SEC Reaches Milestone in the Long and Winding Road Toward Proxy Process Reform - Adopts Final Rules Regulating “Proxy Voting Advice Businesses” and Issues Supplemental Guidance to Investment Advisers

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As part of its broad effort to modernize and enhance “the accuracy, transparency and effectiveness of the proxy voting system,” on July 22, 2020, the Securities and Exchange Commission (“SEC” or “Commission”) voted, three to one, to adopt amendments to key rules under Section 14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) governing the activities of what the SEC now terms “proxy voting advice businesses,” such as ISS, Glass Lewis and Egan Jones. The SEC also issued related supplemental guidance to investment advisers that often retain the services of these firms. These changes, as explained below, become effective over a staggered compliance period ending December 1, 2021.

The new rules do not impose additional filing or disclosure obligations on public companies, but rather confirm that proxy advisory firms engage in “solicitations” and establish new, principles-based conditions for these firms to rely on certain proxy exemptive rules set forth in Exchange Act Rules 14a-2(b)(1) and 14a-2(b)(3) in advising their institutional clients on the substance of matters subject to a vote and/or the execution of voting instructions. As SEC Chair Jay Clayton put it, the SEC’s new rules and enhanced guidance should “ensure that those who take on the responsibility of investing and voting on behalf of our Main Street investors have accurate and useful information necessary to make an informed voting decision for the benefit of those investors.” At least one proxy advisory firm disagrees. On August 12, 2020, ISS confirmed its intention to resume a lawsuit filed on October 31, 2019 in the United States District Court of the District of Columbia that had been in abeyance pending SEC action on the final rules. The lawsuit alleges, among other things, that the SEC lacks authority to regulate proxy voting advice as though it were a solicitation, and that the now-adopted rules are contrary to law.

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