Comment on Amendments to Exemptions from the Proxy Rule for Proxy Voting Advice

Summary of Study

Bottom Line: The formalization and oversight of proxy advisor firm processes, as indicated by proposed SEC rules, will serve to further enhance market engagement, accountability, and accuracy. Each of these aspects is a central facet of an efficient and prosperous capital market.

The need for greater SEC oversight and assurances that information disseminated to investors is fully accurate has increased in recent years. Proxy advisory firms have amplified this need as they increasingly use automated proxy voting systems. 

The SEC proposed rule to require a draft review process so that public companies can verify the accuracy of proxy advisor reports before investors start voting is therefore vitally important. Given the number of items covered annually by proxy advisors for U.S. companies, it is inevitable that proxy reports will contain a certain level of factual errors or misunderstandings over corporate disclosures.

As proposed by the SEC, final proxy reports should include a hyperlink to a company response (if the company chooses to provide one) so that investors can be fully informed before they vote. This should be afforded to all publicly traded companies regardless of their market capitalization. Companies of all sizes deserve the opportunity to address those errors and respond to proxy advisor interpretation of disclosure.

The SEC's proposed rules would overcome the problem that many companies are unable to adequately respond to errors due to the fact that proxy advisors either do not provide a draft review or give prior notice of their reports. Companies are provided 24 hours - or often less time - by ISS to review reams of data and complex analyses for factual and/or methodological errors.

By allowing companies to fix errors, the SEC's rules will aid in restoring trust in the proxy process from all stakeholders - not the least of which the retail investors and ultimate beneficiaries.

Opposition to these proposed rules are unfounded. While it is undoubtedly the case that a substantial proportion of proxy advisors' work falls into a relatively condensed proxy season, being busy is no excuse for not providing accurate information to investors. In addition, to argue that simply providing feedback on a proxy report's content automatically impinges the ability of proxy advisors to provide independent evaluations seems to defy logic and strains credulity.

For nearly a decade, the proxy advisor ISS has been subject to a regulatory regime in France that allows for both a draft review and issuer responses to analysis and voting recommendations, and it has stated publicly how that regime is beneficial to accuracy in its reports.

Recent surveys suggest the SEC rules will be used by the issuer community. During an August 2018 survey of the National Investor Relations lnstitute's practitioner members, more than 95 percent of respondents agreed that the SEC should require proxy advisors to provide a draft review opportunity to all issuers.

Read the full comment letter here.