On July 22, 2020, the Securities and Exchange Commission (the “SEC”) adopted amendments to the proxy solicitation rules and issued guidance regarding the proxy voting responsibilities of investment advisers. The amendments, a scaled-back version of those proposed back in 2019, will nevertheless have an impact on the proxy process, and provide both issuers and investors with additional degrees of transparency into the processes of proxy voting advice businesses, such as Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis & Co., LLC (“Glass Lewis”).
Similar to the proposed amendments originally issued by the SEC in November 2019, the SEC’s adopting release echoes some of the concerns expressed by both issuers and investors regarding the lack of oversight of proxy advisory firms. Shortly before issuing the proposed amendments, the SEC issued guidance in August 2019 (the “2019 Guidance”) in which the SEC confirmed that proxy voting advice constitutes “solicitation” under the federal proxy rules and that, therefore, certain activities conducted by proxy advisory firms are subject to the proxy solicitation rules, and proxy advisory firms must depend on the exemptions from the information and filing requirements of the federal proxy rules. In October 2019, ISS brought a lawsuit against the SEC, challenging the 2019 Guidance and arguing that its activities were already comprehensively regulated under the Investment Advisers Act, and that the inclusion of proxy voting advice in the definition of “solicitation” under the Securities and Exchange Act of 1934 (the “Act”) would unnecessarily subject it to an additional regulatory regime. ISS further voiced concerns that the 2019 Guidance could be used or construed to impede ISS’s ability to deliver recommendations and research in an independent and timely manner. While ISS did not explicitly state why its ability to deliver recommendations timely and independently would be affected by interpretation of the 2019 Guidance, Allison Herren Lee, one of the dissenting SEC commissioners, said that “[the 2019 Guidance] introduces increased costs and time pressure into an already byzantine and highly compressed process,” and that “it calls for more issuer involvement in the process despite widespread agreement among institutional investors and investment advisers that greater involvement would undermine the reliability and independence of voting recommendations.” In January 2020, shortly after the SEC issued the proposed amendments, the lawsuit was stayed until the SEC adopted final rules.
Reactions to the amendments adopted on July 22, 2020 have been predictably mixed. Some commentators, including the Council of Institutional Investors, expressed relief that the SEC is walking back what they viewed as the more onerous aspects of the proposed amendments, while others thought the “principles-based” approach reflects a reasonable compromise allowing the SEC flexibility as the market continues to evolve.
The amendments will be effective 60 days after publication in the Federal Register. However, proxy advisory firms will not be required to comply with the amendments until December 1, 2021. Meanwhile, the ISS lawsuit is still pending in the D.C. District Court.
Proxy advisory firms such as ISS and Glass Lewis have traditionally been able to avoid solicitation disclosure requirements when issuing shareholder recommendations under the proxy rules by relying on two exemptions. The first, Rule 14a-2(b)(1) under the Act, exempts persons not seeking proxy authority from the information and filing requirements. The second, Rule 14a-2(b)(3) under the Act, exempts proxy voting advice to shareholders from certain advisors with whom shareholders have a business relationship. Together, these two regulations have served as a safe harbor for proxy advisory firms by exempting them from the rigorous and expensive information and filing requirements that apply to nearly all other “solicitations” under the federal proxy rules.
The amendments adopted by the SEC generally provide for the following changes:
The final amendments adopted by the SEC are similar in many respects to those proposed in November 2019. However, certain modifications from the proposed amendments found in the final version significantly dilute their effect.
While the adopted amendments, like the proposed version, also codify the SEC’s 2019 Guidance by specifically including proxy voting advice in the definition of “solicit” and “solicitation” and by requiring certain conditions to be met for proxy advisory firms to utilize the exemptions discussed above, the proposed conditions were more detailed and specific than those adopted in the final amendments.
Proxy advisory firms must disclose any material transaction or relationship between the proxy advisor and (i) the registrant, (ii) any other soliciting person, or (iii) any shareholder proponent, in connection with the matter covered by the proxy voting advice.
Proxy advisory firms must disclose any other information regarding the interest, transaction, or relationship of the proxy advisor that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction or relationship.
Proxy advisory firms must disclose any policies and procedures used to identify, as well as steps taken to address, any such material conflicts of interest arising from the above.
The above applies to updated or revised recommendations.
The above does not apply to updated or revised recommendations.
The registrant does not have to be given the option to include a link to its rebuttal in the proxy voting advice.
Despite the principles-based approach ultimately adopted by the SEC, the new amendments to the proxy rules are likely to promote greater transparency for both issuers and investors and to better allow issuers and investors to review, respond to, and challenge recommendations set forth by proxy advisory firms.
Companies will need to carefully determine how best to deal with proxy voting recommendations given this new set of requirements. Since proxy advisors will have some flexibility in whether and how they provide advance notice of their recommendations prior to circulating the advice to their clients, companies may not always be able to anticipate how much time they will have to respond to proxy voting advice. In order to avoid confusing shareholders, the best strategy continues to be one of anticipating criticisms from proxy advisors in order to create the best disclosure and to best position the company to respond in the event an unfavorable recommendation is disseminated. Companies should focus on presenting a clear and consistent narrative when issuing any rebuttal to proxy voting advice.