U.S. companies scored a long-sought win Wednesday when the Securities and Exchange Commission (SEC) approved new rules that are expected to make it harder for activist investors to push for changes in corporate strategy.

The main target of the SEC's overhaul is firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co., which are paid by pension funds and other institutional investors to advise shareholders on how they should vote their stock. The companies—known as proxy advisory firms—have significant influence in whether activist campaigns succeed because investors often follow their recommendations in board elections.

The U.S. Chamber of Commerce and other business groups have lobbied the SEC for years to rein in proxy advisers, arguing that the firms are conflicted and should be more aggressively regulated. The SEC took the first step in toughening oversight last November, when it proposed a number of rule changes.

The prospect of a crackdown has generated intense opposition from hedge funds, investor advocates, and environmental groups, which all use corporate proxies to push their agendas. In February, famed investor Carl Icahn called the SEC's proposal a "big step backward" for corporate governance that would make it more challenging to hold companies accountable for poor performance.

Key Details

  • The final rule, which SEC commissioners approved 3-1 on Wednesday, is softer than a proposal the regulator issued in November. That's because it doesn't include a controversial requirement that proxy advisers share their recommendations with corporations before they are submitted to shareholders. Instead, the regulation requires proxy advisers to adopt publicly disclosed policies and procedures aimed at ensuring investors are made aware of companies' opposing views and other issues, according to the SEC. Proxy firms can be held legally liable if they don't adhere to the policies.
  • Under the SEC's plan, proxy advisers' new policies should ensure that their recommendations are shared with corporations at the same time as shareholders. The SEC also intends to issue guidance for how fund managers should deal with the new requirements and on their use of electronic-voting platforms, which are services offered by ISS and Glass Lewis to make it easier for investors to vote their shares.
  • The SEC held off in approving a related rule first proposed in November that would increase the threshold of how much stock relatively new investors must own to submit shareholder proposals. The regulation, which also would increase the amount of support needed to submit proposals that have previously failed, remains on the SEC's agenda.
  • The rule approved Wednesday also codifies that proxy voting advice is generally covered by SEC regulations and requires that the advisory firms disclose material conflicts of interest.

"Today's recommendations will help ensure that the interests of Main Street investors and the obligations of those who vote on their behalf will not only be better aligned, but better decisions will be made," SEC Chairman Jay Clayton, a political independent, said in remarks ahead of the vote.

Clayton generated controversy last year when he pointed to public comment letters that indicated retail investors backed the overhaul. Some of letters appeared to be fakes, designed to trick the SEC.

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