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IM Staff Withdraws No-Action Letters on Proxy Voting Firms

The staff of the SEC’s Division of Investment Management is reconsidering whether prior staff guidance concerning advisers’ responsibilities in voting client proxies and retaining proxy advisory firms should be modified, rescinded or supplemented. The Division has withdrawn no-action letters issued to Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004), which indicated generally that (1) a proxy voting firm could be considered an independent third party for purposes of making proxy voting recommendations for an adviser’s clients, even though the proxy voting firm receives compensation from an issuer for providing advice on corporate governance issues and (2) an adviser may determine that a proxy voting firm is capable of making impartial recommendations in the best interests of the adviser’s clients based on the proxy voting firm’s conflict procedures. The staff will host a roundtable with market participants on the proxy process in November 2018 to discuss topics including the voting process, retail shareholder participation and the role of proxy advisory firms. According to the IM Division statement, the staff is providing notice of withdrawal of the letters to facilitate the discussion at the roundtable.

The withdrawal of the letters will create some uncertainty for advisers on how to vote proxies going forward, industry watchers told the Wall Street Journal. Commissioner Robert Jackson weighed in on the issue, cautioning that despite the announcements the law governing investor use of proxy advisors is unchanged for now. Jackson added that he is concerned the SEC’s “efforts to fix corporate democracy will be stymied by misguided and controversial efforts to regulate proxy advisors.” However, the Chamber of Commerce and top lawmakers welcomed the announcements. House Financial Services Committee Chairman Jeb Hensarling in a statement commended the action:  “The proxy advisory firm duopoly is in serious need of reform and SEC attention. The market power of proxy advisory firms demands greater accountability for these firms’ actions and the information that they provide institutional investors.”


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