SEC Issues Tough Guidance for Proxy Advisory Firms

WASHINGTON (The Deal) -- The Securities and Exchange Commission late Monday issued long-expected new tough restrictions on proxy advisory firms, including specific disclosure requirements for any conflicts and allowances for institutional investors to abstain from key votes in proxy battles and strategic M&A nonbinding proposals.


At issue are the two main proxy advisory firms - Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC. They provide institutional investors with recommendations on key votes - issues like executive pay, poison pills and stock buybacks are often high on dissident shareholder's proposals.


In addition, they also make key recommendations for or against dissident candidates nominated by activist investors seeking to pressure corporations into deals or to make other changes.


Corporate critics have been pressing the SEC to hike restrictions on the advisers, arguing that they wield too much power over key votes. They argue that activist investors force too many nonbinding votes on social policy issues, political disclosure of lobbying spending or even CEO pay packages that may not impact shareholder value.


Prior to the new SEC provisions, institutional investors had interpreted two no-action letters from the agency as meaning that they were obliged to vote on all matters. It also made them feel as though they could rely on the proxy advisers as a way to discharge their fiduciary duty.


The new guidance would allow institutional investors to abstain from voting any of its proxies in certain situations or would allow the fund manager and its client to agree that the manager will focus its resources only on certain kinds of proposals.

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