President Trump Issues Executive Order on Proxy Advisory Firms
Commentary by Steven Lofchie
In the new Executive Order ("EO") the President directed the Department of Labor, the SEC and the Federal Trade Commission to "increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition."
The EO, titled "Protecting American Investors from Foreign-Owned and Politically-Motivated Proxy Advisors," criticized the two dominant proxy advisor firms - Institutional Shareholder Services Inc. and Glass, Lewis & Co. LLC, which together control more than 90 percent of the proxy advisory market - for using their influence to advance "diversity, equity, and inclusion" and "environmental, social, and governance" agendas rather than prioritizing "investor returns." The President asserted that "these proxy advisors wield enormous influence over corporate governance matters, including shareholder proposals, board composition, and executive compensation, as well as capital markets and the value of Americans’ investments more generally, including 401(k)s, IRAs, and other retirement investment vehicles."
In the EO, the President directed the Secretary of Labor to determine whether any proxy advisor who provides advice for a fee, with respect to the exercise of voting rights for shares held by ERISA plans, is an investment advice fiduciary under ERISA. Deputy Labor Secretary Keith Sonderling said the DOL would review the fiduciary responsibilities of proxy advisors to protect Americans' investments.
The President also directed the SEC Chair to consider "revising or rescinding all rules, regulations, guidance, bulletins, and memoranda relating to shareholder proposals." The EO expressly states that the Chair "direct SEC staff to examine whether the practice of Registered Investment Advisers engaging proxy advisors to advise on (and following the recommendations of such proxy advisors with respect to) non-pecuniary factors in investing, including, as appropriate, 'diversity, equity, and inclusion' and 'environmental, social, and governance' factors, is inconsistent with their fiduciary duties."
The President also directed the Federal Trade Commission Chair "in consultation with the Attorney General," to "review ongoing State antitrust investigations into proxy advisors and determine if there is a probable link between conduct underlying those investigations and violations of Federal antitrust law."
Commentary
The voting advice that proxy advisors give has significant economic consequences, and, in many respects, significant political consequences (e.g., on issues related to climate change.)
In light of the significance of their advice, it is thus notable that a very significant action that prior SEC Chair Gensler took with respect to proxy advisory firms was to undo recently adopted regulation of such firms (see, e.g., SEC Adopts Final Rule Governing Proxy Voting Advice) - an action he initiated for which he gave no explanation (see, e.g., Statement on the application of the proxy rules to proxy voting advice.)
His decision to actively undo adopted regulations established a significant precedent of conduct, even if not of law. It would not be surprising if the current financial regulators determined to go ahead with imposing regulation on proxy advisors.