the Department to investigate and hold all proxy advisory firms accountable for conflicts and inaccuracies under existing rules. Recently, the Labor Department proposed regulations broadening the definition of “fiduciary” under ERISA in order to expand the parties who can be sued for plan advice. That proposal has resulted in serious questions being raised about the fiduciary responsibilities of proxy advisory firms in providing advice to shareholders. Consistent with the Center’s recommendations, Glass Lewis, the second largest proxy advisory firm, urged DOL to prohibit the ISS business model of providing consulting services to corporate issuers while serving as an independent advisor to institutional investors. Glass Lewis also recommended that ISS be required to provide more specific disclosure of its relationships with issuers in its proxy reports. However, Glass Lewis sought to exclude itself from the new rule, stating it is not “appropriate to include un-conflicted proxy research advisors like Glass Lewis in the revised definition of fiduciary.” Yet, Glass Lewis is owned by the Ontario Teachers’ Pension Plan, which has an ownership interest in many public companies, thus creating its own conflicts of interest. In addition, it provides no transparency as to its methodologies, while ISS provides at least some information. The Center recommended that DOL instead undertake a comprehensive review of proxy advisory firm operations and require the elimination of conflicts of interest in services they provide and their ownership structures, as well as greater transparency over their analytical methodologies. With regard to the impact of the rules on employers, the Center objected that the expansion “could conceivably sweep in as a fiduciary any person who provides input to a plan, a plan fiduciary or a plan participant or beneficiary” and thus increase costs and “harm plans, participants, fiduciaries and plan sponsors.” Without directly responding to Glass Lewis, ISS filed its comments with the DOL on February 2. In an effort to justify the conflicts of interest problem in the proxy advisory industry, ISS states "[t]he complexity of relationships among parties in the proxy voting chain means that the potential for conflict of interest is always present for all proxy advisory firms." Ultimately, ISS asserts that they are concerned that the DOL's proposal "could ultimately harm, rather than protect, plans and their participants," because the proposed rule is overly broad.