U.S. President Donald Trump signed an executive order that directs the chairman of the Securities and Exchange Commission (SEC) to review all rules and regulations related to proxy advisors that implicate “diversity, equity, and inclusion” (DEI) and “environmental, social, and governance” (ESG) priorities.
The SEC chair is directed to rescind or revise these types of rules, as appropriate.
The order also requires the SEC to enforce anti-fraud provisions in securities laws against proxy advisors with respect to their voting recommendations.
Further, the SEC should consider requiring proxy advisors to register as investment advisers; consider requiring proxy advisors to provide increased transparency on conflicts of interest; examine whether proxy advisors serve as a vehicle for investment advisers to coordinate their voting decisions[ and assess whether registered investment advisers breach their fiduciary duties by hiring proxy advisors to advise on, non-pecuniary factors in investing, including DEI and ESG.
The order also directs the chairman of the Federal Trade Commission (FTC), in consultation with the Attorney General, to determine whether proxy advisors are engaged in unfair methods of competition or unfair or deceptive acts or practices. Further, the FTC must review ongoing state antitrust investigations into proxy advisors for violations of Federal antitrust law.
Further, the executive order directs the Secretary of Labor to strengthen ERISA fiduciary rules and increase fiduciaries’ transparency regarding their use of proxy advisors, ensuring proxy advisors and plan managers act solely in the financial interest of American workers and retirees.
According to the order, two foreign-owned proxy advisors — Institutional Shareholder Services and Glass Lewis — dominate more than 90 percent of the proxy advisor market. It adds that these firms’ clients often adopt the proxy advisor firms’ recommendations without independent analysis, giving proxy advisors enormous power over shareholder proposals, board composition, executive compensation, and other corporate governance matters.
The order says that conflicts of interest, lack of transparency, and one-size-fits-all voting policies have eroded trust and hurt the value of retirement savings.