The Catholic University of America


SEC Commissioner Daniel Gallagher, Class of 1999,
Speaks at Law School about Proxy Advisors

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The Securities and Exchange Commission’s primary mission of protecting the interests of American stockholders is being put to the test in the case of proxy advisory companies, said SEC Commissioner Daniel Gallagher during a Sept. 25 lecture at the law school.
Gallagher, who is a 1999 graduate of the Columbus School of Law and delivered its 2012 Commencement Address, was invited by Professor David Lipton, director of Catholic University’s Securities Law Program, to discuss “Proxy Advisors - Their Impact on Corporate Governance and Disclosures” before a sizeable group of students in the Walter A. Slowinski Courtroom. Gallagher described the problem of effective regulatory oversight of such firms as partly a matter of resources.
A proxy firm (also a proxy advisor) is hired by shareholders of public companies, or institutional investors such as pension funds and mutual funds, to recommend and sometimes cast proxy statement votes on their behalf. These elections allow for shareholder input in the governance of corporations. However, the proxy system was intended to gather the input of shareholders, not the advisory agents of shareholders.
Two American giants— Glass, Lewis & Co. and Institutional Shareholder Services—have thoroughly dominated the field of proxy advising for years, controlling 97-percent of that market.
The SEC has established a comprehensive set of rules for what needs to be disclosed to shareholders prior to a vote and how the proxy vote is to be cast in an election. Still, potential conflicts of interest exist. For example, some owners of proxy firms do business with both issuers and investors. Thus, their advice may be tainted by a secondary financial interest.
The SEC’s watchdog role in the process is complicated by the strains imposed upon it by Congress, which has immersed the commission in the long and arduous task of writing the rules that implement the massive Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 as well as the JOBS Act of 2012.
“It’s easy to lose sight of our [essential regulatory] day job,” Gallagher observed, noting that the SEC’s portfolio of responsibilities has expanded greatly in recent years. 
Gallagher also suggested reconsidering the commission's 2003 decision to send “no-action” letters to the two proxy advising behemoths. The advisories said the SEC would refrain from taking any enforcement action against the companies based on the facts and representations available to it at the time.
“We need to rethink the regulatory privilege we’ve provided these two firms through the 2003 letters,” said Gallagher.
In 2010, the SEC did issue a “concept release,” which is one way of flagging its awareness of potential problems with the way proxy advising firms operate today. The SEC has solicited comments from consumers, and recalling the ten year-old no action letters remains a legal option for the commission.
The issue appears to be gathering steam. On Sept. 26, it was reported in the financial press that the Canadian Securities Administrators have announced their intention to regulate proxy advisory firms.
“I guess the issue has now become a bit more essential,” said Professor Lipton.