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

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

The U.S. Chamber of Commerce and other business groups havelobbied the SEC for years to rein in proxy advisers, arguing thatthe 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 oppositionfrom 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 stepbackward" for corporate governance that would make it morechallenging to hold companies accountable for poor performance.

Key Details

• The final rule, which SEC commissioners approved 3-1 onWednesday, is softer than a proposal the regulatorissued in November. That's because it doesn't include acontroversial requirement that proxy advisers share theirrecommendations with corporations before they are submitted toshareholders. Instead, the regulation requires proxy advisers toadopt publicly disclosed policies and procedures aimed at ensuringinvestors are made aware of companies' opposing views and otherissues, according to the SEC. Proxy firms can be held legallyliable if they don't adhere to the policies.
• Under the SEC's plan, proxy advisers' new policies shouldensure that their recommendations are shared with corporations atthe same time as shareholders. The SEC also intends to issueguidance for how fund managers should deal with the newrequirements and on their use of electronic-voting platforms, whichare services offered by ISS and Glass Lewis to make it easier forinvestors to vote their shares.
• The SEC held off in approving a related rule first proposed inNovember that would increase the threshold of how much stockrelatively new investors must own to submit shareholder proposals.The regulation, which also would increase the amount of supportneeded to submit proposals that have previously failed, remains onthe SEC's agenda.
• The rule approved Wednesday also codifies that proxy votingadvice is generally covered by SEC regulations and requires thatthe advisory firms disclose material conflicts of interest.

"Today's recommendations will help ensure that the interests ofMain Streetinvestors and the obligations of those who vote on their behalfwill not only be better aligned, but better decisions will bemade," SEC Chairman Jay Clayton, a political independent, said inremarks ahead of the vote.

Clayton generated controversy last year when he pointed topublic comment letters that indicated retail investors backed theoverhaul. Some of letters appeared to be fakes, designed to trickthe SEC.

See also:

• SEC Chairman Cites Fishy Letters in Support ofPolicy Change
• SEC Affirms Authority over Proxy Advisory FirmsThat CEOs Hate
• IR Tech Is Better Preparing Finance Execs forInvestor Communications

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