Institutional investors view the Securities and Exchange Commission’s proposed rules for proxy advisory firms and shareholder resolutions much differently than the business community.

In November, the agency voted to put forth proposed rules that would require proxy advisory firms to disclose more about their process and potential conflicts of interest and give companies the opportunity to make revisions before making final recommendations to clients. Separately, the thresholds for submitting proposals, and subsequently resubmitting them would be raised, making it likely that fewer proposals will be introduced or appear on ballots.

On one hand, Michael Garland, assistant comptroller, corporate governance and responsible investment in the office of New York City Comptroller Scott M. Stringer, the fiduciary for the five pension funds within the $215.5 billion New York City Retirement Systems, said in a statement that the two SEC proposals “will only serve to insulate management and directors from accountability to shareholders.”

On the other, Erik Rust, Washington-based director of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, favors both proposals. “You’re hopefully going to see proposals come from investors that have a long-term interest in the company and aren’t trying to influence short-termism or activist or specialized interest,” he said.

A study from MSCI Inc. released earlier this month examined more than 2,300 shareholder proposals that went to a vote at U.S. companies from 2015 to 2019. It found that 30.9% of proposals were submitted by individual investors. It also found that 55.3% of the proposals submitted by those individual investors obtained “significant support,” defined as winning more than 30% of total votes cast.

Ric Marshall, Portland, Maine-based executive director on the ESG research team at MSCI, said that support dispels the notion that shareholder proposals are simply filed by gadfly investors. “If these were just nuisance filings, if these were just frivolous requests, they wouldn’t get that kind of support from what’s obviously a much more sizable part of the investor community,” Mr. Marshall said.

He understands

SEC Commissioner Elad Roisman, a Republican who is leading the commission’s efforts of proxy issues, voted for the proposals, including allowing companies to review proxy recommendations before they’re finalized. But in a speech March 10 at a Council of Institutional Investors conference in Washington, Mr. Roisman said that based on feedback from stakeholders that utilize proxy advisory firm services, he understands “that there is concern that these days devoted to issuer pre-review could disrupt current voting practices.”

“I take this feedback seriously, and I am certainly open to considering other ways to accomplish the policy goals of improving the total mix of information available to the marketplace and enhancing fairness and transparency in the voting process,” he added.

Glass, Lewis & Co., which along with Institutional Shareholder Services Inc. controls about 97% of the proxy advisory market, said in a statement that the firm continues to engage with the SEC on the proposals. “We have expressed our concerns to the SEC about the proposed rules, particularly the effect they could have on the time our clients need to use our proxy research and analysis to make critical stewardship decisions,” it stated.

Patti Brammer, corporate governance officer of the $100.2 billion Ohio Public Employees Retirement System, is concerned the proposals, as written, would negatively impact the independence of proxy recommendations. Moreover, she said if costs were to rise as a result of new regulations, issuers should bear some of the burden.

“We don’t want to see any increased cost to institutional investors for implementing anything that we haven’t found to be a problem,” she said. “We’re a public entity and have to prudently administer our funds. Our resources are not unlimited.”

Mr. Rust said that if enacted, the proposals will greatly help the proxy-voting system. “You’re going to see a lot more high-quality information and transparency around how the voting recommendations are produced by proxy advisory firms,” he said. “That’s beneficial for public companies as well as investors.”

The SEC comment period for its proxy proposals closed in February and a final rule is expected this year.

When developing health, safety, consumer and environmental protections, agencies depend upon truthful feedback from the public. But lately, corporate malefactors are misleading federal agencies through manipulated public comments.

It’s suspicious when small business owners fight against basic protections from bad investment advice; when teachers, veterans and retirees want shareholders kept in the dark about corporate political spending; or when academics attack basic science and tout long-discredited studies.

When we scratch the surface of these ostensibly grassroots efforts, we often find thinly disguised fakery: astroturfing operations created by corporations.

Earlier this year, I testified at a House Financial Services Oversight and Investigations Subcommittee hearing on how prevalent these deceptive industry tactics have become. Consider a few well-documented examples.

Anti-Shareholder “Activists”

For years, business interests have sought to limit the ability of shareholders to bring resolutions before annual meetings, such as resolutions requiring companies to disclose their political spending. At a Nov. 5, 2019 meeting on proposals to roll back shareholder rights, U.S. Securities and Exchange Commission Chairman Jay Clayton cited seven letters supposedly from regular people claiming that shareholder activism undermined their interests and calling for the censorship of proxy firms that advise shareholders on whether to back these resolutions.

It turns out those letters were “the product of a misleading – and laughably clumsy – public relations campaign by corporate interests,” according to an investigation by Bloomberg. The letters were orchestrated by 60 Plus, which is funded by the National Association of Manufacturers and the Koch Brothers’ money.

A letter from a retired teacher? She never wrote it, although the signature was hers. Letters from military veterans? They were the brother and cousin of the chairman of 60 Plus. The letter from the retired couple? Their son-in-law runs 60 Plus.

Fake Experts Peddling False Claims

In 2019, Public Citizen published a detailed examination of George Washington University’s Koch-funded Regulatory Studies Center (RSC). The RSC regularly comments on regulatory measures, purporting to offer objective and unbiased analysis.

Yet 96 percent of its public comments recommend less regulation than the proposal or the status quo, and three out four comments were authored by someone with ties to other Koch funded groups. The report also unearthed numerous instances of RSC writers imparting deceptive or false information to regulators – such as grossly misstating the scope of regulation, exaggerating its annual growth and citing discredited studies on its costs.

The RSC’s writings often focus on environmental matters that have material implications for Koch Industries, opposing proposals to reduce pollution or combat the climate crisis. Trump administration regulators have acted on many of RSC’s polluter-friendly ideas, such as reducing the costs attributed to greenhouse gases and raising the bar for new energy efficiency standards.

The Chamber’s Pawns

In 2016, a handful of small business owners became the public face of Wall Street’s opposition to the U.S. Department of Labor’s proposed fiduciary rule, guaranteeing that financial advisers provide retirement savers with investment advice in their best interest. The existing rules allowed conflicts of interest that cost investors an estimated $17 billion annually.

Public Citizen contacted the small business owners featured in the U.S. Chamber of Commerce’s campaign against the fiduciary rule. One out of four turned out to be lobbyists for the brokerage industry or officials of the Chamber itself – evidently listed to pad the number of critics. One was even a government official.

The rest fared little better when faced with even minimal scrutiny. One California small business owner, who said the current system helped grow her business over the past 12 years, admitted she had only one employee. A person identified as a “human resources” officer was linked to a firm that no longer existed except as a website. And a Chicago nonprofit leader had no view on the fiduciary rule, didn’t realize he was listed as an opponent and upon finding out asked the Chamber to remove his name.

Trust, But Verify

These are just a few of the known attempts by industry to mislead regulators and rewrite the rules in their favor. The problem of fake industry comments has become so pervasive that Congress, inspectors general, law enforcement, the media and regulators themselves need to take it far more seriously.

If agencies paid closer attention to public comments on all sides of any rulemaking, some of the manipulation and malfeasance might be uncovered. At a minimum, before citing public comments to justify rulemakings or touting them in testimony, agency officials should make a good faith effort to verify their authenticity. It’s the least they can do.

Regulatory agencies provide a valuable service to the public by issuing and implementing safeguards. It’s essential that they deal in truthful feedback from real people.

Naylor is the financial policy advocate for Public Citizen.

A top Senate Democrat is calling for federal financial regulators to shelve all their rulemaking projects that aren’t directly related to the COVID-19 pandemic, saying their attentions right now need to be on protecting the financial system and mitigating economic fallout from the outbreak.

In a letter dated Tuesday, the Senate Banking Committee’s ranking member Sherrod Brown, D-Ohio, urged the Federal Reserve Board to halt its pre-existing rulemaking work and “instead focus and prioritize actions on activities related to the economic risks posed to markets” by the novel coronavirus.

Brown made similar requests in letters addressed to the heads of the Consumer Financial Protection Bureau, Federal Deposit Insurance Corp., Federal Housing Finance Agency, Office of the Comptroller of the Currency, National Credit Union Administration and U.S. Securities and Exchange Commission.

“The COVID-19 virus threatens both the health of the public and the economy,” Brown wrote. “In light of this crisis, I urge you to place an immediate moratorium on rulemakings not related to the crisis at hand until the COVID-19 virus has been fully addressed by our financial and public health agencies.”

Federal financial regulators had a number of significant rulemaking initiatives underway before the pandemic struck, including projects to wrap up revisions to the Volcker Rule’s restrictions on banks’ fund investment activities, issuing first-of-their-kind consumer protection rules for the debt collection industry and overhauling Community Reinvestment Act regulations for the first time in years.

Comment periods on proposals associated with those three projects are in fact set to end in the coming weeks, but with the nation gripped by the COVID-19 outbreak, Brown said the agencies should expect that the public won’t have the bandwidth to provide “meaningful” feedback on anything but pandemic-related rulemaking proposals.

Brown said the regulators should also be concentrating on “providing reliable guidance and responding to the health and economic effects of this crisis rather than on processing other rulemakings.”

“During this period, all rulemakings and comment periods closing after March 1, 2020, that are not related to the virus response or other imminent health, safety or national security threats should be suspended or extended for at least 45 days,” Brown urged.

In addition to the financial regulators, Brown called on the U.S. Department of Housing and Urban Development to similarly table any pending rulemakings that aren’t tied to the pandemic response effort.

The agency’s energies would be better spent right now on “advancing the public health and worker protections, increasing access to nutrition services, enhancing our nation’s safety, and protecting the financial needs of individuals and families facing economic hardship as a result of the virus and response,” Brown said.

In a statement to Law360, a HUD spokesperson pushed back on Brown’s letter.

“Senator Brown should spend less time playing politics with the coronavirus, and instead focus his energies on quickly approving the economic stimulus the president has called for,” the spokesperson said.

Spokespeople for the Fed and the FDIC said their agencies plan to respond to Brown directly. An SEC spokesperson declined to comment. Representatives for the other agencies did not immediately return requests for comment late Tuesday.

The SEC’s attempt to impose new regulations on proxy advisory firms has triggered some “pretty harsh” feedback, a top official said.

Ted Yu, chief of the Securities and Exchange Commission’s mergers and acquisitions office, said Thursday that the agency’s proxy firm proposal is the most controversial of its recent rulemaking. The rule would place more restrictions on Institutional Shareholder Services Inc. and Glass, Lewis & Co., which the business community has said have too much power over companies’ corporate governance.

The commission has received thousands of letters in connection with its proposal and a roundtable discussion on proxy firms. Opposition has come from Amazon.com Inc. workers, activist investor Carl Icahn, and others.

“Folks have pretty strong views on this,” Yu said while video conferencing into a panel discussion at a corporate law conference in New Orleans. “It takes a thick skin to read all these letters sometimes.”

Not All Bad

The comments aren’t all negative, however.

The U.S Chamber of Commerce, General Motors Co., and Garmin Ltd. have voiced at least some approval. Praise has even come from individual investors, though some of their support has raised questions.
SEC Chairman Jay Clayton said in December he was looking into claims that the 60 Plus Association senior advocacy group helped write and send questionable letters supporting new rules for proxy firms.

He mentioned some of the comments when announcing the proposal in November, but some people whose names were on the letters said they didn’t submit them, Bloomberg News reported.

The agency also has received dozens of letters backing its proxy firm plan after a YouTube video from conservative activists encouraged “real Americans” to show Clayton their support.

Commenter Concerns

From the opponents, one of the most prevalent concerns the commission has heard about the proposal so far is that allowing public companies to review reports from advisory firms before release could cut into the time investors get to review them and vote.

“We’re aware of that and we will definitely take it into consideration,” Yu said.

According to Yu, there were a couple of “misconceptions” reflected in the written comments.

Some commenters argued that the rulemaking would generate a new source of liability for proxy advisers, causing them to be sued more regularly.

The SEC would say this isn’t correct, Yu said, adding that the agency doesn’t view this as adding additional liability. Comment letters also laid out concerns that the rule would impair the independence of the advisers and their reports.

But “independence is not impaired here,” Yu said. “We’re working hard on this rulemaking,” and are looking to complete it within the year, he added. “So stay tuned.

Investor protections are under threat, and the culprit is the Securities and Exchange Commission. Catering to the pleas of corporate interest groups, the SEC is moving quickly to impose new regulations on proxy advisor firms that will undermine a well-established, market-based system that has served investors, companies, and the U.S. equity market for decades.

As state treasurers, we are responsible for safeguarding and investing billions of dollars on behalf of taxpayers, pensioners, college savers, and units of government. As we seek to provide the highest level of service, stewardship, and financial value to our beneficiaries, our offices routinely vote on proxy ballot items. These votes involve fundamental business decisions, including the election of board directors; executive compensation; and environmental, social, and governance risks and opportunities. Proxy voting is a critical means for investors—the actual owners of these companies—to signal issues of concern, hold corporate leaders accountable, and protect their assets.

However, on November 5, 2019, the SEC proposed new rules that represent an unnecessary, unprecedented, and destructive intrusion on the relationship between investors and their advisors.

Institutional investors rely on proxy advisors, like Institutional Shareholder Services and Glass Lewis, to provide timely, independent recommendations on proxy ballot items that require votes every year at tens of thousands of companies around the world.

Proxy advisors have recently been accused, without specific examples, of altering director nominee recommendations at the secret direction of a small cabal of their clients. Advisors are retained to provide independent, evidence-based analysis to their clients, and it is difficult to discern a motive for any advisor to disregard its responsibility to the vast majority of clients who pay for objective reviews at the behest of a tiny fraction of that group. Proxy advisors have helped inform investors, and ultimately corporate leadership, as they develop and institutionalize best practices. These markets worked through corporate democracy, without government intervention.

The SEC appears to believe that proxy advisors have become too powerful and needlessly sway voting decisions. We disagree. Proxy advisors serve at the behest of investors, not vice versa. Proxy advisor firms have developed policies and recommendations that reflect the views of their clients on important issues such as staggered boards, executive compensation, and dual class voting. The information provided drives vote decisions that have helped improve many facets of corporate governance for decades.

Despite the plodding pace of change, corporate insiders bristle at the accountability that the proxy voting system has created. Public company lawyers and bankers, industry trade groups, and corporations have lobbied the SEC to put a stop to the practice.

The approval of these proposed changes will have significant detrimental consequences. Among the many negative impacts could be reckless, unnecessary, and prolonged litigation causing proxy advisors to shirk from delivering their most candid assessments—the exact product that investors pay for and expect from advisors. Increased costs will be borne by proxy advisors’ shareholder clients and their beneficiaries—the very people the SEC is duty-bound to protect.

The SEC’s proposed rules would invite public companies to sue proxy advisors and create a chilling effect on independent perspective. The proposed rules would require proxy advisors to give public companies two advanced drafts of proxy advisors’ reports before investors get access to the advice for which they paid.

Paving the way for securities litigation in the context of proxy advice is a troubling idea. Giving companies a preview of proxy advisors’ recommendations and the ability to interfere with that advice before their paying customers get that information makes that bad idea much worse.

Likewise, investors deserve to receive clear, unbiased advice. It is just as much in the interest of shareholders as it is in the interest of advisors to firmly oppose the proposed rules. There is widespread opposition to this proposal from these investors, who are the actual clients of the advisory firms.

The claim that proxy advice is rife with errors is based on flimsy evidence. Analysis by the Council of Institutional Investors indicates that errors in proxy advice are extremely rare, estimated at less than 1%.

Holding corporate managers accountable through corporate democracy in the age of Big Tech, climate disasters, and political polarization is a challenge in and of itself. Obstructing proxy advisors by increasing litigation costs and allowing corporate interference with shareholders’ research will make it nearly impossible for investors to engage with companies responsible in part for some of the most complex issues of our time. The SEC should facilitate, rather than hinder, market-based accountability mechanisms.

The writers are the state treasurers of Illinois (Michael Frerichs), Pennsylvania (Joe Torsella), Rhode Island (Seth Magaziner), and Connecticut (Shawn Wooden).

In recent weeks the SEC has proposed regulations that in our view will undermine financial analyst independence. As an organization with long-standing leadership on analyst ethics and need for professional independence, we see a great danger to markets and shareowner governance with the release of its proposals, “Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice.”

Of specific concern are the provisions that would require financial analysts that provide proxy-voting recommendations to preclear their full reports and opinions with issuers, not once, but twice. First to spot issuer objections to facts used, and second to confirm whether the proxy firms addressed issuers’ concerns.

Perhaps more concerning is a proposed further step. If an analyst or firm do not satisfy an issuer’s objections, the issuer can force the inclusion of its rebuttal in the final report. This would be a clear violation of long-standing professional analyst standards. It would destroy analyst freedom and violate the right of investors to contract for independent advice services. We would go so far as to say it infringes on free speech.

The proxy process is the heart-beat of shareowner rights and of a balanced corporate governance system. Honest and unconstrained analyses and opinions of expert proxy analysts have become vital to this framework. Customers want and pay for, that independent review. The SEC proposal would threaten both the proxy analysts and users of the advice with violating securities laws and fiduciary duties if they create or use proxy voting analyses and recommendations that are based on fraudulent or misleading “facts.” This would ensure a protracted argument each time an issuer does not like a proxy-voting recommendation, by encouraging its framing as a factual inaccuracy.

U.S. founding fathers believed everyone is entitled to their own views and interpretation of the facts. Free speech demands nothing less. Yet, proxy analysts and investment advisers are in danger of being forced to relinquish editorial control, privilege, and judgment to conflicted third-party issuers. Clearly, we do not believe this is the SEC’s intention nor its objective. Yet the practical danger is that unhappy issuers can block, challenge, and try to enjoin any vote recommendations that fail to meet with their satisfaction. We could hope for an issuer’s forthright use of the proposed rule, but expectations are that routine claims of factual error will arise whenever the proxy-voting outcome is in the balance.

We also object to the administrative process related to this proposal. Even SEC Commissioners note the limited and inadequate regulatory process given to these proposals when they were introduced. Among the shortcomings was the lack of a proper cost/benefit analysis, no details on proxy advise error rates prompting this proposal, and the rejection of the near-unanimous views of investors who are actual customers of the proxy advice services. Capping all of this off, are the distortions being circulated by supporters of the proposal. It is troubling enough that our primary securities regulator features letters of support from dubious cadres of retail investors. Making matters worse, though, are the questionable TV ads company lobbyists have sponsored that include highly debatable claims that 80% of retail investors support these proxy adviser reforms. We find it hard to believe 80% of retail investors even know this industry exists, not to mention that their mutual and exchange-traded funds use these entities to efficiently vote on their behalf. We also see the SEC’s apparent acquiescence to regulatory capture by public companies’ attempt to stymie proxy analysts and their important services as short-sighted. Things didn’t work out well for issuers or investors the last two times issuers were able to influence the presumed independent views of investment analysts, and we have both the Sarbanes-Oxley Act and Dodd-Frank Act to remind of those problems.

Correcting factual errors in proxy-voting advice is welcome. And we agree it is an investment managers’ duty to use accurate information when voting proxies in the best interests of their customers. But we do enormous damage to the honesty and integrity of markets when we let issuers curb negative advice or subvert unfavorable recommendations under the pretext of factual errors. These proxy analysis proposals from the SEC will give issuers this kind of authority. It is a direction we should all reject.

Since 2010, I have urged the Securities and Exchange Commission to adopt a rule that would require disclosure of money in politics spent by publicly traded companies.

The past decade had shown that shareholders are similarly concerned with the lack of transparency of corporate political spending. Shareholder proposals about corporate dark money have been one of the most frequently filed topics in the past few years. The Forum for Sustainable and Responsible Investment (US SIF) reported that “[i]n the 2014 season, the bulk of the 130-plus resolutions on political spending and lobbying asked companies to report on their lobbying expenditures, including through indirect channels such as trade associations and non-profit organizations that do not have to report their donors.”

The trend remained the same years later according to the Sustainable Investment Institute (Si2), which tracked these types of shareholder proposals in 2018, “80 resolutions ask[ed] companies to disclose political activity spending ….”

As the SEC has refused to act and as Congress has placed riders in the federal budget to prevent the SEC from completing an anti-dark money rule, fortunately hundreds of companies have been responsive to shareholder proposals asking for better reporting of corporate political spending.

But the rule change recently proposed by the SEC (File No. S7-23-19) would make shareholders’ ability to ask for accountability from publicly traded companies more difficult by shrinking the pool of eligible shareholders who could legally offer shareholder proposals on dark money as well as a host of other issues of interest to investors. There are a few moving parts to this proposed rule. Currently, shareholders who own at least 1 percent or $2,000 worth of a company’s stock for a year can file shareholder resolutions. The SEC proposed changing that eligibility requirement limiting shareholder proposals to investors who had $25,000 worth of stock for one year; $15,000 worth of stock for two years or $2,000 for three years. The new proposed rule would also change what shareholder proposals could be relisted year after year at a corporation.

This proposed rule does not seem consistent with the binding legal precedent of Medical Committee for Human Rights v. SEC, in which the DC Circuit Court recognized the rights of shareholders to raise social and political issues on corporate proxies under Rule 14a-8, which governs shareholder proposals. As the Medical Committee for Human Rights Court stated:

“It is obvious to the point of banality to restate the proposition that Congress intended by its enactment of section 14 of the Securities Exchange Act of 1934 to give true vitality to the concept of corporate democracy. The depth of this commitment is reflected in the strong language employed in the legislative history:

‘Even those who in former days managed great corporations were by reason of their personal contacts with their shareholders constantly aware of their responsibilities. But as management became divorced from ownership and came under the control of banking groups, men forgot that they were dealing with the savings of men and the making of profits became an impersonal thing. When men do not know the victims of their aggression they are not always conscious of their wrongs . . . . Fair corporate suffrage is an important right that should attach to every equity security bought on a public exchange.’”1)

The language above appeared in a case where shareholders at Dow used a shareholder resolution to try to implore the firm to stop selling napalm. The DC Circuit in a later case reiterated the importance of shareholder proposals in 1992.

Moreover, Supreme Court precedent is also clear that the highest court in the land values corporate democracy. The Supreme Court has referred to the federal securities law as providing for “[f]air corporate suffrage.”

And in 1991, in Virginia Bankshares, the Supreme Court quoted the legislative history of the Securities Exchange Act of 1934 about the centrality of shareholders’ voting rights: “[a]ccording to the House Report, Congress meant to promote the ‘free exercise’ of stockholders’ voting rights, and protect ‘[f]air corporate suffrage,’ from abuses exemplified by proxy solicitations that concealed what the Senate Report called the ‘real nature’ of the issues to be settled by the subsequent [shareholder] votes.” Even in Citizens United v. FEC, Justice Kennedy writing for the Court referenced “[s]hareholder objections raised through the procedures of corporate democracy…”

The new proposed rule from the SEC runs counter to corporate democracy because it attempts to artificially shrink access to the proxy to either wealthy investors ($25,000) or very long term investors (3-year). The Commission should either drop these proposed changes or modify them so that they are less onerous and less damaging to the rights of shareholders under American securities law.

Ciara Torres-Spelliscy is a Professor of Law at Stetson University College of Law, where she teaches courses in business law and corporate governance. She is writing on her own behalf and not her institution. She is the author of the book Political Brands.

The Department of Justice weighed in on the controversy surrounding proxy advisory firms, generally praising an SEC move to clamp down on the companies, whose influence over shareholders has roiled corporate boards for years.

In a comment letter posted on the financial regulator’s website, the DOJ focused on a major SEC rule proposed in November that would rein in the power of the firms.

The DOJ said in its letter posted to the public docket earlier this month that it was aware of concerns that “the proxy advisory industry operates as a duopoly,” referring to the two firms that dominate the business: Institutional Shareholder Services and Glass Lewis.

The department also restated complaints from critics of the firms that information the firms provide to shareholders in making their recommendations might not be accurate.

“The Department applauds the SEC’s exploration of ways to address these concerns,” the agency said. “Individual investors count on investment managers to vote in accordance with maximizing the value of their portfolios, yet is not clear the advice of the proxy advisory firms is always aligned with this goal today.”

The DOJ also praised the SEC’s move to “improve the transparency of proxy advisory firms’ practices” as well as the accuracy of the information in voting materials.

But the department’s comments on improving accuracy touched on one of the most contentious aspects of the proposal: the SEC’s requirement that advisory firms give companies an advance look at their recommendations to shareholders. Critics of the proposal call that an overly burdensome regulation that unfairly exposes advisory firms to liability.

The DOJ had one note of caution: If the cost of the regulations is too large, it could decrease competition in an industry already dominated by the two large firms.

“The Department would further emphasize that efforts which increase regulatory costs, in particular, should be undertaken with care, because such costs tend to be stable or to increase over time,” the letter reads. However, the DOJ said it was “optimistic” the regulator would “minimize compliance burdens while making proxy advisory services more transparent and accountable.”

The DOJ did not address a related proposal by the SEC that would introduce new limitations to the shareholder proposal submission process.

ISS declined to comment on the DOJ’s letter. Glass Lewis did not immediately respond to a request for comment.

The beginning of February marked the end of the comment period on the SEC’s new proposed regulation of proxy advisers — an important milestone in a process that has been flawed from the outset and continues to be fraught with errors and misinformation.

The proposal would regulate proxy advice as though it were a proxy solicitation under the Securities Exchange Act of 1934 and would give the management of U.S. public companies an unprecedented editorial role in the production of the research and vote recommendations that institutional investors hire proxy advisers to provide.

To be clear, this proposal is not being driven by institutional investors that hire proxy advisers; our customers are not asking for the government to intervene in the crafting and publication of corporate governance research and recommendations. In fact, many investors have publicly and vigorously opposed the SEC’s proposal.

Rather, it is a faction of corporate America and their well-heeled lobbying organizations in Washington like the Chamber of Commerce and the National Association of Manufacturers that are leading the charge to silence the voices of their shareholders.

By pushing the government to enact these unprecedented and burdensome regulations, certain corporate representatives have brought into plain view their resentment of shareholders’ ability to disagree with management. In doing so, they have launched a volley of attacks against proxy advisers based on anecdote, faulty reasoning and fabricated news.

For example, a Bloomberg investigation into comment letters supporting the new rules found that many were the product of a “misleading” and “laughably clumsy” public relations campaign driven by corporate interests. In fact, multiple people whose names appeared on the comments of support said they never even wrote a letter or that their names were used without their consent. At least one of the public comments appears to have come from beyond the grave.

The SEC’s proposal rests on the erroneous assertion that there are problems with the accuracy and integrity of proxy voting advice. The reality is that proxy advisory firms like Institutional Shareholder Services go to great lengths to ensure the accuracy of the information that underpins our proxy research. The “errors” alleged by supporters of this proposal are mostly differences over subjective interpretations or differing opinions on methodology, not factual inaccuracies.

Even the SEC’s own Investor Advisory Committee made clear last month that the proposed rules “will not reliably achieve their stated goals,” and pointed out the need to “establish a link between the actions and clearly identified problems.”

Simply put, real investors — not the peddlers of an astroturfing campaign — know that this is a solution in search of a problem.

Beyond the flaws in the process, a critical flaw with the substance of the proposal is that it threatens the independence and objectivity of the advice and analysis shareholders need to make well-informed voting decisions.

Today, with some 44,000 shareholder meetings in 110 markets during proxy season, we endeavor to provide our clients with ample time to review the research and voting recommendations they purchase. That generally equates to about 20 days before votes are due. It is compressed, but functional, and allows investors the time they need to make informed vote decisions. We estimate that the proposed rules risk cutting this time down by half or more, making an already abridged period of time untenable for the institutional investors entrusted with the savings of millions of workers.

While stifling the voice of investors is exactly what some public companies and their Washington lobbyists have wanted all along, it will harm real Main Street investors and hardworking Americans who have invested their financial futures in public companies.

But it is not too late. The SEC can make a course correction. We strongly urge the commission to take its fingers off the issuers’ side of the scale, and — in the interests of investors and the capital markets — withdraw these proposed rule amendments.

Lorraine Kelly is the head of governance solutions for Institutional Shareholder Services Inc., New York. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I’s editorial team.

Modern investors have diversified portfolios with stakes in hundreds – sometimes thousands – of companies. Proxy advisory firms provide these investors with objective, unbiased recommendations about how they should exercise the voting rights tied to their shares.

The largest proxy advisory firms generally side with the management of the companies. But they will take an opposing side if company directors are not fulfilling their oversight responsibilities or if the managers try to entrench themselves in their jobs by adopting scorched-earth anti-takeover devices.

A number of corporate managers are enraged when proxy advisory firms call them to account for acting against the interests of the company’s shareholders. What is surprising is that the Securities and Exchange Commission has chosen to favor management and undermine shareholders’ rights and interests.

The SEC is proposing new regulations that both stifle the ability of proxy advisory firms to criticize management and provide management with an inappropriate power to influence the advisory firms’ recommendations. Proxy advisory firms do much-needed research on issues — like whether incumbent directors should be re-elected; whether a company should have a board whose directors are elected to staggered terms; and whether a company should enter into a merger that might involve reductions in the headcount at corporate headquarters, but would be wealth-creating for shareholders. The advisory firms also are an important voice for linking executive compensation more closely to corporate performance.

Corporate managers have the Business Roundtable and the U.S. Chamber of Commerce representing and lobbying for them in the halls of Congress and in the backrooms of the federal bureaucracies. These groups object to anyone advising shareholders to vote to rein in the self-interested proclivities of corporate executives.

The SEC’s move to regulate proxy advisory firms is a naked political gambit. It offers a solution to a problem that does not exist. There has been no significant episode on record of a proxy advisory firm making a material false statement about a company. Moreover, a mechanism is already in place for independent proxy advisers to correct any errors brought to their attention.

The politics behind this proposal has been ugly. In an apparent “astroturfing” campaign that was described by Bloomberg News, the SEC received ghost-written letters in support of the proposed regulations that were fraudulently represented as letters from ordinary investors. The SEC apparently relied on these fake letters in measuring public support for its proposed regulations and is now said to be investigating this scheme to subvert the agency’s rulemaking process.

Nevertheless, at the behest of corporate interest groups, the SEC is fast-tracking a proposal that would give every corporation the right to review a proxy advisory firm’s recommendations as much as five days before the proposals are delivered to shareholders, who are the firm’s actual clients.

These companies are allowed to provide “feedback” on these proposals. While proxy advisory firms would not be compelled to accept revisions suggested by corporate managers, any advisory firm that does not accept this input exposes itself to the very real danger of being named as a defendant in a securities fraud suit brought by the company on the grounds that it “knowingly” countenanced the distribution of a misleading proxy.

Worse, the SEC proposes that companies also be allowed to prepare a written response to be included as a hyperlink along with the advisers’ report.

If companies don’t like the proxy providers’ findings, they can even see to it that the shareholders don’t have access to these opinions. Under current legal standards, a proxy advisory firm is subject to sanction if it knowingly publishes a false statement. One of the SEC’s proposed rules would subject an advisory firm to civil or even criminal penalties for vague, inadvertent transgressions such as publishing statements that later are deemed to be “misleading.” Proxy advisory firms under the proposed rules would even be subject to penalties for relatively minor errors such as failing to cite studies that produce different results from any studies cited by the firms.

It is indeed strange that the SEC, whose mission is to protect investors, is putting its thumb forcefully on the scale in favor of companies and against investors. Its proposal would land a one-two punch against corporate democracy and freedom of speech. Not only is the commission demonstrating a deep hostility for the value of dissent. It is also abandoning the idea that the free and open exchange of competing views will result in the triumph of good investment policies over inferior ones.