SEC to Address Proxy Plumbing


New York – According to an article on, the Securities and Exchange commission plans to look into conflicts of interest at proxy advisory firms:

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’s queries haven’t gone anywhere, as the SEC has been consumed by the Dodd-Frank Act, the regulatory-reform law that was signed around the same time.

Critics worry that institutional investors are overly reliant on the advisory firms for information, and would like the SEC to supervise the firms and clarify their voting policies.

At the same time, companies may hire proxy-advisory firms to help them 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).

As a secondary matter, the concept release raises concerns over a lack of accuracy and transparency in formulating voting recommendations. This has to do with cases where a recommendation is made based on materially inaccurate data. Some issuers would like to get involved in the process so they can correct such material errors before recommendations are made. Proxy advisory firms are understandably wary of issuer involvement in this process. Furthermore, there is concern that proxy advisory firms may use a “one size fits all” approach to corporate governance which may not apply to all issuers.

Approaches being considered to deal with the accuracy and transparency concern are: better disclosure of research practices, policies, and procedures, and requiring proxy advisers to file voting recommendations with the SEC, at least on a delayed basis, in order to enable independent evaluations by market participants of the quality of those recommendations.

Additional questions, for public comment, are asked about proxy advisory firms on pp. 122 – 126 of the concept release.

The SEC is still welcoming public comments on this proposal and on proxy advisory firms more generally.


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