President Donald Trump recently issued an executive order on the regulation of proxy advisory firms directing agencies to reassess existing rules and guidance. The first Trump administration tightened proxy advisor regulations that were then rescinded during the Biden administration.
The impetus for the order is the notion that proxy advisors “regularly use their substantial power to advance and prioritize radical politically-motivated agendas — like ‘diversity, equity and inclusion’ and ‘environmental, social and governance’ — even though investor returns should be the only priority.”
Specifically, the executive order directs the U.S. Securities and Exchange Commission (SEC) to evaluate whether proxy advisors should become subject to additional regulation on conflicts-of-interest disclosures and accountability for factual inaccuracies. The order also instructs the SEC to consider whether proxy advisors facilitate coordinated voting by investors that could cause investors to be a “group” for ownership purposes under the federal securities laws.
The order also:
Shareholder proposals are also a target of this executive order, particularly those that support ESG or diversity, equity and inclusion policies. The order directs the SEC to review rules and guidance relating to shareholder proposals, including section 14a-8, the authority under which most shareholder proposals are filed.
Earlier this year, the SEC signaled that it will no longer object when companies exclude shareholder proposals from their proxies. The SEC is also expected to propose rule amendments limiting proponents’ ability to bring such proposals to shareholder votes.
Proxy advisors have consistently opposed restrictive regulation during the first Trump administration via legal action, and it is expected that SEC action on these topics will prompt even more litigation.
Companies should monitor SEC action in response to this executive order and consult with advisors on how to prepare for potential changes in proxy advisor rules.
