The U.S. Security and Exchange Commission on Wednesday voted to amend proxy voting advice rules adopted in July 2020 but never enforced. The 2020 final rule was to have become effective in August 2022.
Institutional Shareholder Services, one of the two big proxy advisory firms, filed suit to stop the proposed rule in October 2019. Then in January 2020, it paused the suit before reactivating it in August that year. Wednesday’s SEC vote is not likely to persuade ISS to withdraw its lawsuit because the SEC left intact some requirements of the 2020 rule that was originally proposed by the Trump-era SEC.
As originally adopted in 2020, the rules would have required proxy advisory firms like ISS and Glass Lewis to meet two requirements:
“First, those conditions required proxy advisory firms to make their advice available to the companies that are the subject of their advice at or before the time that they make the advice available to their clients. Second, the conditions required proxy advisory firms to provide their clients with a mechanism by which they could reasonably be expected to become aware of any written statements by registrants who are the subject of the advice regarding the proxy advisory firms’ proxy voting advice.”
The SEC rejected both concerns, concluding “that the potential informational benefits to investors of these conditions do not sufficiently justify the risks they pose to the cost, timeliness, and independence of proxy voting advice.”
“We are deeply troubled that the SEC decided to give even more power to an industry that already lacks accountability,” said Bryan Junus, Chief Analyst for The Corporate Citizenship Project, a think-tank focused on a data-driven view of corporate governance issues.
A note to the 2020 ruling presented examples of misstatements or omissions related to proxy voting advice, specifically stating that failure to disclose material information regarding proxy voting advice could be misleading. While Wednesday’s final rule removes that note, other provisions of the 2020 final rule regarding proxy advisors “remain in place and effective.”
ISS and Glass Lewis are likely to continue seeking to change three items in the amended rules:
- Proxy voting advice remains a solicitation subject to proxy rules.
- Proxy voting advisors will continue to be subject to the conflict of interest disclosure requirement.
- Proxy voting advisors remain subject to liability for “material misstatements of fact in, and omissions of material fact” in the advice they give.
In a statement to the Financial Times, an ISS spokesman said, “We continue to firmly believe that the [SEC 2020] rules exceed the agency’s statutory authority by regulating proxy advice as proxy solicitation.”
Regarding the liability issue, proxy advisory firms may be liable under the rule for a statement that falsely describes their views on how their clients should vote. Firms would also be liable if their opinions contain “embedded statements of fact” that are false. Finally, a proxy advisory firm could be liable if a “reasonable investor” interprets an advisor’s opinion as omitting material facts about how the firm reached that opinion.
So why would ISS and Glass Lewis object? Neither is likely simply to lie to clients — that’s not good for business and the firms are likely to get caught. That mostly eliminates the first two conditions. But a lawsuit charging a proxy advisory firm with omitting material facts about how the firm reached its opinion would, at least, shine a light on the secret formulas the firms use to make their voting recommendations on shareholder issues such as ESG scores.
Junus of The Corporate Citizenship Project has a guess.
“The one thing proxy advisors want to avoid is transparency. They are scared of potentially having to reveal their metrics for making their recommendations on ESG and other matters because those metrics may not be nearly as comprehensive as they lead investors, journalists, and businesses to believe. They will do anything to avoid the public seeing the emperor has no clothes.”