--ISS agrees to pay $300,000 penalty in first-ever SEC
enforcement action against a proxy adviser
--SEC says former ISS employee passed along information on proxy
votes in exchange for tickets and meals
--SEC says ISS lacked sufficient controls over employee access
to confidential information
(Adds details throughout.)
By Erik Holm
Institutional Shareholder Services Inc., a proxy advisory firm
that advises investors on corporate governance matters, agreed to
pay a $300,000 penalty to settle charges that an employee leaked
confidential information on proxy votes for roughly five years.
The employee, who no longer works at ISS, passed along
information about how more than 100 clients were voting in exchange
for concert tickets and other favors, the SEC said Thursday. He
sometimes accessed the information from home and used his personal
email to send the information to a proxy solicitor. The person at
the proxy solicitation firm submitted expense reports for more than
$31,000 for meals and tickets to concerts and sporting events, the
SEC said.
The SEC, in its first-ever enforcement action against a proxy
advisory firm, found ISS lacked sufficient controls over employee
access to databases of confidential client vote information. ISS is
registered with the SEC as an investment adviser. The SEC didn't
name the employee, the proxy solicitor or the proxy contests that
had been leaked. But it called some of the proxy votes
"significant."
"Proxy advisers must tailor their controls based on the risks of
their particular business in order to protect the integrity of the
proxy voting process," said Julie M. Riewe, deputy chief of the SEC
Enforcement Division's Asset Management Unit, in a statement. "The
internal controls at ISS did not adequately address the potential
misuse of confidential proxy voting information by firm
employees."
An SEC cease-and-desist order released along with the statement
Thursday said "the ISS Employee would sometimes email the proxy
solicitor requesting tickets to an event, and the proxy solicitor
would respond with another request for more information. In one
instance, the proxy solicitor asked for voting information and the
ISS Employee responded that it would 'cost you another game.'"
ISS managers attended the meals and were invited to the events
at times, the SEC order said.
The SEC said the breach occurred from approximately 2007 to
2012. The charges were brought after an investigation by the SEC's
Boston office.
The settlement also includes a formal censure and an agreement
to retain an independent compliance consultant to evaluate whether
ISS's procedures comply with securities regulations.
A spokeswoman for ISS said the company "took swift action of its
own and also fully cooperated with the SEC to investigate and
promptly resolve this matter.
"The confidentiality of our clients' information is essential
and is of the highest priority to us at ISS," she said. "We now
consider this matter closed."
The SEC said ISS didn't formally admit or deny wrongdoing in the
case.
ISS, the biggest U.S. proxy advisory firm, has been involved in
a high-profile governance matter that just concluded this week when
J.P. Morgan Chase & Co. (JPM) shareholders defeated by a wide
margin a proposal to split the roles of chairman and chief
executive at the bank. Both ISS and a rival firm, Glass Lewis &
Co., had advised shareholders to support the split.
Founded in 1985, ISS has 1,700 clients that manage about $25
trillion in assets world-wide. But companies that face proxy fights
have become more aggressive in recent years in courting important
investors ahead of big votes, and the large investors are handling
more of the voting analysis themselves.
Its corporate-election recommendations "matter more now than
they have ever mattered," said President Gary Retelny in an
interview earlier this week. "Ninety-four percent of our clients
renew every year."
ISS was owned by RiskMetrics Inc., a J.P. Morgan spinoff, before
it was acquired by MSCI Inc. (MSCI) in 2010.
--Joann S. Lublin, Jessica Holzer and Brett Philbin contributed
to this article.
Write to Erik Holm at erik.holm@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires