In its Highly Anticipated Guidance on Proxy Advisory Firms, the SEC Proceeds With Caution

On August 21, the Securities and Exchange Commission adopted (1) guidance on the proxy voting responsibilities of investment advisers under the Investment Advisers Act and related rules and (2) interpretation and guidance on the applicability to proxy voting advice of the rules on proxy solicitation under the Securities Exchange Act.

The SEC’s guidance addresses a controversial element of the proxy voting process: for a very large portion of public company shares, voting decisions are made not by the beneficial owners but by their investment advisers, and a significant role in those decisions is played by two proxy advisory firms — ISS and Glass Lewis. Critics of these proxy advisory firms have called for regulatory action to limit their power, regulate their activities, make them more responsive to issuers, address conflicts of interest, and open up the market to other firms. But investment advisers have a real problem — they need to vote, generally without instructions from their clients, on complex issues at large numbers of companies; and they are in a market environment that rewards low fees and consequently low costs. Proxy advisors are useful to them.

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