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SEC Adopts Amendments to More Closely Regulate Proxy Advisers

Advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis will face tighter regulations following a vote by the Securities and Exchange Commission on Wednesday.


The SEC voted 3-1 to adopt new amendments to proxy voting rules, which were modified from the original proposal issued in November 2019. The vote comes after growing unrest from companies that proxy advisers hold too much influence over the votes of shareholders and conflicts of interest are often ubiquitous at these firms.

The new amendments require proxy advisers to show their voting recommendations to public companies at the same time or before sending them to clients. They also have to inform their clients of public companies’ responses to their advice. To allow time for the exchange of information, proxy advisers can require public companies to file their proxy statements at least 40 days before annual shareholder meetings.

“The final rules require proxy voting advice businesses to hold themselves to a standard appropriate for the power they exercise,” SEC Commissioner Hester Peirce said in supporting the rule.

ISS filed a lawsuit against the SEC in response to the guidance it issued in August of last year on proxy voting responsibilities. The firm claimed the SEC’s determination that providing proxy advice is a “solicitation” is contrary to law, that the SEC failed to comply with the Administrative Procedures Act and that the views expressed in the release were arbitrary and capricious.

ISS President and CEO Gary Retenly was critical of Wednesday’s ruling, saying it interferes with the firm’s ability to perform its duties.  

“While the rules adopted today may appear less draconian than originally envisioned, they nevertheless serve as a blow to institutional investors seeking to judiciously monitor portfolio companies,” Retenly said in a statement.

The SEC also voted by the same margin (3-1) to publish new supplementary guidance to investment advisers addressing how advisers should consider company responses in light of the new amendments to the proxy rules.

SEC Chair Jay Clayton said that the final rules and guidance are the product of a 10-year effort, which has led to “robust discussion” from all market participants. The original proposal issued in November generated substantial comment and criticism, and the SEC took much of it into account in developing the final rule, which now encourages what had been imperative in the proposal — namely that proxy advisors conduct a review and feedback process with issuers.

The rule will take effect for the 2022 proxy season, the SEC said.

About the Author

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Brett Christie is the managing editor of Workspan Daily.

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