Divided SEC Seeks to Clarify Proxy Voting Responsibility, Issues New Interpretation on Proxy Advisors

On 3-2 votes, the Securities and Exchange Commission on August 21 approved new guidance for investment advisors, and issued a new “Interpretation” on applicability of proxy solicitation rules to proxy advisors.  The investment advisor guidance appears similar to “staff guidance” issued in 2014, but with more force as “commission guidance.” The new Interpretation may be the first step in a process involving a later rule proposal. By making it clearer that the SEC sees proxy advisory firms as subject to proxy solicitation rules, this could give the SEC a stronger hook to place requirements on the firms later, which could be concerning, as is the potential for lawsuits that may threaten existing proxy advisors and discourage new entrants in the small but critical market. SEC Commissioner Allison Herren Lee said the SEC actions entail "new substantive requirements – most notably increased issuer involvement in the proxy advisory firm’s process.” She noted that the SEC has not fully gathered and weighed evidence to understand whether that would improve reports, and the requirements run contrary  to views expressed by institutional investors and asset managers. Lee said the changes could raise costs, make timely investor consideration of issues more difficult, and compromise independence of research. “We agree with Commissioner Lee that the commission should have put the new guidance and interpretation out for public comment,” said CII Executive Director Ken Bertsch.