Last Thursday, in preparation for the discussion on proxy advisory firms and related topics at its upcoming Proxy Process Roundtable (reported on here), the SEC announced the withdrawal (effective immediately) of Staff's controversial 2004 no-action letters to Egan-Jones Proxy Services and ISS, which provided guidance to investment advisers (IA) on their use of and reliance on proxy advisory firm recommendations in their voting of client proxies.
This Sullivan & Cromwell memo, which summarizes the two letters, notes: "The Egan-Jones and ISS letters have been cited by some as leading to an overreliance on recommendations made by proxy advisory firms without due consideration of the full scope of the conflicts they face. A provision directing the SEC to withdraw the Egan-Jones and ISS letters was included in the Corporate Governance Reform and Transparency Act of 2017 (H.R. 4015), which passed in the House late last year and is currently before the Senate."
Davis Polk also comments: "The letters have been criticized to have unintentionally resulted in the endorsement of investors using proxy advisory firms in making proxy voting recommendations, in order to address potential conflicts of interests by investment advisers exercising their fiduciary obligations when voting proxies. In them, the SEC staff stated that the recommendations of a third party, independent of an investment adviser, may 'cleanse' the adviser’s vote from conflict, as we explained in a post more than five years ago."
The SEC's Statement further indicates that Staff is seeking feedback at the Roundtable on the still-intact SLB 20, which also provides guidance on IA responsibilities in voting client proxies and retaining proxy advisory firms based - in part - on the now-withdrawn letters.
House Financial Services Committee Chairman Jeb Hensarling (R-TX) commented on the SEC's Statement:
The proxy advisory firm duopoly is in serious need of reform and SEC attention. The market power of proxy advisory firms demands greater accountability for these firms’ actions and the information that they provide institutional investors. Time and again, we’ve seen their recommendations riddled with errors, misstatements of fact, and incomplete analysis. By exploiting the market for pricey advice, proxy advisory firms have shown way too often that they are more focused on pushing special interest agendas rather than serving investors. It is imperative that we improve the proxy process to uphold transparency, accountability, and integrity that both shareholders and companies deserve and expect.
Both Davis Polk and Dorsey also recounted the call on ISS and Glass Lewis by several Republican members of the Senate Banking Committee in May to explain - among other things - the compliance of their proxy voting systems with SLB 20, and address their conflicts of interest (reported on here: "Senate Banking Members Call on ISS & Glass Lewis to Explain Business Practices"). The firms' responses to those inquiries are here (ISS) and here (Glass Lewis). As reported here (see "Senate Committee Directs"), the Senate Appropriations Committee's June FY 2019 Financial Services Appropriations Bill further directs the SEC to consider and report on (among other things) the impact of proxy advisory firms in connection with the decline in public companies and IPOs.
The SEC's Statement indicates that the still-unscheduled Roundtable is expected to be held in November.