SEC is asking asset managers to disclose to investor clients how they evaluate guidance from proxy advisor firms.
  • Some asset managers like Vanguard say an SEC guidance regarding proxy advisor firms won’t affect their business. 
  • SEC guidance asks asset managers to disclose to investor clients how they consider views from proxy advisor firms. 
  • SEC has said it wants to make sure investors and their representatives have all perspectives made available to them to vote at shareholder meetings.

Some asset managers, including Vanguard, say their operations are not affected by new Securities and Exchange Commission guidance asking them to disclose to clients how they view evaluations issued by proxy advisors.

The SEC guidance was accompanied by a new rule, issued on July 22, requiring proxy advisors such as Glass Lewis and ISS to present company responses from the entities they evaluate to investor clients.

The flurry of activity at the agency follows complaints from companies that proxy advisors, who provide guidance to investors on how to vote at company shareholder meetings, may not be presenting the company’s point of view to various stakeholders. Public companies are increasingly receiving shareholder proposals seeking business changes to better address environmental, social and governance issues, including climate change.

Asset managers such as Vanguard, one of the world’s largest providers of mutual funds and exchange-traded funds, said they would not be making major adjustments in response to the statements by the commission.

The company represents 30 million investors and says it evaluates matters brought for a vote at company shareholder meetings based on diverse sources including proxy advisors, other research providers, guidance by company management and boards and shareholder groups.

“While we do believe proxy advisors such as ISS and Glass Lewis play an important role in the governance ecosystem, our firm does not rely on recommendations from proxy advisors for our voting decisions,“ said a spokesperson for Vanguard in a written statement to Karma. “As such, our operations as they stand today will not change under the new directive from the SEC.”

Meanwhile, other asset managers such as JPMorgan say the rule makes it easier to compete in the crowded exchange traded fund market.

“The ETF rule levels the playing field for ETF Sponsors,” said a spokesperson for JPMorgan. “This flexibility increases funds’ opportunity to improve tax efficiency and improve transaction costs.”

Overall, the SEC says its guidance and new rule is meant to increase transparency in the market and make investors aware of all relevant perspectives before voting or allowing representatives to vote for them at annual company meetings. 

The SEC rule requires proxy advisors to make their company evaluations available to the businesses they evaluate at the same time or before the guidance is sent out to their investor clients. The commission also requires proxy advisors to include the company’s written response in their bulletin to investors. 

This becomes especially material if the company does not agree with the guidance issued by the proxy advisor. Lastly, the rule also requires proxy advisors to disclose conflicts of interest to clients.

At issue, proxy advisors such as ISS also provide consulting services for some companies that they evaluate on behalf of their investor clients. ISS has said its services are separate from one another. 

In general, proxy advisors view the SEC’s latest move as regulatory overreach and ISS sued the commission over a related matter last year. More importantly, some companies, such as Glass Lewis, already include written responses from companies in their guidance to investors.

Proxy advisors have argued they have an umbrella organization called Best Practice Principles for Shareholder Voting Research Providers that already enforces operational standards for the sector. 

When the commission issued its rule last month, ISS’s Chief Executive Officer Gary Retelny said, “the new rules, coupled with the new guidance for investment advisers, will hinder investors’ ability to vote in a timely, cost-effective, and objective manner.”