On July 22, the Securities and Exchange Commission announced the adoption of amendments (the Amendments) to the SEC’s rules governing proxy solicitations that are intended to “facilitate the ability of those who use proxy voting advice — investors and others who vote on investors’ behalf — to make informed voting decisions without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice.” The Amendments represent a modified version of the amendments the SEC originally proposed in November 2019, which were previously discussed in the November 8, 2019 edition of Corporate & Financial Weekly Digest. In a press release issued by the SEC, the staff of the SEC stated that the Amendments codify the SEC’s “longstanding view that proxy voting advice generally constitutes a solicitation under the proxy rules” by amending the definition of the terms “solicit” and “solicitation” in Rule 14a-1(l) under the Securities Exchange Act of 1934, as amended (the Exchange Act), and amend Rule 14a-1(l) to specify the circumstances under which a provider of proxy voting advice will be deemed to be engaging in a solicitation subject to the proxy rules. In addition, the Amendments include new Rule 14a-2(b)(9) under the Exchange Act, which conditions the availability of certain exemptions from the filing and information requirements of the federal proxy rules typically used by proxy advisory firms upon such proxy advisory firms’:
- complying with conflicts of interest disclosure requirements, including providing specified disclosure in their proxy voting advice or in an electronic medium used to deliver such advice; and
- adopting and publicly disclosing policies and procedures designed to ensure that (1) their proxy voting advice about a registrant is made available to the registrant at or prior to the time when such advice is disseminated to the proxy advisory firms’ clients; and (2) their clients are provided a mechanism to become aware of any written response by registrants to such proxy voting advice in a timely manner before the applicable meeting of the registrant’s shareholders.
The Amendments establish non-exclusive “safe harbors” that provide that a proxy advisory firm will be deemed to:
- satisfy (1) above, which is codified in Rule 14a-2(b)(9)(ii)(A) under the Exchange Act, if the proxy advisory firm’s written policies and procedures are “reasonably designed” to provide registrants with a copy of its proxy voting advice, free of charge, no later than the time it is disseminated to the proxy advisory firm’s clients; and
- satisfy (2) above, which is codified in Rule 14a-2(b)(9)(ii)(B) under the Exchange Act, if the proxy advisory firm’s written policies and procedures are “reasonably designed” to provide notice on an electronic platform, through email or by other electronic means that the relevant registrant has filed, or has informed the proxy advisory firm that it intends to file, additional soliciting materials and providing an active hyperlink to those materials on EDGAR when they are available.
The Amendments also modify the antifraud provision in Rule 14a-9 under the Exchange Act to include examples of when the failure to disclose certain material information in proxy voting advice, including, for example, material information concerning the proxy advisory firm’s methodology, sources of information or conflicts of interest, could be considered misleading.
The SEC did not adopt a part of its 2019 proposals that would have required proxy advisors to submit their reports to registrants before distributing them to investors, which would have provided registrants with the opportunity to identify factual errors or other weaknesses in the reports and take appropriate action to ensure that investors receive complete and accurate information related to their voting decisions. Instead, the Amendments require a proxy advisory firm to elect to distribute its report to the registrant prior to or simultaneously with the distribution to the proxy advisory firm’s clients.
The SEC’s adoption of these Amendments is not without controversy. The Council of Institutional Investors has expressed concern that the Amendments could “result in delays in distribution of proxy advice, driving up costs for investors, impairing the independence of proxy advice and causing uncertainty for institutional investors.” Institutional Shareholder Services (ISS), a proxy advisory firm, previously filed a lawsuit against the SEC concerning the 2019 proposals, which lawsuit was stayed until the earlier of January 1, 2021 or the promulgation of final rules by the SEC. In light of the adoption of the Amendments and the differences between the Amendments and the amendments that were originally proposed in 2019, it remains to be seen if, and, if so, how, ISS’ lawsuit will proceed.
The Amendments were accompanied by guidance issued by the SEC (the Guidance), available here, for investment advisers concerning their proxy voting responsibilities, fiduciary duties and voting systems that (1) allow the investment advisers’ clients’ votes to be automatically populated based on based on advice received from proxy advisory firms (so-called “pre-population”); and/or (2) automatically submit the clients’ votes to be counted (so-called “automated voting”). The Guidance will become effective on publication in Federal Register.
The Amendments will become effective 60 days after publication in the Federal Register, but affected proxy advisory firms that are subject to the final rules are not required to comply with the amendments to Rule 14a-2(b)(9), discussed above, until December 1, 2021.