May 31, 2019
Proxy advisory firm regulatory action could be considered by both the Securities and Exchange Commission and the Department of Labor, according to new additions to the semi-annual agency regulatory agenda released late last week.
The path to SEC proxy advisory firm reform could go through the proxy solicitation rules. Significantly, the SEC included a near-term rulemaking agenda item stating the agency would consider proposing “amendments to address certain advisors’ reliance on the proxy solicitation exemptions.” Currently, ISS, a registered investment advisor, can take advantage of an exemption from the proxy solicitation rules when providing proxy voting recommendations to investors to avoid having to comply with the expensive and onerous SEC filing and process rules companies must comply with in filing a proxy statement. Although the SEC did not mention ISS or proxy advisors specifically in the agenda item, the Association’s Center On Executive Compensation and other stakeholders have urged the SEC to implement proxy advisory firm reforms by requiring transparency and process changes in order for proxy advisors to continue to qualify for the proxy solicitation exemption.
Proxy advisory firm conflicts may be considered by the Department of Labor: In a surprising update, the DOL’s long-term agenda included an item which would “modernize fiduciary practices related to the voting rights associated with ERISA plan investments.” This would entail an examination of how ERISA plan fiduciaries use proxy advisory firms, including a look at conflicts of interest, to ensure “proxy voting decisions are solely in the interest of” plan beneficiaries.
Resubmission thresholds, pay for performance, and clawbacks: The SEC’s near-term agenda also included a proposed rule on the shareholder proposal resubmission thresholds, which the Center has encouraged the SEC to update. Additionally, after a year’s absence, the unfinished Dodd-Frank clawback and pay for performance rules have made a return to the long-term rulemaking agenda—meaning the issues would not be dealt with in the next twelve months.
Outlook: Although non-binding, the inclusion of proxy advisory firms on both the SEC’s and DOL’s agendas is an encouraging development. The Association’s Center On Executive Compensation will continue to advocate for appropriate reforms in the proxy advisory firm industry while also monitoring the movement of other important executive compensation and governance regulatory items.