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The Proxy Adviser Strikes Back

It’s one of the defining conflicts in corporate governance today: the attempt to constrain the behavior of public companies by non-governmental “shadow regulators” such as proxy advisers and institutional investors. Now the SEC has waded into the fight, and the agency is finding itself ensnared in battles of its own with third-party stakeholders.

The latest salvo came last week from Institutional Shareholder Services (ISS). The influential shareholder adviser filed a lawsuit against the SEC over guidelines that it issued in August seeking more disclosures from proxy advisory firms regarding their recommendations on shareholder proposals. To the delight of the business interests looking to blunt the advisers’ influence during proxy season, the SEC guidance included a call for greater transparency around proxy advisory firms’ methodologies. Additionally, at least according to Commissioners Robert Jackson and Allison Herren Lee, it would increase costs for proxy advisory firms like ISS.

ISS’s lawsuit claims that procedural problems with the SEC’s guidance included a failure to follow the standard government notice-and-comment procedures. Interestingly, ISS CEO Gary Retelny appeared to frame the firm’s objections to the new guidance as a First Amendment issue.

“After careful review of the August guidance, we are deeply concerned that it will be used or interpreted in a way that could impede our ability to deliver our data, research, and analyses in an independent and timely manner,” Retelny said. “We believe litigation to be necessary to prevent the chill of proxy advisers’ protected speech and to ensure the timeliness and independence of the advice that shareholders rely on to make decisions with regards to the governance of their publicly traded portfolio companies.”

The ISS lawsuit adds to the court entanglements currently facing the Commission. In February, the major U.S. stock exchanges sued the agency over efforts to limit trading fees. The SEC also came out on the wrong end of a 2018 decision by the U.S. Court of Appeals for the District of Columbia concerning the regulation of collateralized-loan obligations (CLOs). That case involved the SEC’s application of Dodd-Frank risk-retention rules to CLOs, which the court found it lacked authority to do.

By all indications, the legal challenges aren’t going to cow the SEC into taking a step back from its role in mediating the ongoing tug of war between issuers and would-be shadow regulators, a group that could also include activist shareholders and employees. In fact, the SEC held an open meeting this week to discuss “continued efforts to facilitate constructive shareholder engagement and enhance transparency, improve disclosures, and increase confidence in the proxy process.” The proposed regulations promulgated during Tuesday’s meeting would formalize August’s guidance that proxy advisor vote recommendations are “solicitations” under the proxy rules.

At this point, there’s a low bar for success for such talks. If they don’t end up the subject of litigation, they would have to be considered a step forward.

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