SEC's Proxy Advisor Rule Struck Down, Enabling Duopoly to Manipulate Voting Decisions

Strategic Insights -

The DC Circuit Court of Appeals recently struck down the Securities and Exchange Commission's (SEC) 2020 Proxy Advisor Rule, allowing unaccountable proxy advisors to continue manipulating important voting decisions affecting thousands of companies without recourse. This ruling enables the duopoly of proxy advisors, Glass Lewis and Institutional Shareholder Services (ISS), to continue operating in obscurity, hiding conflicts of interest and lack of transparency in their recommendations.

Key Takeaways:

  • The SEC's 2020 Proxy Advisor Rule aimed to provide public companies with necessary transparency in proxy advisor recommendations, but the DC Circuit Court struck it down.
  • The 2020 rule amendments required proxy advisors to disclose their vote recommendations to companies before they reach institutional investors, allowing businesses to issue feedback and vet the trustworthiness of proxy firms.
  • Glass Lewis and ISS have been shown to harbor several conflicts of interest, including advising clients on ESG proxy matters and selling ESG-based products.
  • The SEC's 2020 rule and 2022 amendments have effectively been terminated, allowing the proxy duopoly to solicit advice to clients without proper oversight.
  • The definition of solicitation in Section 14(a) of the Securities Exchange Act of 1934 includes proxy advisors' recommendations, which should be subject to statutory transparency requirements.
  • The DC Circuit Court's ruling has unjustly insulated the proxy duopoly from any form of oversight, regulatory or otherwise, allowing companies to remain in the dark about proxy advisors' actions and justifications.

Statistics:

  • The SEC's 2020 Proxy Advisor Rule aimed to address mounting concerns over proxy advisors operating in obscurity, with a duopoly of Glass Lewis and ISS dominating the market.
  • In 2019, ISS was exposed for harboring a conflict of interest in corporate governance, providing governance advice to companies while receiving fees from them.
  • The SEC's 2022 amendments preserved the requirement for proxy advisory firms to disclose conflicts of interest to both clients and underlying companies.
  • The DC Circuit Court's ruling affects thousands of companies, allowing unaccountable proxy advisors to continue manipulating voting decisions without proper oversight.

Sources:

  • "Institutional Shareholder Services, Inc. v. SEC"
  • Competitive Enterprise Institute press release
  • SEC rules and amendments (2020, 2022)
  • Milken Institute research (2019)
  • NAM testimony (Charles Crain, 2019)
  • Congressional hearing on ESG and proxy advisors (2019)
  • SEC 2019 interpretation of proxy advice