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1 1 (December 07, 2020)

handle is hein.crs/govdcsr0001 and id is 1 raw text is: K. December 7, 2020 The SEC's Proxy Advisory Firm Disclosure Reforms The boards of directors of public companies provide strategic planning and oversight. The boards, in turn respond to the views of shareholders and may vote on proposed corporate changes if the proposals gain a majority of affirmative shareholder votes at annual and special shareholder meetings. Proposals may include issues involving prospective mergers, executive compensation, environmentalpolicy, corporate diversity, political contributions, and executive management. Due to the large number and diverse arrayof is sues in suchproposals, proxy advis ory firms have emerged to provide proposal voting recommendations to institutional investors, who are large shareholders in most public companies. On July 22, 2020, the Securities and Exchange Commission (SEC) voted 3-1 to adopt controversial amendments to its proxy rules under the Securities Exchange Act of 1934 (1934 Act; P.L. 73-291) that require proxy advisory firms to disclosemore information about themselves, including potential conflicts of interests. The Proxy AdvisKry hndustry State-based business incorporation laws give the states substantial authority over companies that are incorporated within a given state, including various aspects of shareholder voting. Under such laws, at annual and special shareholder meetings, shareholders have theright to vote their shares to elect directors, approve orreject a company's generally binding management proposals, and submit and vote on generally non-binding shareholder proposals. Within the parameters of the state incorporation laws, under Rule 14a-8 of the 1934 Act, the SEC oversees the types of information shareholder propo sals contain, who is eligible to submit proposals for a vote, andhow that information is disseminatedto voters via aproxy statement. The proxy statement is an SEC-required document containing information that companies provide to shareholders to enable themto make informed decisions about proposals being considered at shareholder meetings. Approximately 70% of the outstanding shares in publicly owned domestic corporations are owned by institutional investors such as mutual funds, indexfunds, pension funds, and hedge funds. Institutional investors' individual portfolios may contain the securities ofhundreds of different public companies. As a consequence, for many of them, understanding the is sues associated with multiple public companyboard member elections and thousands of sh areholder proposals at corporate shareholder meetings can be both complicated and costly. Many mediumand s maller-s ized ins titutionalinvestors often lack the necessaiy size to cost-effectively conduct suchresearch andoutsouirce such work to advisory firms. While they tend to conduct in - hous eres earch, some larger investors such as BlackRock also supplement their research through the use of advisory firms. The advisory business is dominated by two firms, Glass Lewis and Institutional Shareholder Services (ISS),jointly estimated to have about 97% of the advisory market share. In 2004, two SEC no-action letters indicated that institutional investment managers could show that their proxies voted in the bestinterest of their clients through the use of voting policies formulated by independent third parties, such as proxy advisory firms. The development is widely credited with helping to institutionalize demand for the advisory firms' s ervices. Through the years, various academics andbusiness interests-including the U.S. Chamber of Commerce, the American Council for Capital Formation, the Society for Corporate Governance, the Business Roundtable, the NASDAQ Stock Exchange, and the National As sociation of Manufacturers (NAM)-have argued that, among other things, advisory firms require additionalregulation because: There tends to be an overrelianceon them, said to be problematic because it diminishes the likelihood that investors will engage with portfolio firms. An extreme reliance is found in something called robo-voting wherein investor clients vote immediately after receiving advisory finrecommendations. A potential downside of this is that it leaves portfolio firms with little opportunityto assess theadvice andrespond. Their voting recommendations can push a social and political agenda that s ome contend have little connecton to shareholder value. Chief among themare the pervasive so-called environmental, social, and political proposals whose contributions to shareholder value is a hotly debated question thathas garnered mixed research findings. They have potentialconflicts of interests that may bias their recommendations and are not adequately dis cbsed. For example, an ISS subsidiary earns fees frompublic companies for advising themon corporate governance and compensation policies. Their research protocols are not transparent and the research is subject to problematic omissions, methodological problems, and analytical flaws. These are said to be reinforced by the allegedly non- competitive nature ofthe industry's essentially duopolis tic structure.

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