Is the Pendulum Swinging? – SEC Commissioner Gallagher Expresses Concerns About Reliance on Proxy Advisors

July 24, 2013

The role of proxy advisors has continued to attract attention from U.S. regulators and on Capitol Hill. Earlier this month, Commissioner Daniel M. Gallagher of the Securities and Exchange Commission (“SEC”) generated controversy when he expressed his view that the SEC should withdraw two 2004 no-action letters – issued to Egan-Jones Proxy Services and Institutional Shareholder Services, Inc. – that are credited with permitting advisers to rely on the recommendations of proxy advisory firms to vote shares on behalf of their managed accounts.

Commissioner Gallagher stated that, in his view, these no-action letters should be replaced by guidance indicating that advisers should be exercising their fiduciary duty in voting shares, “rather than engaging in rote reliance on proxy advisory firm recommendations.” Commissioner Gallagher indicated that, as a result of the no-action letters, investment advisers may “view their responsibility to vote on proxy matters with more of a compliance mindset than a fiduciary mindset.” Commissioner Gallagher’s comments, if implemented, could have a significant effect on those advisers that rely on proxy advisory firms.

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