The SEC proposed amendments to its rules governing proxy voting advice that the Commission majority described as being intended to address investor concerns that existing rules (i) "impede and impair the timeliness and independence of proxy voting advice" and (ii) increase litigation risks and compliance costs. The proposal also includes guidance regarding statements of opinion in proxy voting advice under SEA Rule 14a-9 ("False or Misleading Statements").
In July 2020, the SEC established new requirements for proxy advisors. According to the SEC release, these requirements subsequently became a subject of investor concern. As a result, the SEC is proposing to rescind two portions of the 2020 changes to the proxy rules:
- conditions of certain exemptions from the proxy rules' informational and filing requirements, including related safe harbors and exclusions from those conditions under SEA Rule 14a-2(b)(9)(ii); and
- the portion of the liability provision around disclosure failures concerning "material information regarding proxy voting advice [that] could be misleading" (see Note (e) under SEA Rule 14a-9), which the SEC says market participants are worried will increase litigation risks and undermine the quality of voting advice.
The SEC clarified that, while the proposed amendments would rescind Note (e), the rulemaking also affirms that SEA Rule 14a-9 applies to "material misstatements of facts contained in proxy voting advice."
Commissioner Statements
SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw provided statements of support for the rulemaking. SEC Chair Gary Gensler also applauded the issuance of the proposal, saying that "[p]roxy advice voting businesses play an important role in the proxy process," and that clients "deserve to receive independent proxy voting advice in a timely manner."
SEC Commissioner Hester M. Peirce dissented, saying that "nothing has changed since [the SEC] adopted the rule, and we have not learned anything new," and adding that "the political winds have shifted." Ms. Peirce stated: "I simply cannot pretend that this is a normal course of action for the Commission. A more reasonable approach would be to commit to a retrospective review of the 2020 Final Rules after three or five years to evaluate their effectiveness."
SEC Commissioner Elad L. Roisman offered an extensive dissent. On the 2020 final rules, he noted that the rulemaking was the byproduct of "a decade's worth of thinking and public feedback" on how best to improve the quality of proxy voting advice, and said this proposal was "an explicit attempt to peel back [the 2020 rule's] protections." The proposal, he added, would remove the "affirmative obligation" on proxy advisors to have engagement policies, which were protections considered to be of particular importance for retail investors. Mr. Roisman found the removal of Note (e) under SEA Rule 14a-9 to be a "puzzling" change, and noted how the proposal "admits there are no significant benefits to deleting the note."
Mr. Roisman emphasized issues around the rulemaking process, calling it a "poor precedent." Mr. Roisman said the lack of transparency around such "dramatic changes to recently adopted rules" will call into question the "efficacy and longevity" of SEC rulemakings in the future, adding:
"Troubling to me, I found the proposal lacks many of the due process and procedural protections that usually guide Commission rulemakings. It does not squarely answer the question of why we would peel back our existing rules, which were the product of substantial Commission and staff work and which had undergone the rigor of the Administrative Procedure Act. Nor does the proposal answer the question why now, before these rules have even taken effect.
One rationale is purportedly that investors who use proxy voting advice had 'strong concerns.' But the sources supporting this claim include: a news article that quoted market participants both favoring and disfavoring the Final Rules and a statement from one advocacy group on the day that the Final Rules were adopted speculating on their contents. From these sources, it is impossible to discern what concerns investors actually have about the Final Rules."
Mr. Roisman also expressed concern about the lack of details from a "seemingly determinative [closed-door] meeting" between a group of asset managers and advocacy groups held with the Chair, and questioned why those concerns were considered apart from those of other market participants that had previously commented.
Commentary
The near-immediate proposed reversal of an SEC rule change adopted by the SEC under the prior administration is reflective of the increased politicization of financial regulation. It is likely that this trend will continue as financial rulemaking becomes more motivated by issues that are outside of the traditional concerns of financial regulation; e.g., ESG issues. Should there be a change in administration that takes a different view on these non-financial issues, it would seem entirely possible that the next administration would seek to reverse the rulemaking of current leadership.
While this makes one nostalgic for the era in which SEC rules were adopted by 5-0 votes that reflected a genuine consensus, at least in the short term, a return to that era of consensus rulemaking is improbable in the extreme.
Commentary
The proposed amendments reflect a victory for proxy advisory firms and institutional investors who opposed the final rule. Perhaps equally as important is the debate regarding the rulemaking process unfolding in the Commissioners' statements. At the heart of the Republican Commissioners' dissents appears to be a concern regarding the influence of a small number of proxy advisory firms, and the belief that the proposed rule reflects political considerations rather than a thorough, deliberative rulemaking process. In response to this criticism, Commissioner Lee argues that "it is appropriate for the Commission to consider and respond" to feedback from industry participants, and cites examples of the SEC reviewing recently adopted rules. The debate over the rulemaking process has implications beyond the proposed proxy voting advice rule, and will be of interest for market participants considering how to react to and comply with recently adopted rules.
Primary Sources
- SEC Proposed Rule: Proxy Voting Advice
- SEC Fact Sheet: Proxy Voting Advice
- SEC Press Release: SEC Proposes Rule Amendments to Proxy Rules Governing Proxy Voting Advice
- Commissioner Elad L. Roisman's Statement of Dissent
- Commissioner Hester M. Peirce's Statement of Dissent
- Commissioner Caroline A. Crenshaw's Statement of Support
- Commissioner Allison Herren Lee's Statement of Support
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