November 30, 2018
Two weeks after the Securities and Exchange Commission (SEC) hosted a roundtable on the proxy process, the American Action Forum (AAF) joined the growing number of organizations calling out how proxy advisory firms are harming Main Street investors. The group is led by former Director of the Congressional Budget Office Douglas Holtz-Eakin, and focuses on economic and fiscal policy issues.
AAF released a new primer explaining how further regulation that promotes transparency and competition while limiting conflicts of interest will help proxy advisory firms better serve investors’ needs.
Why the Proxy Advisory Process Isn’t Working
The current proxy advisory process isn’t working to meet investors’ interests. In its primer, AAF highlighted three main issues:
“First, there exists little to no transparency as to the guidelines and methodologies used by proxy advisory firms when making their recommendations. Second, the proxy advisory firms often face conflicts of interests between their own shareholders and the investment funds and other clients they serve. Third, only two firms dominate the proxy advisory market, leading to significant competition concerns.”
Put simply, there’s a lack of transparency, conflicts of interests, and too little competition.
How Conflicts of Interest Are Losing Money for Americans
While the lack of transparency and competition are troubling, the conflicts of interest are even more alarming because they can undermine company profits when institutional investors are vote for proposals that lose money for the companies they’re clients are invested in. As Wade writes:
“Conflicts of interest may also be ideological. The recommendations of the proxy advisory firms frequently relate to environmental, social, or governance demands that are likely at odds with the firm’s prime directive of returning value to shareholders.”
Proposed Regulations Can Help Proxy Advisory Firms
Fortunately, current proposed regulations could introduce more transparency and competition, and stymie conflicts of interest in the proxy advisory industry.
During the roundtable, the SEC demonstrated a desire to provide additional oversight to proxy advisory firms in order to keep Main Street investors’ interests and needs at the forefront. Furthermore, some investment advisory firms also called for the SEC to promote transparency.
This roundtable took place a day after a new bipartisan bill was introduced in the Senate, which would require the SEC to regulate proxy advisory firms under the Investment Advisors Act. If it becomes law, proxy advisory firms would have to register with the SEC and submit to SEC reviews to ensure conflicts of interest policies are sufficient and prevent firms from knowingly making false statements to their clients.
AAF’s primer is another example of how organizations are educating audiences about why proxy advisory firms need improved regulation. Many institutional investors (including public pension funds) rely heavily on the recommendations of proxy advisory firms. The fund managers and the retail investors who entrust their money to them cannot afford to take bad advice that’s riddled with conflicts of interest.