Excerpts from the statement by ISS CEO Gary Retelny to the Senate Committee on Banking, Housing and Urban Affairs, July 6, 2018:
FACT: ISS is a Registered Investment Adviser (RIA) and is subject to strict SEC oversightContrary to the suggestions oft made in the hearing, ISS is a Registered Investment Adviser (“RIA”) and is therefore subject to the Investment Advisers Act of 1940 (“Advisers Act”) and the rules and regulations that the U.S. Securities and Exchange Commission (“SEC”) has promulgated thereunder. The Advisers Act and related SEC rules provide a mature and comprehensive regulatory regime that covers virtually every aspect of our business and that subjects ISS to the SEC’s continuing oversight and examination authority.As an RIA, ISS is required to implement and maintain a comprehensive compliance program, including a mandatory requirement for a Code of Ethics, which is publicly available on our website. The RIA regime also dictates that we provide clients with transparency about our internal operations, including how potential conflicts of interest are addressed. Indeed, ISS is already subject to and complying with rigorous federal legal requirements.
FACT: Proxy advisory firms, including ISS, have a fiduciary obligation to their clientsAs an RIA, ISS has a fiduciary obligation to our investor clients, which means ISS and our employees must carry out our duties solely in the best interest of clients and free from any compromising influences and loyalties.Further, we note that in 2010, the SEC confirmed that proxy advice is a form of investment advice subject to the Advisers Act and the rules and regulations thereunder.  The SEC restated this view just last month in a proposed interpretive release on investment adviser standards of conduct.
FACT: Proxy advisory firms do not set or regulate corporate governance disclosure standards, do not set shareholder meeting agendas, do not put forward shareholder proposals, and do not advocate for shareholder proponents, and do not vote proxies. ISS’ only job is to analyze proxy statements and provide informed research and vote recommendations based on the policies and guidelines that our institutional investor clients have selected, and in many cases developed, themselves. We are an independent provider of data, analytics and voting recommendations to support our clients in their own decision-making. Indeed, it is proxy advisory firms’ clients who control both their voting policies and their vote decisions.Federal statutes and state law dictate most of the items that appear on proxy statements to be voted upon by shareholders. The remaining agenda items, including the selection of nominees for election to the Board, are overwhelmingly put forward by corporate management, or sometimes by a company’s shareholders.Further, as a disinterested fiduciary, ISS has no financial stake in the outcome of a particular vote. ISS does not choose the ballots or agenda items on which we render advice. Rather, at a client’s direction, we are asked by our clients to analyze and provide a voting recommendation for each agenda item related to every equity security held in our clients’ portfolios. In fact, we are agnostic as to whether clients support a proposal, reject the proposal or abstain from voting altogether. Indeed, ISS will recommend contradictory votes on the same issue if individual clients’ policies conflict. We are similarly indifferent as to whether clients choose to follow an ISS vote recommendation or not.
FACT: ISS’ report error rate is minor, and what’s often classified by the issuer as an error is in fact a fundamental disagreement in corporate governance philosophy. ISS is committed to ensuring the accuracy and quality of our reports. As an RIA and a fiduciary, we have adopted a number of policies and procedures designed to ensure the integrity of our data collection and research process, upon which our reports are founded. We have robust systems and controls designed to ensure that research reports and vote recommendations include high-quality, relevant information; are accurate; are correctly based on policies selected or developed by the client; and are reviewed by appropriate personnel prior to publication. ISS commissions regular SSAE 16 audits, conducted by a third-party auditor, to ensure compliance with our internal control processes, including our research process.
Source: ISS Senate Hearing Statement