Citing concerns that proxy advisory firms “not only increase the costs of being a public company, but also create disincentives for companies to become public in the first place,” Nasdaq OMX Group has petitioned the Securities and Exchange Commission for new disclosure and transparency demands on how those firms formulate their recommendations.

The petition requests that the SEC revise guidance issued nearly ten years ago and demand disclosure of the models, formulas and methodologies used to make recommendations on how shareholders should vote. Disclosure is also urged for “all relationships that may give rise to conflicts of interest.” Nasdaq also takes issue with the firm's tendency for “one-size-fits-all” assessments that deal in marketplace generalities, not company-specific matters.

“For many investors, with numerous shareholder proposals to consider, the firms provide a potentially valuable service,” Nasdaq wrote, adding that it “does not intend to prohibit the firms' business or harm the institutional investors which rely on their services.”

“However, as they operate today, their services cannot be evaluated in a meaningful manner, including by the shareowners who rely upon them and the companies who are left unsure what it requires to satisfy them,” it added. “Unless we enable companies and all market participants to have full information about the practices and activities of the firms, [they] will continue to exert outsized influence from the shadows in which they operate and profit.”

In recent years, institutional ownership has grown to encompass more than 75 percent of share ownership, Nasdaq says. Institutions are responsible for voting billions of shares and, to assist with this responsibility, typically retain proxy advisory firms, notably Institutional Shareholder Services and Glass, Lewis & Co., firms that control approximately 97 percent of the market for proxy advisory services.

“Notwithstanding this outsized influence, many of the firms are unregulated and their recommendations on shareholder votes, and how they arrive at them, are subject to little or no scrutiny or oversight,” it wrote, advancing additional concerns about potential conflicts of interest from their ownership structure and offering of consultation services.

Nasdaq makes a case that pressure on proxy advisory firms to be more open is growing, both in the U.S. and abroad. In July 2010, the SEC published the Concept Release on the U.S. Proxy System, raised a number of questions about the current role of advisory firms. In response, the Commission received over three hundred comments letters, the majority supporting further oversight. Also, earlier this year, the European Securities and Markets Authority, after seeking comment on the proxy advisory industry, issued a report in which it called for a code of conduct for the proxy advisory industry. The Canadian Securities Administrators, an umbrella group of Canada's securities regulators, recently announced that it expects to propose a regulatory approach to proxy advisory firms in early 2014.

Nasdaq foresees disclosure demands similar to those it and other exchanges must abide by and “publish their rules and any stated policy, practice or interpretations.” The petition requests that the SEC revisit guidance, in no-action letters issued nearly 10 years ago to investment advisers, that allowed them to rely on proxy advisory firm recommendations without breaching fiduciary duty. This relief would be made conditional upon advisory firms meeting enhanced transparency demands.