The role of proxy advisory firms was included with other proxy-related issues such as over-voting and under-voting, proxy distribution fees, and issuers’ ability to communicate with beneficial owners of securities in the SEC’s 2010 “proxy plumbing” concept release.
Although the SEC has taken no further public action since the release, many continue to call for some kind of regulatory oversight of proxy advisory firms to address potential conflicts of interest, inaccuracies in their reports, and the need for transparency into their general methodologies.
During a June 5, 2013 House Financial Services subcommittee hearing Darla Stuckey, senior vice president, policy and advocacy, Society of Corporate Secretaries and Governance Professionals; Harvey Pitt, former SEC chair who spoke on behalf of the US Chamber of Commerce; and Jeffrey Morgan, president and CEO of National Investor Relations Institute (NIRI), testified about the market power and impact of proxy advisory firms. Ann Yerger, executive director of the Council of Institutional Investors (CII) submitted her written testimony. No one from either of the two largest proxy advisory firms (Institutional Shareholder Services and Glass Lewis) was present. Read the Bloomberg report here.
Stuckey said that "routine" proxy matters such as election of directors in uncontested elections, and say-on-pay, have become much more important to the life of companies, and that the one-size-fits-all approach of proxy advisory firms does not work. She cited the SEC’s and Congress’ increased regulation on institutional investor voting as one of the reasons such routine proxy matters have become more important to companies. For Stuckey’s full testimony, click here.
Morgan pointed out that since institutional investor ownership of the largest 1,000 companies has grown to 76 percent in 2007 from 47 percent in 1987, these investors and their advisors now wield tremendous influence at company annual meetings. In his statement, Morgan noted that companies are concerned with “the role of loosely regulated proxy advisory firms” and “the outdated SEC rules that can prevent companies from effectively communicating with shareholders on a timely basis.” For Morgan’s full testimony, click here.
Yerger noted that the CII believes proxy advisory firms should register as investment advisers, provide substantive rationales for vote recommendations, minimize conflicts of interests, and correct material errors promptly. However, she wanted to make it clear that despite the role of advisory firms, institutional investors should not be viewed as “abdicating and outsourcing” their voting responsibilities to investment advisers. For Yerger’s full testimony, click here.
President Obama has nominated two top US Senate staff members to replace two outgoing SEC commissioners.Michael S. Piwowar, a chief economist for the Senate banking committee, and Kara M. Stein, a legal counsel and senior policy advisor to Sen. Jack Reed, have been tabbed to replace Troy A. Paredes, and Elisse B. Walter, respectively.
Paredes’ term expires in June, while Walter is allowed to serve until the end of the year or until a replacement is confirmed. Walter had served as SEC chair until Mary Jo White was confirmed earlier this year.Both nominees now face summer confirmation hearings before the Senate banking committee.
As part of its rollout of the new conflict minerals disclosure regulations, the SEC has released a list of Frequently Asked Questions (FAQ). Companies’ initial reports on the 2013 calendar year are due by May 31, 2014.
One of the clarifications in the FAQ was that companies will not have to disclose whether or not their product packaging contains conflict minerals because packaging does not meet the “necessary to the functionality of production of the product” test.
The 12 questions in the FAQ also address supply chain issues, filing Form SD (the regulatory filing form used to report conflict minerals usage), describing products in relation to conflict mineral content, and the transition regulations for IPOs.
The rule, mandated by the Dodd-Frank Act, requires public companies to disclose whether they use conflict minerals (tantalum, tin, tungsten, and gold) and whether the minerals originated in the Democratic Republic of the Congo (DRC) or adjoining countries. It responds to concerns that conflict minerals mined in these “covered countries” help finance armed groups that are responsible for violence in the region.
A lawsuit challenging the rule was filed by the National Association of Manufacturers and the US Chamber of Commerce. As of June, no ruling has been made in the federal court where the suit will be heard although companies are moving ahead with compliance efforts.