ISS Comment on SEC Draft on Proxy Advisors

The ISS comment on the SEC’s proposed rule on proxy advisors is excellent. Full version at the link below. An excerpt:

ISS submits that there is no legal basis for any aspect of the proposal and that Congress never authorized the SEC to regulate either proxy advisers or proxy advice under the Exchange Act proxy rules. ISS further submits that the proposal to grant public companies and certain other solicitors the right to review, comment on and insert content into the advice proxy advisers render to their clients is unconstitutional, since it infringes on advisers’ First Amendment rights of free speech. By forcing proxy advisers to give their intellectual property to the subjects of their advice, the proposal also violates the Takings Clause of the Fifth Amendment of the Constitution and destroys ISS’ reliance interests in maintaining the independence and integrity of its adviser-client relationships.

Furthermore, the proposal rests on the erroneous assertion that there are problems with the accuracy and integrity of proxy voting advice and ignores statements by the consumers of proxy advice that contradict that baseless assertion. The reality is that we at ISS go to great lengths to ensure the accuracy of the information that underpins our proxy research and recommendations and it is clear to us—after looking at the unsupported claims of “evidence” of pervasive errors— that most “errors” are actually differences over subjective interpretations or differing opinions on methodological frameworks.
The proposal is also unworkable. The suggested review, feedback and response-insertion provisions would severely impede proxy advisers’ ability to deliver research and voting recommendations for U.S. corporations to investor clients in a timely fashion. We estimate that the review and feedback rights provided to registrants and certain other soliciting parties alone could reduce our report delivery time by between 45 and 65 percent, thus reducing the time available for shareholders to make the well-informed decisions that the proposals purport to encourage.

The proposal arbitrarily fails to explain why investors cannot be adequately protected under the fiduciary regime established under the Investment Advisers Act of 1940 (Advisers Act); nor does the proposal acknowledge, as it should have, that the suggested amendments to the proxy rules would duplicate, overlap and conflict with applicable Advisers Act rules.

The proposal’s cost/benefit analysis is also seriously deficient. Among other things, it selects as a baseline the Interpretation and Guidance that the Commission adopted last August without undertaking any cost-benefit analysis, and without assessing the proposal’s effect on competition. The proposal underestimates the operational costs of complying with the revised proxy rule exemptions and fails to calculate the costs to proxy advisers and their clients of managing and monitoring the new requirements resulting from the review, feedback and content-insertion provisions. The proposal also ignores the costs to proxy advisers of having to defend baseless lawsuits by disgruntled registrants under Rule 14a-9. With regard to impact on the capital markets, the proposal fails to recognize the likely diminution of competition and loss of diverse thought among proxy advisers, and the increased insider trading risks caused by proxy advisers’ forced disclosure of material nonpublic information to registrants and certain other solicitors. On the other hand, the proposal’s benefits, which are largely illusory, are grossly overstated.

iss comment sec 2-3-20

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