Gallagher to Pursue ‘Structural’ Reforms for Proxy Advisers

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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.”

Calls for Change

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

To contact the editor responsible for this story: Phyllis Diamond at

Gallagher's paper is available at


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