Investors cast tens of thousands of votes as owners of public companies in any given year. For help with that formidable task, many institutional investors pay proxy advisory firms like Institutional Shareholder Services or Glass Lewis for independent advice. These research organizations publish reports with voting recommendations. More often than not, they end up taking the side of incumbent boards and CEOs. But sometimes proxy advisers have the temerity to criticize incumbents. Now their freedom to criticize is under threat.
On Aug. 21, the SEC passed new guidance by a 3-2 vote that would make proxy advisers legally liable under securities laws. Before the new guidance, proxy advisory firms could effectively be sued only if they knowingly published false statements. Now any public company can claim any omission or fact in a proxy advisory report is “false” or “misleading,” a much lower litigation standard. This is akin to newspapers facing liability for publishing articles critical of an incumbent politician. Even worse, on Nov. 5 the SEC proposed a new rule that would require proxy advisory firms to give a preview of their reports to the very companies that are the subjects of those reports—this before investors can read the advice they purchased. This odd arrangement would allow corporations to interfere with advisers’ research—a recipe for disaster.
For the first time in modern history the SEC is making it harder to be a shareholder. That would be an unfortunate legacy in an administration that has prioritized reducing burdensome regulations. I implore the SEC to rethink this misguided proposal.