Looking at Proxy Advisory Firms from the Investor’s Perspective
Commissioner Luis A. Aguilar
Dec. 5, 2013
Let me start by welcoming each of the participants here today, as well as the public audience, whether here in person or watching by webcast.
Public company shareholders have a vital role to play in corporate governance. To that end, they are given important rights under federal and state law. Chief among these are the right to vote for the election of directors and on other significant matters and to make their views known to the company’s management and directors. Most corporate shareholders exercise their voting rights by proxy, which makes federal regulation of the proxy process a critical focal point for investor protection purposes.
To support the exercise of their voting rights, many institutional investors and investment advisers hire proxy advisory firms to provide analysis and voting recommendations on matters appearing on the proxy.
These firms often also provide other services to their institutional clients—such as:
- executing votes in accordance with investor instructions;
- engaging in record-keeping and other administrative tasks associated with voting;
- conducting corporate governance research; and
- helping to “mitigate conflict of interest concerns” that their clients may have.
The Commission recognized the role of proxy advisory firms in its 2010 concept release regarding the federal proxy system. In that release, the Commission noted certain potential concerns relating to the activities of proxy advisors, including among other things the potential effects on shareholders of any conflicts of interest by the proxy advisory firm, to the extent such conflicts may not be sufficiently disclosed and managed. For example, some proxy advisory firms also provide consulting services to issuers—or to shareholders that may have their own proposals to be voted on. This may present the potential for conflicts of interest, particularly if a proxy advisory firm makes recommendations to investor clients with respect to the very same matters it has consulted on. It is reasonable to ask if such actual or potential conflicts of interest can be effectively cured by disclosure and by efforts to insulate proxy advisory recommendations from a firm’s consulting business.
However, as the Commission has acknowledged, it is important to note that proxy advisor activities are already subject to various regulations, which may already provide a framework for protecting investors from conflict of interest and other potential risks relating to the proxy advisory relationship. For example, some of the activities of a proxy advisory firm can constitute a proxy solicitation governed by our rules. In addition, some proxy advisory firms are in fact registered as investment advisers and, as such, these firms bear certain fiduciary duties to their clients.
Ultimately, voting rights belong to the shareholder and are an important aspect of the shareholder’s investment. As such, as we consider the role of proxy advisory firms in the U.S. proxy system, it is proper to focus on how such firms engage with investors and how their actions benefit or hurt investor protection.
I look forward to hearing more from roundtable participants and commenters about how investors and investment advisers use proxy advisory firms, including any steps that proxy advisory firms may be taking to make sure that they meet their obligations to the clients that rely on them. In that regard, it would be helpful to understand, from the perspective of investors and investment advisers, whether proxy advisory firms are substantively different from other advisors and service providers engaged by asset managers, and if so, why?
In closing, I want to thank the panelists for taking the time to be here today. Your input is valuable to us, and we appreciate your varied perspectives. I look forward to what I expect will be a productive and interesting dialogue.
I also thank the SEC staff who have worked well together in order to create today’s program.
* The views I express today are my own, and do not necessarily reflect the views of the U.S. Securities and Exchange Commission, my fellow Commissioners, or members of the staff.
 The Commission has previously said that, when an investment adviser is casting votes in a matter in which its own interest may differ from the interest of its clients, the adviser may demonstrate that the vote was not a product of a conflict of interest on the part of the investment adviser, if it votes client securities, in accordance with a pre-determined policy, based on the recommendations of an independent third party. See, SEC Release No. IA-2106, Proxy Voting by Investment Advisers (Jan. 31, 2003) at text accompanying note 25, available at http://www.sec.gov/rules/final/ia-2106.htm#P85_20377.
 SEC Release No. 34-62495, Concept Release on the U.S. Proxy System (July 14, 2010), available at http://www.sec.gov/rules/concept/2010/34-62495.pdf.
 Id., Section V.A.2, p. 116.
 Id., Section V.A.1, pp. 107-114.