SEC close to weighing possible action on proxy advisory firms

WASHINGTON Wed Mar 19, 2014 2:59pm EDT

Mary Jo White, chair of the Securities and Exchange Commission, testifies to the House Financial Services Committee about the effects of the Volcker Rule on employment in Washington on February 5, 2014. REUTERS/Joshua Roberts

Mary Jo White, chair of the Securities and Exchange Commission, testifies to the House Financial Services Committee about the effects of the Volcker Rule on employment in Washington on February 5, 2014.

Credit: Reuters/Joshua Roberts

WASHINGTON (Reuters) - The Securities and Exchange Commission will soon review recommendations for possible regulatory action targeting proxy advisory firms, SEC Chair Mary Jo White said on Wednesday.

White did not offer any details on what kinds of new rules or changes could be in store for proxy advisory firms like Glass Lewis and Institutional Shareholder Services, which help large institutional investors weigh how to vote on critical company issues such as board elections and compensation.

The SEC previously held a roundtable about the sector, where stakeholders discussed a variety of concerns such as whether the firms properly disclose potential conflicts of interest and whether investment advisers too heavily rely on their advice when they vote on behalf of clients.

Without signaling what the SEC might do, White, speaking to an audience at the U.S. Chamber of Commerce, said that she was "particularly" interested during the roundtable in hearing the discussions about improving disclosure of possible conflicts and about how much investment advisers rely upon proxy advisory firms and what this means for their fiduciary obligations.

The U.S. Chamber of Commerce has been among the most vocal in pressing the SEC to reform the proxy advisory sector.

"The staff now will be making recommendations to me in the very near term about what additional action might be taken on these issues," White told the audience.

Some of White's colleagues on the commission, including Dan Gallagher, a Republican, have said the SEC has enabled investment advisers to rely too heavily on proxy advisory firms for advice after the SEC staff issued letters that permit advisers to rely on the advice without the fear of possible enforcement action.

This is problematic because investment advisers have a fiduciary obligation to put their customers' interests first, Gallagher has said.

Most recently, in a March 18 letter, 10 members of Congress, including New Jersey Republican Scott Garrett and North Carolina Republican Patrick McHenry, called on the SEC to require more disclosures of conflicts.

In the letter, the lawmakers said they were concerned that the SEC does not require proxy advisory firms to disclose whether a proponent of a shareholder proposal or a competing director slate is a client.

"In our view, this lack of disclosure calls into question the legitimacy and veracity of the advice dispensed by proxy advisory firms and undercuts the ability of their clients to meet their fiduciary duty to individual investors," they wrote.

(Reporting by Sarah N. Lynch; Editing by Leslie Adler)

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