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SEC Proxy Advisory Rule Reversal Welcome, Says As You Sow CEO

Current amendments present US proxy advisors with unethical “conflict of interest”.

The US Securities and Exchange Commission (SEC) Chair Gary Gensler’s decision not to enforce new rules for proxy voting advisory firms is a positive step towards empowering US shareholders, according to Andrew Behar, CEO of shareholder advocacy non-profit As You Sow.

“The decision is a welcome one for all shareholders,” he said.

The planned amendments to the SEC’s proxy solicitation rules were adopted under the Trump administration in July 2020. The changes require proxy advisory firms, such as Institutional Shareholder Services (ISS) and Glass Lewis, to provide companies with the information underpinning their subsequent voting recommendations to shareholders prior to AGM votes.

“[Shareholders] want a voting system that has checks and balances that allow them to make decisions based on good information, but this change means proxy advisors are struggling with a major conflict of interest, because they have to go to the company board first,” Behar said.

Limiting proxy advisory firms’ activities in this way has a direct impact on shareholders looking to hold corporates accountable on ESG-related issues, Behar explained.

“[As You Sow] represents shareholders. We go to a company and let them know that we’ve identified material risk and we have a solution that will help them address it. When a proxy advisory firm supports that resolution and recommends voting for it to the company’s shareholders, that’s always a good thing,” he told ESG Investor.

SEC Commissioners Hester Peirce and Elad Roisman questioned the decision, having voted in favour of the amendments last year.

In a joint statement, Commissioners Peirce and Roisman asked what would justify a departure from the SEC’s “longstanding legal interpretation about proxy solicitation”. Furthermore, with the official compliance deadline not under 1 December, 2021, they noted that it is “challenging, if not impossible, for us to know how these requirements will work in practice”.

The new requirements for proxy advisors are unfair and therefore the SEC shouldn’t wait to address it, Behar countered. “It doesn’t need to be tested. It needs to be reversed,” he said.

ISS, which has a case pending in court to sue the SEC in response to the 2020 rules, also supports the potential reversal.

“We welcome the SEC’s announced decision to consider revisiting its proxy adviser rulemaking, which we believe was ill-conceived, inconsistent with the law, and pushed through under the previous administration against the wishes of investors the agency is meant to protect,” said Gary Retelny, ISS President and CEO.

Following Gensler’s decision, the SEC’s Division of Corporation Finance has determined that no enforcement action will be taken against proxy advisory firms that don’t adhere to the amendments introduced in 2020 while the Commission deliberates a rule reversal.

“In addition, in the event that new regulatory action leaves the 2020 exemption conditions in place with the current 1 December, 2021 compliance date, the staff will not recommend any enforcement action based on those conditions for a reasonable period of time after any resumption by ISS of its litigation challenging the 2020 amendments,” the Division of Corporation Finance said.

The ISS also queried proposed reforms to proxy voting processes in Australia last month. The Australian Treasury launched a consultation on the transparency of proxy advice, which the ISS said “seems to be premised on a misguided notion”.

Nonetheless, shareholder activism and advocacy continued to grow in the US. Recently, investors hailed the “day of reckoning” following ESG-related voting victories against ExxonMobil and Chevron.

Proxy advisory firms having the freedom to provide their recommendations without having to discuss their findings with the corporates first will only bolster these efforts, Behar said.

“We’re seeing a complete shift in the mindsets of shareholders as they’re increasingly standing up and challenging corporates on [ESG-related] issues, especially climate. It should be changing the minds of any company that isn’t trying to change,” he said.

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