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Why We Are Suing the SEC: Op-Ed by Gary Retelny

This op-ed by ISS Chief Executive Gary Retelny was published by The Financial Times on November 5, 2019.


The US Securities and Exchange Commission in August issued an interpretation of a law Congress designed for those engaged in the solicitation of a proxy and applied it to the providers of proxy advice.


Today, the SEC is expected to build on that interpretation and propose new rules restricting the provision of proxy advice to institutional investors. This action will impede these investors’ rights to receive timely and independent research on corporate governance matters regarding their public company investments.


Proxy advice is the data, analysis and vote recommendations that investors use to help them fulfil their fiduciary responsibilities and corporate governance oversight of their public stock investments when they vote the shares they own at shareholder meetings.


The changes embodied in the August interpretation and the proposed rulemaking — which is moving forward despite widespread objections to its necessity and legality — will disrupt the system for proxy voting, in place for many years, and likely harm the very investors the SEC is charged with protecting.


The commission’s action will tilt the scales in favour of company management and degrade the important gains in corporate governance achieved since the days of Enron, WorldCom, and the financial crisis. In order to prevent this, Institutional Shareholder Services was left with only one option: to file a lawsuit challenging the interpretation.


Our lawsuit makes clear that the SEC inappropriately altered the regulatory regime and that the new interpretation is unlawful


The SEC’s so-called proxy adviser reform seems to be driven by a concerted effort by corporate interests and their Washington lobbying groups to tamp down the voice of their shareholders. And the support for this business-backed campaign is simply lacking in truth.


Throughout the course of this debate, much rhetoric and misinformation has taken hold. Public companies, the subjects of proxy adviser research, have long advocated for new rules that will muffle dissent from their shareowners on corporate governance matters.


The problems they cite, for example that proxy advisory reports are rife with errors, are simply not accurate and, critically, have been rightly debunked by the very institutions that pay for proxy advisory services.


It is against this backdrop that we are forced to take legal action to protect the rights of shareholders as well as our independent services to them. Our lawsuit makes clear that the SEC inappropriately altered the regulatory regime applicable to the voting advice provided by proxy advisory firms and that the new interpretation is unlawful.


Specifically, the SEC contends that voting advice provided by proxy firms is a “solicitation” under federal proxy rules. If allowed to stand, the August interpretation would effectively treat the advice proxy advisers provide to their fee-paying clients in the same way that the SEC treats proxy solicitations (meaning the communications, most typically made by the boards and management of public companies, advocating that shareholders vote in support of the position favoured by the person doing the solicitation).


In contrast, proxy advice is a specialised form of investment advice rendered for a fee at the direction, and in the best interest, of our institutional investor clients. As such, proxy advice is the antithesis of a solicitation under the securities laws.


Unlike a person or firm engaged in a proxy solicitation, ISS is indifferent with respect to the ultimate outcome of a shareholder vote and does not seek to achieve a certain result.


Our goal in providing analysis and recommendations is to inform and empower our clients, sophisticated institutional investors, to vote their shares the way they see fit, knowing that they are free to follow our recommendations or not. Because proxy advice is not proxy solicitation, we believe the SEC’s recent interpretation is contrary to law.


ISS does not object to SEC oversight of its activities. Nor does ISS object to transparency. Indeed, ISS has been registered with the SEC as an investment adviser for more than 20 years. In this capacity, ISS has assumed fiduciary duties of care and loyalty to our investor clients; transparency is a hallmark of these duties.


Investors hire us because they know we strive to be unbiased and transparent, and because we provide services that they value and deem to be cost-effective. It speaks volumes that the institutional investors that hire proxy advisers are not the ones calling for new rules.


Even the SEC’s investor advocate unit has cautioned against these actions. The Council of Institutional Investors and others have also called on the SEC to correct its course.


The decision to sue our regulator was not taken lightly, but the stakes are too high. Our lawsuit is designed to protect the balanced and well-functioning relationship between proxy advisers and their clients. This relationship supports an efficient system for proxy voting for the benefit of millions of shareholders who are invested in publicly traded companies.




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