State of the Union on Proxy Advisor Reform

Proxy advisors appear to have won the latest round in an ongoing conflict – but that’s not the end of the story by a long shot.

Why it matters: The role of proxy advisors is more hotly contested than ever before, with multiple court battles erupting after the SEC finalized a moderate set of 2020 reforms to proxy advisor regulations.

• Now that the SEC is considering major changes to executive compensation disclosure, proxy advisors are back in the forefront.

Zoom in: Last week, the DC Circuit ruled that proxy voting advice is not a “solicitation” under SEC rules, which spells the end of the SEC’s 2020 campaign to use that tactic to regulate proxy advisors (not that Gary Gensler’s SEC was interested in doing so).

• What now? The SEC could try to find another regulatory path in the securities laws to rein in proxy advisors.
• Far more likely: Congress will attempt a legislative fix, such as the recently introduced Stopping Proxy Advisor Racketeering Act, which would ban proxy advisors from providing advice if they offer consulting services.

Meanwhile, Texas has forged its own path with a law requiring proxy advisors to supply a litany of disclosures if their recommendations are based (even in part) on ESG factors, effective September 1.

• The impact of such an unusual law is unclear. Might proxy advisors choose to simply stop issuing reports for Texas companies, or issue a report without a recommendation? Will investors in that state wind up having to rely less on proxy advisors? FW Cook suggests the new law may actually drive businesses to domicile in Texas as a competitive advantage with regard to governance.
• According to Paul Hastings, Florida, Oklahoma and West Virginia are considering similar bills while ISS and Glass Lewis are likely considering legal challenges to the Texas law.

Bottom line: We expect some sort of increased supervision of proxy advisors, but the path to get there is not yet determined.