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SEC to revive review of proxy advisory firms at upcoming meeting

Sarah N. Lynch
Tuesday, 5 Nov 2013 | 5:20 PM ET

WASHINGTON, Nov 5 (Reuters) - U.S. securities regulators will hold a roundtable next month to discuss the role of proxy advisory firms, in what could mark the first step toward drafting new regulations for the industry.

The decision by the Securities and Exchange Commission to schedule the Dec. 5 public meeting comes nearly a month after Nasdaq OMX's general counsel, Edward Knight, formally petitioned the SEC to consider new rules amid concerns that proxy advisory firms are exerting "outsized influence from the shadows" on corporate elections.

Proxy advisory firms such as MSCI Inc's Institutional Shareholder Services and Glass, Lewis & Co. are often hired by mutual funds, pensions and other institutional shareholders to help advise them on how to vote on key matters, from executive compensation to board appointments.

Although some clients praise the firms for taking on the heavy workload of sifting through thousands of proxy votes a year, the firms also have proven to be a lightening rod for controversy.

Many corporate executives often allege the two firms hold too much sway over how shareholders vote, fail to respond to criticism and are not adequately regulated by the SEC.

Daniel Gallagher, one of the SEC's two Republican commissioners, has been calling for the agency to take action in recent months.

In July, he took aim at proxy advisory firms in a speech, saying he feared the SEC has enabled investment advisers to overly rely on proxy advisory firms for advice when they cast their corporate ballots, raising the risk they are not acting in the best interest of their customers.

He reiterated his call for reforms in another speech late last month.

In 2010, the SEC launched a review of proxy advisory firms in a 150-page request for comment to ask about what, if any, new regulations should be imposed to address potential conflicts of interest and transparency issues.

But the release did not lead to formal rulemaking, likely in part because of the SEC's heavy workload in writing rules required by the Dodd-Frank Wall Street reform law.

The issue was revived earlier this year, however, after a congressional panel held a hearing on the subject and also after the SEC fined ISS over allegations that one of the firm's employees shared non-public voting data in exchange for meals and concert tickets.

ISS settled the case and paid a fine without admitting or denying the charges.

Most recently, MSCI said it was exploring a sale of its ISS unit.

A spokeswoman for ISS told Reuters she expects ISS will participate in the upcoming panel discussion at the SEC.

In a statement Tuesday, the U.S. Chamber of Commerce said it welcomed the SEC's decision to hold a roundtable.

"It looks like the SEC is recognizing that not all is well with proxy advisory firms," said Tom Quaadman, the vice president of the Chamber's Center for Capital Markets Competitiveness.

(Reporting by Sarah N. Lynch; additional reporting by Ross Kerber in Boston; Editing by Ken Wills)

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