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.