Following the passage of a draft Bill in the US House of Representatives aimed at regulating proxy advisors (HR 5311) on 16 June 2016 , the Council of Institutional Investors and the International Corporate Governance Network, as representatives of global investors, have written to criticise the proposals.
Signatories to both letters assert that, the Bill, if passed, would have far-reaching and negative consequences for companies and investors, and would not, as the bill’s sponsors suggest, improve the competitive landscape.
The Corporate Governance Reform & Transparency Act of 2016 (HR 5311) would give companies the right to preview shareholder voting research reports and lobby the report writer(s) to change their analysis or recommendations. As the CII notes, US regulation overseen by the Financial Industry Regulatory Authority (FINRA) rules specifically prohibit the same type of pre-review of financial analyst reports.
Analyst objectivity and independence as an end-client protection is a central tenet of the CFA’s analyst objectivity standards as well the rules currently being enacted in Europe through MIFID and MAR.
The CII letter outlines the chilling effect it believes the legislation will have noting “We believe this right of pre-review will give company managements substantial editorial influence on reports on their companies, particularly combined with the threat of publication delay through the heavy-handed ombudsman construct, and the right to sue if “aggrieved” by a vote recommendation.”
ICGN signatories observed that the US regulatory initiative stands at odds with other regulators, such as the CSA in Canada and ESMA in the European Union, that have examined the role and use of proxy advisors, and concluded that further regulation is not necessary. From an ICGN perspective they were not clear to us why the U.S. situation was materially differ from other jurisdictions so as to call for a more prescriptive regulatory approach, particularly when the Best Practice Principles address a number of the issues raised by the bill.
ICGN Response: ICGN-Corporate Governance Reform and Transparency Act 2016
CII Response: June 13 Letter to House Committee on Financial Services
A video of the initial hearing of the bill can be found here: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=400629
The progress of the Bill can be tracked here: