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.

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.”