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Scrutiny of Proxy Advisers to Continue

The SEC plans to monitor shareholder voting decisions and company board elections when they start to pick up again in early 2015 and see if the recently published staff guidance on the use of proxy advisory firms has had an effect. The guidance was issued in response to a long-running lobbying campaign by businesses to tighten the supervision of proxy advisory firms, partly because the two firms that dominate the market — Institutional Shareholder Services (ISS) and Glass Lewis & Co. — are seen as having outsized influence on institutional investors.

Keith Higgins, director of the SEC’s Division of Corporation Finance, told lawmakers during a July 24, 2014, hearing that his staff will be monitoring shareholder voting decisions and company board elections following the release of staff guidance on the use of proxy advisory firms.

“The proxy season really is typically the first four months of the year, so we are sort in a lull on proxy season. But we expect to watch, to see what happens,” Higgins said in response to a question by Rep. Scott Garrett, a New Jersey Republican who chairs the House Financial Services Subcommittee on Capital Markets. “We get feedback from market participants as to how it’s working. But we don’t yet have a work plan on how we are going to test how well the guidance did.”

Higgins said he expected to hear from companies or investment advisers if there are any problems or questions.

At the end of June, the SEC’s Divisions of Corporation Finance and Investment Management issued Staff Legal Bulletin (SLB) No. 20, Proxy Voting: Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms, which reviews rules covering investment advisers and their responsibilities for proxy voting.

SLB No. 20 says investment advisers aren’t required to vote every share of stock they hold for their clients and don’t have to follow every recommendation of a proxy advisor.

The guidance was issued in response to a long-running lobbying campaign by businesses to tighten the supervision of proxy advisory firms. Two firms — Institutional Shareholder Services (ISS) and Glass Lewis & Co. — dominate the market, but in the view of businesses they are subject to minimal accountability. Institutional investors believe the complaints are exaggerated.

“As a matter of best practice and in fulfilling its regulatory obligations, ISS has for more than two decades effectively managed and disclosed potential conflicts of interest to its clients through robust policies, processes and practices,” ISS said in an emailed response. “We will review the SEC’s guidance with an eye toward further enhancing these disclosures, in keeping with our objective to provide our services with the highest level of transparency in the industry.”

Glass Lewis did not respond to request for comment as this story was being written.

Garrett, who has been a vocal critic of the proxy advisers, said the guidance is a “very good first step in addressing the growing and outsized influence being wielded by the proxy advisor industry.” He wanted the SEC to do more because he said he’s concerned about “irrelevant and unnecessary shareholder proxy proposals being brought by activist corporate gadflies.” He didn’t specify which proposals he thought were unnecessary, but in the past he’s opposed disclosures related to political spending, social issues, or environmental concerns.

Garrett asked whether the SEC would be reporting back to Congress or issuing a report to see whether the interpretive guidance on proxy advisory firms has been successful, and Higgins said the agency would consider issuing a report, although there were no specific plans to do so.

“As far as how you measure success, it will be something that’s not particularly transparent to us,” Higgins said. He explained that the guidance is about how clients can agree with their investment advisors about when and how to vote shares. “Those would be agreements that we might not be privy to.”

A day before the hearing, the Council of Institutional Investors (CII) sent a letter to the subcommittee and said it is generally supportive of SLB No. 20.

“We do not believe that the SEC’s rules, or interpretations thereof, require investment advisers to vote all proxies,” wrote Jeff Mahoney, CII’s general counsel. “We, however, recognize that there may be confusion regarding this issue,” adding that the CII believes that SLB No. 20 is sufficient to address the issues that have been raised and that the SEC doesn’t need to spend more time or resources on additional industry guidance or rulemaking.

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