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December 20, 2011
Schapiro Remarks Suggest Regulation of Proxy Advisors
    by Robert Kropp

The SEC Chairman cites corporate concerns over quality of information used for recommendations, and potential conflicts of interest, as reasons for regulation of proxy advisory firms.

In a speech delivered last week before the Transatlantic Corporate Governance Dialogue, Chairman Mary Schapiro suggested that the Securities and Exchange Commission (SEC) is considering regulations for proxy advisory firms.

Referring to an SEC concept release from July, 2010, in which the Commission sought comments on aspects of the US proxy system, Schapiro said, "Many of the comments suggest that proxy advisory firms may interfere with, rather than enhance, the communication at the heart of effective engagement."

In her speech, Schapiro noted that comments from companies expressed frustration over the influence of proxy advisory firms, and said that companies are worried that proxy advisors "may not be accountable for, or even concerned with, the quality of the information on which they make voting recommendations."

Schapiro also acknowledged the concerns of investors over potential conflicts of interest at the firms, stating that insufficiently disclosed conflicts of interest prevent shareowners "from considering possible conflicts when analyzing those recommendations."

The largest proxy advisory firm by far is Institutional Shareholder Services (ISS), which was purchased by RiskMetrics Group in 2007. In addition to issuing voting recommendations for more than one trillion shares voted each year, RiskMetrics also provides governance advice to corporations seeking to improve their environmental, social, and corporate governance (ESG) rankings on the many lists that are published every year.

In fact, RiskMetrics itself publishes a ranking of top sustainable corporations, called the Global ESG 100 Top-Rated Corporations.

In 2010, the Shareholder Communications Coalition issued a discussion draft in which it stated, "As the SEC reviews its corporate disclosure requirements on these topics—and sustainability advocates increase their advocacy of specific shareholder proposals—this may create conflicts of interest between RiskMetrics' servicing of its institutional clients and the corporate consulting services it also provides."

In her speech, Schapiro said, "The Commission is considering how to provide guidance on how the federal securities laws should regulate the activities of proxy advisory firms."


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