At an open meeting yesterday morning, the SEC welcomed new Commissioner Mark Uyeda and bid farewell to Commissioner Allison Herren Lee. The SEC also voted to adopt new amendments to the rules regarding proxy advisory firms, such as ISS and Glass Lewis—which the SEC refers to as proxy voting advice businesses, or “PVABs”—and to propose new amendments to three of the exclusions in Rule 14a-8, the shareholder proposal rule. The amendments to the PVAB rules reverse some of the key provisions governing proxy voting advice that were adopted in July 2020. In his statement, SEC Chair Gary Gensler observed that many investors expressed concerns that “certain conditions in the 2020 rule might restrain independent proxy voting advice. Given those concerns, we have revisited certain conditions and determined that the risks they impose to the independence and timeliness of proxy voting advice are not justified by their informational benefits.” With regard to the shareholder proposal rule, according to the press release, the proposed amendments were designed to “promote more consistency and predictability in application.” In his statement, Gensler indicated that the proposed amendments would “improve the shareholder proposal process” by providing “greater certainty as to the circumstances in which companies are able to exclude shareholder proposals from their proxy statements.” Both of the SEC’s actions received three-to-two votes—about the only consensus reached in the meeting was that the term “proxy voting advice businesses” and its acronym “PVABs” were clumsy choices. Interestingly, in the case of both of these actions taken by the SEC, amendments to these same rules were adopted in 2020. From the Democratic commissioners’ perspective, these new amendments were intended to clarify and strike a better balance in response to public comments and staff experience, while from the perspective of the Republican commissioners, the amendments ensured only “regulatory whiplash” from the “regulatory seesaw.”
The final PVAB amendments will become effective 60 days after publication in the Federal Register. Here are the press release, fact sheet and final rule. The proposal to amend rule 14a-8 will be open for comment for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication in the Federal Register, whichever period is longer. Here are the fact sheet and proposing release. I plan to publish updates to this post with more detail about the final amendments and the proposed amendments at a later time.
Proxy voting advice
Final amendments. In July 2020, the SEC adopted amendments that codified the SEC’s interpretation that made proxy voting advice subject to the proxy solicitation rules. The intent was not, however, to cause ISS and other proxy advisory firms to file a slew of proxy statements. To address the real issue that the SEC was targeting, the 2020 rules added to the exemptions from those solicitation rules two significant new conditions—one requiring disclosure of conflicts of interest and the second designed to facilitate effective engagement between PVABs and the companies that are the subjects of their advice. Those particular changes were adopted in response to concerns by companies that the analyses by PVABs were rife with factual errors, omissions and methodological weaknesses that could affect the reliability of their voting recommendations and that processes then in place to mitigate these risks were not adequate. What’s more, some companies contended that they did not have adequate opportunities to review the advice, engage with the firm and correct the errors on a timely basis, impairing the accuracy, transparency and completeness of the information available to voters. While, under the new final amendments, proxy voting advice would generally still be considered a “solicitation” under the proxy rules and proxy advisory firms generally would still be subject to the requirement to disclose conflicts of interest, some provisions in the 2020 amendments would be reversed. In particular, the new amendments rescind that second central condition facilitating engagement—which some might characterize as a core element, if not the core element, of the 2020 amendments. More specifically, the rescinded condition required that PVABs make their proxy voting advice available to the subject companies at or before the time that they make the advice available to their clients and that PVABs provide their clients with a mechanism by which they could reasonably be expected to become aware on a timely basis of any written responses to the proxy voting advice from the subject companies. According to the press release, institutional investors and other clients of proxy advisory firms “have continued to express concerns that these conditions could impose increased compliance costs on proxy voting advice businesses and impair the independence and timeliness of their proxy voting advice.” The fact sheet indicates that the SEC “concluded that the potential informational benefits to investors of these conditions do not sufficiently justify the risks they pose to the cost, timeliness, and independence of proxy voting advice.” (See this PubCo post.)
Yesterday’s amendments also rescind note (e) to Rule 14a-9, adopted as part of the 2020 rules. Note (e) provided examples of situations in which the failure to disclose certain material information regarding proxy voting advice, such as the PVAB’s methodology, sources of information or conflicts of interest, may be misleading. The press release observes that, although the 2020 changes were “intended to clarify the application of this liability provision to proxy voting advice, they instead created a risk of confusion regarding the application of this provision to proxy voting advice, undermining the goal of the 2020 changes. The final amendments address the confusion while affirming that proxy voting advice generally is subject to liability under the proxy rules.” The adopting release also reaffirms the SEC’s position that, under Omnicare and other cases, “Rule 14a-9 liability does not extend to mere differences of opinion….Rule 14a-9 prohibits misstatements or omissions of ‘material fact.’ …Thus, to state a claim under Rule 14a-9, it would not be enough to allege that a PVAB’s opinions—regarding, for example, its determination to select a particular analysis or methodology to formulate its voting recommendations or the ultimate voting recommendations themselves—were wrong.”
Finally, the adopting release rescinds the 2020 guidance from the SEC to investment advisers regarding their proxy voting obligations. Among other things, that guidance provided advice regarding how investment advisers should consider company responses to proxy advisor recommendations resulting from the amendments to the solicitation rules, including robo-voting.
Beyond the SEC, yesterday’s action was not exactly well received. ISS was clearly dismayed that the rule was not reversed in its entirety:
“While we applaud the Commission for removing some of the 2020 rule’s more draconian provisions, the rule should have been rescinded in its entirety. As investors and their representatives made abundantly clear in two rounds of public comments, the proxy rule is a solution in search of a problem. Today’s action misses the mark by failing to address the most critical defect; namely, the reclassification of proxy advice provided in a fiduciary capacity as proxy solicitation. We firmly believe the Commission’s decision to regulate a form of independent investment advice as though it were a solicitation of a specific outcome in a shareholder vote exceeds the agency’s statutory authority, is contrary to law, and is arbitrary and capricious. That is why we filed our suit challenging the 2020 rule and the 2019 guidance on which the rule was based. Oral arguments in the case are scheduled for late this month.”
Adoption of the amendments also triggered a promise of litigation from the president of the National Association of Manufacturers:
“The SEC has offered no justification for abandoning a decade’s worth of bipartisan, consensus-driven policymaking. This move will undoubtedly harm the competitiveness of publicly traded manufacturers, and it will hurt Main Street investors. The SEC’s decision to change course without allowing the 2020 rule to take effect and be fairly evaluated epitomizes ‘arbitrary and capricious’ rulemaking. The NAM will be filing suit in the coming weeks to preserve the 2020 rule’s commonsense reforms and protect manufacturers from proxy advisory firms’ outsized influence.”
At the open meeting. Commissioner Hester Peirce (who dissented) suggested that the staff could have put their time to better use than redoing a freshly adopted rule in the absence of any change in the facts suggesting that a revision was warranted. Why would the SEC amend these rules without any information about the impact and cost of the 2020 amendments? Commenters, she said were “baffled by the ‘regulatory whiplash.’” As she characterized them, the 2020 amendments “recognized the ability of proxy advisors to move client voting decisions and markets. The rules introduced some procedural protections around the provision of proxy advice, including ‘engagement policies,’ which were intended to ensure that proxy advisor’s clients receive transparent, accurate, and complete information on which to make their voting decisions.”
The rationale given for the new amendments, she said, was that “proxy advisors have engaged in a self-improvement campaign and miraculously have acquired the ‘market-based incentives’ that were missing when the Commission adopted its 2020 Rules.” But commenters on the proposal responded that, among other things, proxy advisors “have limited incentives to engage with public companies, particularly smaller ones, to correct errors,” and the SEC “should not assume that proxy advisors’ current voluntary engagement practices, even if they are good, will continue.” While some commenters supported the new proposal, she said, they did not provide any new information to justify the change from the 2020 rules. Notwithstanding the weight of comments opposed to the changes, she argued, the SEC is instead “gutting the rules so that little of what we adopted less than two years ago remains. Sadly, the one piece of the existing rules I would have liked to change—the term Proxy Voting Advice Business, or ‘PVAB’—remains unscathed in the rewrite.” She concluded by questioning the SEC’s credibility as an independent agency if its regulations ”so drastically swerve from one year to the next? If we keep making U-turns like this one, people might start to wonder whether the GPS we are using is calibrated to respond to political rather than market signals.”
In her statement, Lee stressed that, given the role of proxy advisors in providing research to institutional assets managers and other shareholders, it was important that the SEC’s regulation of proxy advisors “not impede the provision of timely and independent proxy voting advice or otherwise create unnecessary burdens on the exercise of shareholder voting.” Lee observed that, over many years of information gathering by the SEC, there was “an absence of any credible evidence suggesting pervasive, or even moderate, errors in proxy voting advice. In fact, the Commission’s analysis has shown that the supposed error rate for proxy voting advice is vanishing to none. Not only was there no clear basis for a rule that increased the involvement of conflicted parties in proxy voting advice, but investors (the supposed beneficiaries of the new rules) stated emphatically that this aspect of the new rules would interfere with, rather than promote, efficient proxy voting by introducing unnecessary cost and delay and increasing the risk of impaired independence.” (With regard to possible impairment of independence, note that Lee characterized the rescinded engagement provisions as “mechanisms to enhance management’s influence over proxy voting advice.”) In her view, this rulemaking was responsive to those investor concerns. Moreover, it was not unusual, she argued, for the SEC to adjust its rules, even a short time after adoption.
Commissioner Caroline Crenshaw took the opportunity to review the development of the complex proxy infrastructure, which has led to the demand for proxy advisors: each proxy season, “institutional investors vote shares across thousands of issuers on a significant number of matters on behalf of their clients—resulting, some years, in over 7.5 million votes. In order to manage this volume of voting, investors often hire companies, called proxy advisory firms, to help provide research, analysis, recommendations, and logistical support for the matters that appear on a given corporation’s proxy.” She also contended that it is “essential for the Commission to re-assess from time to time whether corporate democracy is in balance,” and the new proxy voting advice rules were the result of just such an assessment. In her view, the rulemaking was “responsive to feedback from the intended beneficiaries of a rule promulgated in 2020, who have stated, clearly, that changes made at that time would impede both the independence and timeliness of proxy voting advice. The data and evidence gathered by the Commission over the years also indicates that risks posed by the 2020 rule in terms of costs, timeliness, and a sacrifice of independence, quite simply, exceed the benefits of that rule.” She also recognized that “the 2020 changes sought to ensure the accuracy of proxy voting advice. That goal is a good one. But the Commission’s own data show that the amendments implemented to achieve that goal were, in fact, unnecessary. The rate of factual errors in proxy voting advice was vanishingly small, less than two percent. The rule as adopted introduced real and costly risks to address a problem that was marginal, at best. As a result, the Commission is taking important and measured steps today to continue to assess and promote an appropriate balance in corporate democracy and shareholder voting.”
Like Peirce, Uyeda (who dissented) was perplexed about the reasons for the amendments in the absence of changes in the facts. He expressed concern that “this regulatory seesaw does not reflect administrative ‘best practices’ that promote long term reliance and confidence by market participants in the stability of important areas of securities regulation.” He began by tracing the development of PVABs to guidance from the Labor Department in the 1980s advising that asset managers “had a fiduciary obligation to vote every proxy,” and the continuing belief by asset managers that voting every proxy remains the safest course (although not a position taken by the SEC). Consequently, “proxy voting by asset managers has been largely transformed into a compliance process,” with the engagement of proxy advisors as a result. However, he expressed concerns about that advice. While on the staff of the Senate Banking Committee, he heard small and mid-size companies complain “that proxy voting advisory firms often make recommendations based off a checklist implemented by relatively inexperienced workers who do not fully understand complex corporate matters subject to proxy votes, and who cannot adequately focus on the circumstances of a specific company because ‘there are so many of them and so little time.’”
Among his substantive concerns were the deletion of Note (e) to Rule 14a-9, which indicated that the failure to disclose certain material information regarding proxy voting advice may be misleading. In his view, the deletion of Note (e) failed to provide regulatory clarity, especially given that the language of the note was included in the preamble of the adopting release. He also chided the SEC for the short duration of the comment period, which he viewed as insufficient, especially in light of the multitude of other proposals and the timing during holiday season. He also noted favorably statements in the release that practices voluntarily adopted by some PVABs may be less likely to adversely affect the independence, cost and timeliness of proxy voting advice and that market-based incentives may cause PVABs to maintain these practices. Perhaps the SEC should consider that alternative in the future?
Proposed amendments to Rule 14a-8
Proposed amendments. According to the fact sheet, the proposed amendments to Rule 14a-8 are designed to “improve the shareholder proposal process and promote consistency by revising three of the substantive bases for excluding a shareholder proposal under the rule.”
- Substantial implementation (Rule 14a-8(i)(10)). Currently, this provision allows companies to exclude a shareholder proposal that “the company has already substantially implemented.” To provide some guidance on what that means, the proposed amendments would specify that a proposal may be excluded as substantially implemented if “the company has already implemented the essential elements of the proposal.” [emphasis added]
- Duplication (Rule 14a-8(i)(11)). Under this provision, companies may exclude a shareholder proposal that “substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company’s proxy materials for the same meeting.” But what is “substantial duplication”? The proposed amendments would provide that a proposal constitutes a “substantially duplication” if it “addresses the same subject matter and seeks the same objective by the same means.”
- Resubmission (Rule 14a-8(i)(12)). This provision currently allows companies to exclude a shareholder proposal that “addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years” if the matter was voted on at least once in the last three years and did not receive sufficient shareholder support. The proposed amendments align this provision with the standards proposed to be applied for duplication. Specifically, the proposed amendments would provide that a shareholder proposal constitutes a resubmission if it “substantially duplicates” a prior proposal, and that a proposal “substantially duplicates” another proposal if it “addresses the same subject matter and seeks the same objective by the same means.” Notably, the proposal does not revamp the resubmission thresholds, which were last adjusted in the course of a contentious meeting in 2020. (See this PubCo post.)
At the open meeting. In her statement, Peirce (who dissented) noted that, only two years ago, the SEC had adopted the last amendments to Rule 14a-8 recalibrating the balance between allowing shareholder proposals to be included in a company’s proxy materials against “the reality that consideration of such proposals consumes company and shareholder resources.” She could not support a proposal that would “upset that careful calibration by narrowing companies’ ability to exclude proposals that they have substantially implemented, are duplicative of other proposals, or are resubmissions of prior failed proposals.” Instead, she advocated that the SEC wait for information about how the 2020 rules operated.
In addition, she contended that the proposed new terms would simply create new ambiguities for the staff “to interpret and market participants to debate. Any new ambiguity is likely to be resolved in favor of favored shareholder-proponents, and any new clarity is likely to narrow the three exclusion categories.” For example, the new test for assessing whether a company can exclude a proposal based on substantial implementation is whether the company has already implemented the essential elements of the proposal. But what are “essential elements”? In her view, “the release suggests that staff will defer to shareholder-proponents’ assessment of which elements are essential; the Proposing Release explains that ‘[i]n determining the essential elements of a proposal, we anticipate that the degree of specificity of the proposal and of its stated primary objectives would guide the analysis.’” Similarly, with regard to the duplication exclusion, she suggests that the proposal would effectively “defang” the exclusion: “Unless proposals are seeking exactly the same things, it seems that neither will be excludable as duplicative. The likely result—one the Proposing Release acknowledges—is multiple potentially overlapping or even conflicting proposals on the same topic on the same proxy. Shareholder proponents, come one, come all!” The proposal regarding resubmissions, in her view, takes the exclusion back, in effect, to its original form (“substantially the same”), which allowed proponents to easily “evade exclusion of their proposals by recasting the form of the proposal, expanding its coverage, or changing its language such that it was not identical to a prior proposal.” Amendments were adopted in 1983 changing that language, but this new proposal “would exclude only proposals that ‘substantially duplicate’ prior failed proposals,” invoking the same test as used in the duplication exclusion. Similarly, “[a]s with the duplication exclusion basis,” she contends, “the resubmission basis will not exclude any proposal unless it is nearly identical to a prior proposal.” Will any proposal ever be deemed a “resubmission”? If not, then what was the purpose of the 2020 changes to the resubmission thresholds? She also questioned the brief duration of the comment period. Peirce concludes with a prediction that “if this proposal is adopted, company proxy statements are likely to look like our rulemaking agenda—packed with items, many of which overlap with one another and rehash recently completed matters.”
Outside of her formal statement (and based on my notes), Peirce also observed that the proposing release, while not proposing to amend Rule 14a-8(i)(7), the ordinary business exclusion, reaffirmed the SEC’s 1998 standards for determining whether a proposal relates to ordinary business for purposes of Rule 14a-8(i)(7). The 1998 release described the policy underlying the ordinary business exclusion as resting “on two central considerations. The first relates to the subject matter of the proposal. . . . [P]roposals relating to [ordinary business] matters but focusing on sufficiently significant social policy issues . . . generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote. . . . The second consideration relates to the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” At the same time, the SEC “also clarified that specific methods, time-frames, or detail do not necessarily amount to micromanagement and are not dispositive of excludability.” What was the point of that reaffirmation, she inquired? What did it mean? Why was it necessary? The proposing release did not otherwise address Rule 14a-8(i)(7). Was the reason perhaps to bestow the SEC’s imprimatur, in effect, on the positions taken by Corp Fin in SLB 14L? (That SLB rescinded the three prior SLBs, reversing some of the interpretations of “significant social policy,” “micromanagement” and “economic relevance” imposed under those rescinded SLBs, and returning to the perspective that prevailed in 1998, all of which made exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. See this PubCo post.) Staff took a crack at responding several times; the gist of the response was that the guidance stated in the 1998 release was the SEC’s latest statement on the issues and that the reaffirmation statement in the proposing release was considered appropriate, but not necessary, for purposes of clarity. Unclear if Peirce found the response satisfactory.
Lee stressed the importance of the shareholder proposal process to various improvements in corporate governance over time, as well as the role of shareholder proponents as bellwethers of significant issues. As a result, she said, “it is imperative that the substantive bases for excluding shareholder proposals from the ballot are not overbroad and create as balanced, predictable, and efficient a framework as possible.” The proposed amendments, in her view, “would clarify the framework governing the inclusion or exclusion of shareholder proposals from the proxy ballot, and help ensure proponents have a fair opportunity to put appropriate proposals before their fellow shareholders.” By focusing on “essential elements,” the proposed revision regarding substantial implementation would establish a “more objective and specific standard to enhance certainty for shareholders and companies alike.” The proposed changes to the duplication and resubmission exclusions “would align and narrow these bases for exclusion to circumstances where proposals address the same subject matter and seek the same objective by the same means, thereby facilitating the ability of shareholders to put forth various differing approaches to achieving their objectives. Just as management endeavors to be innovative and creative in driving value and seeking solutions, shareholders too can add value by generating ideas for different approaches to an issue.”
Crenshaw observed that monitoring and oversight of public corporations by shareholders (and others) “are vital.” Shareholder proponents “have used the shareholder proposals submitted in proxy materials to limit mechanisms that insulated boards and management. Through proposals, corporate governance hygiene in the form of board declassification and term limits have become commonplace.” However, over a period of many years, Crenshaw noted, “observers have expressed concern about variation and potential unpredictability in the application of some exclusions.” The proposal “seeks to clarify that framework, and in so doing, ‘facilitate[s] shareholder suffrage and communication between shareholders and the companies they own on important issues.’ This modernization, in combination with the release language, seeks to provide transparency and predictability in how the principles under certain 14a-8 exclusions are applied and, in turn, help ensure that all proposals that ought to be put to a shareholder vote will be.”
In his statement, Uyeda (who dissented) observed that these rules were so recently amended, we don’t really yet know the full effect. Why not wait to evaluate data from the 2022 proxy season? His information indicated that the number of proposals increased by 8% over 2021, but at the same time, the success rate for exclusion of proposals declined dramatically to 38% in 2022, down from 71% in 2021. To Uyeda, the proposed changes “would further discourage issuers from attempting to seek exclusions of shareholder proposals because they have been substantially implemented or are duplicative of other proposals. They could also effectively nullify the 2020 amendments to the resubmission exclusion and render this basis almost meaningless.” For example, “if a shareholder proposal merely tweaks an essential element, such as the subject matter, objective, or means, the duplication and resubmission exclusions would no longer apply.” The relative ease of submitting a proposal, he contends, would give leverage to special interests, and the lack of transparency around engagement “means that the investing public may never know how companies altered their actions in response to a shareholder proposal, whether threatened or actual.” Nor is it clear that the proposal would add value for investors. But, he contends, the proposal would create an uneven playing field for public domestic companies relative to foreign companies and private companies. In his view, the proposal, together with the staff guidance in SLB 14L, “sends a message to public companies about shareholder proposals: don’t bother trying to exclude them. It will become one more reason for not becoming a public company to begin with.”