The Justice Department’s Antitrust Division has withdrawn a 1987 Business Review Letter issued to Institutional Shareholder Services.

ISS is a foreign-owned proxy advisory firm that advises its clients on how to vote shares their clients hold for thousands of corporate governance questions each year.

ISS and Glass, Lewis & Co LLC control more than 90 per cent of the proxy advisory market, and their clients’ holdings represent a significant ownership stake in the United States’ largest publicly traded companies.

As a result of this concentration of market power, ISS and Glass Lewis “have tremendous influence” in corporate governance matters and, based on their market dominance, shape the policies of America’s largest companies, said the U.S. Justice Department in a statement on Wednesday.
At the time that the Antitrust Division issued its 1987 BRL to ISS, proxy advising as an industry was in its infancy, according to the statement.

The letter noted that, based on the understanding that ISS “will offer advice only on matters relating to the exercise of voting rights on issues of corporate governance, and that ISS will not provide advice or engage in discussions with respect to the corporate operations or business activities”, the DOJ “ha[d] no current intention to bring action under the antitrust laws to enjoin the establishment and operation of ISS”.

The 1987 BRL did not address corporate consulting services, which ISS now offers in connection with proxy voting services.
“ISS’s business model is now in direct conflict with the language in the Letter. ISS is, in fact, now providing advice with respect to corporate operations. In so doing, ISS wields enormous influence over corporate governance issues and policies through its proxy voting services,” said the DOJ.
A BRL “states only the enforcement intention of the Antitrust Division as of the date of the letter, and the Division remains completely free to bring whatever action or proceeding it subsequently comes to believe is required by the public interest.”

While the 1987 BRL stated the division’s enforcement intention at that time, the letter does not apply to ISS’s current business practice of corporate consulting services.

These issues were not a part of ISS’s original business model and are outside the scope of the 1987 BRL. The representation at the time that ISS would not “provide or engage in discussions with respect to the corporate operations or business activities” may run contrary to ISS’s business model today, the U.S. government said.

The 1987 BRL expressly qualified the Antitrust Division’s enforcement position to exclude services directed at corporate operations or activities. The DOJ clarified that while antitrust safe harbours for passive investment protect most beneficial corporate governance advocacy, they do not protect the use of commonly held stock in competitors to encourage market-wide reductions in output or other anticompetitive conduct.

“To be clear, proxy advising is not inherently problematic, and the lawful exercise of voting rights pursuant to a proxy advisor recommendation does not raise competition concerns,” the statement pointed out. “The Antitrust Division is withdrawing its 1987 BRL because the letter does not reflect ISS’s current business practices or the Antitrust Division’s view of those practices. Moreover, the concentration of market power in the proxy advisory market raises significant competition concerns.”

The division had previously recognised potential competitive concerns in the proxy advisory industry. In 2020, it filed comments before the Securities and Exchange Commission in a rulemaking process about proxy voting advice.