When you point one finger, sometimes three point back at you. The U.S. Securities and Exchange Commission wants to make new rules that will constrain proxy advisers, research firms like Glass Lewis and Institutional Shareholder Services that advise investors how to vote at companies’ annual meetings. Groups representing companies, institutional investors, money managers, and individuals submitted hundreds of letters for and against the proposal during the 60-day comment period, which ended last week. Breakingviews explains how comments on the proposals – and who they came from – make a better case for proxy firms than against them.

WHAT’S THE POINT OF PROXY ADVISERS?

Investing in companies involves a type of difficulty known as an agency problem. If an asset manager or individual owns only a small stake, the effort of analyzing the business and its management in depth isn’t worth it. Instead, shareholders often pay other people to do it: There’s a sea of analysts, prognosticators and commentators that spans Wall Street banks, credit-rating firms, specialist media and independent firms.

Proxy advisers operate somewhere between research teams at investment banks and credit raters, publishing reports that focus on shareholder decisions like votes on mergers, directors, top-executive pay and such – and increasingly on demands from investors for increased disclosure on risks from climate change.

THAT SOUNDS USEFUL

It is. Glass Lewis, ISS and smaller rivals are a good additional check on company management, especially given the agency problem for most investors. An asset manager as big as BlackRock, with $7.4 trillion under management, can afford to do its own analysis, but many can’t.

SO WHAT’S THE PROBLEM?

There are a few, some real and some perceived. Because of their role in the voting process – sometimes recommending investors vote against company management – proxy advisers are seen as a thorn in the side of corporate America. Unsurprisingly, the U.S. Chamber of Commerce, which represents big American companies, came out swinging in its comments to the SEC.

Some of the chamber’s criticisms are fair. Proxy advisers publish a lot. Glass Lewis, for example, put out more than 5,000 reports in 2018 on U.S. issuers, and more than 23,000 in total. They sometimes make mistakes.

Proxy advisers are also conflicted. Some of their paying clients include hedge funds, like those that make up the Council for Investor Rights and Corporate Accountability. That’s a lobbying group for firms like Elliott Management and Pershing Square Capital Management. These noisy investors are often the instigators of the battles proxy advisers are refereeing. There are other potential conflicts in the proxy services the same firms sometimes provide to companies, too.

Less reasonable – especially considering that conflicts and mistakes are also facts of life for Wall Street analysts, credit-rating firms and others providing similar services – is the idea that regulation to limit the proxy advisers’ activity is the answer.

WHAT IS THE SEC PROPOSING TO CHANGE?

One draft rule would force increased disclosure about conflicts. That makes sense.

Another would give companies the right to check and rebut what proxy advisers write before publication. Although that can be dressed up as a way to ensure accuracy, it’s a ham-fisted approach that would also encourage self-censorship and could even make proxy advisers de facto mouthpieces for the companies they cover.

THAT SOUNDS COUNTERPRODUCTIVE

Yes. The current system in which investors have access to a range of published analysis and use it alongside a company’s own disclosures to make their own decisions works fine. After all, just because proxy advisers dole out opinions doesn’t mean others have to take them. And companies already have formal and informal channels to convey their views to investors.

The California Public Employees’ Retirement System – America’s biggest pension manager, with around $400 billion of assets – is one independent group that has vehemently objected to the SEC’s plans. CalPERS wants the regulator to encourage companies to enhance their own disclosures. It reckons scrutiny from proxy advisers helps achieve that goal, and that the proposed rules “go in the opposite direction” by making the process more complicated and expensive.

CalPERS also argues that the SEC is using insufficient data and analysis to bolster its justification for the proposed new rules.

SO WHAT COULD THE SEC DO INSTEAD?

Other issues are more pressing. Proxy voting processes are stuck in the 20th century, if not the 19th. BlackRock, for example, in November urged the regulator to make it easier for retail investors to vote on non-routine items by eliminating rules that make it difficult to contact them. The asset manager, run by Larry Fink, also wants the SEC to help streamline the process to reach shareholders, which today often requires printed materials sent through snail mail.

There are increasing demands from investors, including BlackRock, for companies to assess and disclose risks to their business from a changing climate. Along with other big risks, it’s something the SEC could easily require companies to do – but that isn’t happening either, and an increased onus on proxy advisers in some ways could make this more difficult.

The SEC’s job is to protect investors and keep markets honest. CalPERS and others have a case that partially muzzling proxy advisers would work the other way. Glass Lewis, ISS and the rest are not perfect. But they’re still useful.

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CONTEXT NEWS

– In November, the Securities and Exchange Commission outlined proposed changes to rules for proxy advisers. The new rules would require that proxy advisers disclose material conflicts of interest, that companies must be given an opportunity to review and provide feedback on proxy voting advice before it is issued, and that proxy voting advice include “a hyperlink or analogous electronic medium” that includes the company’s views on the advice.

– The new rules had a 60-day comment period.

It is a yearly ritual for American corporations: executives of Fortune 500 companies appearing at shareholder meetings to answer investors’ concerns about everything from board membership to climate-change policies.

Now the Securities and Exchange Commission wants to make it harder for small shareholders to get resolutions onto company ballots, known as proxies. It says responding to resolutions can pose an undue burden on companies, costing tens of thousands of dollars apiece for research, and printing and mailing of ballots.

The move has sparked a lively debate over the limits of shareholder democracy. Critics say the proposal would make it harder for regular investors to hold executives accountable. Advocates say that current rules are lax, opening the door to a multitude of resolutions, and that small shareholders have other ways of exerting influence, including through social media.

“The world has changed since those rules and thresholds were first set out” in the 1990s, William Hinman, director of the SEC’s division of corporation finance, said at a conference in January. “We also were observing that a small handful of folks were continuously providing some of the same proposals year after year, and the majority of shareholders were not getting on board.”

Among the SEC’s proposed changes: raising the minimum stake required to submit a resolution to $25,000 from $2,000, assuming one year of continuous ownership. The threshold falls after years two and three. The commission would also bar representatives from submitting proposals on behalf of more than one shareholder at the same meeting. Unsuccessful resolutions would have to garner more support to be resubmitted on future ballots.

A period for public comment that ended this past week has generated thousands of letters from chief executive officers, fund managers, interest groups and individual shareholders. SEC Chairman Jay Clayton must now decide whether to tweak the proposal before advancing it for a formal vote in coming months.

Among those backing the changes is the U.S. Chamber of Commerce, one of the country’s most influential business lobbies.

The system has “devolved into a free-for-all that a small minority of interests use to advance idiosyncratic agendas at the expense of Main Street investors,” Thomas Quaadman, an official at the chamber who specializes in market regulation, said in a comment letter to the SEC.

Investors including Elizabeth Halliday, a self-employed website designer with an individual retirement account, see it differently.

She said the SEC’s proposal would “just completely take out huge numbers of people” from the process. After reading about it in a newsletter last month, she said she fired off an email to the SEC, calling the plan “tinder for the socialist, pissed-off left.”

One investor who says she would have been excluded by the proposal is March Gallagher, a 51-year-old attorney in Rosendale, N.Y.

About two months after the 2011 nuclear disaster at Fukushima, Japan, Ms. Gallagher said she invested $3,000 in shares in Entergy Corp., ETR -0.98% which owned the Indian Point nuclear facility near her home.

After two unsuccessful attempts, she brought a resolution to Entergy’s 2014 annual meeting asking the company to shutter the facility. Ms. Gallagher’s resolution only garnered 3% support, but she was grateful for a chance to speak at the meeting and interact with several company officials who she said seemed swayed by her arguments. The plant is now slated for decommissioning.

“I’ve never felt like my voice had more impact,” Ms. Gallagher said in an interview, adding that she would be reluctant to invest $25,000 in the shares of a single company.

An Entergy spokesman said the company had nothing to add to Ms. Gallagher’s account.

A related change being considered by the SEC would impose new regulations on so-called proxy-advisory firms, which are paid by mutual funds and other large investors to research items on shareholder ballots and provide recommendations on how to vote.

The firms would have to disclose conflicts of interest—such as when they sell services to both public companies and their investors—and give companies a chance to review and provide feedback on their recommendations. It would also increase the advisers’ liability for publishing false or misleading information.

Corporate executives complain that the two main proxy-advisory firms—Institutional Shareholder Services Inc. and Glass, Lewis & Co.—use opaque methodology to formulate their recommendations, and that smaller companies have limited opportunities to contest them.

Proxy advisers say they have been caught in the middle of a broader debate over shareholder rights and are being targeted by executives who resent occasional recommendations to vote against management.

Institutional investors and asset managers have generally sided with the proxy-advisory firms in criticizing the SEC’s proposed rule.

William J. Stromberg, CEO of asset-management company T. Rowe Price, wrote in a comment letter to the SEC that his firm needed an adviser to recommend how to vote on 56,532 proposals—98% of them from management—at 6,444 shareholder meetings last year. He said the proposed rule would likely give proxy advisers’ clients less time than corporate managers to review voting recommendations.

“The proposal will effectively provide companies with a mechanism to influence proxy advisory firms’ voting recommendations,” Mr. Stromberg wrote.

BlackRock, Vanguard and State Street routinely ignore their proxy advisers’ recommendations and vote to block environmental and social action at companies, according to research that rebuts claims that big asset managers blindly follow voting advice.

The analysis by responsible investment charity ShareAction, on behalf of the Charities Responsible Investment Network, found that the world’s largest fund managers voted differently to their proxy advisers’ recommendations about three-quarters of the time on environmental, social and political lobbying proposals.

The findings challenge accusations that asset managers “robo-vote” or automatically follow the recommendations of proxy advisers, which provide investors with advice on how to vote on issues from executive pay to director re-elections at annual meetings.

The Securities and Exchange Commission has proposed new rules to reform the proxy advice industry after an influential lobbying campaign warned that proxy advisers wield too much power. A comment period on the proposals closed earlier this month, with the SEC expected to finalise the rules by the end of the second quarter.

“Corporate lobby groups have managed to paint proxy advisers with a bad brush,” said Isobel Mitchell, co-author of the ShareAction report, which looked at the voting recommendations of Institutional Shareholder Services and Glass Lewis, the two biggest proxy advisers.

“Our research shows asset owners should be concerned about their managers’ own practices and behaviour influencing their voting decisions, rather than an over-reliance on the recommendations of proxy advisers, as is often claimed by business lobbyists.”

Ms Mitchell questioned why many big investors, including traditional active managers such as JPMorgan Asset Management, were less likely to support environmental, social and political lobbying proposals than their proxy advisers.

The research found that 65 per cent of the big investors examined backed company management on environmental, social and political lobbying proposals more often than their proxy adviser, a finding that will raise questions about how seriously asset managers are taking sustainability.

Sarasin & Partners, CCLA, HSBC Global Asset Management and Aviva Investors were more likely than their proxy adviser to back environmental and social resolutions at annual meetings.

Rakhi Kumar, head of ESG investments and asset stewardship at State Street Global Advisors, said the $3.1tn asset manager took a “case-by-case approach” to voting on proposals related to sustainability topics. She added that it would consider issues such as the materiality of the topic and whether the adoption of the proposal would promote long-term shareholder value.

State Street said last month that it would start voting against boards of big companies that lagged behind on ESG issues.

BlackRock also announced that it would be “increasingly disposed to vote against management” that were not making sufficient progress on sustainability, as it unveiled a far-reaching plan to put ESG issues at the heart of its investment process last month.

According to the ShareAction report, ISS recommended that investors back 79 per cent of the environmental, social and lobbying resolutions examined, compared to 54 per cent of the time at Glass Lewis.

Gary Retelny, chief executive of ISS, said the company typically was supportive of ESG resolutions that asked for more disclosure from companies, believing it was important for shareholders to know what was going on at businesses.

“We are very big on long-term shareholder value. That is the lens through which we evaluate many of these things,” he said.

Courteney Keatinge, senior director of ESG research at Glass Lewis, said it looked at shareholder proposals on a case-by-case basis.

“We carefully scrutinise whether adoption of these proposals would result in any long-term material benefit or risk mitigation for shareholders and take into account factors including the company’s industry, size, operations, geography, and pertinent regulations and market norms.”

Investor and corporate groups around the world are weighing in on proposals from the Securities and Exchange Commission that could dramatically change the rules for proxy advisory firms and how shareholder proposals are submitted.

On the investor side, voices are being raised from as far away as the Australian Council of Superannuation Investors, whose members represent $2.2 trillion in assets; the U.K.’s £10 billion ($13.1 billion) National Employment Savings Trust; and Dutch asset manager Robeco. These organizations are raising concerns, if not outright alarms, that if the proposals go through unchanged, shareholder rights — and corporate governance best practices — hang in the balance.

On the corporate side, groups such as the U.S. Chamber of Commerce argue that tighter regulation of proxy advisers to curb conflicts of interest, lack of transparency and unchecked errors is overdue, as are the thresholds for submitting shareholder proposals.

By the time the comment period ended Feb. 3, the proposals were on track to set a record for SEC comment letters, with more than 14,000 already posted on the agency’s website, with investor groups, asset managers, pension funds, faith-based groups, scholars, state and local government officials, unions and thousands of individual investors strongly opposing the proposals.

If the new rules for proxy advisory firms are finalized, they would have to disclose more information about their processes and any conflicts of interest and give companies the opportunity to offer revisions to their proxy reports.

Changes detailed

Changes under the proposed new rules for the shareholder proposal process include raising both the amount and time a stock is held before shareholders could file resolutions, higher thresholds for resubmitting shareholder proposals in subsequent years and timeouts for ideas that slip in support in a given year, among other things.

The question now turns to whether SEC officials are open to some compromises over practices that both sides acknowledge may have room for improvement, including giving companies a limited opportunity to fact-check for inaccuracies but not change things they simply don’t agree with.

There may not even be time, with the clock ticking to finalize the fast-moving initiative no later than May, to avoid having it undone if the White House changes hands in 2020. If the proposals are unchanged, it could be a return to the not-so-good old days, said Amy Borrus, deputy director of the Council of Institutional Investors in Washington, whose members include 135 public pension funds, corporate and labor funds, and foundations and endowments with more than $4 trillion in combined assets.

“The business lobbying campaign is aimed at making it harder and more costly for institutional investors to get the independent research and advice they need to hold executives accountable — and make it less likely they vote against management or vote at all,” particularly on sensitive subjects like executive pay, she said.

“I think corporate fury at proxy advisory firms is fueled in part by nostalgia for the days when more equity was held directly by individuals, and both retail and institutional investors generally voted automatically with management — or didn’t vote at all.

“Say-on-pay votes supercharged that ire. CEOs do not like public challenges to how and how much they are paid, or to be second-guessed by shareholders on a range of environmental, social and governance matters,” Ms. Borrus said.

In its comment letter, hedge fund firm Third Point LLC said the timing “does not seem to us like coincidence, as shareholders are demanding increased transparency from public companies.”

The growing trend of ESG shareholder proposals is a frequent theme raised by many commenters, both for and against the changes. Corporate supporters of the changes caution that proxy advisory firms should only consider ESG motions with a direct tie to financial performance, and the same for shareholder proposals.

If finalized, the proposed rules “would introduce major impediments to environmental, social and governance integration, which has traditionally depended on dedicated investors engaging with management and access to independent and efficient proxy voting advice,” Fiona Reynolds, CEO of Principles for Responsible Investment, wrote in a letter to the SEC. The letter was signed by scores of diverse investors from around the world, including religious groups, foundations, public pension funds and asset managers.

The U.S. is the PRI’s largest market, with more than 500 signatories investing more than $42 trillion in assets under management.

It is also a fiduciary issue, said William J. Stromberg, CEO and president of T. Rowe Price Group Inc. in Baltimore, in his comment letter. The proposed proxy reforms would likely give corporate issuers “considerably more time to review proxy reports than the fee-paying clients of proxy advisers” that rely on the reports to fulfill their fiduciary obligations to clients, he said.

The SEC’s own investor advisory committee reflects how polarizing the issues have become. A divided committee voted 10-5 to ask the SEC to rework the two proposals, saying that they do not serve investor interests and that the SEC did not establish a link between the actions and clearly identified problems. Two dissenting members filed their own comment letter, saying there is room for the full commission to debate the best path forward, one that should focus on proxy voting advice that can increase shareholder value, and, at a minimum, the SEC should address conflicts of interest in proxy advisory firms.

First step

SEC Commissioner Elad Roisman, the point person for the proposals, characterized them in November as a first step to get actionable feedback that will help agency officials achieve “a sensible modernization” of rules to help the SEC fulfill several missions: investor protection, maintaining fair and efficient markets, and facilitating capital formation.

The prospect of something less than sensible in investors’ eyes is already triggering talk of delay or blocking tactics, including lawsuits challenging the SEC’s regulatory process and even freedom of speech protection for proxy firms.

“Shareholders are not going to stand for it. If the SEC does not go back to the drawing board, there will be legal challenges,” said Brandon Rees, deputy director of corporations and capital markets at the AFL-CIO in Washington. Its 55 member unions have a collective $736 billion in multiemployer pension fund assets.

“The corporate community is hoping to turn back the clock, but that train has long left the station,” Mr. Rees said.

Carl Icahn is escalating his attacks on a U.S. Securities and Exchange Commission plan that he warns will make it harder for shareholders to hold companies accountable for poor performance.

In a Feb. 7 letter to the SEC, the 83-year-old activist investor called a proposed overhaul of shareholder voting rules “a big step backward” for corporate governance. The billionaire argued the changes would unfairly tip the scales toward management in elections that determine corporate strategy and who sits on the board.

At issue are a series of SEC proposals announced in November that would rein in proxy advisory firms and make it harder for investors to get their petitions on corporate ballots. The revamp is particularly relevant to Icahn, who’s frequently used shareholder elections to oust directors.

“Companies spend a fortune to protect the status quo,” Icahn said in an interview. “The agenda of the boards — their agenda is different than the shareholders they’re supposed to protect.”

Business Lobbying

On the other side of the fight are corporate executives who claim that shareholder campaigns unfairly target them and prevent management from executing on long-term strategies. The U.S. Chamber of Commerce and other business groups have long pushed for more regulation of proxy advisers and for rules that would help insulate companies from shareholder petitions on contentious issues like climate change and human rights abuses.

Proxy advisers are paid by mutual funds and other investors to conduct research and ultimately make recommendations on how shareholders should vote their stock. The firms play a crucial role for investors like Icahn because their advice can often determine whether activist campaigns are successful.

The SEC has been deluged with comment letters from pension funds, hedge funds, business executives, and religious and social groups over its plans. SEC commissioners will have to hold a second vote for the rules to become final. Icahn’s letter follows a Wall Street Journal op-ed he wrote in November blasting the SEC proposals.

SEC Chairman Jay Clayton, who was appointed by President Donald Trump, and Republican SEC Commissioner Elad Roisman have both said that the proxy voting process needs to be revamped.

SEC Defense

Earlier this month, Roisman gave a speech defending the agency’s approach, saying that much of the criticism has been “based entirely on misinformation” and riddled with “myths.” Roisman, who is leading the SEC’s work on the issue, specifically rejected a frequent claim that the regulator is doing the bidding of corporate lobbyists.

An SEC spokeswoman and a lawyer in Roisman’s office declined to comment on Icahn’s letter.

Icahn, a Trump supporter who has broadly defended the president’s de-regulatory agenda, didn’t accuse the SEC of intentionally doing the bidding of big business. But he insisted that the agency’s proposals would inappropriately give corporate insiders new standing to sue proxy advisers for simply issuing analysis that companies disagree with. Roisman has disputed that the SEC rule changes would do that.

In the SEC’s plans, proxy advisers would generally be required to share their recommendations twice with management before shareholders could see them. Proxy advisers would also have to disclose conflicts of interest.

“It’s very hard, very expensive for someone to go in and try to fight them,” Icahn, in the interview, said of corporate management. “Now they’re going to make it harder.”

For a man in battle with Corporate America and the US financial regulator, Gary Retelny is in fine form.

In a two-hour video interview, the chief executive of Institutional Shareholder Services talks about everything from his childhood in Nicaragua to stamp collecting. He also cheerfully but methodically rebuts the many denunciations of the company he has led since 2011.

ISS is the world’s largest proxy adviser, an insipid phrase that belies its importance in global financial markets.

The governance division of ISS makes recommendations on how shareholders should vote at more than 40,000 company meetings a year, advising investors on whether to support a chairman’s re-election, reject a chief executive’s pay package or approve a merger.

Depending on who you speak to, ISS is far too powerful, rife with conflicts of interest and error-prone, or it plays a vital role in helping investors to navigate complex corporate governance matters across their portfolio of stocks.

“We get all kinds of criticism,” says Mr Retelny. “But the criticisms you hear now are incredibly dated.”

Mr Retelny, 61, is well versed in batting off attacks. First, he has spent the past three years defending ISS from an intense and sometimes unbelievable campaign from Corporate America and its lobbyists.

More recently the Securities and Exchange Commission proposed controversial new rules governing proxy advisers last November. The SEC’s consultation period for the rules ends on Monday.

ISS has argued strongly against the proposals, which include forcing proxy advisers to reveal their voting recommendations to a company’s management before they are sent to clients.

Speaking from New York, Mr Retelny is lively, engaging and unfailingly polite, but he does not back down from an argument — something the SEC discovered last year, when ISS decided to sue the regulator. The move drew gasps from the corporate and investment worlds. “That’s punchy,” says an executive at one of the world’s largest asset managers.

The lawsuit is currently paused while the SEC finalises the rules. “But we expect to re-engage, depending on what the final rules are,” says Mr Retelny.

Although ISS has been in business for more than three decades, scrutiny of it and its rival Glass Lewis has intensified in recent years, as big investors increasingly started to pay attention to corporate governance.

At the same time, many large shareholders globally became more willing to vote against management, including at oil majors ExxonMobil and Occidental in 2017, when shareholders backed climate-change resolutions to the frustration of management.

As Mr Retelny sees it, rather than pick a fight with their shareholders, disgruntled companies — annoyed that investors are voting against pay packages or all-male boards have singled out proxy advisers. “We have become a convenient point of attack,” he says.

Then he rattles off a range of facts and figures to counter the complaints about ISS. While the proxy adviser has been accused of publishing error-ridden reports, Mr Retelny says of the 6,498 reports it issued last year in the US, it made 48 material mistakes that led to a correction in its recommendation — an error rate of 0.7 per cent.

“We do make mistakes, but we correct them,” he said.

Another regularly touted criticism is that investors blindly follow ISS’s voting recommendations. But Mr Retelny says 88 per cent of its top clients receive tailored recommendations that are based on the investor’s voting policy rather than ISS’s default report.

He is also quick to defend ISS’s position as the largest proxy adviser, even if he says the company never set out to be the dominant provider.

Mr Retelny says scale matters in the proxy advice business, as asset managers are often invested in thousands of companies around the world.

“We do 40-odd thousand of these [reports] a year. It is quite a logistical undertaking and scale matters very, very much in order to provide the services on a timely basis that clients demand.”

Then there are complaints that ISS has become a de facto governance standard setter, unnecessarily wading into debates around environmental and social topics and taking too prescriptive a view on issues such as executive pay and board competition.

Mr Retelny says ISS only opines on the resolutions for the meeting in its proxy report. “If there is an environmental or social item, we certainly will provide a recommendation because that is what our clients expect of us.”

He also bats off criticism about a conflict of interest at ISS, which has a division that provides advisory services to companies on how to improve governance, while also issuing voting recommendations advice to shareholders in those companies.

Many companies provide different services to different clients, he says, adding that he would not consider selling either part.

In recent weeks, ISS relaunched an initiative called Protect the Voice of Shareholders, its own lobbying effort aimed at “correcting misinformation and educating visitors about the threats posed by proposals under consideration by the SEC”.

The scale of the lobbying against proxy advisers from parts of Corporate America, however, has surprised Mr Retelny. Notably, there was a group called Main Street Investors Coalition that purported to represent ordinary savers, but was financed by big trade organisations.

There was also a series of fake letters to the SEC supporting tough proxy adviser rules. According to a Bloomberg investigation, the letters were signed by so-called main street investors, but were actually penned by an advocacy group.

“It’s something we didn’t expect,” Mr Retelny says. “It’s underhanded, they’re dirty . . . It’s a very concerted effort by a very small group of people backed by a very small group of companies that are fabricating things.”

The SEC is under pressure to finalise the rules in the next few months, ahead of the US presidential election.

Mr Retelny, however, is hopeful there might be a watering down of the proposals. “There are a number of very smart people and thoughtful people at the SEC,” he says.

“I’m optimistic . . . that whatever rules they do issue, they are constructive and helpful to shareholders in essentially doing their job.”

Still, the whole process has been distracting for the chief executive. If the business lobby is hoping for a small, quieter ISS, however, that looks unlikely.

Although ISS is best known for its proxy advice business, this is just one of five different divisions and accounts for about 30 per cent of its revenues.

Mr Retelny says he is always on the hunt for new ways to grow the company, which is owned by management and private equity.

“We continue to look for growth opportunities, whether they’re organic or by acquisition, and we expect that to continue certainly in the future,” he says.

He is also on the hunt for stamps, especially relating to Nicaragua. Mr Retelny’s family left the country for the US during Nicaragua’s 1978 socialist revolution.

He has not been back since, but he seeks out envelops bearing the stamps and seals of the co-called Nicaragua route.

The envelopes date from the California gold rush of the 1850s, when Cornelius Vanderbilt set up a transport company to take passengers from the east coast of the US to the west coast, via Nicaragua.

“I specialise in very strange things,” he jokes.

Proposed SEC rules that impose new requirements on proxy advisory firms and raise thresholds for submitting shareholder proposals would undercut shareholder rights and should be reworked, the Council of Institutional Investors said in comment letters being submitted Friday.

“The SEC has failed to make the case for the drastic regulatory schemes it would impose on proxy advisory firms and on shareholders who file resolutions at companies in their portfolios,” said CII Executive Director Ken Bertsch in a statement, calling them “solutions in search of a problem.”

The comment periods on the two proposals end Monday. If finalized, proxy advisory firms would have to disclose more information about their processes and any conflicts of interest and give companies the opportunity to offer revisions.

Proposed changes to the shareholder proposal process include raising the minimum amount of stock held and the time held before shareholders could file resolutions at annual corporate meetings. Shareholders could not aggregate their holdings with others and must be available to meet with the company to discuss the proposal. Thresholds for resubmitting shareholder proposals in subsequent years would also be higher.

The CII comment letters said the proxy firm and shareholder submission proposals “are the most significant attempt by the SEC to limit the voice of shareholders since the Commission was created in 1934,” and called the changes “fundamentally flawed and unnecessary.”

The letters said that the Securities and Exchange Commission has failed to make the case for the drastic regulatory schemes. The SEC’s economic analysis fails to support the proposed changes and the SEC may not even have the authority to regulate proxy advisers as proposed. “We believe this issue ultimately will be decided in court,” one CII comment letter said.

The agency’s investor advisory committee voted Jan. 24 to recommend that SEC officials rework the two proposals.

Daniel Loeb, the activist investor, launched a stinging attack on the Securities and Exchange Commission’s plans to curb the power of shareholder advisory firms, saying the US regulator has been misled by corporate lobbyists that reflect the Washington “swamp at it worst”.

In the latest quarterly letter to investors in his Third Point hedge fund, Mr Loeb said the group was strongly opposed to a proposed SEC rule that would change the balance of power between companies and big proxy adviser firms that recommend how shareholders vote in corporate elections.

The tussle is of particular interest to activists such as Mr Loeb whose campaigns to change company strategy or oust board members rely on winning over other shareholders.

Among other things, the SEC’s proposal would require proxy advisers, such as ISS and Glass Lewis, to submit their advice to companies twice before issuing it to investors.

The proposal has been sharply criticised by asset managers, but applauded by corporate lobbying groups such as the US Chamber of Commerce and the National Association of Manufacturers, who alleged proxy advisers have conflicts of interest and often publish inaccurate information.

Mr Loeb said the SEC’s proposal would disenfranchise shareholders and give companies more ammunition to stop investor advocacy on issues from executive compensation to environmental disclosures.

Additionally, if the proposed rule is finalised, it could subject the proxy advisory groups to “an onslaught of litigation” that could put them out of business.

“It is the Main Street investor who will suffer most if corporate accountability is reduced because recommendations on proxy proposals are effectively neutered by a much-loathed American tactic — the threat of harassing litigation that clogs up courts and undermines free markets,” Third Point said.

“With all there is to do to police markets, why would the SEC adopt a cumbersome and costly solution when no one has demonstrated that a real problem exists?”

Mr Loeb’s attack is expected to be echoed by other activists, such as Elliott Management’s Paul Singer, before an SEC deadline for comment on the proposal on February 3.

If Jay Clayton, SEC chairman, advances the rule to a final vote in the months ahead, he will be doing so over the opposition of religious organisations and companies such as T Rowe Price and Neuberger Berman, who have submitted letters of objection.

When he debuted the proposal in November, Mr Clayton highlighted several letters from ordinary investors who seemed to express concerns about proxy advisers. But Mr Loeb, citing a Bloomberg news report, highlighted the letters’ suspicious origin.

“Someone has been rigging the public debate and trying to mislead the commission,” Mr Loeb wrote in his letter. “These endorsements were actually part of a false letter-writing campaign that had been bought and paid for by corporations. This is the ‘swamp’ at its worst.”

The SEC did not immediately respond to a request for comment.

Hedge fund Third Point on Thursday called on Sony Corp (6758.T) to keep divesting non-core assets and said it opposes the U.S. Securities and Exchange Commission’s proposed rule on proxy advisers.

The firm, run by Daniel Loeb, praised Sony for last year’s strong returns but said it needs to take a hard look at its portfolio, from which it has divested only Olympus.

“Sony has avoided the topic of portfolio optimization, but we continue to believe that Sony’s media and semiconductors franchises can stand alone and create more value independently than together,” the firm wrote in a letter to its investors. A copy was seen by Reuters.

The New York-based hedge fund is among the first, along with Carl Icahn, to oppose the SEC’s proposed rule for proxy advisory firms. The measure is designed to give investors more insight into how firms, including Institutional Shareholder Services and Glass Lewis & Co, formulate their recommendations on issues ranging from proposed mergers to executive pay.

Third Point’s flagship portfolio returned 18.6% last year and its investment bets are closely watched in the investment community, especially as most of last year’s gains were fueled by activist positions, including bets on Sony and Campbell Soup Co (CPB.N).

Pushing corporations to improve operations has helped fuel Third Point’s returns for nearly a decade, the letter said, adding that the strategy was becoming more valuable in a changing market environment.

Third Point began building a stake in Sony last year and called for a spinoff of its semiconductor unit. While praising Sony management for having listened to its ideas, it clearly wants things to move faster.

The fund also praised Campbell Soup Co’s (CPB.N) new Chief Executive Mark Clouse, the man it has said privately it helped recruit, for revitalizing the iconic brand. Third Point took some of its profits and now owns less than 5% of the company, leaving money on the table for new bets.

Third Point’s letter did not discuss any new investment ideas but it called the SEC’s proposed proxy adviser rule an “end run around shareholder rights.”

The rule would give corporations, many of whom have complained about the power and influence of ISS and Glass Lewis for years, the right to review recommendations before they are published.

Under the proposal, proxy advisers could be subject to lawsuits, even if companies had endorsed their recommendations.

The authors are shareholders of R|K Invest Law, PBC, and were formerly lawyers for the SEC’s Office of the General Counsel. Mr. Kirby was previously a principal at Baker McKenzie and K&L Gates. Ms. Roth was previously with Dechert, LLP, served as in-house counsel for Calvert Investments, and authored the first Community Investment Notes as counsel for Calvert Impact Capital.

The SEC Adopts a New Definition of “Solicitation” that Includes Proxy Advisory Services

In August 2019, the Securities and Exchange Commission (“SEC” or “Commission”) expanded existing proxy rules by issuing an interpretive release, essentially creating a new definition of what constitutes a proxy solicitation.[1] The SEC announced that when shareholders hire proxy advisory services to provide information relating to items to be voted on at a company’s annual meeting of shareholders, the advisory firm is itself engaging in a “proxy solicitation.” That conclusion reverses years of interpretation and industry understanding, and conflicts with the regulatory exemption for proxy advisory firms imbedded into the proxy rules themselves.[2]

The SEC Has Issued Proposed Rules Based on the New Definition

The SEC has now proposed to implement its novel definition by restricting the rule’s exemption to advisory firms that provide the publicly-traded corporate issuer with access to the advisory service’s propriety report before the proxy advisory firm sends it to its own clients. The SEC would mandate that the proxy advisory firm provide the issuer with a platform on which the issuer could comment on the advisory service’s report. The rule would also compel proxy advisory services to disclose proprietary information relating to their methodology. The SEC claims that these proposed changes are aimed at curtailing perceived abuses.[3]

The expanded definition of who is deemed to be engaging in a proxy solicitation results in proxy advisory services becoming subject to SEC Rule 14a-9, the proxy antifraud rule. In that regard, an investment advisory service’s proprietary advice to its clients based on public information provided in issuer documents would become subject to regulatory antifraud scrutiny and could be deemed by the SEC to be incomplete and thus materially misleading.

The Proposed Rules Would Restrict Free Speech

By taking these steps, the SEC is attempting to exercise regulatory authority over an aspect of business not expressly reserved to it by Congress. Not only would implementation impose substantial burdens on a service to shareholders already explicitly carved out from the proxy rules, it interferes with a private business relationship.

As such, the very manner in which the proposed rules are designed to be implemented appears to violate the First Amendment. By defining “solicitation” to include the analyses and recommendations provided by proxy advisory services to their clients, the SEC seeks to regulate private discourse between shareholders and the firms they hire to provide analyses based on criteria chosen by the shareholder. The result is to restrict contractual parties from having a free and frank interchange, in this case relating to their proxy voting choices. No statute grants the SEC that authority and – even if there were such a statute – it would likely not withstand First Amendment scrutiny.

It is the free speech issue that we believe merits further analysis and is missing from the SEC’s reasoning in support of its proposed rulemaking.[4] We explore that issue below.

The SEC is Engaging in the Unlawful Regulation of “Viewpoint” Speech

Advisory services analyze publicly-available information (which primarily comes from the issuer’s own disclosure documents), synthesize it to meet specific client requests for information, and provide guidance on how that information relates to a client’s stated investment objectives. Clients then incorporate that analysis into their own evaluation of how to vote on the issues presented at the shareholder meeting. This type of advice to clients is the essence of “viewpoint” speech.

As the Supreme Court explained in a ruling addressing the First Amendment, government “has no power to restrict expression because of its message, its ideas, its subject matter, or its content.” Reed v. Town of Gilbert, 576 U.S. _,135 S. Ct. 2218, 2226 (2015) (citation omitted). “[A] speech regulation targeted at specific subject matter is content based even if it does not discriminate among viewpoints within that subject matter.” Id. at 2230. On its face, the proposed SEC regulation seeks to limit discussions between a shareholder and its proxy advisory service where the subject matter is the question of how to vote proxies. The SEC does not otherwise attempt to limit the content of discussions about other topics for which the shareholder and its service provider may be engaged, such as potential compliance with ESG screens. Thus, the SEC’s proposed regulation is aimed at the subject matter of the proxy advisory service. This is content regulation of speech at its most basic level.

Even if one were to accept the SEC’s assertion that the integrity of research provided by proxy advisory services “could be” suspect,[5] what the government may not do is regulate the discussions between shareholders and their service providers. Just this past term, the Supreme Court explained that “viewpoint regulation” goes to the heart of First Amendment protections, striking down the Lanham Act limitation on registration of offensive trademarks: “The government may not discriminate against speech based on the ideas or opinions it conveys.” Iancu v. Brunetti, 588 U.S. _, 139 S. Ct. 2294, 2299 (2019).

When a publicly-traded company issues a statement about its financial affairs or solicits proxies, it generally publishes those statements first by filing them with the SEC – at which point they are deemed public – and then by making those statements widely available through a variety of channels. The information contained in the statement thus becomes part of the public discourse about the company.

When making statements to the public, publicly-traded companies are subject to strict government regulation, including the antifraud provisions relating to the statements made. See, e.g., SEC Exchange Act Rules 10b-5, 13b2-2 and 14a-9.[6] However, once the company’s statements become public, analysts and others are free to evaluate that information together with other publicly-available information and reach their own opinions and factual conclusions about what that information implies, whether good or bad. They also remain free to publicize those conclusions in the public domain or sell them to investment advisers or other interested persons, including voting shareholders.[7] These opinions and conclusions by analysts and proxy advisory firms are covered by the same heightened public discourse First Amendment protections as statements about public figures.[8]

Indeed, the SEC itself recognized these limitations in earlier public statements at the time it first wrote and revised its proxy solicitation rules. For example, the 1992 Commission, explaining of its reluctance to regulate communications among shareholders, acknowledged that “[a] regulatory scheme that inserted the Commission staff and corporate management into every exchange and conversation among shareholders, their advisors and other parties on matters subject to a vote certainly would raise serious questions under the free speech clause of the First Amendment, particularly where no proxy authority is being solicited by such persons.” Regulation of Communications Among Shareholders, Release No. 34-31326 (Oct. 16, 1992) [57 Fed. Reg. 48276, 48279 (Oct. 22, 1992)].

In Attempting to Redefine the Statute, the SEC Has Exceeded its Powers

But, more importantly, the SEC’s recent effort to extend the definition of “proxy solicitation” beyond persons who are actually seeking to procure, withhold or revoke a proxy is an attempt by the SEC to expand its reach beyond any power Congress delegated to the agency.[9] While the SEC is given broad authority to regulate the solicitation of proxies as necessary and appropriate, that power is not unlimited. It may not redefine basic terms in the statute, nor may it seek to regulate an entire industry segment.

The SEC seeks to meet the issue of authority head on by asserting that the term “solicit” in the statute is ambiguous and did not have a sufficiently well-understood meaning when Congress enacted it in 1934. (See Proposed Amendments to Exemptions at 19 and note 48.) That argument seems forced. The term has a commonly-understood meaning, requires no definition as used in Section 14(a), and Congress accordingly did not provide one. It would be presumptuous of the SEC to assume that Congress erred in that respect.

A unanimous Supreme Court recently reversed the SEC for engaging in a similar definitional sleight of hand. In Digital Realty Trust, Inc. v. Somers, 583 U.S. _, 138 S. Ct. 767 (2018), the Court struck down an SEC Rule that sought to define the term “whistleblower” contrary to the unambiguous statutory text. That same fate may well befall the SEC’s effort to redefine the term “solicit” in the proxy rules beyond its well-understood meaning. The SEC does not have the authority to extend the regulation beyond the commonly and long understood meaning of “solicit” as focused on those persons seeking to procure, withhold or revoke a proxy.

By expanding the definition of “solicit,” the SEC seeks to regulate the content of the discussions between a shareholder and its proxy advisory service. This content-based regulation is contrary to modern First Amendment jurisprudence. For that reason, it is likely that a court would refrain from accepting the SEC’s expanded definition when to do so would force the court: (i) to confront the First Amendment constitutional issue of whether Congress has the power to regulate the scope of private discourse among shareholders and their service providers; and, if so, (ii) to consider whether Congress has delegated that power to the SEC to implement by agency rulemaking.

There can be little question that the communication between the proxy advisory service and its client is speech. As stated by the Supreme Court, “the creation and dissemination of information are speech within the meaning of the First Amendment.” Sorrell v. IMS Health Inc., 564 U.S. 552, 570 (2011). What the SEC rules seek to do is regulate those communications by imposing advance burdens on the speaker regardless of the nature of the content of those communications. That is the essence of viewpoint regulation of speech barred by the First Amendment.

The SEC’s Proposals Go Beyond Mandating Disclosure of Conflicts

The analysis does not change if the proxy advisory service is offered by a registered investment adviser. The courts have long recognized the limits that the First Amendment places on the regulatory reach of the Investment Advisers Act of 1940 (“Advisers Act”). See SEC v. Lowe, 472 U.S. 181 (1985), and SEC v. Wall Street Publishing, Inc., 851 F.3d 365 (D.C. Cir. 1988). The Advisers Act regulates the disclosure of conflicts of interest and fraudulent practices by an investment adviser, but it may not regulate the content of speech by the investment adviser to its client. In its interpretive release and related rule proposal, the SEC is going far beyond mandating disclosure of conflicts of interest or proscribing fraud. Instead, the SEC is improperly attempting to regulate the content of speech.

The SEC’s attempt to overreach is not somehow “cured” because the securities laws apply to a highly-regulated industry. The First Amendment does not distinguish among types of businesses. Rather, the analysis of whether the SEC’s proposed regulation violates the First Amendment is subject to “strict scrutiny,” and requires that the agency’s regulatory choices as to content regulation be the least intrusive of any alternative. See Reed v. Town of Gilbert, 135 S. Ct. at 2231-32. The SEC’s proposed regulations do not appear to meet this test. Demanding disclosure of methodology and making proxy advisory firms give prior notice of the content of their advice is perhaps the most intrusive rather than the least intrusive alternative that could have been chosen by the Commission.

This First Amendment inquiry is fundamentally the same whether the question is analyzed under traditional First Amendment principles, or under the narrower commercial speech standard. “Commercial speech that is not false or deceptive and does not concern unlawful activities … may be restricted only in the service of a substantial governmental interest, and only through means that directly advance that interest.” Zauderer v. Office of Disc. Counsel, 471 U.S. 626, 638 (1985). There is no factual basis for the notion that every communication between a proxy advisory firm and its client is potentially false or deceptive speech. At best the rule seeks to prevent possible incomplete communications between them, which is hardly a sound foundation for regulation of even commercial speech. There are less intrusive means available to guard against potential false or deceptive disclosures.

There is No Legitimate Government Interest for the Proposed Rules

Nor do the proposed rules advance a substantial governmental interest. Instead, they advance the interests of the publicly-traded companies. The proposed rules interfere with communications between shareholders and their service providers. That is First Amendment protected activity for which the SEC offers no cogent justification.

The SEC previously recognized the benefit of leaving those discussions unfettered by regulation: “The purpose of the proxy rules themselves are better served by promoting free discussion, debate and learning among shareholders and interested persons, than by placing restraints on that process to ensure that management has the ability to address every point raised in the exchange of views.”[10] Its current releases offer no compelling argument as to why its earlier pronouncement is no longer valid.

That a shareholder seeks assistance in determining how a particular shareholder proposal in the already-filed proxy statement squares with the shareholder’s individual investment policies and objectives is outside the scope of the SEC’s role. In the context of the First Amendment analysis, there is no legitimate government interest in requiring any sort of disclosure by the proxy advisory service of the content of its analysis.

The SEC Should Abandon Its Attempt to Regulate Proxy Advisory Services

The SEC is the watchdog for the investor – not for the publicly-traded company. The Commission should continue to respect its boundaries as it has in the past, and will hopefully, with the guidance of its staff and public input, set aside these proposals as beyond any legitimate governmental interest. We see no justification, let alone the strict scrutiny required under the First Amendment, for regulation of proxy advisory services.

[1] See Release No. 34-86721, Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, available at: https://www.sec.gov/rules/interp/2019/34-86721.pdf (effective September 10, 2019).

[2] See Rule 14a-2(b)(3), 17 C.F.R. § 14a-2(b)(3).

[3] See Release No. 34-87457, Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice (Nov. 5, 2019), available at: https://www.sec.gov/rules/proposed/2019/34-87457.pdf (“Proposed Amendments to Exemptions”).

[4] In that connection, we will not address the argument that the new definition violates the Administrative Procedure Act (“APA”). That allegation has been well-articulated in a lawsuit filed against the SEC by Institutional Shareholder Services, a firm that – among its many products – provides proxy advisory services. ISS v. SEC, No. 19-cv-03275 (D.D.C., filed October 31, 2019). In its complaint, ISS alleges that the SEC “interpretive guidance” issued in August 2019 is, in effect, a rule of general applicability adopted in violation of the notice and comment requirements of the APA. ISS also takes issue with the SEC’s claim that ISS’s advice to clients could ever reasonably be considered a proxy solicitation, even were the SEC properly to undertake a rulemaking initiative. On January 17, 2020, the court granted an unopposed motion to hold the case in abeyance until the earlier of January 1, 2021 or the promulgation of final rules. (Docket No. 14.)

We also do not address the separate question of whether the agency re-interpretation of an existing longstanding regulation is entitled to judicial deference. See Auer v. Robbins, 519 U. S. 452 (1997). See also Bowles v. Seminole Rock & Sand Co., 325 U. S. 410 (1945). The Auer doctrine was narrowed by the decision last term in Kisor v. Wilkie, 588 U.S. _, 139 S. Ct. 2400 (2019). As the Court explained, the doctrine does not apply to the extent the agency regulation is not “genuinely ambiguous” and the agency’s interpretation is “reasonable.” Id. at 2415-16. One can certainly question whether there is any genuine ambiguity over the question of whether the communication to a client at the client’s request about a proxy voting question is the type of communication intended to be covered under Section 14(a) and whether that interpretation is “reasonable.”

[5] Proposed Amendments to Exemptions at 39.

[6] 17 C.F.R. §§ 240.10b-5, 240.13b2-2 and 14a-9.

[7] Depending on the forum in which those conclusions are published, they may subject the author to regulatory oversight.

[8] See New York Times v. Sullivan, 376 U.S. 254 (1964) (proof of actual malice required in defamation action by public figure defendant). See, e.g., Dun & Bradstreet, Inc. v. Greenmoss Builders, Inc., 472 U.S. 749 (1985) (extending NY Times to credit information reporter); Bose v. Corp. v. Consumers Union of United States, Inc., 466 U.S. 485 (1984) (extending NY Times to reviewer of consumer product).

[9] The SEC enacted Rule 14a-1(l)(1)(iii) in its current form in 1956. That subsection specifies that a “solicitation” includes “[t]he furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” 17 C.F.R. § 240.14a-1(l)(1)(iii).

[10] Regulation of Communications Among Shareholders, Id. at 48279.