SEC takes steps to free up proxy advisers, shareholder proposals

Wall Street’s watchdog is taking new steps to empower investors and proxy advisory firms through a pair of rules voted on at a Wednesday meeting. 

The Securities and Exchange Commission approved final rules by a 3-2 partisan vote to free proxy advisers from some restrictions placed on them at the end of the Trump administration. Critics of the 2020 rules say they hampered firms’ independence. 

Institutional Shareholder Services Inc. and Glass Lewis & Co., the two largest proxy advisory firms, were the primary targets of earlier rules, which required them to share voting recommendations with companies that were the subject of their reports before or at the same time as shareholders.  

They were also required to create a way for shareholders to review any response from the companies related to the advice. The rules subjected the firms to more legal liability related to their advice. 

Investors said they worried the strictures would impair the timeliness of voting recommendations and also curb proxy advisers’ independent assessments of companies and their boards.

‘U-TURNS’

The changes approved by the five-member commission Wednesday will rescind those measures. The agency’s two Republicans voted against the changes. 

“Changing course so dramatically with so little justification does not bode well for the commission,” Commissioner Hester Peirce said. “If we keep making U-turns like this one, people might start to wonder whether the GPS we’re using is calibrated to respond to political, rather than market, signals.”

SEC Chair Gary Gensler supported the change. 

“It is critical that investors who are the clients of these proxy advisory firms are able to receive independent and timely advice,” he said.

Proxy advisers help inform shareholders on how to vote on hundreds of issues ranging from director appointments and executive compensation to proposals on topics like workforce diversity, board independence, and environmental, social and governance issues. 

Business groups have long complained ISS and Glass Lewis hold outsize influence over corporate governance that allows them to set the standards for U.S. boardrooms, thanks to investors’ reliance on their recommendations. Many business groups welcomed the commission’s 2020 regulations, which they said would introduce greater transparency around conflicts of interest and accuracy in assessing companies’ performance. 

MANUFACTURERS RESPOND

The National Association of Manufacturers said in a statement released Wednesday that it plans to sue the SEC to preserve the 2020 rules. 

ISS also issued a response saying that while it appreciates the changes, the firm believes the 2020 rules should have been “rescinded in its entirety.” Its lawsuit against the SEC over the Trump-era regulation is continuing, with oral argument kicking off on July 29.

“Today’s action misses the mark by failing to address the most critical defect; namely, the reclassification of proxy advice provided in a fiduciary capacity as proxy solicitation,” ISS said in a statement. Categorization as a proxy solicitation requires the companies to be subject to more oversight by the SEC.

At the same meeting, the commission voted 3-2 along party lines to approve a proposal to amend the bases companies can apply to try to keep shareholder proposals off their ballots. The SEC said the proposal was intended to bring more clarity to the process. The end result could mean tightened exclusion standards, leading companies to face more shareholder proposals.

“Clarity in this case seems to be defanging the exclusion,” Peirce said. 

‘PEOPLE DECIDE’

The SEC’s approach under Gensler has been “letting the people decide” on major corporate governance issues by scaling back how often it intervenes between shareholders and companies, said Pamela Marcogliese, a partner in Freshfields Bruckhaus Deringer’s corporate advisory practice. 

Last November, the regulator moved to rein in companies’ ability to quash activist demands by making it harder to nix proposals from their proxies. 

That staff guidance resulted in fresh rounds of environmental- and social-focused proposals during the 2022 proxy season, according to a recent analysis by Freshfields.

The SEC allowed companies to exclude just 80 shareholder proposals during the past season, compared with 146 the prior year, according to the analysis. 

Climate change-related proposals saw a major uptick in the past year with 130 filed compared with 81 for the 2021 proxy season, according to the report. Human rights and human capital issues like workforce data also saw more proposals come to a vote, according to the analysis.

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