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Regulating ISS, Proxy Advisers Is on SEC’s Radar Under Roisman

March 12, 2019, 9:30 AM

Proxy advisory firms are likely to be a top priority for the Securities and Exchange Commission’s point man on revamping corporate America’s shareholder voting system.

SEC Commissioner Elad Roisman’s background at the commission and in Congress suggests he may heed corporate calls to add oversight for the advisers, whose voting recommendations to institutional investors play an increasingly important role in the proxy process.

The Republican was a protégé of former SEC commissioner Daniel Gallagher, a regular critic of proxy advisers, before becoming a commissioner himself in September. Roisman was also involved in proxy issues as chief counsel to Republicans on the Senate’s Banking Committee, which has weighed legislation to regulate the advisory firms.

SEC Chairman Jay Clayton recently tasked Roisman with formulating a plan on proxy advisers as part of a broader look at the so-called proxy plumbing that underpins shareholder votes on director elections, executive pay, and other company matters.

“Elad is the exact right person for this role,” Gallagher said.

Proxy Firms up Front

Roisman, who declined an interview request for this story through a representative, was serving as counsel to Gallagher when the commission last took an in-depth look at proxy firms in 2013. Gallagher is now chief legal officer at Mylan N.V., which has lobbied on legislation that would force proxy advisers to register with the SEC.

“I think that would be closer to the front of the line,” said Thomas Quaadman from the Chamber of Commerce, which is pushing for a new oversight regime for proxy advisers. Quaadman is executive vice president of its Center for Capital Markets Competitiveness.

At issue is whether institutional investors over-rely on the advisers when voting their shares, as groups like the Chamber argue. The top two proxy advisers, Institutional Shareholder Services Inc. and Glass, Lewis & Co., have pushed back on that claim. Proxy firms have also been criticized for lacking transparency and for posing conflicts of interest.

Roisman called out those conflicts while speaking at the SEC’s November roundtable on the proxy process during his second month as a commissioner. He also raised questions about whether companies should be allowed more room to rebut a proxy adviser’s recommendations.

“We welcome the opportunity to work with Commissioner Roisman to better understand our industry and how we assist institutions seeking to effectively and responsibly discharge their fiduciary proxy voting duties to investors,” ISS General Counsel Steven Friedman said in a statement. Glass Lewis didn’t comment on what it wants or expects to see from Roisman.

Proxy Plumbing Fixes

One area where he might take a more measured approach is shareholder proposals. The SEC is considering whether to tighten its limits on the proposals, which investors are increasingly using to advocate on issues such as climate change and gender diversity.

“There will be a huge reaction to anything to restrict shareholder proposals,” said Ken Bertsch, executive director of the Council of Institutional Investors.

The SEC has received more than 18,000 form letters urging it not to revise the proposal process. The letters were organized by an environmental group.

Also on the agency’s agenda are fixes to proxy plumbing itself. Many involved in the proxy system agree that it’s out-of-date and can be unreliable.

“Proxy plumbing is not the most sexy of areas at the commission,” said a former SEC official, who spoke on the condition of anonymity to be candid. “Most people find it boring. But, it is one of the more important things to get done.”

To contact the reporters on this story: Andrea Vittorio in Washington at avittorio@bloomberglaw.com; Andrew Ramonas in Washington at aramonas@bloomberglaw.com

To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com