The news of the revocation of both the Egan-Jones and ISS no-action letters sent a message far and wide with a myriad of commentators discussing the impact of the announcement. The Wall Street Journal Editorial Board praised the SEC for its decision calling it “overdue.” The two no-action letters provided a safe harbor from a 2003 SEC rule that requires institutional investors to develop and disclose proxy voting policies. As the editorial notes, the letters allowed investors to effectively outsource that duty to “independent” third parties as a safe harbor, even though proxy advisory firms do not have a fiduciary duty to shareholders.
The revoked letters solidified proxy advisory firms’ status as “independent” third parties, protecting investors from lawsuits alleging conflicts of interest. However, as the editorial board notes, proxy advisory firms suffer from obvious conflicts of interest, and yet they were effectively sanctioned by the SEC’s no-action letters. 72 percent of publicly traded companies purchase consulting services from proxy advisory firms on executive compensation, according to a 2012 study cited by the editorial, perhaps because it has been found that an ISS no vote recommendation carries significant influence among investors. The conflict of interest that results from ISS selling consulting services while also providing “independent” rating of proxies is the worst example of a conflict.
The Takeaway Revocation of the no-action letters is the “first step” to addressing proxy advisory firms according to the SEC, which announced late this week it will hold a public “roundtable discussion” on proxy issues on November 15, including SEC oversight of proxy advisory firms. The Association’s Center On Executive Compensation will submit comments to the SEC in advance of the roundtable.