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1 1 (January 25, 2023)

handle is hein.crs/govekjg0001 and id is 1 raw text is: Con gressiono! Research Service Informing the legislitive debate since 1914 Updated January 25, 2023 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, environmental policy, corporate diversity, political contributions, and executive management. Due to the large number and diverse array of issues in such proposals, proxy advisory firms have emerged to provide proposal voting recommendations to institutional investors, who are large shareholders in most public companies. In July 2020, the Securities and Exchange Commission (SEC) adopted controversial amendments to its proxy rules implemented pursuant to the Securities Exchange Act of 1934 (1934 Act; P.L. 73-291) that require proxy advisory firms to disclose more information about themselves, including potential conflicts of interests. In July 2022, the SEC reversed key parts of the 2020 rulemaking. The Proxy Advisory industry 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 the right to vote their shares to elect directors, approve or reject 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 proposals contain, who is eligible to submit proposals for a vote, and how that information is disseminated to voters via a proxy statement. The proxy statement is an SEC-required document containing information that companies provide to shareholders to enable them to 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, index funds, pension funds, and hedge funds. Institutional investors' individual portfolios may contain the securities of hundreds of different public companies. As a consequence, for many of them, understanding the issues associated with multiple public company board member elections and thousands of shareholder proposals at corporate shareholder meetings can be both complicated and costly. Many medium and smaller-sized institutional investors often lack the necessary size to cost-effectively conduct such research and outsource such work to advisory firms. While they tend to conduct in- house research, 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 best interest 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' services. Views on the Advsory Ffrms Through the years, various academics and business 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 Association of Manufacturers (NAM)-have argued that, among other things, advisory firms require additional regulation because: There tends to be an overreliance on 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 firm recommendations. A potential downside of this is that it leaves portfolio firms with little opportunity to assess the advice and respond. Their voting recommendations can push a social and political agenda that some contend have little connection to shareholder value. Chief among them are the pervasive so-called environmental, social, and political proposals whose contributions to shareholder value is a debate that has garnered mixed research findings. They have potential conflicts of interests that may bias their recommendations and are not adequately disclosed. For example, an ISS subsidiary earns fees from public companies for advising them on corporate governance and compensation policies. Their research protocols are not transparent, and the research may be subject to problematic omissions and methods and analytical flaws. These are said to be reinforced by the allegedly non-competitive nature of the industry's essentially duopolistic structure.

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