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SEC Commissioner Daniel M. Gallagher recently gave a speech to the National Conference of the Society of Corporate Secretaries  & Governance Profesionals.  In the speech Commissioner Gallagher noted that:

  • In 2003, the SEC adopted a new rule and rule amendments under the Investment Advisers Act of 1940 addressing an investment adviser’s fiduciary obligation to its clients when the adviser has authority to vote its clients’ proxies.
  • When proxy advisors asked the SEC staff for guidance and clarity with respect to the new rule, they got their wish in the form of a pair of staff no-action letters effectively blessing the practice of investment advisers simply voting the recommendations provided by proxy advisers.
  •  He is very concerned that these letters have unduly increased the role of proxy advisory firms in corporate governance.  He also has grave concerns as to whether investment advisers are indeed truly fulfilling their fiduciary duties when they rely on and follow recommendations from proxy advisory firms.

Commissioner Gallagher also noted that staff no-action letters are not approved by the Commission, and do not necessarily represent the view of the Commission or the Commissioners.  He stated that he believes “we should replace these two staff no-action letters with Commission-level guidance. Such guidance should seek to ensure that institutional shareholders are complying with the original intent of the 2003 rule and effectively carrying out their fiduciary duties.  Commission guidance clarifying to institutional investors that they need to take responsibility for their voting decisions rather than engaging in rote reliance on proxy advisory firm recommendations would go a long way toward mitigating the concerns arising from the outsized and potentially conflicted role of proxy advisory firms.”

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