Global proxy advisory firms feel uneasy, India finds balanced solution

In US, prior to 2019, there were no formal regulations that dealt with proxy advisory firms. Two large proxy advisors followed general guidelines and best practices, but there were no specific rules

One half of America is celebrating Donald Trump’s election, while just about the other half bemoans his win. Corporate America is among those in a triumphant mood. They expect taxes to be lowered, tariffs to rise, regulatory cobwebs to be cleared, and bureaucracy to be streamlined, if not altogether axed. In contrast, there is a sense of disquiet among global proxy advisory firms — the narrow edge of the market in which my firm operates. They expect the Proxy Rules 2019, which were slowly being rolled back, to now have fresh life injected.

 

In the US, prior to 2019, there were no formal regulations that dealt with proxy advisory firms. The two large proxy advisors followed general guidelines and best practices, but there were no specific rules in place.

 

The sway of proxy advisory firms has been a topic of discussion in the US for a long time.  Even earlier this year, Jamie Dimon, the executive chair of JPMorgan, highlighted the “undue influence” of proxy advisers in his 60-page annual shareholder letter.

 

Despite these concerns, the US Securities and Exchange Commission (SEC) acted only in August 2019, under the chairmanship of Jay Clayton, a Trump-appointed commission chair. The SEC introduced new guidance to regulate proxy advisory firms. This guidance clarified that the voting recommendations made by proxy advisors could be classified as “solicitations” under federal proxy rules—that is, communication aimed at influencing the voting decisions of shareholders. This subjects the proxy firms to anti-fraud provisions, significantly increasing their legal risks. Additionally, the guidance emphasised the need for transparency and accuracy in proxy voting advice.

 

Following this guidance, the SEC proposed new rules in November 2019, wherein the proxy advisory firms were required to share their voting advisory reports with the companies on which they were opining, before distributing it to their investor clients. This provision aimed to give companies an opportunity to identify and correct any errors or misstatements in the reports, but meant higher costs for the proxy firms, even as recommendations became bland. These were formalised in the “Final” SEC Rules in July 2020.

 

Following Joe Biden’s move into the White House, the SEC backtracked on these rules. In 2021, it announced a review of the Final 2020 rules, while holding in abeyance the need for proxy firms to pre-share its voting reports with companies. In a series of announcements, the various rules were rolled back over 2022. This led the National Association of Manufacturers, as well as the Natural Gas Services Group, to challenge these amendments in the US federal court. In June 2024, the 5th Circuit Court of Appeals upheld the appeal, reversing the rescission in the 2022 Final Amendments.  As another case was pending in the 6th Circuit Court of appeals, this matter has been in limbo, with an expectation that the SEC will eventually prevail. With Donald Trump being elected President, this assumption has changed; US proxy advisors need to be prepared for a business and process overhaul.

 

In contrast to the US, India has seen a stable and progressive regulatory regime that has balanced the growing clout of proxy firms growing with corporate pique.  The Securities and Exchange Board of India (Sebi) began regulating proxy advisory firms in 2014, much before the US. Sebi is likely the first regulator to bring proxy advisory firms under its ambit. It is also worth noting that Sebi was the first securities regulator to bring credit rating firms under its jurisdiction.

 

Proxy advisory firms are primarily regulated under the Sebi (Research Analysts) Regulations, 2014, and its amendments. Initially, proxy advisors, i.e. “persons who provide advice to institutional investors or shareholders of listed companies in relation to their exercise of their rights in the company, including recommendations on public offers or voting recommendations on agenda items,” were to register with Sebi.

 

In 2019, Sebi set up a working group under the chairmanship of Sandeep Parikh. The report highlighted that the industry was still in its nascent stage and recommended that firms adopt a code of conduct or a set of standards regarding expected behaviour. A significant recommendation that has since been enacted is that any grievance a company has against a proxy firm’s behaviour must be first brought to Sebi’s attention, where it will be examined and appropriate action taken.

 

Regarding the report-sharing issue that is causing unease among US proxy firms, Sebi found an elegant solution, as outlined in their procedural guidelines. Rather than sending proxy reports to companies before sharing them with investors, Sebi recommended that these be simultaneously disseminated to both companies and investors. Any comment or clarification that the company wishes to make must be compulsorily shared with investors through an update to the original report. Franky, I am surprised that the SEC did not adopt  this approach in their market.

 

As far as Indian proxy regulations are concerned, I believe we are almost where we want to be, except for the wrinkle that proxy firms and research analysts are governed by the same regulations. For those who look West to implement a regulatory framework, this is a signal from a small corner of the market that our regulators can be both forward-looking and pragmatic. This also adds to the growing body of evidence that there is much for global regulators to learn from their Indian counterparts.   

 

The writer is with Institutional Investors Advisory

 

Services India (IiAS). The views are personal.

 

X: @AmitTandon_IN