An employee of proxy advisory firm Institutional Shareholder Services gave away voting results in exchange for fancy dinners and tickets to sporting events — more than 100 times.
The Securities and Exchange commission today issued a cease-and-desist order against ISS, imposed a $300,000 fine, and forced ISS to hire an independent consultant to improve compliance procedures.
The order follows JPMorgan's annual shareholder meeting on Tuesday, in which the bank's investors ignored the advice of ISS and Glass Lewis, another proxy advisory firm, to vote in favor of splitting Jamie Dimon's chairman and CEO role. Shareholders voted overwhelmingly for him to keep both titles.
It also comes against the backdrop of a Wall Street Journal report that detailed the waning influence of these firms.
"Big firms that sell recommendations on how to vote in corporate elections are losing some of their relevance, as companies more aggressively court key investors ahead of big votes and those investors handle more of the voting analysis themselves," noted the WSJ article.
As it turns out, selling recommendations wasn't the only the for sale at ISS.
According to the SEC order, an ISS employee received $11,500 worth of sports and concert tickets and around $20,000 in meals for the employee, his family and his coworkers over a four year period, in exchange for information on how the firm's institutional investor clients planned to vote on shareholder proxy proposals. According to other ISS employees quoted in the SEC order, "there was a never a business purpsose for the meals."
Sometimes, a firm's proxy solicitor would ask for votes and the employee would respond with "cost you another game." Although such actions are plainly illegal and against the ISS Code fo Ethics, the SEC's order claims that "ISS did not establish, maintain or enfore sufficient policies or practices" to prevent exchanging client information for gifts. ISS's information procedures were almost comically lax – on their ProxyExchange program, ISS explicltly allowed all account managers to see every ISS client vote so that other ISS employees could cover for each other.
ISS has more than 1,700 clients and, like Glass Lewis, provides recommendations to institutional shareholders, such as asset managers and mutual funds, on how they should vote on major proposals at company shareholder meetings.
The information shared by the employee was confidential and the SEC details that some of ISS's clients "had detailed confidentiality provisions in ther contracts" that mandated ISS "safeguard, protect, and keep secret the Fund information."
"The internal controls at ISS did not adequately address the potential misuse of confidential proxy voting information by firm employees," said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division's Asset Management Unit, in a statement.
The SEC said there were "hundreds" of examples where the proxy solicitor would email the employee with a list of clients and certain shareholder proposition and ask specifically for "how many & how voted." The employee emailed back with the number of shares and votes for each client and did this for over 100 clients. The SEC would not specify which clients had their votes leaked or what proposals they were voting on.
Although ISS did have a policy against employees receiving gifts or exorbitant business entertainment, the company "failed to provide adequate training " and "did not require employees to report gifts." While the bulk of the SEC order details the relationship between one employee and one proxy solicitor, it also says that "several ISS account managers were treated to meals and/or sporting event tickets by other proxy solicitor firms."
An SEC spokesman said that the investigation and sanction were part of the SEC deciding in 2010 to devote resources and attention to what then SEC chair Mary Schapiro described as the "proxy plumbing." In a 2011 speech, Schapiro said that "Companies are frustrated by the influence these firms have, and worry that they may not be accountable for, or even concerned with, the quality of the information on which they make voting recommendations."
Charles Elson, a professor at the University of Delaware and the Director of the John L. Weinberg Center for Corporate Governance told BuzzFeed that "these things happen in any organization," and that unless there was evidence that such behavior was "systemic," the SEC's action wouldn't weaken what influence ISS still has on the proxy voting process.