U.S. public companies scored an early victory in a longstanding fight to curb the impact of consultants who influence shareholder votes on hot-button topics such as executive pay.
The Securities and Exchange Commission on Thursday waded into the dispute on Thursday by rescinding a pair of roughly 15-year-old letters written by its staff. The letters had given mutual-fund managers greater assurance to rely on a consultant’s recommendations about matters up for a vote at a public company’s annual meeting.
Many corporations and Republicans in Congress say the letters boosted the influence of consultants known as proxy advisers, including Institutional Shareholder Services, which sometimes opposes big CEO pay packages.
The U.S. Chamber of Commerce has pushed lawmakers and the SEC to quash the letters and more tightly regulate ISS and its main rival, Glass Lewis & Co.
The Chamber praised the SEC’s move. The business group has argued that ISS and Glass Lewis form a duopoly that enjoys sweeping influence over corporate-governance matters through their recommendations, which many mutual-fund managers follow.
ISS said the SEC’s change wouldn’t disrupt how investors employ its advice.
“Corporate lobbyists have created a mythology surrounding these letters in an attempt to undermine the important work we do for our sophisticated institutional investor clients,” said ISS General Counsel Steven Friedman.
A spokesman for Glass Lewis didn’t immediately respond to a request for comment.
SEC Commissioner Robert Jackson Jr., a Democrat, questioned the decision to change how investors interact with proxy advisers. There is little evidence that proxy advisers wield too much influence, he said.
“It’s hard to imagine that, upon a survey of all the problems that plague corporate America, the commission could conclude that investors receiving too much advice about how to vote their shares—advice they are free to, and often, disregard—is one that deserves our immediate attention,” Mr. Jackson said.
The SEC staff’s letters, issued in 2003 and 2004, said mutual-fund managers could outsource their voting decisions to entities such as ISS when they have a conflict of interest, such as a separate business relationship with the public company whose shares its funds own. For instance, some asset managers have contracts with public companies to manage the corporation’s pension funds. That could give the investment firm an incentive to side with corporate managers on controversial votes.
Experts in mutual-fund law said the SEC’s move, delivered in a brief statement posted to its website, will create uncertainty for investment advisers. The SEC’s rules generally require mutual-fund managers to vote on items listed on the annual proxy statement for stocks owned by their funds. Proxy statements list items that are up for a vote at the annual meeting.
The SEC’s move “leaves advisers and particularly fund advisers without a clear and established path for how to vote proxies in many cases,” said John Baker, an expert in the regulation of mutual funds at Stradley Ronon Stevens & Young LLP.
ISS issues recommendations on about 6,000 U.S. companies every year. In 2017, it urged “no” votes on executive pay about 12% of the time, said ISS Executive Director Subodh Mishra, while only about 2% of corporate “say on pay” votes failed.
The SEC’s move Thursday came after a letter from six Republican senators who asked the Government Accountability Office last month to rule whether the SEC overreached in issuing the letters in 2003 and 2004. The SEC, like other regulators, isn’t supposed to issue decisions that carry the force of law without first giving the public a chance to comment on them.
The SEC’s decision also reflects a trend by Trump-nominated financial regulators to overturn less-formal policies adopted under previous administrations. Banking regulators have issued what they refer to as “guidance” to urge financial firms to curb activities that regulators perceive as too risky. While guidance doesn’t have the full force of law, regulators sometimes enforced them that way.
SEC Chairman Jay Clayton said Thursday that public statements from the SEC’s staff members are “nonbinding and create no enforceable legal rights or obligations.” Mr. Clayton, a political independent appointed by President Trump, said the SEC would “continue to review whether prior staff statements and staff documents should be modified, rescinded or supplemented.”
Those comments echoed a similar statement from the Federal Reserve and other banking regulators on Tuesday.
SEC officials said they rescinded the letters to ease debate at a November public roundtable focused on regulation of the shareholder voting process. At a similar roundtable in 2013, former SEC Chairman Harvey Pitt said the letters “entrenched” the influence of ISS and Glass Lewis.
“The result of that was to encourage portfolio managers, in particular, to use proxy advisory firms,” Mr. Pitt said at the time.
