Proxy advisors (e.g., Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co (“Glass Lewis”)) have played a substantial role in the design of executive compensation for many years. This has been due to the strong reliance of institutional investors (as well as investment advisors) on the proxy voting recommendations of firms such as ISS and Glass Lewis. Some commentators have viewed the proxy advisors as being quasi-regulators without any formal oversight of their potential conflicts of interest.
The current structure goes back a number of years, and two SEC no-action letters from 2004 issued to Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004) confirmed that proxy advisory firms could still be considered independent third parties under Rule 206(4)-6 of the Investment Advisers Act of 1940 even if the proxy advisory firm receives compensation from an issuer for providing advice on corporate governance issues.
Although there have been some legislative proposals to address the above concerns (e.g., H.R. 4015-Corporate Governance Reform and Transparency Act of 2017), these have progressed slowly.
Some recent SEC actions have observers wondering if the SEC might make some changes which will reduce the influence of proxy advisors. As a starting point, in July, the SEC announced its intention for its staff to host a Roundtable on the proxy process in general and solicited comments from interested parties. The announcement outlined potential topics for the Roundtable, and this included the topic of the overall role of proxy advisors.
Secondly, earlier this month, the SEC Division of Investment Management issued an Information Update (IM-Info-2018-02), which indicated that the two 2004 no-action letters discussed above were being withdrawn:
“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.”
There is no immediate impact from this change, particularly since some other related guidance (Staff Legal Bulletin No. 20) is still in place. However, it does suggest that we can expect some focus on the proxy advisory role in the upcoming Roundtable which is expected to be in November.