The SEC’s Recent Proxy Guidance Could Provide Leverage to Challenge a Proxy Advisor’s Recommendation

Recently, the Securities and Exchange Commission (“SEC”) issued new guidance on proxy voting which has been characterized as an attempt to hold proxy advisors more accountable to public company stockholders. Proxy advisors, such as Institutional Shareholder Services Inc. and Glass Lewis & Co., advise stockholders on how to vote in corporate elections and key topics ranging from executive pay to proposed mergers and acquisitions. In the past, public companies have suggested that proxy advisors have too much influence over corporate governance because they lack regulatory oversight. Defenders of proxy advisors maintain that these firms help hold issuers accountable to public company stockholders.

The SEC’s guidance was intended to clarify that voting advice provided by proxy advisors is generally considered a solicitation under federal proxy rules, and thus anti-fraud rules apply. As a result, the SEC maintains that these solicitations are prohibited from including false or misleading material information. In its guidance, the SEC recommends certain practices proxy advisors can utilize to avoid violating the regulations. These include explaining the methods used to produce advice, revealing third-party sources which the proxy advisor relied upon in generating the advice, and disclosing any conflicts of interest.

Stockholder voting on proxy contests and mergers and acquisitions are of critical importance to investors. In these types of votes, stockholders are being asked to participate, alongside the board of directors, in corporate decision making at the highest level and therefore require stockholders to be just as informed as the board. It is too early to know for certain, but of particular interest for those following the market and company proxies, time will tell whether the SEC’s guidance will ultimately empower public companies to challenge or improperly influence proxy advisors when making recommendations on corporate governance issues.