SEC Proposes New Obligations For Proxy Advisory Firms And Changes To Rules For Shareholder Proposals

Are issuers precluded from raising concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that form the basis of a recommendation? Are firm conflicts of interest insufficiently transparent? Are proxy advisory firms an effective "market-based solution" helping large numbers of institutional investors with time and resource constraints make better voting decisions? Are proxy advisory firms "faux regulators," wielding too much influence—with too little accountability—in corporate elections and other corporate matters? Maybe all of the above? At an open meeting this morning, the SEC voted, with two dissents, to propose amendments to add new disclosure and engagement requirements for proxy advisory firms and to "modernize" the shareholder proposal rules by increasing the eligibility and resubmission thresholds. These actions represent the third phase of the SEC's efforts to address the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC's recently issued interpretation and guidance (see this PubCo post). As anticipated, at the meeting, the commissioners expressed strong views on these topics, with Chair Jay Clayton observing that a "system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders" needs some work, and Commissioner Robert Jackson characterizing the proposal as swatting "a gadfly with a sledgehammer." Both proposals are subject to 60-day comment periods. Next up, according to Clayton, proxy plumbing and universal proxy.

SideBar

The second phase, adopted in August, included an interpretation and guidance directed at proxy advisory firms confirming that their vote recommendations are "solicitations" under the proxy rules and subject to the anti-fraud provisions, and providing some "suggestions" about disclosures that would help avoid liability. But for those who were left wanting after phase two, they may be more satisfied by the new proposal. (See this PubCo post.) On the other hand, ISS was so alarmed just by the SEC's action that last week, it filed suit against the SEC and its Chair, Jay Clayton, contending that the interpretation and guidance is unlawful and that its application should be enjoined for a number of reasons, including that the SEC's determination that providing proxy advice is a "solicitation" is contrary to law, that the SEC failed to comply with the Administrative Procedures Act and that the views expressed in the Release were arbitrary and capricious. (See this PubCo post.)

The Proposals

Proxy advisory firms

The new proposal would amend the definition of "solicitation" in Rule 14a-1(l) to essentially codify the SEC's earlier interpretation and clarify when proxy advisor recommendations are "solicitations"; amend the exemptions to the proxy solicitation rules in Rule 14a-2(b) by providing for disclosure by proxy advisory firms of material conflicts of interest and providing a standard opportunity for all registrants to review the advice (provided that they file definitive proxies at least 25 days prior to the meeting); and amend Rule 14a-9 to provide illustrations of potentially problematic misstatements by proxy advisory firms. Here is the SEC rule proposal—more to come on that later.

More specifically, according to the press release regarding proxy advisory firms, the proposal would amend

Rule 14a-1(l), to modify the definition of "the terms 'solicit' and 'solicitation,' to specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules. The proposed amendment would also codify the Commission's view that voting advice provided in response to an unprompted request would not constitute a solicitation." Rules 14a-2(b)(1) and 14a-2(b)(3), for proxy voting advice businesses, to condition these exemptions from the information and filing requirements of the proxy rules on the following: "They must include disclosure of material conflicts of interest in their proxy voting advice; "Registrants and certain other soliciting persons must be given an opportunity to review and provide feedback on proxy voting advice before it is issued (with the length of the review period dependent on the number of days between the filing of the definitive proxy statement and the date of the shareholder meeting); and "Registrants and certain other soliciting persons may request that proxy voting advice businesses include in their voting advice a hyperlink or analogous electronic medium directing the recipient of the advice to a written statement that sets forth the registrant's or soliciting person's views on the proxy voting advice. In addition, the proposed amendments would "permit proxy voting advice businesses to require registrants and other soliciting persons to enter into confidentiality agreements for materials exchanged during the review and feedback period and would allow proxy voting advice businesses to rely on the exemptions where failure to comply with the new conditions was immaterial or unintentional."

Rule 14a-9 to "include examples of when the failure to disclose certain information in the proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule." SideBar

Of course, the debate over proxy advisory firms has long been fraught. On one side, many have expressed strong views advocating proxy advisor regulation. In this article from March 2019, the WSJ reported that over 300 companies had "signed on to a February Nasdaq, Inc. letter calling for the SEC to take 'strong action to regulate proxy advisory firms.'" As reported in the Financial Times, lobbyists such as the U.S. Chamber of Commerce and the National Association of Manufacturers have funded a campaign running ads warning that "proxy advisory firms pose a growing risk" to retirement accounts. "'You've probably never heard of proxy advisory firms,' read another ad that ran as part of the campaign. 'But these secretive companies can have a disruptive impact on publicly traded companies that affects workers and retirement investors.'" According to the FT, a Chamber representative, in calling for better oversight by government agencies, contended that the "proxy advice industry is dominated by two firms who have become de facto corporate governance standard setters."

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