Last month, the SEC released a Public Statement Regarding Staff Proxy Advisory Letters, concerning its upcoming Roundtable on the Proxy Process and announcing that the staff of the Division of Investment Management had determined to withdraw the letters that the staff issued in 2004 to Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc., (Sept. 15, 2004). The statement concluded:

Taking into account developments since 2004, the staff has determined to withdraw these letters, effective today. The staff is providing this notice of withdrawal of the letters in order to facilitate the discussion at the Roundtable and looks forward to receiving information and feedback from stakeholders with multiple perspectives at the Roundtable, including on the staff guidance in Staff Legal Bulletin No. 20 (June 30, 2014). The staff expects to utilize what it learns in any future recommendations to the Commission with respect to proxy advisory firms.

To satisfy their fiduciary duty to clients, investment advisers generally must adopt and implement policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of its clients. The two letters that the SEC now has withdrawn stated that one way an adviser could demonstrate that it had voted the proxies in the clients’ best interests was to vote such proxies according to the recommendations of an independent third party. Thus, many investment advisers took advantage of this guidance and relied on the recommendations of one of the well-established proxy advisory firms. Apparently, investment advisers can no longer rely on the recommendation of a proxy advisory firm, without more.

In December 2017, we posted on legislation known The Corporate Governance Reform and Transparency Act, which passed by the House of Representatives last December. The Act would have added a new Section 15H to the Exchange Act, which would impose a series of new requirements on proxy advisory firms. And before that, in June 2014, we posted on SEC Staff Legal Bulletin No. 20, “Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms,” released by the Division of Investment Management and the Division of Corporation Finance.

The SEC and Congress seem intent on rewriting the rules applicable to proxy advisory firms (but probably not in time for the 2019 proxy season).