The US Securities and Exchange Commission (SEC) has adopted new rules governing the conduct of proxy advisers (see here for the SEC’s release).

    The rules are designed to address some of the key concerns that have been expressed in the US in relation to the “outsized” role and influence of the proxy adviser industry, and are focused on promoting transparency and accountability. They will not come into effect until 1 December 2021, to allow an appropriate transition period for the industry.

    In approving the new rules, the SEC acknowledged the significant influence proxy adviser recommendations have on shareholder voting outcomes, with SEC Chairman Jay Clayton observing that proxy voting advice businesses are “uniquely situated” to influence proxy voting decisions, and that proxy voting is important to both fund performance and retail investor welfare.

    The objective of the new rules is to ensure that investors who use proxy voting advice receive more transparent, accurate, and complete information on which to make their voting decisions, without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice.

    Commentators in the US suggest that the changes may also facilitate and encourage independent, informed voting decisions by institutional investors, more open dialogue between companies and proxy advisors, and direct engagement between companies and their investors.

    Chairman Clayton noted that the changes are part of the SEC’s on-going efforts to “modernize and enhance the accuracy, transparency and effectiveness of [the] proxy voting system.”

    The new rules are of interest in the Australian context given shared concerns across the jurisdictions about industry practices and limited regulation.

    What are the new SEC rules?

    In brief, under the new SEC rules proxy advisers must:

    • ensure there are no material omissions or materially false or misleading statements in their reports and proxy voting advice (Reports);
    • disclose any material conflicts of interest in relation to their Reports;
    • provide companies with a copy of any Report regarding them at least simultaneously with it being provided to clients of the proxy adviser, so that companies have an opportunity to identify factual errors or methodological weaknesses;
    • notify clients if they are advised by a company that it intends to file a response to the Reports; and
    • include a hyperlink that allows investors to access the written views of the company regarding the Reports once the company’s response is available.

    While the primary focus of the new rules is centred on the importance of the accuracy and quality of reports and proxy voting advice, and on providing companies with an opportunity to respond, the SEC also flagged its concerns about ancillary business practices of proxy advisory firms.

    For example, the SEC’s release makes clear that necessary disclosures by proxy advisers “may include disclosure about certain business practices in which the proxy voting advice business engages that might reasonably be expected to call into question its objectivity and the independence of its advice” such as where the firm has a practice of “selectively consulting with certain clients before issuing its benchmark voting recommendation on a specific matter (e.g., a contested director election or merger)” given the risk that “consulted clients’ voting preferences [may] influence recommendations given to other clients that were not consulted and importantly, without the knowledge of those clients not consulted.

    AICD position

    The rules introduced in the US appear to be balanced and reasonable.

    They address a number of concerns that have been raised in the Australian context in the past including formulaic approaches to proxy adviser voting recommendations; the risk of conflicts of interest where proxy advisers extend their services to include governance consultancy services for listed entities; a lack of accountability notwithstanding the potential impact voting recommendations may have on corporate stakeholders; and general quality issues.

    However, for similar rules to be introduced in Australia, legislative reform would likely be required.

    The AICD has previously expressed a view that an industry code of conduct addressing resourcing, competency, conflicts of interest and a framework for engagement would be a positive step. Given the developments we are seeing internationally, particularly in the US, it is important to regularly assess our own rules and processes concerning proxy advisers to ensure they are robust and stand up against international standards.

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