SEC Commissioner Gallagher Discusses Concerns with Proxy Advisors

At the Transatlantic Corporate Governance Dialogue Conference, SEC Commissioner Daniel M. Gallagher voiced his concerns about the role of proxy advisors and the need for the SEC to take regulatory action to mitigate the potentially conflicted role of proxy advisory firms.

Commissioner Gallagher described what he views as the "outsized role" of proxy advisory firms in corporate governance, and stated that it is largely a result of the "unintended consequences" of SEC action. In 2003, the SEC adopted new rules and rule amendments, which required an investment adviser that exercises voting authority over its clients' proxies to adopt policies and procedures reasonably designed to ensure that it votes those proxies in the best interests of its clients. The SEC then issued two staff no-action letters to provide guidance to proxy advisors concerning the new rules, which Commissioner Gallagher said have "effectively blessed the practice of investment advisers remotely voting the recommendations provided by proxy advisors." According to Gallagher, these no-action letters created a "perceived safe harbor," and he called on the SEC to "address the harm they have done."

Additionally, Commissioner Gallagher stated that there is a global regulatory concern regarding proxy advisors, citing the Canadian Securities Administrators' consultation paper regarding proxy advisory firms' potential regulation, the French AMF report on proxy advisory firms and regulatory recommendations, and the European Securities and Markets Authority ("ESMA") report on the proxy industry.

Given this global concern, Commissioner Gallagher stated, the SEC must address the role of proxy advisors, beginning with withdrawing the two proxy advisor staff no-action letters and replacing them with SEC-level guidance. According to Gallagher, remedying the "problematic" staff guidances is the first step toward increasing transparency regarding proxy advisors.

The SEC will hold a proxy advisory firm roundtable on Thursday, December 5, 2013.

See: Commissioner Gallagher's Speech.
Related news: SEC Commissioner Gallagher Discusses Proxy Advisors (with link to the Cadwalader Quorum) (October 31, 2013).