The Situation: On July 22, 2020, the U.S. Securities and Exchange Commission ("SEC") adopted final rule amendments to regulate proxy voting advice as part of its emphasis on modernizing the proxy process. The final SEC amendments were modified from the SEC's original proposal in November 2019. For additional information, see our prior publication describing the SEC's original proposal.
The Result: The final amendments update the proxy voting advice regime in an effort to make it more accurate, transparent, and materially complete, including by amending the definition of "solicitation" under the proxy rules to specifically include reports from proxy advisory firms, such as ISS and Glass Lewis. The final amendments also provide exemptions for proxy advisory firms if they provide their clients with information on conflicts of interests, implement principles-based requirements to make proxy voting advice available to companies, and provide their clients notice of company responses to the proxy voting advice. In addition, the final amendments clarify the potential implications of Rule 14a‑9 of the Securities Exchange Act of 1934, as amended ("Exchange Act") in the context of proxy advisory firms.
Looking Ahead: The principles-based approach adopted by the SEC should give more companies access to proxy voting advice and timely opportunity for the clients of proxy advisory firms to become aware of companies' views about such advice. The SEC, however, did not adopt part of its earlier proposal that would have required proxy advisory firms to provide companies time to review and provide feedback on proxy voting advice before their reports are disseminated. The final amendments nevertheless provide a mechanism by which investors can reasonably be expected to become aware of any written responses by companies to the advice of proxy advisory firms. Company use of additional soliciting materials in response to proxy voting advice may, in turn, become a very regular practice as a result of the final amendments.
Updates to Proxy Voting Advice Regime
As part of the SEC's ongoing focus on improving the proxy process and the role of proxy advisory firms, the final amendments seek to improve the accuracy, reliability, and transparency of proxy advisory firms and their disclosures.
Codification of the Interpretation of "Solicitation" under Rule 14a-1(l) and Section 14(a). The final amendments codify the SEC's interpretation that any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets his or her expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee, is a "solicitation" subject to the federal proxy rules. The final amendments also codify the SEC's view that proxy voting advice provided only in response to unprompted requests does not constitute a "solicitation." In sum, the determination of whether proxy advice constitutes a solicitation hinges on whether the investment advisor, asset manager, or person offering advice has marketed their expertise in proxy voting and has, accordingly, prompted clients to request such advisor's input on proxy voting matters.
Additional Exemptions Regarding Proxy Voting Advice and Response under Rule 14a‑2(b)(1) and 14a‑2(b)(3). Rule 14a‑2(b) provides exemptions from the SEC's filing and information requirements placed on persons soliciting proxy votes. The final amendments adopted in new Rule 14a‑2(b)(9) condition the availability of such exemptions on proxy advisory firms having done the following:
- Conflicts of Interest Disclosure. Under this requirement, proxy advisory firms must provide at least the following specified conflicts of interest disclosure in their proxy voting advice or in an electronic medium used to deliver the proxy voting advice: (i) any information regarding an interest, transaction, or relationship of the proxy voting advice business (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 (ii) any policies and procedures used to identify, as well as steps taken to address, any such material conflicts of interest arising from such interest, transaction, or relationship.
- Adopted Written Policies and Procedures to Supply Proxy Voting Advice to Companies and Highlight Company Responses. Under these requirements, proxy advisory firms must adopt and publicly disclose written policies and procedures reasonably designed to ensure that: (i) companies that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the proxy advisory firm's clients; and (ii) the proxy advisory firm 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 who are the subject of such advice, in a timely manner before the shareholder meeting.
Safe Harbors. The final amendments also provide for two non‑exclusive safe harbors for a proxy advisory firm with respect to its written policies and procedures:
- A proxy advisory firm will be deemed to satisfy the requirement to supply proxy voting advice to clients if its policies and procedures are reasonably designed to provide companies with a copy of its proxy voting advice, at no charge, no later than the time such advice is disseminated to the proxy advisory firm's clients. Proxy advisory firms may, however, require companies to (i) file their definitive proxy statements at least 40 calendar days before the shareholder meeting, which is consistent with the deadline for companies choosing to follow notice and access; and (ii) acknowledge that they will only use the proxy voting advice for their internal purposes "and/or in connection with the solicitation" and will not publish or otherwise share the proxy voting advice except with company employees or advisers.
- A proxy advisory firm will be deemed to satisfy the requirement to highlight company responses to the proxy voting advice if the proxy advisory firm's policies and procedures are reasonably designed to provide notice on its electronic client platform, through email or other electronic means that the company has filed, or intends to file, additional soliciting materials setting forth the company's statement regarding the advice, including an active hyperlink to those materials on EDGAR when available.
Antifraud Standard under Rule 14a‑9. Proxy voting advice remains subject to Rule 14a‑9's prohibition on materially false or misleading statements or omissions. The final amendments modify Rule 14a‑9 to include examples of what, depending on facts and circumstances, may be misleading under the rule, including a failure to disclose material information regarding proxy voting advice such as the proxy advisory firm's methodology, sources of information or conflicts of interest.
Effective Dates and Transition Periods. The final rules are effective 60 days after publication in the Federal Register. Proxy advisory firms that are subject to the final rules are not required to comply with the new requirements to qualify for exemptions from the filing and information requirements placed on persons soliciting proxy votes until December 1, 2021, and full compliance is expected for the 2022 proxy season.
Read the full text of the adopting release detailing the final amendments to the rules governing proxy voting advice here.
Three Key Takeaways
- The conflicts of interest disclosure requirements will provide additional transparency regarding the proxy advisors' consulting services sold to companies and their advisory services sold to investors and other market participants, but may evolve into boilerplate disclosure.
- While the final rules did not go as far as contemplated by the proposal, companies will be able to receive the proxy advisor's proxy voting report, without charge, which should provide companies that do not currently purchase such reports with more time to respond to such advice, if deemed appropriate or necessary.
- Company use of additional soliciting materials in response to negative or critical proxy voting advice may evolve into a standardized practice as a result of the final amendments.
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