Solutions Center

Commonsense Solutions to Better Ensure Proxy Advisory Firms Serve the Interests of Investors

Proxy advisory firms can play an important role in the corporate governance ecosystem. Their research and analysis represent a valuable tool to help shareholders’ representatives fulfill their fiduciary responsibility, particularly those who hold stakes in a large number of companies and vote on thousands of resolutions every year.

However, there is broad, bipartisan agreement that the current system has not functioned properly for some time and no longer meets the needs of Main Street investors in particular. Allowing proxy advisors to claim they are not subject to SEC proxy rules is out of keeping with the legal standards governing the rest of the financial services industry. They are too important to be operating on the margins or in the shadows.

A number of commonsense, practical reforms are needed to ensure that proxy advisors deliver accurate and quality information to the market. The goal must be to make certain that the firms provide high-quality, conflict-free guidance that enables investment advisers to act in the best interests of their clients – America’s Main Street investors.

At the U.S. Chamber of Commerce and the National Association of Manufacturers, we believe that the following reforms are essential to ensure investors benefit from the most accurate, objective and transparent guidance:

1. The SEC should amend its rules to clarify that providing proxy voting guidance qualifies as a proxy solicitation and is subject to SEC proxy rules.

Additionally, the SEC should clarify that the rules only provide a safe harbor to proxy advisors if they take the following steps to ensure the quality and independence of their analysis:

  • Provide the issuer with sufficient time to review a draft recommendation and, if submitted, include the issuer’s response along with the firm’s recommendation in the materials sent to the firm’s clients
  • Disable any automatic voting when a company has submitted a response, to allow shareholders and their representatives to review both the recommendation and the company response prior to votes being cast
  • Ensure that a recommendation is not based on materially inaccurate or misleading information
  • Explain the methodology used to determine the recommendation, including company and industry factors considered and any use of one-size-fits-all guidelines
  • Fully disclose all potential conflicts of interest and have policies and procedures in place to avoid and mitigate conflicts
2. The SEC should make clear that proxy advisory firms are subject to a fiduciary duty to their clients as under the Investment Advisers Act and can be held accountable for breaching this duty.
3. Following the withdrawal of the 2004 SEC no-action letters regarding use of proxy advisory firm recommendations, the SEC should provide clarity to the market by continuing to make clear the due diligence requirements investment advisers have when relying on proxy firm recommendations in order to ensure that clients’ best interests are protected.
4. Understanding that many investment advisers utilize proxy advisory firm research as one data point in their own analysis, the SEC should confirm that use of proxy advisory firms is not necessary or sufficient for an investment adviser to fulfill its fiduciary responsibility and does not relieve them of their duty to make an independent analysis.