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​US regulator limits regulatory move on proxy-advisory space

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A senior member of the UK proxy voting community has welcomed the release by the US Securities & Exchange Commission (SEC) of staff guidance dealing with the responsibilities of investment advisers and exemptions from proxy regulation for proxy advisers.

Sarah Wilson, chief executive and founder of Manifest Information Services, told IPE: “I am pleased with the outcome. The SEC has pointed out there are already regulations to address these issues.

“Where there is a problem, the SEC has followed the Canadian lead and suggested companies pick up the phone and speak to shareholders where there are concerns about what a proxy adviser is saying.”

In the US, Institutional Shareholder Services and Glass Lewis dominate the market.

Proxy advisers provide recommendations to shareholders on topics as diverse as executive pay, board appointments and acquisitions.

The SEC released a seven-page Staff Legal Bulletin detailing 13 Q&As on 30 June.

The guidance falls short of imposing a new regulatory regime on proxy-advisory firms.

Instead, it is largely aimed at investment advisers who engage proxy advisers.

The SEC began its review of the proxy-advisory market in July 2010 when it issued its so-called proxy plumbing concept release.

This consultation paper – the first of three steps in the US regulator’s rule-making process – mulled the prospect of an overhaul of the mechanics of the entire proxy voting system.

The SEC said it wanted to gauge how far shifting shareholder demographics and changes in technology meant “rule revisions should be considered to promote greater efficiency and transparency.”

SEC chairman Mary Schapiro said: “To result in effective governance, the transmission of this communication between investors and public companies must be timely, accurate, unbiased and fair.”

According to figures quoted by the SEC in 2010, more than 600bn shares are voted at more than 13,000 shareholder meetings every year.

Proxy-voting rules were last subject to a major overhaul some three decades ago.

Regulating the market is, however, a challenge. Although some proxy advisers offer services that stray into the territory of investment advice and fiduciary capacity, others go no further than offering a take-it-or-leave-it research and vote-management service.

Critics of proxy advisers, among them the companies whose corporate governance shortcomings they comment on, claim advisers’ proxies are subject to conflicts of interest and operate through opaque models and methodologies.

In April, the Canadian Securities Administrators published a consultation document in which it set out best practice for the proxy industry.

The Canadian proposals remind issuers they “may engage with their shareholders, who have the ultimate responsibility of determining how to exercise their right to vote, to explain why they have adopted a given corporate governance practice”.

The European Union has also stepped into the arena and issued proposals to regulate proxy advisers as part of its shake-up of the 2007 Shareholder Rights Directive.

Here the EU makes the case for improving transparency around the activities of proxy advisers.

The Commission’s move comes after the ESMA’s failed bid to regulate proxy advisers in 2013.

Wilson told IPE she believes the Commission has confused problems in the US market with Europe.

“We have no issue with transparency to our clients – that is our contractual obligation,” she said. ”However, not all proxy advisers share the same business model.

“For example, Manifest, in its vote-agency capacity, does not ‘control’ votes. We facilitate and manage a client’s instructions under a strictly defined service contract.

“Controlling a vote is a fiduciary act and something that cannot be outsourced. This is the major difference between the US and the European model.”

Wilson also pointed to the Commission’s proposal that advisers must guarantee their research as particularly worrying.

“We can’t do that, no investment analyst can do that, and auditors don’t do that,” she said.

”We offer a point of view that is based on public information assessed against a client’s pre-agreed governance policy.

“We can’t guarantee a recommendation to follow any particular course is accurate – we are simply offering an opinion based on a particular set of facts.

“For example, a company might have a joint chairman and chief executive. There are investors who will always vote against that, no matter why it has arisen.”

As for the way forward, Wilson said she hoped the Commission would “go back to the drawing board with these proposals” and instead focus on the investor’s fiduciary responsibilities, as well as the substantial flaws in the voting process itself.

She added: “The EU position is behind the pace set by the SEC and the Canada. As they stand, the proposals will have the unintended effect of embedding service providers more deeply into the stewardship debate rather than focusing on the owners.

“If there are concerns about market dominance and competition, that is a matter that should be addressed through a reference to DG COMP.”

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