[This post revises and updates my earlier post primarily to reflect the contents of the proposing release.]
At an open meeting on November 17, the SEC voted, three to two, to propose amendments to the proxy rules that would reverse some of the key provisions governing proxy voting advice that were adopted in July 2020. Those amendments had 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 voting advice businesses, which the SEC refers to as “PVABs,” 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 calling for PVABs to engage with the companies that are the subjects of their advice. The proposed amendments would rescind that second central condition—which some might characterize as a core element, if not the core element, of the 2020 amendments. The proposal would also rescind a note to Rule 14a-9, adopted as part of the 2020 rules, that provided examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading. According to SEC Chair Gary Gensler, PVABs “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 had quite a different take on the proposal, contending 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.” The proposal will be open for public comment for 30 days after publication of the proposing release in the Federal Register.
SEC adopts universal proxy and proposes significant amendments to 2020 rules governing proxy voting advice
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.”
It’s worth noting that the minibus budget package passed by the House last week includes a provision intended to put the kibosh on the proxy advisory firm rules that were adopted by the SEC in July 2020. Specifically, the bill provides that “[n]one of the funds made available by this Act may be used to implement the amendments to sections 240.14a-1(l), 240.14a–2, or 240.14a-9 of title 17, Code of Federal Regulations, that were adopted by the Securities and Exchange Commission on July 22, 2020.” Of course, Corp Fin had already put a temporary halt on enforcement of those rules. And unlike prior years, there is no provision in the House bill—yet—that would prohibit the SEC from using any of the funds to finalize rules requiring disclosure of corporate political spending. The bill next goes to the Senate, where, of course, there could be substantial changes.
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?
The newest SEC Commissioner, Elad Roisman, who has reportedly gotten the nod to head up the SEC’s efforts regarding proxy advisory firms, told the U.S. Chamber of Commerce in late March that he expects the SEC to issue new guidance, sometime after proxy season this year, regarding the use by institutional investors of proxy advisory firm recommendations, as reported in The Deal. And, according to the WSJ, Roisman has “also questioned whether it was appropriate for the SEC to exempt proxy advisers from some regulations on investment advice, including whether they can both advise a company and make recommendations to its shareholders at the same time.” However, as discussed in this PubCo post, the question of whether proxy advisory firms, such as ISS and Glass Lewis, have undue influence over the voting process and should be reined in has long been something of a political donnybrook. With the issue of proxy advisory firm regulation so politically freighted, will the SEC limit the scope of its effort to guidance to institutional investors or, more controversially, go further and impose regulation on proxy advisors, as many companies have advocated?