On July 22, 2020, the Securities and Exchange Commission (SEC) adopted amendments to its proxy rules addressing proxy voting advice provided by proxy advisory firms, such as ISS and Glass Lewis. The amendments were originally proposed on November 5, 2019, as discussed in our prior publication “SEC Proposes Amendments to Rules on Proxy Voting and Shareholder Proposals.”
These amendments (1) expand the definition of “solicitation” under SEC proxy rules to specifically include proxy voting advice of the type typically provided by proxy advisory firms and (2) impose additional requirements that proxy advisory firms must meet to avoid subjecting their proxy voting advice to the filing and certain other requirements of the proxy rules. The final amendments do not require proxy advisory firms to give companies an opportunity to review and respond to the proxy voting advice before it is issued to the proxy advisory firm’s clients, which the previously proposed amendments would have required.
The SEC also supplemented its prior guidance regarding the proxy voting responsibilities of investment advisers to address disclosure obligations relating to the use of automated voting through a proxy advisory firm, particularly in circumstances where a company has filed additional soliciting materials.
Effective Date. The amendments will be effective 60 days after publication in the Federal Register, but proxy advisory services are not required to comply with the additional requirements that must be met to avoid subjecting their proxy voting advice to the filing and certain other requirements of the proxy rules until December 1, 2021. As a practical matter, this means that these additional requirements will not affect proxy solicitations by calendar year-end companies until the 2022 proxy/annual meeting season.
Key Takeaways for Public Companies
We do not expect the amendments to have a significant effect on public companies or proxy advisory firms. However, the amendments do include a number of changes that represent important positive changes in the relationship between public companies and proxy advisory firms. In particular:
- Proxy advisory firms are likely to be more sensitive to the accuracy of their voting recommendations and, as such, some may be more open to positive engagement with companies prior to issuing their recommendations.
- Publishing supplemental proxy solicitation materials in response to adverse recommendations by one or more proxy advisory firms may yield even greater benefits than it has historically in light of the SEC’s guidance regarding automated voting and investment advisers’ consideration of additional company materials.
- Investment advisers should have greater transparency regarding the methodology employed by proxy advisory firms and interactions that these firms may have with certain clients that may influence voting policies and specific voting recommendations.
- Companies may have an enhanced ability to seek to remedy proxy voting advice that they believe is incorrect or omits important information.
The Proxy Rule Amendments
Proxy voting advice is a “solicitation” under the proxy rules.
As described in our prior alert, in August 2019 the SEC issued guidance that provided ways for the recipients of proxy voting advice, such as institutional investors and fund managers, to monitor proxy voting advice businesses. That guidance provided that, among other things, proxy voting advice provided by proxy voting advice businesses constitutes a “solicitation” subject to the proxy rules.
The final amendments codify recent SEC guidance by amending the definition of “solicitation” in Rule 14a-1(l) to include:
any proxy voting advice that makes a recommendation to a security holder as to its vote, consent, or authorization on a specific matter for which security holder approval is solicited, and that is furnished by a person that markets its expertise as a provider of such proxy voting advice, separately from other forms of investment advice, and sells such proxy voting advice for a fee.
This definition would specifically include proxy voting advice of the type typically provided by proxy advisory firms, such as ISS and Glass Lewis. The amendments also codify the SEC’s view that proxy voting advice provided by a person who furnishes such advice only in response to an unprompted request (such as a financial advisor responding to a client’s inquiry) would not constitute a solicitation.
Anti-fraud provisions of the proxy rules apply to proxy voting advice.
One of the most significant consequences of proxy voting advice being included with the definition of “solicitation” under the proxy rules is that it will be subject to Rule 14a-9, which prohibits any solicitation from containing any statement:
which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
As a result, proxy advisory firms are likely to be more sensitive to the accuracy of the information contained within their proxy voting advice and potentially more responsive to companies that believe their proxy voting advice contains factual inaccuracies or fails to provide important information relating to their voting recommendations.
The amendments also modify Rule 14a-9 to specifically include an example of when the failure to disclose information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. The amended rule lists the failure to disclose material information regarding proxy voting advice, such as the proxy advisory firm’s methodology, sources of information, or conflicts of interest, as an example of what may be misleading within the meaning of the rule. This is consistent with the SEC’s prior guidance from August 2019 where it had noted that, to the extent proxy voting advice is materially based on a methodology using a group of peer companies selected by the proxy advisory firms, it may need to include the identities of the peer group members used as part of its recommendation and the reasons for selecting these peer group members as well as, if material, why its peer group members differ from those selected by the company.
Exemptions from proxy rules conditioned on new disclosure and procedural requirements.
Proxy advisory firms currently rely upon the exemptions in Rule 14a-2(b)(1) and (3) to provide proxy voting advice, to the extent it is currently subject to the proxy rules at all, without complying with the filing and certain other requirements of the proxy rules. The amendments condition the availability of these existing exemptions for proxy voting advice on the proxy advisory firm complying with the following requirements.
Conflicts of Interest Disclosure. In its proxy voting advice or in an electronic medium used to deliver the proxy voting advice, the proxy advisory service must prominently disclose:
- Any information regarding an interest, transaction or relationship of the proxy advisory firm (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
- Any policies and procedures used to identify material conflicts of interest, as well as the steps taken to address any such material conflicts of interest arising from such interest, transaction or relationship.
In the adopting release, the SEC made it clear that this disclosure requirement is not limited to potential conflicts arising from company engagement of the proxy advisory firm as a consultant and also may include a proxy advisory firm’s practice of selectively consulting with certain clients before issuing its voting recommendation on a specific matter.
Provide Proxy Voting Advice to Company. The proxy advisory firm must adopt and publicly disclose written policies and procedures reasonably designed to ensure that it makes its proxy voting advice available to subject companies at or prior to the time the proxy advisor distributes the advice to its clients. This requirement only relates to the initial proxy voting advice that is provided, and the amendments do not require proxy advisory firms to provide the company with any subsequently revised proxy voting recommendations with respect to the same meeting. This requirement does not apply to any portion of the proxy voting advice that makes a recommendation relating to the approval of an M&A transaction (i.e., transactions specified in Rule 145(a) under the Securities Act) or a solicitation by any person or group of persons for the purpose of opposing a solicitation subject to the proxy rules by any other person or group of persons (i.e., in a contested matter). Proxy voting advice based on custom voting policies that are proprietary to a proxy advisory firm’s client is also not subject to this requirement, although this requirement does apply to proxy voting advice based on a proxy advisory firm’s benchmark policies or specialty policies, such as a socially responsible policy, sustainability policy or Taft-Hartley labor policy.
A proxy advisory firm will be deemed to satisfy this requirement if it has written policies and procedures that are reasonably designed to provide a registrant with a copy of its proxy voting advice, at no charge, no later than the time such advice is disseminated to the proxy voting advisory service’s clients. A proxy advisory firm may still satisfy this safe harbor if the policy under which it provides proxy voting advice to a subject company includes conditions requiring that (a) the subject company has filed its definitive proxy statement at least 40 calendar days before the security holder meeting, and (b) the subject company has acknowledged that it will only use the proxy voting advice for its internal purposes and/or in connection with the solicitation and will not disclose or share the proxy voting advice except with the company’s employees or advisers.
The final amendments do not require proxy advisory firms to give companies an opportunity to review and respond to the proxy voting advice before it is issued to the proxy advisory firm’s clients, which the previously proposed amendments would have required.
Provide Mechanism for Clients to Become Aware of Company Response. The proxy advisory firm must adopt and publicly disclose written policies and procedures reasonably designed to ensure that it provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by subject companies, in a timely manner before the applicable security holder meeting. A proxy advisory firm will be deemed to satisfy this requirement if it either provides notice to its clients on its electronic platform or through email or other electronic means that the company intends to file or has filed additional soliciting materials on EDGAR and includes an active hyperlink to those materials when available. Similar to the requirement to provide proxy voting advice to the subject company, this requirement also does apply to proxy voting advice based on custom voting policies or to any portion of the proxy voting advice relating to the approval of an M&A transaction or a contested matter.
Pending ISS Litigation Contesting SEC Amendments and Guidance
It is important to note that ISS announced in October 2019 that it had filed a lawsuit challenging the SEC’s August 2019 guidance regarding the use of proxy voting advice by institutional investors and fund managers, which was supplemented by further guidance issued by the SEC concurrently with adoption of the amendments. The ISS lawsuit argues, among other things, that the SEC’s regulation of proxy voting advice as proxy solicitation is contrary to law and exceeds the SEC’s statutory authority under the Securities Exchange Act of 1934. This claim would also apply to the new amendments. ISS and the SEC agreed to a stay of this litigation until the SEC had adopted final amendments to its proxy rules. With the final amendments now adopted, the ISS litigation will presumably move forward, with the potential result that the ISS litigation may impact both the amendments and the original and supplemental guidance.
Supplemental Guidance for Investment Advisers
The SEC has also supplemented its September 2019 guidance on the proxy voting responsibilities of investment advisers and fund managers who vote shares on behalf of their clients, especially when voting is based on recommendations of proxy advisory firms, which was summarized in an earlier client alert. The supplemental guidance says investment advisers should consider whether their policies and procedures “address circumstances where the investment adviser becomes aware that an issuer intends to file or has filed additional soliciting materials with the Commission after the investment adviser has received the proxy advisory firm’s voting recommendation but before the [voting] deadline.” It said that if an issuer files such additional information sufficiently in advance of the voting deadline and the information would reasonably be expected to affect the investment adviser’s voting determination, the investment adviser would likely need to consider the additional information prior to exercising voting authority in order to demonstrate that it is voting in its client’s best interest.
The supplemental guidance also addresses how investment advisors should fulfill their responsibilities to make voting decisions when the investment adviser utilizes a proxy advisory firm’s electronic system that prepopulates voting ballots with the proxy advisory firm’s voting recommendations (i.e., automated voting).
The supplemental guidance states that in these circumstances the investment advisor should consider “(1) the extent of that use and under what circumstances it uses automated voting; and (2) how its policies and procedures address the use of automated voting in cases where it becomes aware before the submission deadline for proxies to be voted at the shareholder meeting” that a company intends to file or has filed additional soliciting materials in response to the proxy advisor’s recommendations that could be material to a matter on which the investment advisor is voting. The supplemental guidance also indicates that investment advisers should review their policies and procedures, and related disclosures, with respect to how it satisfies its responsibilities under SEC rules.
The supplemental guidance will be effective upon publication in the Federal Register.
Daniel P. AdamsPartner
Paul J. DelligattiPartnerDC Business Law Leader
Andrew H. GoodmanPartner
John T. HaggertyPartnerCo-Chair, Public M&A / Corporate Governance
John O. NewellCounsel