July 19, 2013
In a speech addressing the impact of expanding SEC "social disclosures" on the increased investor reliance on proxy advisory firms, SEC Commissioner Daniel Gallagher urged Commission action on reining in proxy advisory firm influence over proxy voting. Commissioner Gallagher noted that "some of our disclosure rules are being used by special interest groups, who do not necessarily have the best interests of all shareholders in mind, to pressure public companies on certain governance and business practices [e.g., pay ratio]." He continued: "When the Commission-mandated public disclosure documents of public companies run well into the hundreds of pages, we have to question whether such documents are at all understandable, and of any utility, to investors. In either case, the result is that investors are left less informed when making investing decisions." He indicated that the expanded disclosure requirements, coupled with two SEC staff interpretation letters allowing institutional investors to fulfill their fiduciary duties by relying on proxy advisory firms, have raised the question of whether institutions and their advisors are "truly fulfilling their fiduciary duties when they rely on and follow recommendations of proxy advisory firms." Commissioner Gallagher urged that the staff interpretations be replaced with Commission-level guidance to ensure that institutional shareholders are effectively carrying out their fiduciary duties. Additionally, he stated that the SEC should "fundamentally review the role and regulation of proxy advisory firms and explore possible reforms including, but not limited to, requiring them to follow a universal code of conduct, ensuring that their recommendations are designed to increase shareholder value, increasing transparency of their methods, ensuring that conflicts of interest are dealt with appropriately, and increasing [proxy advisory firms'] overall accountability." He finished by acknowledging that while proxy advisors are important to institutional investors, they should be "subject to oversight and accountability commensurate with their role."