At Georgetown University’s Center for Financial Markets and Policy, SEC Commissioner Daniel M. Gallagher spoke about corporate governance, focusing specifically on the role of proxy advisors.
Commissioner Gallagher began by pointing out the outsized role of the two largest proxy advisory firms, ISS and Glass Lewis, which control close to 97% of the market. According to Gallagher, this disproportionate power is an unintended result of the SEC’s 2003 rules and amendments, which require an investment adviser that exercises voting authority over its clients’ proxies to adopt policies designed to ensure that it votes those proxies in the best interests of its clients.
The SEC produced guidance with respect to the rule, providing two no-action letters which, along with the rule, essentially offered a “get-out-of-jail-free card” to investment advisers if they paid for and carried out a proxy advisor’s recommendations. According to Gallagher, “rather than encouraging investment advisors to employ their own judgement to address and minimize any potential conflicts of interests in voting their clients’ proxies, which everyone should expect from a fiduciary, the letters cleared the way for investment advisers to shift the responsibility for those votes to third parties which have their own, potentially greater, conflicts of interests, without the fiduciary duties and liability risk faced by investment advisers.” The last thing the SEC should want, Gallagher stated, is for investment advisers to be led to cast their clients’ votes blindly in line with a proxy advisor’s recommendations, which are often based on simple low-cost approaches that ignore the complex aspects of contextual corporate governance.
To fix this issue, Commissioner Gallagher said, he believes that the SEC should withdraw the two proxy advisor staff no-action letters and replace them with SEC-level guidance designed to ensure that investment advisers are complying with the 2003 rule and their fiduciary duties. Additionally, Gallagher said that the SEC should review the role and regulation of proxy advisory firms, including the possibility of requiring them to follow a universal code of conduct and ensuring that their recommendations are designed to increase shareholder value.
See: Commissioner Gallagher’s Speech.
Related news: SEC Commissioner Gallagher Delivers Remarks on Proxy Advisory Services (May 20, 2013).