Stacked white books on rules and regulations

In a pair of reform proposals introduced Tuesday that target the proxy voting process, the U.S. Securities and Exchange Commission (SEC) appears to be siding with issuers seeking to curb the power of proxy advisory firms and gadfly investors.

To start, the SEC voted to propose amendments to its proxy solicitation rules that, it said, are intended to improve the accuracy and transparency of the proxy voting process.

Among other things, the proposals aim to boost the disclosure about material conflicts of interest that proxy advisors provide their clients, and to give issuers and others the opportunity to review and correct alleged errors in proxy voting advice.

At the same time, the SEC also proposed amendments to its rules that would stiffen the test for shareholder proposals to be included in a company’s proxy statement.

The proposal would require that a shareholder has held their shares for at least three years “in order to demonstrate long-term investment in the company” before they can make a shareholder proposal that must be included in the proxy.

The proposal also aims to clarify that a single shareholder can’t submit multiple proposals at the same shareholder’s meeting on behalf of different shareholders, in addition to raising the thresholds of shareholder support that must be met for proposals to be included again in future meetings.

The SEC’s rule proposals follow controversial guidance issued by the regulator earlier this year that would curb the influence of proxy advisors, which is an objective supported by issuers and resisted by some in the investment community.

The response to Tuesday’s proposals was dividing along similar lines.

The Council for Investors Rights and Corporate Accountability (CIRCA) criticized the SEC’s proposals, stating, “The commission’s proposed rules would allow corporations too much influence over proxy advisers’ independent research.”

Conversely, the U.S. Chamber Centre for Capital Markets Competitiveness applauded the SEC’s proposed reforms. “These proposals will both ensure investors will have access to transparent and unconflicted proxy advice as well as improve the proxy submission process that has not been updated in over 50 years,” it said in a statement.

Recently, proxy advisory firm Institutional Shareholder Services Inc. (ISS) launched a lawsuit seeking to overturn the SEC’s new guidance in this area.

In response to today’s proposals, ISS president and CEO Gary Retelny issued a statement saying, “It speaks volumes that the institutional investors which hire proxy advisers are not the ones calling for new, more onerous rules such as those now being contemplated.”

Both sets of proposals are going out for a 60-day comment period.

“Rulemaking typically is a lengthy and deliberative process and one can hope the SEC listens to and addresses the concerns of the investors it is charged with protecting,” Retelny said.

“The commission should engage in a thoughtful and careful process to ensure new rules do not further diminish shareholders’ ability to vote on an informed basis and to demand accountability as owners,” CIRCA added.