On July 22, 2020, the U.S. Securities and Exchange Commission (SEC) voted 3 to 1, along party lines, to adopt amendments to its proxy solicitation rules relating to proxy voting advice. The final amendments, which were modified from the amendments proposed in November 2019 and discussed in our prior Alert, are summarized below.
Solicitation. Similar to the proposed amendments, the final amendments amend the definition of the terms "solicit" and "solicitation" in Rule 14a-1(l) under the Securities Exchange Act of 1934, as amended (Exchange Act), to include proxy voting advice. This amendment codifies the SEC's earlier interpretive guidance providing that proxy voting advice from a proxy advisory firm (such as Institutional Shareholder Services or Glass, Lewis & Co.) generally constitutes a solicitation under the federal proxy rules.
Conditions to Use of Exemptions. Although proxy voting advice provided by proxy advisory firms generally constitutes a solicitation, proxy advisory firms rely on exemptions to the information and filing requirements of the federal proxy rules in order to avoid the various disclosure requirements of the federal proxy rules. The final amendments add certain conditions that proxy advisory firms must satisfy in order to rely on these exemptions.
These conditions are added to Exchange Act Rule 14a-2(b)(9) and include the following: 1) the proxy advisory firm must include specified conflicts of interests disclosure in its proxy voting advice or in an electronic medium used to deliver the proxy voting advice; 2) the proxy advisory firm must adopt and publicly disclose written policies and procedures reasonably designed to ensure that such advice has been made available to the subject companies at or prior to the time when such advice is distributed to the proxy advisory firm's clients; and 3) the proxy advisory firm must adopt and publicly disclose written policies and procedures designed to ensure that the firm provides its clients with a mechanism by which its clients can reasonably be expected to become aware, in a timely manner, of any written statements regarding the proxy voting advice by the subject company.
The final amendments provide that proxy advisory firms are not required to comply with the latter two conditions discussed above in order to rely on the applicable exemptions to the information and filing requirements of the federal proxy rules: 1) if their proxy voting advice is based on a custom policy that is proprietary to the firm's client; or 2) if the proxy voting advice is provided regarding certain mergers and acquisitions and contested matters. Notwithstanding the foregoing, proxy advisory firms must still satisfy the condition relating to conflicts of interest disclosure.
Unlike the proposed amendments, the final amendments do not require proxy advisory firms to 1) provide subject companies with a review and comment period prior to distributing their proxy voting advice to clients or 2) include a hyperlink to the subject company's written statement in the proxy voting advice report.
The new rules include two non-exclusive safe harbors to assist proxy advisory firms in complying with these new rules; these safe harbors are likely to be highly influential in shaping behavior.
First, with respect to the obligation to adopt and disclose policies and procedures reasonably designed to ensure that their advice has been made available to the subject company in an appropriate manner, proxy advisory firms will be deemed to have satisfied this obligation if their policies and procedures have been reasonably designed to provide a subject company with the proxy voting advice, at no charge, at least concurrently with the delivery of such advice to the proxy advisory firm's clients. The safe harbor permits proxy advisory firms to condition such policies and procedures on the subject company: 1) having filed its definitive proxy statement at least 40 calendar days prior to the stockholder meeting; and 2) expressly acknowledging that it will only use the proxy voting advice for internal purposes and it will not publish the proxy voting advice or otherwise share such advice except with its employees or advisers.
Second, with respect to the obligation to adopt and disclose policies and procedures reasonably designed to provide a mechanism for clients to become aware of any written statements regarding the proxy voting advice by the subject company, proxy advisory firms will be deemed to have satisfied this obligation if their policies and procedures have been reasonably designed to inform their clients when the subject company notifies the firm that it intends to file or has filed additional soliciting material with the SEC setting forth its views with respect to the proxy voting advice. Ensuring that this notification is provided to the proxy advisory firm will become an important practice point for companies.
In a welcome development, the SEC chose to address a longstanding abuse of the proxy advisory recommendations by activist investors, hedge funds, and others. These investors often seek to lobby proxy advisory firms through private calls and meetings on contentious topics. The adopting release makes clear that necessary disclosures by proxy advisory firms "may include disclosure about certain business practices in which the proxy voting advice business engages that might reasonably be expected to call into question its objectivity and the independence of its advice," such as where the advisory firm has a practice of "selectively consulting with certain clients before issuing its benchmark voting recommendation on a specific matter (e.g., a contested director election or merger)" given the risk that "consulted clients' voting preferences [may] influence recommendations given to other clients that were not consulted and importantly, without the knowledge of those clients not consulted." In addition, the SEC noted that "use of a proxy voting advice business by investors as a vehicle for the purpose of coordinating their voting decisions regarding an issuer's securities without complying with the filing obligations of Section 13(d) or 13(g) would raise compliance concerns under the beneficial ownership reporting requirements."
Antifraud Amendments. Exchange Act Rule 14a-9, the antifraud provision of the federal proxy rules, generally provides that no solicitation (whether exempt from the information and filing requirements or not) may contain any false or misleading statement or omit to state any material fact necessary in order to make the statements not false or misleading. It includes several examples of what, depending on the facts and circumstances, might be misleading. The final amendments add the failure to disclose material information regarding proxy voting advice—such as the proxy advisory firm's methodology, sources of information, or conflicts of interest—as another example of what, depending on the facts and circumstances, may be misleading.
Investment Adviser Guidance. On July 22, 2020, the SEC issued guidance regarding the proxy voting responsibilities of investment advisers in light of the SEC's adoption of the final amendments relating to proxy voting advice. The updated guidance provides that investment advisers would likely need to consider a subject company's response to a proxy advisory recommendation that is provided with sufficient advance notice and would reasonably be expected to affect the investment adviser's voting determination. In addition, the updated guidance states that "an investment adviser that uses automated voting should consider disclosing: 1) the extent of that use and under what circumstances it uses automated voting; and 2) how its policies and procedures address the use of automated voting in cases where it becomes aware before the submission deadline for proxies to be voted at the shareholder meeting that an issuer intends to file or has filed additional soliciting materials."
What to Do Now?
The final amendments are effective 60 days after publication in the Federal Register; except that, proxy advisory firms are not required to comply with the conditions to the use of the exemptions until December 1, 2021. The guidance relating to investment advisers is effective upon publication in the Federal Register.