Center Urges SEC to Mandate Disclosures from Proxy Advisory Firms as Bipartisan Reform Bill Introduced in Senate

November 16, 2018

In advance of this week's SEC Roundtable on the Proxy Process, the Association’s Center On Executive Compensation submitted comments to the SEC on the need for public disclosures addressing the conflicts of interest and procedural shortcomings inherent in the proxy advisory firm industry.

The Center’s SEC comment letter focuses on creating new proxy advisory firm disclosure requirements to account for all interested stakeholder groups.  Notably, the framework fits well with the objectives of the new Senate bill (see below).  Key points include:

  • Mandatory disclosure of conflicts of interest along with compensation the proxy advisor received for the services creating the conflict should be required on the front of the research report and on the proxy advisory firm’s website.

  • Five-day rule:  All companies must receive a draft of the proxy report and be given five business days to review it for accuracy.  Additionally, proxy advisory firms must provide the final report to issuers five days before releasing the report to their clients to enable issuers to prepare for shareholder engagement in advance of votes being cast.

  • Custom voting methodology disclosure:  Investors should be required to disclose whether their proxy votes are executed automatically (i.e., by the proxy advisor) based on the investor’s pre-programmed voting policy and whether any votes diverged from that policy.

The Center’s comments recognize the role proxy advisory firms play and the economic need for their services.  Disclosure, as recommended by the Center, would provide needed transparency into areas of concern to allow the market to dictate corrective action while minimizing the negative economic impact on investors and advisory firms.

New proxy firm bill:  Meanwhile, on Capitol Hill, a bipartisan group of six members of the Senate Banking Committee, led by Democrat Jack Reed (D-CT), introduced new proxy advisory firm legislation.

The bill focuses on the fiduciary responsibilities of the firms using proxy advisory firm services.  It would require large proxy advisors to register under the Investment Advisers Act, thus imposing on them a specific fiduciary duty to their clients.  Senator Reed explained, “[G]iven the importance that investors have placed on continued access to proxy advisory firms, it is critical that proxy advisory firms are appropriately regulated and held accountable to investors, and this is the purpose of the bipartisan Corporate Governance Fairness Act.” 

With the renewed heat on proxy advisory firms on the Hill and the roundtable discussion at the SEC, the Association’s Center On Executive Compensation will continue to advocate for meaningful, reasonable, and effective change on this issue.