SEC Adopts Final Rules for Proxy Advisors

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Firms that advise institutional advisers and institutional investors in the proxy voting process (“proxy advisors”) have gained prominence in recent years, but have also faced increased scrutiny regarding the accuracy and transparency of their advice. These concerns, along with questions about these firms’ potential conflicts of interest and whether companies have adequate opportunity to review and respond to proxy voting advice before votes are cast on shareholder meeting proposals prompted the Securities and Exchange Commission (“SEC”) to issue interpretive advice and propose rules on these matters last year.1

On July 22, 2020, the SEC adopted final proxy solicitation rules that are designed to provide clients of proxy advisors with accurate and complete proxy voting advice.2 The final rules take a principles-based approach – rather than a prescriptive one – after a nearly decade-long initiative to enhance the accuracy, transparency and effectiveness of the proxy voting system.3 

Key highlights of these amendments are summarized below:

  • To qualify for the exemption from the information and filing requirements of the proxy rules, proxy advisors must satisfy the principles-based conditions of new Rule 14a-2(b)(9). Specifically, such firms must:
    • Provide, in their proxy voting advice or in an electronic medium used to deliver the advice, prominent disclosure of specified conflicts of interest and related policies and procedures; and   
    • Adopt and publicly disclose written policies and procedures reasonably designed to ensure that: 
      • Companies that are the subject of the proxy voting advice have that advice made available to them at or before the time when that advice is disseminated to the proxy advisor’s clients; and 
      • Clients are provided with a mechanism by which they can become aware of any written statements regarding the proxy voting advice by companies that are the subject of the proxy voting advice, in a timely manner before the shareholder meeting. 
  • The amendments provide two safe harbors for satisfying the new conditions:
    • The safe harbor relating to the dissemination of proxy advice provides that the proxy advisor may have written policies and procedures to require that: 1) the company has filed its definitive proxy statement at least 40 calendar days before the shareholder meeting date and 2) the company has acknowledged that it will only use the copy of the proxy voting advice for its internal purposes and/or in connection with the solicitation.
    • The safe harbor relating to the notification of clients provides that the proxy advisor may have written policies and procedures that provide notification to its clients on its electronic platform – or provide notification through e-mail or other electronic means – that the company intends to file or has filed additional proxy material (and include a hyperlink to such content on EDGAR when available).  
  • The amendments codify the SEC’s earlier interpretation that proxy voting advice generally falls within the definition of “solicitation” as defined in the Exchange Act.4

Outlook 

The amendments to the proxy rules will be effective 60 days after publication in the Federal Register, but proxy advisors subject to the final rules are not required to comply with them until December 1, 2021. As a result, the rules will not impact the upcoming 2021 proxy season. Of further note, Institutional Shareholder Services, Inc., one of the most prominent proxy advisors, filed suit against the SEC last year to challenge the view that voting advice issued by proxy advisors should be considered a solicitation under SEC rules. The parties had agreed to stay the litigation until the SEC issued final rules. Pending any outcome of this litigation, public companies should monitor changes in proxy advisor policies and the potential impact on the voting process for the 2022 proxy season.

1 See “Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice,” SEC Release No. 34-86721 (August 21, 2019), available at https://www.sec.gov/rules/interp/2019/34-86721.pdf and see “Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice,” SEC Release No. 34-87457 (November 15, 2019), available at https://www.sec.gov/rules/proposed/2019/34-87457.pdf
2 See “Exemptions from the Proxy Rules for Proxy Voting Advice,” SEC Release No. 34-89372 (July 22, 2020), available at https://www.sec.gov/rules/final/2020/34-89372.pdf.
3 See “Proxy Voting – Reaffirming and Modernizing the Core Principles of Fiduciary Duty and Transparency to Provide for Better Alignment of Interest Between Main Street Investors and the Market Professionals Who Invest and Vote on Their Behalf,” SEC Chairman Jay Clayton (July 22, 2020), available at https://www.sec.gov/news/public-statement/clayton-open-meeting-2020-07-22.
4 See our client alert discussing the August 2019 guidance.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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