By Yin Wilczek
Aug. 18 — Securities and Exchange Commissioner Daniel Gallagher said he intends to continue pursuing structural changes to address the “dangerous overreliance” on the proxy advisory industry.
In an August “working paper” that Gallagher authored for the Washington Legal Foundation, the commissioner said he also intends to closely monitor whether recent guidance issued by the SEC solves “current significant problems.”
As part of his assessment, Gallagher asked that public companies send him copies of any communications they might have with their institutional investors involving concerns about the accuracy of information upon which proxy advisory recommendations are based.
“I would be very interested to learn which complaints are being disregarded by proxy advisory firms and institutional investors,” Gallagher wrote in his paper. “In addition, I believe [Staff Legal Bulletin] 20 should diminish the number of these complaints over time, and I will be very interested to discover whether this is in fact the case.”
Gallagher and other commentators repeatedly have called for reform of the proxy advisory industry and for withdrawal of the two no-action letters that they say might have entrenched the industry's outsized influence.
Rule 206(4)-6 under the 1940 Investment Advisers Act requires investment advisers to implement policies and procedures to ensure—as part of their fiduciary obligations—that their clients' proxies are properly voted, and to avoid material conflicts of interest. The rule also provides that an adviser may avoid material conflicts if it voted in accordance with the recommendations of an independent third party.
To address some of the concerns, the SEC issued SLB No. 20 in late June. The guidance clarified that proxy advisers must affirmatively disclose “significant relationships” or “material interests” that may pose a conflict of interest when they advise clients.
The guidance also spelled out advisers' duties on retaining proxy advisory firms with respect to the accuracy of the facts upon which the firms base their voting recommendations.
Gallagher at the time told Bloomberg BNA that the guidance didn't go far enough.
In his Washington Legal Foundation paper, Gallagher proposed replacing the two staff no-action letters with “Commission-level guidance.”
The commissioner also suggested that the commission conduct a comprehensive review of proxy advisers and their regulation, “including, but not limited to, requiring them to follow a universal code of conduct” and “ensuring that their recommendations are designed to increase shareholder value.”
To contact the reporter on this story: Yin Wilczek in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Phyllis Diamond at email@example.com
Gallagher's paper is available at http://www.wlf.org/upload/legalstudies/workingpaper/GallagherWP8-14.pdf.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)