The SEC’s recent proxy proposals—both the proposal related to proxy advisory firms (see this PubCo post) and the proposal related to Rule 14a-8 shareholder proposals (see this PubCo post)—have been hit hard by the critics. Even the SEC’s own Investor Advisory Committee piled on, ultimately recommending that the SEC consider a do-over. (See this PubCo post.) To the defense comes SEC Commissioner Elad Roisman, who has been honchoing these proposals at the SEC.
You might recall that, at the end of October, proxy advisory firm ISS filed suit against the SEC and its Chair, Jay Clayton (or Walter Clayton III, as he is called in the complaint) in connection with the interpretation and guidance directed at proxy advisory firms issued by the SEC in August. (See this PubCo post.) That interpretation and guidance addressed the application of the proxy rules to proxy advisory firms, confirming that proxy advisory firms’ vote recommendations are, in the view of the SEC, “solicitations” under the proxy rules, subject to the anti-fraud provisions of Rule 14a-9, and providing some suggestions for disclosures that would help avoid liability. (See this PubCo post.) Then, in November, the SEC proposed amendments to the proxy rules to add new disclosure and engagement requirements for proxy advisory firms, codifying and elaborating on some of the earlier interpretation and guidance. (See this PubCo post.) As reported in Bloomberg, the SEC has now filed an Unopposed Motion to Hold Case in Abeyance, which would stay the litigation until the earlier of January 1, 2021 or the promulgation of final rules in the SEC’s proxy advisor rulemaking. In the Motion, the SEC confirmed that, during the stay, it would not enforce the interpretation and guidance. ISS did not oppose the stay, and the Court has granted that motion. As a result, this proxy season, companies should not expect proxy advisory firms to feel compelled to comply with the SEC interpretation and guidance, including advice to proxy advisors to provide certain disclosures to avoid Rule 14a-9 concerns.
SEC’s Investor Advisory Committee critical of SEC proposals on proxy advisory firms and shareholder proposals
At a meeting on Friday of the SEC’s Investor Advisory Committee, the Committee members voted (ten in favor, five opposed, with two abstentions) to submit to the SEC a recommendation regarding SEC guidance and rule proposals on proxy advisory firms and shareholder proposals. The recommendation is highly critical of the guidance and of both proposals as unlikely to reliably achieve the SEC’s own stated goals, ultimately advising the SEC to rethink and republish the proposals and reconsider its guidance. (Apparently, the initial draft of the recommendations was even more of a scold, as the author, John Coates, indicated to the Committee that the current version reflected substantial revisions, including removing the word “failure” throughout.) The recommendation contends that the proposals and guidance are almost futile without addressing in parallel more basic proxy plumbing issues (as the Committee had previously recommended) (see this PubCo post), that none of the SEC’s actions at issue adequately identifies the underlying problems that are intended to be remedied, provides a sufficient cost/benefit analysis or discusses reasonable alternatives that might have been proposed. SEC advisory committees typically have a fair amount of sway, so time will tell whether the recommendation will lead the SEC to do any revamping of its actions.
Last week, the SEC voted (by a vote of three to two) to propose amendments to the proxy rules to add new disclosure and engagement requirements for proxy advisory firms, such as ISS and Glass Lewis. The proposal is part of the third phase of the SEC’s efforts to address perceived problems in the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC’s recently issued interpretation and guidance (see this PubCo post). Of course, not everyone perceives the same problems in the system or perceives them the same way—a disparity that was plainly evident at the open meeting as the proposal’s advocates and critics were hardly reticent in expressing their views. (For a discussion of the goings-on at the open meeting, see this PubCo post.) The proposal is subject to a 60-day comment period and, if adopted, the rules would be subject to a one-year transition period.
SEC proposes new obligations for proxy advisory firms and changes to rules for shareholder proposals
Are issuers precluded from raising concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that form the basis of a recommendation? Are firm conflicts of interest insufficiently transparent? Are proxy advisory firms an effective “market-based solution” helping large numbers of institutional investors with time and resource constraints make better voting decisions? Are proxy advisory firms “faux regulators,” wielding too much influence—with too little accountability—in corporate elections and other corporate matters? Maybe all of the above? At an open meeting this morning, the SEC voted, with two dissents, to propose amendments to add new disclosure and engagement requirements for proxy advisory firms and to “modernize” the shareholder proposal rules by increasing the eligibility and resubmission thresholds. These actions represent the third phase of the SEC’s efforts to address the proxy voting system, the first phase being the proxy process roundtable (see this PubCo post) and the second phase being the SEC’s recently issued interpretation and guidance (see this PubCo post). As anticipated, at the meeting, the commissioners expressed strong views on these topics, with Chair Jay Clayton observing that a “system in which five individuals accounted for 78% of all the proposals submitted by individual shareholders” needs some work, and Commissioner Robert Jackson characterizing the proposal as swatting “a gadfly with a sledgehammer.” Both proposals are subject to 60-day comment periods. Next up, according to Clayton, proxy plumbing and universal proxy.
Today, ISS filed suit against the SEC and its Chair, Jay Clayton (or Walter Clayton III, as he is called in the complaint) in connection with the interpretation and guidance directed at proxy advisory firms issued by the SEC in August. (See this PubCo post.) That interpretation and guidance (referred to as the “Proxy Adviser Release” in the complaint) confirmed that proxy advisory firms’ vote recommendations are, in the view of the SEC, “solicitations” under the proxy rules and subject to the anti-fraud provisions of Rule 14a-9. In its complaint, ISS contends that the Proxy Adviser Release is unlawful and its application should be enjoined for a number of reasons, including that the SEC’s determination that providing proxy advice is a “solicitation” is contrary to law, that the SEC failed to comply with the Administrative Procedures Act and that the views expressed in the Release were arbitrary and capricious.
Interestingly, the litigation comes right before the SEC is scheduled to consider and vote (on November 5) on a proposal to amend certain exemptions from the proxy solicitation rules to provide for disclosure, primarily by proxy advisory firms such as ISS and Glass Lewis, of material conflicts of interest and to set forth procedures to facilitate issuer and shareholder engagement and otherwise improve information provided. There are various rumors circulating about the details of the proposal, including this Reuters article stating that the proposal would require proxy advisory firms to “give companies two chances to review proxy materials before they are sent to shareholders.” (Note that also on the agenda is a proposal to “modernize” the shareholder proposal rules by changing the submission and resubmission requirements.) Whether the firms’ advice is a “solicitation” takes on particular significance given that the SEC’s anticipated proposal appears to be predicated on the firms’ reliance on the exemptions from the proxy solicitation rules.
At an open meeting yesterday, the SEC voted (three to two) to publish guidance aimed at addressing some of the long-simmering controversy surrounding the reliance by investment advisers on proxy advisory firms. Do investment advisers rely excessively on proxy advisory firms for voting recommendations? How can they rely on proxy advisory firms and still fulfill their own fiduciary obligations? Are issuers allowed a fair chance to raise concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that forms the basis of a recommendation? Are conflicts of interest sufficiently transparent or addressed? What about the argument expressed by some that proxy advisory firms are essentially faux regulators with too much power and little accountability? (Ok, sorry, that last one didn’t come up.)
Guidance directed at investment advisors, while redolent of earlier non-binding staff guidance, now has the benefit of legal force in light of its adoption by the SEC. The new guidance revisits the extent to which an investment adviser can “outsource” to proxy advisory firms and still fulfill its fiduciary duty to its clients by, as Chair Jay Clayton summed it up, conducting “reasonable due diligence, reasonably identifying and addressing conflicts, and full and fair disclosure.” And the interpretation and guidance directed at proxy advisory firms confirms that their vote recommendations are “solicitations” under the proxy rules and subject to the anti-fraud provisions, and provides some “suggestions” about disclosures that would help avoid liability. The guidance and interpretation will be effective upon publication in the Federal Register.