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SEC Examines Role of Proxy Advisors in Concept Release     

Article published on July 19, 2010
By Kristin Gribben

The SEC voted unanimously last week to publish a concept release for a 90-day public comment period on ways to improve the proxy voting system. The release includes questions about the proxy advisory industry and whether it has undue influence on the proxy voting system.

The commission has promised to address proxy voting “plumbing” issues since 2009. The Shareholder Communication Coalition, which consists of trade and lobbying groups such as the National Investor Relations Institute (NIRI), the Business Roundtable and the National Association of Corporate Directors, has been advocating for proxy voting reform for several years. The last time the commission took a detailed look at the voting system was nearly 30 years ago.

Business groups have been vocal in their support of having the commission address problems with the current system, especially following the passage of shareholder activist-friendly measures both in Congress and at the SEC.

“Our recent rulemakings and proposals, while seeking to empower shareholders, would act, in my view, to empower only the right shareholders — institutional investors, labor unions and public pension funds — to the detriment of retail shareholders,” Commissioner Kathleen Casey said at the July 14 meeting. “By approving the amendments to Rule 452 we have disenfranchised those retail shareholders,” she said, referring to the SEC’s decision last year to ban broker votes during director elections.

The release addresses a wide variety of issues. The main questions the SEC is asking that are likely of concern to corporate directors are whether investors should be allowed to remain anonymous to issuers (objecting beneficial owner, or OBO, versus non-objecting beneficial owner, or NOBO), how to encourage more retail investor participation through mechanisms such as client-directed voting to broker-dealers and whether there should be greater regulation of proxy advisory firms.

The OBO/NOBO issue is of particular interest to issuers that have been hit with proxy battles and who argue there needs to be an easier way of communicating directly with their shareholders. The Shareholder Communication Coalition advocates for doing away with the OBO option and allowing issuers to directly contact their investors, while some investors say they opt for OBO status to protect their trading strategies.

In the area of proxy advisory firms, the SEC is asking for public comment on whether there should be more disclosure of potential conflicts of interest, enhanced oversight over the formation of voting recommendations, and public disclosure of their voting recommendations in SEC filings. Proxy advisory firms “may be subject to undisclosed conflicts of interest or may fail to conduct adequate research,” said SEC Chairman Mary Schapiro at the meeting.

The SEC says it will consider asking proxy advisory firms for increased disclosure regarding the extent of research involved with a particular recommendation, requiring disclosure of proxy advisory firms’ policies and procedures for interacting with issuers, informing issuers of recommendations and handling appeals of recommendations, and requiring proxy advisory firms to file their voting recommendations with the SEC as soliciting material.

Officials at the Center on Executive Compensation say reform of proxy advisory firms is even more important on executive compensation-related recommendations now that say on pay will be mandatory. “There have been legitimate questions raised around the analytical rigor with which compensation is reviewed and reported by proxy advisory services,” says Charlie Tharp, executive vice president for policy, in a statement.

Other Parts of the Release

The release is divided into three general subjects. The first deals with the accuracy, transparency and efficiency of the voting process, which includes the over-voting and under-voting of shares, accurate vote tabulation of shares, vote lending by institutional investors, and proxy distribution fees. The second area deals with shareholder communication and participation. This includes the OBO/NOBO debate, how to improve retail investor participation through education and client-directed voting and whether the SEC should data-tag proxy statements for corporate governance issues such as executive compensation and director qualifications. The third area explores the relationship between voting power and economic interest, which primarily includes a discussion of the proxy advisory firms, along with issues like empty voting, whereby voting rights are decoupled from voting interests.

Following the 90-day comment period, the SEC is expected to issue a rule proposal that would again be open for public comment before a final rule would be passed.

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