The Shareholder Communications Coalition has asked the SEC to erect a regulatory framework for firms providing proxy advisory services to institutional investors in connection with annual or special shareholder meetings. The Coalition is composed of the Business Roundtable, National Investor Relations Institute, and the Society of Corporate Secretaries & Governance Professionals. In a letter to the SEC, the Coalition urged the Commission to adopt regulations on conflicts of interest by proxy advisory firms, disclosure by these firms regarding the standards, procedures, and methodologies used to formulate voting recommendations, and the correction of factual errors in the information used by these firms to develop their recommendations. The Coalition also asked the SEC to consider requiring proxy advisory services to register as investment advisers under the Investment Advisers Act.
Proxy advisory firms are typically retained by mutual fund and hedge fund asset managers, pension plans, and other institutional investors to provide voting recommendations and otherwise assist in voting by these institutional investors, which range widely in size of assets under management.
According to the Coalition, recent public statements by SEC officials indicate that the agency intends to move forward with a rulemaking proposal to address the role of proxy advisory firms. This proposal and other upcoming rulemakings will follow the SEC's issuance of a Concept Release on the proxy system in July 2010.
In the Coalition’s view, new SEC regulations should include minimum standards of professional and ethical conduct for the proxy advisory community. The regulations should also require full disclosure of conflicts of interest by proxy advisory firms. For example, firms should disclose relationships with clients who are proponents of the shareholder proposal or a vote no campaign whenever the firm is issuing a recommendation to other clients in favor of the same proposal or campaign.
In addition, regulations should address whether a proxy advisory firm should be allowed to offer consulting services to a company for which it is providing recommendations on how investors should vote their shares. If a proxy advisory firm is allowed to offer consulting services to such companies, the SEC should consider regulations ensuring a complete separation of proxy advisory activities from all other businesses of the firm, including consulting and research services.
Given the tremendous influence of proxy advisory firms, continued the group, there is also a need for greater transparency about the internal procedures, standards, methodologies and assumptions they use in developing recommendations, especially when they apply policies without considering industry-specific or company-specific circumstances. Proxy advisory firms should be required to keep a public record of all their voting recommendations. They should also disclose the underlying data and the rationale used to generate specific voting recommendations.
Proxy advisory firms should also be required to provide companies with draft reports in advance of distribution allow companies to review the factual information in the reports. Companies should be able to respond to any factual errors, which would then be corrected by the advisory firm. Proxy advisory firms should also be required to disclose promptly and publicly any errors made executing or processing voting instructions on a particular proxy vote.