Amendments to Rules Governing Proxy Voting Advice
On November 17, 2021, the Securities and Exchange Commission (the "SEC" or the "Commission") voted 3-2 to propose amendments to the rules governing proxy voting advice that were enacted last year.1 Below is brief history of the prior rulemaking in this area and a summary of the proposed amendments.
Prior Developments
On August 21, 2019, the SEC issued an interpretation affirming its long-standing view that proxy voting advice provided by proxy advisory firms generally constitutes a "solicitation" under the federal proxy rules (the "2019 Guidance").2
On November 5, 2019, the SEC issued proposed amendments to its rules governing proxy voting advice provided by proxy advisory firms.3
On July 22, 2020, the SEC voted 3-2 to adopt final rules regarding proxy voting advice provided by proxy advisory firms (the "2020 Final Rules").4 The 2020 Final Rules, among other things:
- Amended Rule 14a-1(1) under the Exchange Act to codify the SEC's interpretation that proxy voting advice generally constitutes a "solicitation" subject to the federal proxy rules;
- Adopted Rule 14a-2(b)(9) under the Exchange Act to add two new
conditions that each proxy advisory firm would generally need to
satisfy to avoid certain other proxy requirements. The conditions
include:
- a conflicts of interest disclosure requirement; and
- a requirement to adopt and disclose written policies reasonably designed to ensure that (A) each applicable issuer has the proxy voting advice of such proxy advisory firm available to it at the same time or prior to the time such advice is disseminated to clients of the proxy advisory firm and (B) the proxy advisory firm provides its clients with a mechanism (such as a hyperlink) by which they can be expected to become aware of any written statements by the applicable issuer regarding the proxy voting advice before the shareholders' meeting (collectively, the "Rule 14a-2 Conditions"); and
- Added a new Note (e) to Exchange Act Rule 14a-9, which prohibits false and misleading statements, to include specific examples of material misstatements or omissions related to proxy voting advice.
The amendments to Rules 14a-1(1) and 14a-9 became effective on November 2, 2020 and the Rule 14a-2 Conditions are set to become effective on December 1, 2021. One market-leading proxy advisory firm has filed a lawsuit against the SEC challenging the 2020 Final Rules. The suit is currently being held in abeyance.
Earlier this year, SEC Chair Gary Gensler directed Staff from the Division of Corporation Finance to consider whether to recommend further regulatory action regarding proxy voting advice. Subsequently, on June 1, 2021, Staff from the Division of Corporation Finance issued a statement (the "CF Statement") providing that, pending further regulatory action by the SEC, the Staff would not recommend that the Commission take enforcement actions based on the 2020 Final Rules or the 2019 Guidance.5
On October 13, 2021, the National Association of Manufacturers and Natural Gas Services Group, Inc. filed a lawsuit as to the CF Statement. The lawsuit argues that the Administrative Procedure Act requires the SEC to engage in notice-andcomment rulemaking whenever it amends a regulation, including when it desires to suspend the regulation's effectiveness. 6
Proposed Rule Amendments
On November 17, 2021, the SEC voted 3-2 to propose rules partially amending the 2020 Final Rules (the "2021 Proposed Amendments"). The 2021 Proposed Amendments would remove the Rule 14a-2 Conditions and remove Note (e) to Rule 14a-9. The conflicts of interest disclosure requirement would still be in effect and proxy voting advice would remain a solicitation subject to the federal proxy rules.
Court challenges to the amendments are likely when the notice-and-comment rulemaking process is complete and final rules are issued. In any such court proceeding, the Commission will be required to show that there are "good reasons" for the changes to the 2020 Final Rules. 7
In connection with the notice-and-comment rulemaking process for the 2020 Final Rules, the Commission made adjustments to the then proposed rules based on investor comments. As to the removal of the Rule 14a-2 Conditions, the proposing release for the 2021 Proposed Amendments (the "Proposing Release") notes that many investors still have strong concerns about the Rule 14a-2 Conditions. The Proposing Release also notes that most of the major proxy advisory firms have current practices that could address some of the concerns underlying the Rule 14a-2 Conditions, including the existence of a Best Practices Principles Group comprised of most of the major proxy advisory firms. However, the Proposing Release does note that many of the mechanisms of the Best Practices Principles Group were in place and considered by the Commission at the time it adopted the 2020 Final Rules.
Commissioner Peirce issued a statement in dissent, noting that (i) the Commission considered concerns raised by all commenters during the rulemaking process and the Proposing Release fails to identify any new concerns, and (ii) the Commission was well aware of the Best Practices Principles Group during the prior rulemaking process.8
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Footnotes
1. See Proxy Voting Advice, Securities Exchange Act of 1934 (the "Exchange Act") Release No. 93595 (Nov. 17, 2021).
2. See Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Exchange Act Release No. 86721 (Aug. 21, 2019).
3. See Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice, Exchange Act Release No. 87457 (Nov. 5, 2019).
4. See Exemptions From the Proxy Rules for Proxy Voting Advice, Exchange Act Release No. 89372 (July 22, 2020).
5. See Statement on Compliance with the Commission's 2019 Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice and Amended Rules 14(a)-1(1), 14(a)-2(b), 14(a)-9, Division of Corporation Finance (June 1, 2021).
6 See National Association of Manufacturers et al. v. SEC, No. 7:21-cv-183 (W.D. Tex.).
7 Todd Garvey, A Brief Overview of Rulemaking and Judicial Review, Congressional Research Service (Mar. 27, 2017).
8 See Dissenting Statement on Proxy Voting Advice Proposal, Commissioner Hester Peirce (Nov. 17, 2021).
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