Investment Advisor And Proxies

Integrity Research» Blog Archive » SEC to Address Proxy Plumbing

The Securities and Exchange Commission plans to issue a proposal this fall that will address the role of proxy-advisory firms, SEC chairman Mary Schapiro said on Tuesday. “When we catch our breath from our Dodd-Frank responsibilities, I want to return to the issue of what we call proxy plumbing,” she told an audience at a conference held by The Wall Street Journal.

In a concept release nearly a year ago, the SEC questioned the advisory firms’ potential conflicts of interest that arise from servicing both public companies and their shareholders.But the regulator requests have not gone anywhere, that the SEC has been consumed by the Dodd-Frank, Regulatory Reform Act which was signed at the same time.

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Critics fear that institutional investors are too heavily on the advisory firms for information, and wants the SEC to oversee firms and clarify their voting policy.

At the same time, companies can hire proxy advisory firms to help develop governance policies that will please shareholders. The SEC noted last July that some of these firms “provide vote recommendations to institutional investors on matters for which they also provided consulting services to the issuer.” The SEC’s concept release suggested one improvement would be to require the firms to provide more disclosures about their potential conflicts of interest.

The SEC’s concept release on the proxy system is available here .

The section of the concept release dealing with proxy advisory firms (pp. 105 – 126) outline the following concerns with proxy advisory firms:

Conflicts of interest for proxy advisory firms when they provide both proxy voting recommendations to investment advisers and other institutional investors and consulting services to corporations seeking assistance with proposals to be presented to shareholders or with improving their corporate governance ratings. This is especially concern when the proxy firm provides advice to the company on the very same matter that is then put to a shareholder vote, on which the proxy firm then provides a voting recommendation.

A conflict also arises when a proxy advisory firm provides corporate governance ratings on issuers to institutional clients, while also offering consulting services to corporate clients so that those issuers can improve their corporate governance ranking.

The concept release suggests that stronger, more specific, disclosure is required on these conflicts of interest, even where a wall of confidentiality exists between between consulting and research departments. In addition to more specific disclosure requirements, potential regulatory responses being considered by the SEC include: federal registration of proxy advisory firms as investment advisors; additional guidance on the fiduciary duty of proxy advisors; and, finally, additional regulations similar to those addressing conflicts of interest on the part of Nationally Recognized Statistical Rating Organizations (NRSROs).

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