Whether and how to regulate proxy advisory firms, such as ISS and Glass Lewis, has long been a contentious issue, with some arguing that their vote recommendations were plagued by conflicts of interest and often erroneous, while others saw no reason for regulation given that the clients of these firms were satisfied with their services. In September 2019, the SEC published in the Federal Register a new interpretation and guidance directed at proxy advisory firms confirming that their vote recommendations were considered to be “solicitations” under the proxy rules and subject to the anti-fraud provisions, and providing some “suggestions” about disclosures that would help avoid liability. (See this PubCo post.)  In July 2020, the SEC adopted new amendments to the proxy rules regarding proxy advisory firms, codifying the SEC’s interpretation that made proxy voting advice subject to the proxy solicitation rules.  In addition, the SEC adopted two new conditions to the exemptions from those rules for proxy advisory firms, which required disclosure of conflicts of interest and adoption of principles-based policies to make proxy voting advice available to the subject companies and to notify clients of company responses. Compliance with the new conditions was not required prior to December 1, 2021. (See this PubCo post). Yesterday, SEC Chair Gary Gensler directed the staff to consider whether to recommend further regulatory action regarding proxy voting advice.  In his statement, Gensler highlighted his direction that the staff consider “whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters.” As a result, Corp Fin issued a Statement indicating that “it will not recommend enforcement action to the Commission based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action in this area.” What approach will the SEC now take to proxy advisory firm regulation?

In a separate Statement, Commissioner Hester Peirce and Commissioner Elad Roisman questioned this action, , indicating that, while they were “open to seeing what, if any, changes to our rules the staff recommends and to working with our colleagues to consider such recommendations,” they were perplexed as to

“what has changed in the roughly ten months since the Commission last considered this issue that would call into question such recently adopted requirements. Indeed, the compliance date for the exemption conditions is still months away, which makes it challenging, if not impossible, for us to know how these requirements will work in practice. How can we evaluate the appropriateness of further changes without considering such new data or experience? We find it even harder to understand how the Commission would justify a departure from its longstanding legal interpretation about proxy solicitation.”

Acknowledging that some groups were displeased with the rules, they nevertheless believe that the SEC’s rulemaking “was beyond reproach. During the years-long rulemaking process, the Commission considered all policy arguments, including those in opposition to the proposed amendments. The rule’s adopting release discusses the Commission’s analysis of these points in the context of the rule’s entire administrative record. The rule we adopted reflected the broad range of input we received on the proposal.” They hoped that any future SEC action “will not deprive users of proxy voting advice of information they need to properly consider such advice or lead them to make decisions based on misinformation.”


The debate over the role and regulation of proxy advisory firms has a long history. In 2004, the staff of the Division of Investment Management issued two no-action letters, Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (Sept. 15, 2004), which provided staff guidance about investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms. The two letters indicated that one way advisers could demonstrate that proxies were voted in their clients’ best interest was to vote client securities based on the recommendations of an independent third party—including a proxy advisory firm—which served to “cleanse” the vote of any conflict on the part of the investment adviser. Historically, investment advisers have frequently looked to proxy advisory firms to fill this role. As a result, the staff’s guidance in those letters was often criticized for having “institutionalized” the role of—and, arguably, the over-reliance of investment advisers on—proxy advisory firms, in effect transforming them into ersatz regulators.

Frequently disparaged (see this PubCo post), the two no-action letters were withdrawn by the staff in September 2018, in anticipation of the SEC’s proxy roundtable. In the staff statement, the staff indicated that the notice of withdrawal of the two letters was provided to facilitate the discussion at the SEC’s 2018 Proxy Roundtable and that it intended to use information and feedback learned at the roundtable in making recommendations to the SEC with respect to proxy advisory firms. While some expected the roundtable discussion of the power of proxy advisory firms to be something of a donnybrook, as it turned out, the discussion was remarkably tepid. Surprisingly, there did not seem to be much call for registration or other regulation of proxy advisors, possibly because of the fear of rising costs associated with registration and further regulation. There was, however, some discussion of conflicts of interest, difficulty in correcting erroneous records and so-called “robo-voting.” (See this PubCo post.)

Of course, beyond the roundtable, others have expressed strong views advocating  proxy advisor regulation.  A case for more comprehensive reform of the proxy advisory industry was presented in this 2018 proxy season survey from Nasdaq and the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. There, they observed that ISS and Glass Lewis controlled 97% of the industry, making them “de facto standard setters for corporate governance in the U.S.” However, they argued, they are plagued by conflicts of interest that affect their objectivity, adopt a one-size-fits-all approach, are unwilling to “constructively engage with issuers, particularly small and midsize issuers that are disproportionately impacted by proxy advisory firms,” lack transparency regarding the development of recommendations, and are prone to making analytical errors but unwilling to address them. Although regulators and legislators have taken some initial steps in overseeing the proxy advisory firms, they argued, more reform was needed. CCMC and Nasdaq conducted the survey during the 2018 proxy season including responses from 165 companies. The theme, they contended, was that there had been few improvements: “Companies are bringing more issues to the attention of proxy advisory firms, but they still find it difficult to engage in constructive discussions that lead to better informed voting recommendations. Conflicts of interest still pervade the industry, and many report a lack of transparency into how recommendations are developed.” (See this PubCo post.) Although, for a time, ISS provided drafts of its reports in advance to S&P 500 companies, it has discontinued that practice.

In an article in March 2019, the WSJ reported that over 300 companies had “signed on to a February Nasdaq, Inc. letter calling for the SEC to take ‘strong action to regulate proxy advisory firms.’” These corporate groups, the WSJ reported, “are pushing the SEC to allow companies more leeway to address the firms’ recommendations before they are sent to shareholders, a process that would also allow them to flag any errors in the recommendations. Some corporate groups, including NAM, want the SEC to consider new registration requirements for proxy advisers and add new disclosure requirements related to possible conflicts of interest.” In addition, legislators seem to regularly introduce legislation, to no avail, that would require the SEC to regulate proxy advisers. See, for example, the Corporate Governance Fairness Act, introduced in 2018. (See also this PubCo post and this PubCo post.)

There has, however, been prominent opposition to that position. For example, in remarks to the SEC Speaks conference, Investor Advocate Rick Fleming identified proxy advisory firm regulation as one of ideas percolating at the SEC that he was “less enthusiastic about” (to put it mildly):

“I think it is fair to say that investors are wary about efforts to regulate proxy advisors. As many of you know, asset managers who hold shares in a wide range of companies face a logistical challenge in voting on numerous items each proxy season. Investment advisers are also required to vote shares in a way that is faithful to the fiduciary duties they owe their clients. To satisfy this obligation in a cost-effective way, many asset managers use the services of a proxy advisor. In addition to assisting with vote execution and regulatory reporting across markets globally, the advisors monitor the issues that are up for a vote, collect and analyze information and data, and give asset managers advice on how to vote their shares in accordance with the asset managers’ expressed wishes.

“Some have criticized proxy advisors and allege that they have conflicts of interest in their business models, factual errors in their analytical processes, and a political agenda that supports social policies at the expense of investment returns.  All of these things would cause me great concern, except for one thing—the investors who are paying for this service are not the ones who are expressing those concerns.  Indeed, at the Roundtable on the Proxy Process that the Commission held last November, I think the investors made it pretty clear that they are relatively happy with the services they receive from proxy advisors. This is not to suggest that proxy advisors are perfect, but to the extent that any problems exist, it seems that their paying customers should be the ones to raise them….So, if investors aren’t calling for increased regulation of proxy advisors, what is driving the push for regulation?… In my view,… the simple fact of the matter seems to be that proxy advisors have given asset managers an efficient way to exercise much closer oversight of the companies in their portfolios, and those companies don’t like it.”

In response to that critique, Roisman contended that, he did “not consider asset managers to be the ‘investors’ that the SEC is charged to protect.  Rather, the investors that I believe today’s recommendations aim to protect are the ultimate retail investors, who may have their life savings invested in our stock markets.”

Interpretation and Guidance

Rule 14a-1(l) provides that a solicitation includes communications seeking to influence votes and communications to security holders “under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.”  In the interpretation and guidance (to which former Commissioner Robert Jackson and current Commissioner Allison Lee dissented), the SEC emphasized that proxy voting advice by proxy advisory firms constitutes a “solicitation” within the meaning of the Rule, regardless of whether the person was seeking authorization to act as a proxy and even if the person seeking influence was indifferent to the outcome. In addition, the SEC underscored that the anti-fraud provisions of Rule 14a-9 were applicable to proxy advisory firms’ soliciting communications. According to the interpretation, “Rule 14a-9 also extends to opinions, reasons, recommendations, or beliefs that are disclosed as part of a solicitation, which may be statements of material facts for purposes of the rule.”  Accordingly, to avoid Rule 14a-9 concerns, “disclosure of the underlying facts, assumptions, limitations, and other information” may be necessary. To avoid violations of Rule 14a-9, the guidance advised proxy advisory firms to consider disclosing:

  • “an explanation of the methodology used to formulate its voting advice on a particular matter (including any material deviations from the provider’s publicly-announced guidelines, policies, or standard methodologies for analyzing such matters) where the omission of such information would render the voting advice materially false or misleading;
  • “to the extent that the proxy voting advice is based on information other than the registrant’s public disclosures, such as third-party information sources, disclosure about these information sources and the extent to which the information from these sources differs from the public disclosures provided by the registrant if such differences are material and the failure to disclose the differences would render the voting advice false or misleading; and
  • “disclosure about material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts.”

Lee contended that the new guidance “introduces increased costs and time pressure into an already byzantine and highly compressed process.  Second, 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.” 

Rule Amendments

In the rule amendments, the SEC revised the definition of “solicitation” in Rule 14a-1(l) to codify the interpretation and its “longstanding view that proxy voting advice generally constitutes a ‘solicitation’ under Section 14(a).”  More specifically, under the amendments, a “solicitation” included “any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee.” However, the determination “ultimately depends on the specific nature, content, and timing of the communication and the circumstances under which the communication is transmitted.”

To the extent that proxy voting advice was a solicitation, in the absence of an exemption, proxy advisors would be subject to, among other things, the requirement to file and furnish definitive proxy statements.  However, that was not really the SEC’s goal. Instead, the SEC crafted new conditions applicable to these exemptions “fashioned both to elicit adequate disclosure and to enable proxy voting advice businesses’ clients to have reasonable and timely access to transparent, accurate, and complete information material to matters presented for a vote….”

The amendments affected Rules 14a-2(b)(1) and 14a-2(b)(3), which provide exemptions from the information and filing requirements of the proxy rules, stating that proxy advisory firms can rely on these exemptions if they satisfy conditions set forth in new Rule 14a-2(b)(9):

  • Disclosure of conflicts of interest. First, to rely on the exemption, proxy advisors would be required to disclose prominently information regarding (i) an interest, transaction or relationship of the proxy advisor (or its affiliates) that is “material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction, or relationship” and (ii) any policies and procedures used to identify, as well as the steps taken to address, material conflicts of interest arising from the interest, transaction or relationship.
  • Notice of proxy voting advice and response. Second, Rule 14a-2(b)(9)(ii) would require a proxy advisor, as a separate condition to the availability of the exemptions, to adopt and publicly disclose written policies and procedures reasonably designed to ensure that:
    • Companies that were the subject of proxy voting advice “have such advice made available to them” at or prior to the time when the advice was disseminated to the proxy advisor’s clients; and
    • The proxy advisor provided to its clients “a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice” from the subject companies, in a timely manner before the shareholder meeting.
  • Safe harbors. The amendments also included two new, non-exclusive safe harbors for proxy advisors with regard to the required written policies and procedures.

In addition, the amendments modified Rule 14a-9 to include examples of when material omissions in proxy voting advice could be considered misleading within the meaning of the rule.

Roisman, who honchoed the proxy-process rulemakings through the SEC, said that there had been growing calls for the SEC to provide more oversight of proxy advisors as institutional ownership of the public markets had “increased to unprecedented levels and rendered the voting advice sold by proxy voting advice businesses more widely consumed—and influential—than ever before….Advocates for reform have argued that new regulations are needed to address conflicts of interests, factual errors, and methodological biases in these businesses’ proxy voting advice.”   Peirce approved of the final rules as a “measured” change,  which achieved the SEC’s “objective of ensuring that investors and their advisers who rely upon proxy voting advice are provided with more transparent, accurate, and complete information.  The rules achieve this goal without imposing unduly burdensome requirements on proxy voting advice businesses given the significant time constraints of the proxy voting process.”

Lee, who dissented, objected to the rule changes and guidance as “unwarranted, unwanted, and unworkable.” In particular, she was concerned that the new rules would

“increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations. The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.” Lee also noted her objection to the codification of “a new interpretation of what it means to solicit a proxy under Exchange Act Section 14(a) that departs from the Commission’s historical interpretation of that term. The interpretation largely ignores the significance the Commission has traditionally given to the distinction between solicited and unsolicited advice.”

Posted by Cydney Posner