On July 22, 2020, the US Securities and Exchange Commission (SEC) adopted amendments (Final Rules) to its proxy solicitation rules that are designed to enhance the transparency, accuracy and completeness of the information that proxy voting advice businesses (proxy advisors), such as Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co., provide to investors and others who vote on behalf of investors.1
The Final Rules codify the SEC's position that voting advice produced by proxy advisors generally constitutes a solicitation under the proxy rules. The Final Rules add new conditions to the exemptions to the information and filing requirements of the proxy rules that proxy advisors have historically relied on. As a result, proxy advisors will have to:
- prominently disclose conflicts of interest to their clients in their proxy voting advice or in the electronic medium used to deliver that advice;
- establish procedures designed to allow all companies that are subject to their voting advice to be able to access that advice prior to or simultaneously with the release of that advice to clients; and
- provide a mechanism for their clients to be able to access any written company response to their voting advice on a timely basis before they vote.
The Final Rules also make clear that the failure to disclose material information regarding proxy voting advice could cause such advice to be misleading, in violation of the proxy rules.
Background
The Final Rules were adopted as part of the SEC's ongoing focus on improving the proxy process and infrastructure. The impetus for the proxy voting advice rules arose from a recognition that institutional investor ownership of US public companies has grown to tremendous levels, with proxy advisors influencing, and in many cases directly executing, institutional investor voting decisions impacting a large percentage of voting shares of those companies.
The SEC has been examining issues surrounding proxy advisors and the proxy voting process over the course of many years, during which time the SEC had the opportunity to consider viewpoints representing various constituencies. For example, the SEC issued a concept release in 2010 on the US proxy system, often referred to as the "proxy plumbing" release, which, among other topics, addressed the role and legal status of proxy advisors and potential regulatory responses.2 Then in 2013, the SEC staff held a roundtable on the use of proxy advisors, which was followed by Staff Legal Bulletin No. 20 in 2014 providing guidance with respect to the availability and requirements of two federal proxy rule exemptions that proxy advisors may seek to rely on.
In November 2018, the SEC staff hosted another roundtable on the proxy process, with one of the three panels devoted to a discussion of proxy advisors. To facilitate discussion at that roundtable, the staff of the Division of Investment Management withdrew two no-action letters addressing investment advisers' use of recommendations of independent third parties to vote client proxies that were previously issued to Egan-Jones Proxy Services (May 27, 2004) and ISS (September 15, 2004).3
On August 21, 2019, the SEC issued an interpretive release providing guidance on how the current proxy rules apply to proxy voting advice.4 For more information on the Proxy Voting Advice Guidance, see our Legal Update "SEC Issues Guidance on the Application of the Proxy Rules to Voting Advice," dated August 27, 2019.5 On November 5, 2019, the SEC proposed amendments to its proxy solicitation rules relating to the provision of proxy voting advice by proxy advisors. 6 For more information on that original proposal, see our Legal Update "SEC Proposes Proxy Voting Rule Amendments," dated November 12, 2019.7
Amendments to Proxy Solicitation Rules
Rule 14a-2(b) under the Securities Exchange Act of 1934 provides exemptions from the information and filing requirements of the SEC's proxy solicitation rules. (These exemptions do not exempt proxy solicitations from the antifraud requirements of Rule 14a-9, as discussed below.) Proxy advisors typically rely on one or both of the following two exemptions:
- Rule 14a-2(b)(1), which generally exempts solicitations by persons who do not seek the power to act as proxy and do not have a substantial interest in the subject matter of the communication beyond their interest as shareholders.
- Rule 14a-2(b)(3), which generally exempts proxy voting advice furnished by an advisor to any other person with whom the advisor has a business relationship.
The Final Rules add conditions to these exemptions applicable to persons furnishing proxy voting advice that constitutes a solicitation, which are contained in new Rule 14a-2(b)(9).
Conflict of Interest Disclosure Conditions. New Rule 14a-2(b)(9)(i) adds conflict of interest disclosure conditions to the availability of the Rule 14a-2(b)(1) and Rule 14a-2(b)(3) exemptions for proxy advisors. This amendment requires proxy advisors to include in their proxy voting advice or in an electronic medium used to deliver that advice prominent disclosure of:
- Any information regarding an interest, transaction or relationship of the proxy advisor (or its affiliates) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction or relationship; and
- Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction or relationship.
Procedural Conditions. The Final Rules did not adopt the controversial provision of the proposed amendments that would have established a prescribed advance review and comment period for companies that are the subject of proxy voting advice. Instead, new Rule 14a-2(b)(9)(ii) requires proxy advisors to adopt and publicly disclose written policies and procedures reasonably designed to ensure that:
- Companies that are the subject of the proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the proxy advisor's clients; and
- The proxy advisor provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by companies that are the subject of such advice in a timely manner before the security holder meeting (or, if no meeting is held, before the votes, consents or authorizations may be used to effect the proposed action).
Proxy advisors are not required to give companies revised or updated versions of their proxy voting advice with respect to the same meeting, vote, consent or authorization.
Footnotes
1 https://www.sec.gov/rules/final/2020/34-89372.pdf
2 https://www.sec.gov/rules/concept/2010/34-62495.pdf
3 https://www.sec.gov/news/public-statement/statement-regarding-staff-proxy-advisory-letters
4 https://www.sec.gov/rules/interp/2019/34-86721.pdf
6 https://www.sec.gov/rules/proposed/2019/34-87457.pdf
Originally published 30 July, 2020
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