New Bill Bans Proxy Advisors from Consulting for Companies They Rate: Seeking to Clear Conflicts of Interest

The aptly named Stopping Proxy Advisor Racketeering Act aims to overhaul how proxy advisory firms—the groups that tell big investors how to vote their shares—operate. Essentially, this bill is setting up strict walls between the advice these firms give and any consulting services they might sell to the same companies.

Under the new Section 14C of the Securities Exchange Act of 1934, it will be illegal for a proxy advisory firm to issue voting advice if they, or one of their affiliates, are also selling consulting services to the company (the “registrant”) the advice is about. Think of it like this: If a firm is paid to help a company design its executive pay package, that firm can’t then turn around and tell shareholders whether to approve that very same pay package. The idea is to eliminate the incentive for the advisor to go easy on a company that’s also a paying client. Violations can lead to civil penalties levied by the SEC.

The Wall Between Advice and Consulting

This legislation takes a wide swing at potential conflicts. The bill explicitly prohibits firms from changing their standard voting recommendation just because a company might become a consulting client down the road. They must stick to their established, public methodology, regardless of potential future business. This is designed to prevent firms from using their power to influence votes as a lever to sell other, more expensive services. For companies, this means they might get advice that is harder to swallow, but theoretically, more objective.

Crucially, the definition of "Consulting Services" is broad. It includes guiding a company on corporate governance, pay, social responsibility, or environmental issues related to a vote the firm is advising on. It even includes sharing non-public details about the firm's rating methods. The SEC is also given the power to add more services to this prohibited list later, which creates a bit of regulatory uncertainty for these firms.

When Engagement Becomes a Conflict

The bill also restricts advisory firms from providing voting advice on a specific issue if they are actively engaged in “stewardship or engagement services” with a party pushing that issue—like a shareholder proponent. In simple terms, if a firm is helping an activist investor organize support for a climate proposal, they can’t also advise their institutional clients on how to vote on that same proposal. They have to pick a side, or step back entirely.

While the goal is to ensure advice is unbiased, this provision could be tricky. Shareholder proponents—the people pushing for changes like better environmental or social policies—often rely on these advisory firms for sophisticated analysis and strategy. By forcing the firm to pull back from advising on the vote once they start helping the proponent, the bill could inadvertently limit the flow of comprehensive, integrated advice to the broader shareholder base. It restricts the ability of experts to both help craft proposals and then comment on them for the wider market. For the average person, this means that the advice their 401(k) manager gets on complex issues might be less informed if the firm that knows the issue best is forced to stay silent.