Saturday, February 9, 2019

Proxy Advisor Regulation - Developments this Week

I’ve previously blogged about the battle to muzzle proxy advisor services with new regulations, including posting a summary of the SEC’s roundtable on the subject, a discussion of the (lack of) existing regulation, comments on the SEC’s withdrawal of two no-action letters concerning the use of such services.

This week, we have a bit of new news.  First, the SEC announced that Commisioner Elad Roisman will be spearheading efforts in this area.  That matters because, as I previously observed, Commissioner Roisman seems particularly sympathetic to the idea that firms should have an opportunity to review and comment and/or correct proxy advisor recommendations.   So I’m guessing that’s something the SEC is going to propose.

Second, NASDAQ, Inc. – along with many other public companies (not all of which are NASDAQ companies, btw) – submitted a letter to the SEC requesting various changes to the proxy rules, including more regulation of proxy advisors.  And the first thing I’ll note about the NASDAQ letter is that it’s nine pages long – 1.5 pages of text, and the rest is just a list of signatories. 

I also notice that NASDAQ’s proposals are quite similar to those that were included in the Republican Financial Choice Act, which passed the House in 2017.  And it seems to me that, if adopted, they would pose a real threat to how proxy advisors function.

Among other things, NASDAQ claims it wants a process for companies to dispute “inaccurate” proxy recommendations, except it makes clear that it’s not just objecting to factual errors, but advisor opinions that the issuer feels are wrong.  As NASDAQ puts it, “The SEC should require transparent processes and practices that allow ALL public companies, regardless of their market capitalization, to engage with proxy advisory firms on matters of mistakes, misstatements of fact and other significant disputes.” (emphasis added). 

What NASDAQ is referencing here is the fact that ISS does send previews of its reports to the S&P 500, but not other companies.  (Glass Lewis makes factual data, but not the analysis, available to all issuers in advance).  I’m not sure I have much of an opinion on whether the reports should be distributed in advance to issuers, but if proxy advisors are required by law to resolve any disputes or even just entertain those disputes before distributing the report to clients – even disputes that are not about factual data but about substantive analysis – that could inhibit their efforts to make timely and unbiased recommendations to clients. 

As I said above, this is also the proposal likely to gain the most traction with Commissioner Roisman, so we’ll see how things unfold.

NASDAQ also wants proxy advisor services to make its recommendation policies public, and go through a formal notice and comment system to change those policies.  Obviously, this would not only inhibit proxy advisors’ flexibility, but would force them to reveal what may very well be trade secrets, thus potentially undermining their business models (a point John Coates made in his testimony before Congress). 

Finally, I note that NASDAQ is also asking the SEC to repeal the NOBO/OBO rules so that companies have direct access to information about shareholder identity. I didn’t even know that was something that was on the table, and I rather suspect that was thrown in as a Hail Mary, as I gather there would be a lot of objection from institutional investors.

So, that’s the general scoop, and I have to say that while I’m not surprised to see a lot of issuers take these positions, I'm a little surprised to see them coming from NASDAQ itself; given its ownership of the NASDAQ exchange, I’d have thought it would be a little more circumspect.  Is there a political economy story I’m missing, possibly some kind of competitive pressure for listings that’s playing a role here?  Or am I overthinking it?

Ann Lipton | Permalink


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