Could 2017 Be the Year for Tighter Regulation of Proxy Advisers?

Capitol DomeMany public companies continue to view proxy advisory firms with suspicion. They complain that the firms’ proxy voting recommendations aren’t adequately researched, or are based on one-size-fits-all policies.

Pension funds and other large investors hire proxy advisers to conduct research and help them vote on issues in the thousands of corporate annual meetings that occur each year.

According to a Government Accountability Office report in November, there currently are five players in the U.S. proxy advisory industry: Institutional Shareholder Services Inc., Glass Lewis & Co., Egan-Jones Proxy Services, Marco Consulting Group and ProxyVote Plus.

Most of the industry players are regulated under disparate requirements. ISS, Marco Consulting and ProxyVote are registered with the Securities and Exchange Commission as investment advisers, based on their work as pension consultants. Egan-Jones is registered with the SEC as a “Nationally Recognized Statistical Rating Organization,” which does not impact its proxy advisory work.

The GAO report also found that market participants agree the firms influence shareholder voting and companies’ corporate governance. However, there is disagreement as to the extent of the influence.

The SEC has tried to address corporate concerns over the advisers’ conflicts of interest and accuracy, but those steps haven’t been enough for some lawmakers.

The Financial Choice Act—the bill introduced by House Financial Services Committee Chairman Jeb Hensarling to roll back the Dodd-Frank Act—would require the firms to register with the SEC. To be eligible for registration, the firms would have to disclose the procedures and methodologies they use to develop voting recommendations, and any potential or actual conflicts arising from their provision of advisory services.

Hensarling has said he is interested in reintroducing the 2.0 version of his 512-page bill in the next Congress, and there is a good chance the new bill will include the proxy adviser provisions. Regulatory oversight of the industry is strongly supported by some Republican congressmen, including Rep. Sean Duffy (R-Wis.). In May, Duffy introduced a bill (H.R. 5311) to regulate proxy advisers, which was folded into the Choice Act.

It should be noted that when Duffy introduced his bill, ISS President and Chief Executive Officer Gary Retelny told Congress that the requirements weren’t necessary. If passed, the proposed legislation “would inappropriately tip the debate over the proper role of shareholders in corporate governance in favor of entrenched corporate interests at the expense of shareholders and free-market capitalism,” Retelny said. “It would do so in a very costly, inefficient and counter-productive manner.”

While the next Congress will have many pressing priorities, the proxy adviser provisions will have a higher chance of enactment if Duffy becomes chairman of the House Financial Services Capital Markets subcommittee. He and Rep. Bill Huizenga (R-Mich.) are leading candidates for the position.

The picture will become clearer in January, when the subcommittee chairs are chosen.