In a surprise statement with potentially far-reaching impact, the Securities and Exchange Commission announced the immediate revocation of the influential Egan-Jones Proxy Services and Institutional Shareholder Services “No-Action Letters” which facilitated the rise and undue influence of the proxy advisory firm industry, including widespread conflicts of interest. The Egan-Jones and ISS letters allow proxy advisory firms to be viewed as “independent” by investors despite questionable conflicts of interest. The “independent third-party” designation allows investors to rely on proxy advisor voting recommendations in satisfaction of their fiduciary duties to their shareholders.
- Egan Jones Letter. The Egan-Jones letter effectively gave investors a “safe harbor” in relying on proxy advisory firm voting recommendations without running afoul of the federal securities laws. Specifically, the letter said that an investor that relies on an “independent third party” in determining proxy votes will be viewed by the SEC to have upheld their fiduciary duty to vote proxies in their clients’ best interest if the third party is “free from influence or incentive to make recommendations other than in the advisor’s best interest.”
- ISS Letter. The ISS letter facilitated ISS’s consulting services business by stating proxy advisory firms can demonstrate independence based on an evaluation of the proxy advisory firm’s “conflict procedures” rather than a case-by-case analysis of individual conflicts. ISS provides “independent” proxy voting recommendations on a company to investors while often providing the company with consulting services on how to get a better ISS voting recommendation.
The immediate impact of the revocation of the letters is unclear. SEC Staff No-Action letters are non-binding opinions from the SEC Staff that they will not pursue a securities enforcement action against an entity for a course of conduct. Therefore, nothing has technically changed for proxy advisory firms and the investors which utilize them because revocation of the letters alone does not indicate that current proxy advisory firm disclosure practices are in conflict with the federal securities laws.
However, the SEC’s decision opens the door to a discussion of appropriate regulatory action and disclosures of independence and conflicts of interest at the SEC’s proxy process roundtable which the SEC announced is expected to take place in November. Following the announcement, Democrat SEC Commissioner Robert Jackson released a statement characterizing the issue in part as follows "Regulating proxy advisors has long been a top priority for corporate lobbyists, who complain that advisors have too much power. There is, of course, little proof of that proposition," and focusing on proxy firms is distraction from the real issues which needed to be discussed at the proxy process roundtable.
The Center On Executive Compensation supports the withdrawal of the no action letters to facilitate the roundtable dialog and will file comments in advance of the roundtable based upon Subscriber input to explain its perspective on the shortcomings on the oversight of proxy advisory firms.