On June 30, two Securities and Exchange Commission (SEC) divisions (Investment Management and Corporate Finance) issued Staff Legal Bulletin Number 20 providing guidance to investment advisors and institutional investors on their proxy voting responsibilities and use of proxy advisors. The bulletin also addresses proxy advisors’ conflict-of-interest disclosure obligations and may disappoint companies concerned about proxy advisor influence on executive compensation that had hoped the SEC would take stronger action. 

Some aspects of the guidance are already standard practice in the industry, so the bulletin’s impact may be limited. For investment advisors to fulfill their obligation to vote proxies in their clients’ best interests, the bulletin’s Q&As provide direct guidance on how their proxy voting policies and procedures should be structured. For proxy advisors, the Q&As provide guidance on how the proxy rule exemptions may be affected by a proxy advisor’s relationship with a company or third party that could have a material interest in a matter being brought to a shareholder vote.

The new Q&As follow an SEC hearing last December 2013 and come amid ongoing market interest, particularly with respect to the roles of proxy advisors and potential conflicts of interest. The bulletin does not set out any new rules, but is intended to help investment and proxy advisors interpret existing rules, specifically Rule 206(4)-6 under the Investment Advisors Act of 1940. From a compensation perspective, the perceived influence of proxy advisors remains a topic of particular interest among companies and shareholders despite the ongoing high levels of overall support for say-on-pay votes and increased engagement between companies and their shareholders on the topic of executive pay.


Proxy voting practices and procedures are addressed in several questions. The guidance specifies that, as fiduciaries, investment advisors should consider taking the following actions:

  • Adopt and implement written proxy voting policies and procedures and review their adequacy at least annually (also, periodic review of proxy vote samples should be conducted to ensure that the organization’s voting policies and procedures are being followed)
  • Determine whether any proxy advisory firm retained by the investment advisor has the capacity and competency to adequately analyze proxy issues, including:
    • Review the proxy advisor’s qualifications, staffing and procedures
    • Implement policies and procedures that allow the investor to monitor the proxy advisor
    • Examine the competency of those retained to assist with proxy voting, including how they ensure that recommendations are based on current and accurate information and the process that could be used by the investment advisor if a concern was raised.

Most of these steps are already likely to be in place for the largest institutional investors. As a result, the guidance may have the greatest impact on small and mid-size investors who may be more reliant on proxy advisor vote recommendations. While potentially creating more work for investors, the new SEC guidance appears to affirm the flexibility that investors have in determining how and when they will vote and whether or not to retain third parties such as Institutional Shareholder Services (ISS) and Glass Lewis. Although the obligations are placed primarily on investment advisors, the proxy advisors may nonetheless want to take a closer look at topics such as data accuracy and verification, potentially providing issuers with opportunities to review their data.


The new guidance generally confirms the circumstances under which proxy advisors can avoid having to comply with the information and filing requirements for a “solicitation” under federal proxy rules. Notably, the guidance affirms that proxy advisors who only provide vote recommendations are not considered to be engaging in a solicitation, while those who help investors establish the underlying voting guidelines and exercise some discretion in voting the shares would not be deemed to be exempt. Here again, given current practices in the industry, this guidance may have greater implications for small and mid-size investors.

The bulletin also addresses consulting relationships that proxy advisors may have that would influence their ability to claim the “solicitation” exception. Notably, the guidance touches on the following aspects:

  • Materiality: The guidance notes that whether a relationship between a proxy advisor and a company or proponent with a significant or material interest in an underlying vote recommendation will be deemed a conflict of interest will depend on the facts and circumstances and their potential impact on the objectivity of the advisor.
  • Disclosure: The guidance related to potential conflicts of interest affirms that proactive, affirmative disclosure must be made, but does not specify whether it must be made public or only between the proxy advisor and its client. The guidance notes that boilerplate disclosure language that a relationship may or may not exist and/or statements that the information is available upon request are not sufficient.

The SEC’s approach of providing guidance as opposed to a formal rulemaking follows the pattern set by standard-setting organizations in other countries that have examined the role of proxy advisors. For example, the Canadian Securities Administrators proposed guidance for public comment (until July 23, 2014), and the European Securities and Markets Authority (ESMA) released a report in February 2013. While neither organization advocates regulation of proxy advisors, the ESMA report encouraged the industry to develop a voluntary code, which has been done by The Best Practice Principles Group (BPPG) that includes ISS, Glass Lewis and others. The signatories have already published or intend to publish statements related to their voluntary compliance with principles contained in the report titled Best Practice Principles for Shareholder Voting Research & Analysis. The topics in the BPPG report are similar to those in the SEC guidance and cover three main areas: service quality, conflicts-of-interest management and market communications.

Given that the recent SEC issuance is merely guidance, there’s no deadline for compliance, although the SEC staff expects any necessary changes to be made by investment advisors and proxy advisors before the 2015 proxy season or sooner.


Jim Kroll 

Jim Kroll

Towers Watson New York

Brian Myers 

Brian Myers

Towers Watson Arlington

Jim Kroll is a director in New York who leads the firm’s executive compensation governance advisory practice and Brian Myers is an executive compensation consultant in the firm’s Arlington, Virginia office. Email james.kroll@towerswatson.com, brian.myers@towerswatson.com or executive.pay.matters@towerswatson.com.