Yesterday, the White House finally issued the Executive Order that we had all been expecting which specifically targets the proxy advisory firms ISS and Glass Lewis. The Executive Order states:

Section 1. Purpose. Unbeknownst to many Americans, two foreign-owned proxy advisors, Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC, play a significant role in shaping the policies and priorities of America’s largest companies through the shareholder voting process. These firms, which control more than 90 percent of the proxy advisor market, advise their clients about how to vote the enormous numbers of shares their clients hold and manage on behalf of millions of Americans in mutual funds and exchange traded funds. Their clients’ holdings often constitute a significant ownership stake in the United States’ largest publicly traded companies, and their clients often follow the proxy advisors’ advice.

As a result, these proxy advisors wield enormous influence over corporate governance matters, including shareholder proposals, board composition, and executive compensation, as well as capital markets and the value of Americans’ investments more generally, including 401(k)s, IRAs, and other retirement investment vehicles. These proxy advisors regularly use their substantial power to advance and prioritize radical politically-motivated agendas — like “diversity, equity, and inclusion” and “environmental, social, and governance” — even though investor returns should be the only priority. For example, these proxy advisors have supported shareholder proposals requiring American companies to conduct racial equity audits and significantly reduce greenhouse gas emissions, and one continues to provide guidance based on the racial or ethnic diversity of corporate boards. Their practices also raise significant concerns about conflicts of interest and the quality of their recommendations, among other concerns. The United States must therefore increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition.

The Executive Order goes on to direct the Chairman of the SEC, the Chairman of the FTC and the Secretary of Labor to take a number of rulemaking and investigative actions.

The Executive Order specifically directs the SEC Chairman to:

– Consistent with the APA, “consider revising or rescinding those rules, regulations, guidance, bulletins, and memoranda that are inconsistent with the purpose of this order, especially to the extent that they implicate ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ policies;”

– Consistent with the APA, “consider revising or rescinding all rules, regulations, guidance, bulletins, and memoranda relating to shareholder proposals, including Rule 14a-8 (17 CFR 240.14a-8), that are inconsistent with the purpose of this order;”

– Enforce the antifraud provisions of the federal securities laws with respect to material misstatements or omissions contained in proxy advisors’ proxy voting recommendations;

– Assess whether to require proxy advisors whose activities fall within the scope of the Investment Advisers Act of 1940 to register as registered investment advisers;

– Consider requiring proxy advisors to provide increased transparency on their recommendations, methodology, and conflicts of interest, “especially regarding ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ factors;”

– Analyze whether, and under what circumstances, a proxy advisor serves as a vehicle for investment advisers to coordinate and augment their voting decisions with respect to a company’s securities and, through such coordination and augmentation, form a group for purposes of sections 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934; and

– Direct the SEC staff to examine whether the practice of registered investment advisers engaging proxy advisors to advise on (and following the recommendations of such proxy advisors with respect to) non-pecuniary factors in investing, including, as appropriate, “diversity, equity, and inclusion” and “environmental, social, and governance” factors, is inconsistent with their fiduciary duties.

The Executive Order directs the FTC Chairman to “review ongoing State antitrust investigations into proxy advisors and determine if there is a probable link between conduct underlying those investigations and violations of Federal antitrust law,” as well as to “investigate whether proxy advisors engage in unfair methods of competition or unfair or deceptive acts or practices that harm United States consumers.”

The Executive Order also directs the Secretary of Labor to “take steps to revise all regulations and guidance regarding the fiduciary status of individuals who manage, or, like proxy advisors, advise those who manage, the rights appurtenant to shares held by plans covered under the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1001 et seq.), including proxy votes and corporate engagement, consistent with the policy of this order.” Further, the Secretary of Labor is directed to “take all appropriate action to enhance transparency concerning the use of proxy advisors, particularly regarding “diversity, equity, and inclusion” and “environmental, social, and governance” investment practices.”

The White House also issued a Fact Sheet regarding the Executive Order. Clearly, the SEC now has a lot to do on the topic of proxy advisory firms!

– Dave Lynn