At an open meeting yesterday, the SEC took up two rulemakings aimed at shareholder voting. First, the SEC voted four to one (a bipartisan if not unanimous vote) to adopt amendments to the proxy rules—initially proposed in 2016 and then shelved—relating to the use of universal proxy cards. The final rules require, in a contested director election, that proxy cards identify all director nominees for election at the upcoming shareholder meeting, including those candidates on dissident slates, allowing proxy voters to split their tickets and more closely replicate in-person voting. The final rules also enhance disclosures regarding voting options and voting standards that will apply to all director elections. According to SEC Chair Gary Gensler, the amendments “address concerns that shareholders voting by proxy cannot vote for a mix of dissident and registrant nominees in an election contest, as they could if voted in person….Today’s amendments will put these candidates on the same ballot. They will put investors voting in person and by proxy on equal footing. This is an important aspect of shareholder democracy.” The Council of Institutional Investors, which had petitioned the SEC in 2014 to adopt universal proxy, hailed the rule: “Imagine if, in a political election, you could vote only for Democrats or only for Republicans….That has been the dilemma facing most investors voting in a proxy contest at U.S. companies.”
The SEC also voted, three to two, to propose amendments to the proxy rules governing proxy voting advice, reversing some key provisions of the controversial amendments adopted in July 2020. Those amendments had codified the SEC’s interpretation making proxy voting advice subject to the proxy solicitation rules and included a significant new condition to the exemptions (with two components) from those solicitation rules essentially requiring proxy advisory firms to engage with the companies that are the subjects of their advice. The proposed amendments would rescind the key condition regarding engagement as well as the 2020 changes that were made to the proxy rules’ liability provision. According to Gensler, proxy advisory firms “play an important role in the proxy process. Their clients deserve to receive independent proxy voting advice in a timely manner.” The U.S. Chamber of Commerce said that the “rules finalized by the SEC last year created a level playing field and ensured that investors would have access to high quality information free of bias. If the SEC decides to roll back these rules, it will signal that it is not serious about rooting out and eliminating misinformation and conflicts of interest in the proxy process and will instead place special interests at the head of the line, harming investors and markets. We will engage with the SEC to stop these misguided proposals from moving forward.”
Posts summarizing the SEC releases on the final rules and the proposal will follow later.
Universal proxy
A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of dissident and management nominees using a single proxy card. In the absence of universal proxy, in contested director elections, shareholders can choose from both slates of nominees only if they actually attend the meeting. Otherwise, they are required to choose an entire slate from one side or the other. (Dissidents’ “short slates” allow shareholders to vote for company nominees to round out the short slates; however, shareholders voting on the dissident’s proxy card would still be limited to voting for those company nominees selected by the dissident, rather than any company nominee of their choice.) Because a later-dated proxy revokes an earlier-dated one under state law, it’s not easy to split votes between slates. One impediment to the use of a universal proxy is the “bona fide nominee” requirement of Rule 14a-4(d)(1), which requires that a nominee consent to be named in the proxy and, if elected, to serve as a director.
The SEC has dangled the possibility of imposing mandatory universal proxy in front of us for a long time. Apparently, the SEC considered requiring universal proxies back in 1992 and, in 2014, CII filed a rulemaking petition asking the SEC to reform the proxy rules to facilitate the use of universal proxies in proxy contests. Then, in 2016, the SEC proposed amendments to the proxy rules that would have mandated the use of universal proxy cards in contested elections. (See this PubCo post.) But it went no further. With the change of administrations in the White House, followed by the change of administrations at the SEC, the proposal for universal proxy fell off the SEC’s near-term radar and was relegated to the long-term agenda, with no action taken. (See this PubCo post.) Then, the proposal suddenly appeared on the SEC’s Spring 2020 RegFlex Agenda, identified as being at the final rule stage, with October 2020 given as the date for final action. (See this PubCo post.) But again no action was taken…until this past April, when the SEC reopened the public comment period on the 2016 proposal to take into account subsequent market developments—for example, the increased incidence of adoption of proxy access bylaws and the proliferation of virtual shareholder meetings.
New rules. The new rules mandate the use of universal proxy cards— proxy cards that identify all nominees for election as director at the upcoming shareholder meeting, including those candidates on dissident slates—in all non-exempt contested elections. The final amendments facilitate the use of universal proxy cards by amending the current proxy rules to allow each side to list the other side’s director candidates on its universal proxy card by revising the definition of “bona fide nominee” to include nominees who have consented to being named in “a” proxy statement instead of “the” proxy statement of the party identifying that nominee on its card. The short slate rule is also eliminated as no longer necessary. In addition, the final amendments impose new notice and filing requirements for all soliciting parties, including requiring companies and dissidents to provide each other with names of their nominees by definitive dates. The new rules also prescribe new formatting and presentation requirements for universal proxy cards. Under the final rules, dissidents will need to satisfy a minimum solicitation threshold of at least 67% of the voting power of the shares eligible to vote in the election. The new rules will apply only to operating companies, not to registered investment companies or business development companies.
The SEC also adopted new requirements that will apply to all director elections, including uncontested elections, intended to clarify and enhance disclosure about voting options. For example, the new rules will require proxy statements to include disclosure about the effect of all voting options provided. In addition, voting options for “against” and “abstain” votes will be required on proxy cards where those options have legal effect under state law. Here is the SEC’s fact sheet.
The new rules become effective 60 days after publication in the Federal Register and will apply to shareholder meetings after August 31, 2022.
The open meeting. At the open meeting, all of the commissioners were clearly amenable to the concept of universal proxy. Both Commissioners Hester Peirce and Elad Roisman expressed objections to some of the specific provisions of the final rule, but those objections were not sufficiently profound to cause Roisman to dissent; only Peirce voted no.
Peirce was particularly concerned that the final rules will unduly advantage special interests “by serving as a tool for frivolous, as well as serious, activists.” In particular, she took issue with the “price of entry onto the company’s proxy card.” That is, she thought that the solicitation threshold of 67% was too “easy to meet or ignore”; she would have preferred a higher threshold and one that focused on shareholder accounts rather than voting power because, in her view, “dissidents will often be able to meet the threshold by soliciting a small number of institutional shareholders, while ignoring small shareholders.” In addition, she would have preferred that access be conditioned on a “demonstrated commitment” to the company through a minimum ownership threshold and minimum holding period. Her concern was that any “non-shareholder looking to further any cause” can just buy a share—or just raise the specter of doing so—which the activist can then leverage into negotiations with the company to further the cause. In her view, that type of activity “will distract managers from important company business, but could result in changes that do not benefit the company.” She noted that the rule also lacks a clear enforcement mechanism with regard to the solicitation threshold.
Roisman believed that, on balance the benefits of the new rule outweighed the problematic provisions. Like Peirce, he would have preferred several changes, including the addition of eligibility criteria, such as thresholds of ownership or holding periods for the company’s stock. While the 67% solicitation threshold may accomplish some of the same purpose, he wasn’t convinced that it was the “right percentage and whether it will operate as a proper substitute for an ownership and duration threshold.” He also expressed a concern that “the rule will put even more power in the hands of the proxy advisory businesses,” whose support dissidents may feel they need to win to be successful in the contest. He suggested that the SEC should continue to consider his suggested changes going forward.
Commissioner Allison Herren Lee regarded these changes as “long overdue.” In her view, they had wide support among “a broad and diverse coalition of market participants and commenters, and will help modernize the proxy voting rules to promote fairness.” In particular, she said, most shareholders vote by proxy, making it “critically important that the proxy voting process, to the extent possible, replicate the experience of voting in person at an annual meeting. With respect to contested director elections, however, there is a significant asymmetry between in-person and proxy voting.” Universal proxy “will eliminate this asymmetry.” Commissioner Caroline Crenshaw expressed similar views.
Proxy advisory firm proposal
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 are plagued by conflicts of interest and often erroneous, while others see no reason for regulation given that the clients of these firms are satisfied with their services. In July 2020, the SEC adopted new amendments to the proxy rules regarding proxy advisory firms, codifying the SEC’s earlier interpretation that proxy voting advice is subject to the proxy solicitation rules. The amendments also added two conditions to the exemptions from those solicitation rules for proxy advisory firms and provided two non-exclusive safe harbors designed to satisfy the conditions to the exemptions. Compliance with the new conditions was not required prior to December 1, 2021. (See this PubCo post). Then in June, SEC Chair Gary Gensler directed the staff to consider whether to recommend further regulatory action regarding proxy voting advice. 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.”
The proposal. According to the fact sheet, investors and others have expressed “strong concerns about the 2020 rules’ impact on proxy advisory firms’ ability to deliver independent proxy voting advice to their clients in a timely manner. The proposed amendments would address those concerns by rescinding two portions of the 2020 rules.” The amendments were characterized at the open meeting as targeted adjustments intended to reduce burdens that impair timeliness and independence of proxy voting advice, not a wholesale reversal of the 2020 amendments.
As noted above, the 2020 rules added two conditions to the proxy advisor exemptions from the solicitation rules—one requiring disclosure of conflicts of interest and the second, in Rule 14a-2(b)(9)(ii), regarding proxy advisor engagement with companies. More specifically, the condition in Rule 14a-2(b)(9)(ii) require a proxy advisor to adopt and publicly disclose written policies and procedures reasonably designed to ensure that:
- companies that are the subject of proxy voting advice “have such advice made available to them” at or prior to the time when the advice is disseminated to the proxy advisor’s client; and
- the proxy advisor provides 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.
The 2020 amendments also included two new, non-exclusive safe harbors for proxy advisors with regard to the required written policies and procedures.
In light of the concerns expressed by investors and others that the condition would “impose increased compliance costs on proxy advisory firms and impair the independence of their proxy voting advice,” the SEC is proposing to rescind Rule 14a-2(b)(9)(ii) as well as the related safe harbors and exclusions from those conditions. (See this PubCo post.)
The 2020 amendments also modified Rule 14a-9, which prohibits false or misleading statements, to add, in Note (e), examples of when material omissions in proxy voting advice could be considered misleading within the meaning of the rule. More specifically, the amendments provided that “failure to disclose material information regarding proxy voting advice, ‘such as the proxy voting advice business’s methodology, sources of information, or conflicts of interest’ could, depending upon particular facts and circumstances, be misleading within the meaning of the rule.”
Once again, the SEC heard from investors and others that the examples in Note (e) could “increase proxy advisory firms’ litigation risks, which could impair the independence and quality of their proxy voting advice.” Under the proposal, Note (e) would be rescinded, “while affirming that the rule applies to material misstatements of facts contained in proxy voting advice.” The proposing release sets forth SEC guidance “regarding the application of Rule 14a-9 to statements of opinion contained in proxy voting advice.”
The comment period for this proposal is open for 30 days after publication of the proposing release in the Federal Register.
The open meeting. The portion of the open meeting dedicated to this proposal was much more contentious. In particular, Roisman, who honchoed the proxy-process rulemakings through the SEC, seemed perturbed by both the proposed “explicit attempt to peel back [investor] protections” and, in his view, the opaque and relatively abbreviated proposal process that could undo “nearly a decade’s worth of work.”
First, he highlighted the growth in fund ownership, which has given rise to “widespread reliance on the services of such a small number of proxy advisors.” As a result, “it is clear that these firms’ advice has the potential to affect a huge number of matters up for a vote across our markets.”
The SEC, he said, has “stated that it is a matter of vital importance to ensure that the voting advice these firms provide is based on the most accurate information reasonably available and that the businesses providing such advice be sufficiently transparent with their clients about the processes and methodologies used to formulate their advice.” To that end, he stressed, the SEC “engaged in a rulemaking process that was more extensive and thorough than is typical,” including holding a roundtable and reviewing public comments received over a ten-year period and, in the final rule, tailoring its requirements to respond to public comments received on the 2019 proposed rules. In his view, it would not be “an exaggeration to say that [the final proxy advisor rules] are the product of roughly a decade’s worth of thinking and public feedback on how the Commission could promulgate regulations that would improve the quality of proxy voting advice available in our markets….Together, the conflict of interest disclosures and the engagement policies were intended to ensure that those who use proxy voting advice receive more transparent, accurate, and complete information on which to make their voting decisions. Sadly, the Final Rules were never permitted to take effect.”
The proposal, he lamented, would nullify the important protections of the engagement policies imposed under the rules and “would replace this obligation with . . . nothing.” Perhaps even more “troubling,” he “found the proposal lacks many of the due process and procedural protections that usually guide Commission rulemakings. It does not squarely answer the question of why we would peel back our existing rules, which were the product of substantial Commission and staff work and which had undergone the rigor of the Administrative Procedure Act. Nor does the proposal answer the question why now, before these rules have even taken effect.” Was the SEC inappropriately deferring to a small group of investors, as well as to proxy advisors’ own efforts at self-regulation, to the detriment of retail investors and the important protections provided by these rules?
In the end, Roisman believed that the final rules should be allowed to take effect and that the SEC should “rethink this rulemaking process…. Offering such little transparency into our process or reasoning for considering dramatic changes to recently adopted rules can lead people to worry about the efficacy and longevity of our rulemakings. This is poor precedent for our Commission to overturn thoughtfully developed regulation so lightly.”
Although much less invested in the original rulemaking than Roisman, Peirce expressed similar views. She argued that the SEC “lacks a sound basis for seeking to amend a brand new rule. Nothing has changed since we adopted the rule, and we have not learned anything new. The release takes a stab at justifying the rewrite, but we might as well simply acknowledge that the political winds have shifted.” She noted that the proposal attempted to justify “running away from these common-sense reforms” by pointing to “continued opposition to the 2020 Rules” by proxy advisory firms and their clients and to proxy advisory firms’ efforts at developing industry-wide practices. However, she observed, the SEC was aware of all this in the first go-round; the “release fails to identify any new concerns.” She also found the proposed amendment to Rule 14a-9 to be a “head-scratcher.” Why delete Note (e) and then include the substance in guidance?
Lee emphasized the importance of ensuring “that our rules do not interfere with the independence of proxy voting advice, introduce unnecessary cost and complexity into an already compressed proxy voting process, or otherwise burden the free and full exercise of shareholder voting rights.” In her view, the “proposal represents a targeted reappraisal of only certain aspects of those amendments that generated substantial concern, particularly among investors (the intended beneficiaries of the changes), that [the SEC] didn’t get the balance right in last year’s final rules.” In particular, she identified in the 2020 amendments the inclusion of “mechanisms to enhance management’s influence over proxy voting advice by effectively requiring that issuers be given access to and an opportunity to respond to such advice, and that proxy advisors separately notify their clients of those responses despite the fact that they are publicly filed.” And the addition of the example in Rule 14a-9 created “uncertainty regarding the scope of liability” for proxy advice. She maintains that these aspects of the 2020 rules “prompted considerable concern. Today’s proposal responds to those concerns by proposing to eliminate the issuer access and response provisions, and clarify the scope of fraud liability for proxy advisors.” In addition, she contends that, when considering the 2020 rules, the SEC never really met its burden to “establish that there was any need for those features of the rulemaking to begin with. In fact, it was quite clear then and now that the so-called ‘error rate’ with respect to proxy voting advice is vanishing to none.”
With regard to process issues, she contends that, because the SEC “made fairly substantial modifications to the amendments from proposal to adoption,” commenters never really had “an opportunity to weigh in on certain features of the rules in their final form until after adoption. But now they have. And investors in particular have explained that certain features of the final rules still include the same infirmities they had identified in the proposal, namely increased risk of impaired independence and significant new costs and delays.” The SEC is simply responding to that feedback and, she argued, it is entirely consistent with SEC precedent “to review recent rules (sometimes even before their compliance date) in response to feedback from market participants.”
Crenshaw also observed that the proposal addresses concerns of those investors who rely on proxy voting advice that “the existing framework jeopardizes the independence of proxy voting advice and makes the conveyance of that proxy voting advice to investors costlier and subject to delay.” By informing investors’ voting decisions, “proxy voting advice is integral to our current system of corporate governance and shareholder democracy.” Accordingly, “strengthening independence and ensuring that the costs of voting advice are not prohibitive are important objectives”
