Last night, the Trump Administration issued this executive order (and a related fact sheet) aimed at the proxy advisors in the US, specifically ISS and Glass Lewis. With a hat tip to Cooley’s Reid Hooper, Michael Mencher and Brad Goldberg, here are seven things to know:
1. No direct impact on this proxy season: There doesn’t appear to be anything in the executive order that will directly impact how this proxy season will unfold as it requires the SEC to review and assess a number of items pertaining to proxy advisor activities (or enforce existing regulations), but it doesn’t change anything right now as rulemaking would be required in most cases and that process takes time to accomplish.
2. Sets a high priority list for the SEC to act upon: In a way, the executive order feels like the semi-annual Reg Flex Agenda, revealing the priorities of the SEC – but with an aspirational tinge since there are no firm timelines for the SEC to act. But given this set of priorities comes from the White House, we should fully expect the SEC to act on these items within the next year.
3. There could be an indirect impact on this proxy season: Obviously, the executive order could have an immediate impact on how the proxy advisors operate as they fight for their survival. We already have seen actions taken by Glass Lewis along these lines, particularly its decision to join ISS as a registered investment advisor and its move towards offering clients four different types of policies to consider by 2027.
4. Shareholder proposals also in the crosshairs: Section 2(b) also takes aim at shareholder proposals by stating: “Consistent with the APA, the SEC Chairman shall consider revising or rescinding all rules, regulations, guidance, bulletins, and memoranda relating to shareholder proposals, including Rule 14a-8 (17 CFR 240.14a-8), that are inconsistent with the purpose of this order.” This seems to be an attempt to combat Rule 14a-8 and seek rescission of the rule – or revise it perhaps to increase the ownership thresholds.
5. Coming repeal of all (or part of) SLB 20: It would appear that Staff Legal Bulletin No. 20, which is a set of proxy advisor-oriented staff interpretive guidance that came out in 2014 may be at risk. The second half of this SLB relating to the guidance around the proxy rule exemptions available to proxy advisors may be rescinded, along with revising Rule 14a-2(b).
6. Revives pieces of prior regulatory efforts: Section 3 of the executive order lays out five additional actions for the SEC to take regarding proxy advisors:
i. Ensure voting recommendations don’t include material misstatements or omissions
ii. Ensure Glass Lewis registers as an investment advisor
iii. Require more transparency about voting recommendations, methodology, and conflicts of interest processes, particularly involving DEI and ESG
iv. Analyze the extent to which ‘robo-voting’ triggers a Section 13(d) group analysis
v. Analyze whether Section 206 of the Investment Advisors Act should be revised to have more teeth regarding non-pecuniary factors such as DEI and ESG
A number of these actions have been considered by the SEC in the past as stalled efforts aimed at proxy advisors go back as far as twenty years.
7. Multi-agency attack coming: It’s not just the SEC that will be taking action. The FTC and DOL are also directed to act, with the FTC looking at possible antitrust violations by the proxy advisors – and the DOL looking at the fiduciary status of those who manage plans covered by ERISA.
Authored by
Broc Romanek