It’s been recently reported that the White House is looking to wage a full scale war on proxy advisors.  Not only are they being singled out for antitrust probes, but apparently they’re being investigated by CFIUS over their foreign ownership.

Additionally, the White House is looking for ways to issue some kind of securities-law based executive order to curb their influence.

Now, just to state the obvious about why this is all happening, I refer back to a prior blog post:

one cannot help but suspect that companies’ reasons for objecting to proxy advisors is the same as their objection to unions – it’s not conflicts or corruption, it’s that they overcome transactions costs of a disaggregated constituency and facilitate coordination so as to create a countervailing power center.  Managers, in other words, just don’t want to be challenged – by anyone.

But anyway. I keep getting questions about what the White House could actually do.  And I can’t answer that from an antitrust or national security perspective, but I can spitball some ideas from a securities law perspective, though I’m sure the forces gunning for proxy advisors are probably far more creative than I am about it.

So, let’s start with: Executive orders cannot create new law, but they could as a practical matter influence how the SEC acts, including its interpretations of its own rules, or serve as a basis for new SEC rulemaking.

Now, in the first Trump administration, the SEC enacted new rules to regulate proxy advice as proxy solicitation.  But, earlier this year, the D.C. Circuit held that proxy advice is not proxy solicitation, and therefore cannot presumably be regulated as proxy solicitation, so let’s assume that’s off the table.

What else could the SEC do?

Well, currently, there’s a question about whether proxy advice counts as investment advice, which would require the proxy advisor to register as an investment adviser.  ISS is a registered investment adviser; Glass Lewis is not, and has explained that it believes voting advice does not fall within the definition of investment advice under the Investment Advisers Act.

I’m not going to weigh in on whether that’s correct, but the SEC might try to enact new rules or guidance requiring that proxy advisers register as investment advisers (as with the solicitation rules, that could be challenged by Glass Lewis, but who knows what would happen).

Once proxy advice is classified as investment advice falling under the ambit of the Investment Advisers Act, then, well, the SEC might have a significant amount of power to place regulatory burdens on its provision, from publicity and recordkeeping requirements to procedural requirements as to how advice is formed … all of which could make the provision of advice (or, the provision of advice that contradicts management) very difficult indeed. 

Again, these rules could be challenged – the Fifth Circuit recently invalidated rules enacted by Biden’s SEC regulating private fund investment advisers – but that doesn’t mean they wouldn’t create headaches.

But that’s not all.  The SEC (and the Department of Labor, which regulates private pension funds) could come at this from the client side.  Institutional investors rely on proxy advisers to satisfy their own fiduciary obligations to vote their shares in their beneficiaries’ best interest, and they are able to do that because of prior guidance by both the SEC and the DoL permitting it.

During Trump I, there were some attempts to burden institutional investors’ ability to rely on proxy voting advice.  For one, the SEC withdrew some letters it had issued about how to deal with investment advisers who have conflicts of interest, though, as I blogged at the time, the import of that action was unclear.

Later, the Department of Labor proposed to, essentially, overburden pension plan voting policies to the point of making votes virtually impossible to cast cost effectively – unless the plan developed a blanket policy in favor of voting with management (which, of course, gives away the game about what’s really motivating these attacks on shareholder voting).

That proposal was substantially watered down, but the outlines demonstrate what’s within the realm of the possible today.  Both agencies could withdraw prior guidance and interpretations that permit reliance on proxy advisors, or, at the very least, make reliance on proxy voting advice very difficult from an administrative point of view.

And another thing.  On this week’s Shareholder Primacy podcast, Mike Levin and I talk about what just happened with Pfizer, Novo Nordisk, and Metsera.  Here at Apple, here at Spotify, and here at YouTube.