Risk & Compliance

SEC Puts Proxy Firms on Notice

The regulator will propose changes to proxy-advisory firms this fall.
Sarah JohnsonJune 21, 2011

The Securities and Exchange Commission plans to issue a proposal this fall that will address the role of proxy-advisory firms, SEC chairman Mary Schapiro said on Tuesday. “When we catch our breath from our Dodd-Frank responsibilities, I want to return to the issue of what we call proxy plumbing,” she told an audience at a conference held by The Wall Street Journal.

In a concept release nearly a year ago, the SEC questioned the advisory firms’ potential conflicts of interest that arise from servicing both public companies and their shareholders. But the regulator’s queries haven’t gone anywhere, as the SEC has been consumed by the Dodd-Frank Act, the regulatory-reform law that was signed around the same time.

Coming after the SEC received hundreds of comments on its 40-page concept release, the pending proposal would address these firms’ potential conflicts of interest, as well as questions surrounding the transparency and accuracy of the work they produce. Schapiro said the regulator welcomed more comments on the year-old concept release in the meantime.

The proxy-advisory industry, which is unregulated, is dominated by two firms: ISS and Glass Lewis. Earlier this year, the number of advisory firms grew smaller with the acquisition of Proxy Governance Inc. by Ernst & Young. The audit firm aims to use PGI’s database of more than 51 quarters of proxy information to help companies notice emerging trends. (It will not be selling services to investors.)

Business groups have been advocating for change. “Compared to last year, there’s less competition, with PGI leaving the field, and there’s still no transparency in how these firms make recommendations,” says Tom Quaadman, vice president with the capital markets center at the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. Critics worry that institutional investors are overly reliant on the advisory firms for information, and would like the SEC to supervise the firms and clarify their voting policies.

At the same time, companies may hire proxy-advisory firms to help them develop governance policies that will please shareholders. The SEC noted last July that some of these firms “provide vote recommendations to institutional investors on matters for which they also provided consulting services to the issuer.” The SEC’s concept release suggested one improvement would be to require the firms to provide more disclosures about their potential conflicts of interest.