The Activist Investor Blog
The Activist Investor Blog
SEC Sort of Finally Regulates Proxy Advisors, Maybe
After literally many years of debate and heartache about what the SEC should do with proxy advisors (PAs), it comes down to a simplistic yet puzzling set of advisory comments.
We have weighed in a few different ways, finding that PAs provide a private consulting service that falls beyond the scope of SEC regulation:
How Powerful are Proxy Advisors?
Even More Debate on Proxy Advisors
with our take on the hearing that led to the present rules:
How the Proxy Advisory Services Roundtable Should Have Gone.
Alas, no one listens to us. Instead, this week, the SEC issued a Staff Legal Bulletin (SLB) on the subject. Some of it applies only to the PAs (ISS, Glass Lewis), while some applies directly to investment advisors (RIAs). The RIA part is fairly harmless, but worth knowing about. The PAs part has a bit more impact. And, Wachtell, Lipton gave us an unfortunate chuckle with their memo on the SLB.
RIAs: Vote Responsibly
The SLB affirms RIAs have always needed to discharge the twin fiduciary duties of care and loyalty in corporate voting. RIAs also need not vote on every matter, but can select only those votes that make sense for their clients.
The SLB does guide RIAs in hiring and overseeing PAs. RIAs should “ascertain...whether the PA has the capacity and competency to adequately analyze proxy issues...” and “consider...the adequacy and quality of the PA’s staffing and personnel...” So, the SEC wants RIAs to select and manage a vendor well, thanks for that.
The SEC, or rather the corporate interests that urged the SEC to intervene, evidently have an obsession about PAs’ use of company information in advising investor clients, and about PAs’ consulting services for companies. Thus, RIAs should “(i) ensure that...proxy voting recommendations are based on current and accurate information and (ii) identify and address any conflicts of interest...”
So, if you’re an RIA under the SEC’s jurisdiction, then the next time the SEC reviews your shop, expect a few questions about how you manage ISS and Glass Lewis.
Proxy Advisors: Better Disclosure
Other stuff pertains to the PAs. The SEC staff wants better disclosure of corporate consulting relationships. So, to the extent that they advise companies in addition to investors, ISS and Glass Lewis will need to disclose specific company relationships. We will probably see that disclosure in written reports to investor clients about that company.
PAs will have a slightly tougher time avoiding the SEC proxy solicitation rules. If the PA actually casts votes on behalf of an investor, following the investor’s general guidelines, then the PA will need to disclose any applicable conflicts (with company clients, or with other investor clients that propose business on which the PA opines for all clients). If the PA only sends reports to investors with recommended votes, they remain exempt from the proxy solicitation rules.
Comic Relief from Wachtell
Either that, or a sad lack of self-awareness. The SEC’s “welcomed guidance” landed in a laudatory client memo, praising the awkward and confusing Q&A format as “user-friendly”.
Funny how? In their summary of how PMs should manage PAs, they
encourage investors to require...PAs to... implement... process for advance issuer review and dialogue on proxy advisory reports during the drafting process...
And, in the summary of how the new rules allow RIAs to skip votes, they think the SLB
give(s) confidence to PMs (that they may vote) shares...in accordance with the recommendations of the entity that is subject to fiduciary duties and managing the enterprise in which the investor has chosen to invest – the company’s board of directors.
(Emphasis ours, of course.)
This must be the first time Wachtell has encouraged investors to do anything besides go away. And, it’s laughable for Wachtell to suggest investors gain confidence in a BoD recommendation over those of their retained PA.
Advisory Only
Anyway, the SLB represents SEC staff opinion. As the SEC itself notes, they “summarize the SEC staff's views...represent interpretations and policies...(and) are not legally binding.” So, investors can and probably should heed the SLB, but it’s not required.
That’s it. Guidelines worth knowing so that PMs can know when to ignore them. We hope we’ve heard the last of this useless and distracting subject.
Tuesday, July 8, 2014