At an open meeting held on July 22, 2020, the Securities and Exchange Commission (SEC) adopted reforms to the proxy solicitation rules (Proxy Advice Amendment) that govern how proxy advisory firms (e.g., Glass, Lewis & Co. and Institutional Shareholder Services) conduct their businesses. In connection with its adoption of the Proxy Advice Amendment, the SEC also released new guidance for investment advisers relating to their fiduciary duty when voting proxies on behalf of their clients. Key provisions of the Proxy Advice Amendment and the SEC’s related guidance are summarized below.
The Proxy Advice Amendment
The SEC’s adoption of the final Proxy Advice Amendment follows its release of a related rule proposal in November 2019 and issuance of guidance regarding advisers’ proxy voting responsibilities in August 2019 (for more information on this guidance, please see our client alert on the subject). Among other things, the Proxy Advice Amendment codifies earlier SEC interpretive guidance that proxy advisory firms’ recommendations are solicitations for purposes of Section 14(a) of the Securities Exchange Act of 1934 and related rules (the Proxy Rules), and conditions proxy advisory firms’ ability to rely on certain exemptions from the requirements of the Proxy Rules on their (i) disclosing certain conflicts of interest, and (ii) providing notice to companies seeking shareholder votes of their proxy voting advice and, if applicable, companies’ responses thereto. The Proxy Advice Amendment also specifies examples of omissions from a proxy advisory firm’s recommendations that the SEC might consider misleading.
Revised Definition of “Solicitation”
The Proxy Rules provide generally that, in the absence of an applicable exemption, a party engaged in a “solicitation” must adhere to the information and filing requirements of the Proxy Rules (which include filing and furnishing a proxy statement). The Proxy Advice Amendment modifies the Proxy Rules by defining the term “solicitation” to include: “[a]ny 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 change codifies the SEC’s longstanding view that the provision of proxy voting advice by a person that (i) markets its expertise as a provider of such advice separately from other forms of investment advice, and (ii) sells such advice for a fee (i.e., a Proxy Advisor) qualifies as “solicitation” for purposes of the Proxy Rules. A carve-out in the Proxy Advice Amendment provides for an exception from the definition of “solicitation” for advice that is provided only in response to an unprompted request.
Revised Exemptions to the Information and Filing Requirements
Proxy advisory firms typically rely on certain exemptions in the Proxy Rules to avoid the filing and information requirements thereof. The Proxy Advice Amendment adds additional requirements for proxy advisory firms to qualify for these exemptions, as described below.
- Conflicts of Interest Disclosure. The Proxy Advice Amendment release discusses a number of specific circumstances in which a conflict of interest might arise with respect to the provision of proxy advice, particularly when a proxy advisory firm has a business and/or financial relationship with a company that is the subject to the proxy voting. To address such potential conflicts of interest, the Proxy Advice Amendment requires that proxy advisory firms include in their proxy voting advice to clients (or in any electronic medium used to deliver such advice) disclosure of (i) any information regarding an interest, transaction, or relationship of a proxy advisory firm that is material to assessing the objectivity of the proxy advisory firm’s advice, and (ii) any policies and procedures used to identify, as well as measures taken to address, such material conflicts of interest.
- Notice of Proxy Voting Advice and Response. Under the Proxy Advice Amendment, proxy advisory firms must adopt and disclose publicly written policies and procedures reasonably designed to ensure that: (1) companies seeking the shareholder votes that are the subject of a proxy advisory firm’s voting advice are made aware of such advice at the time the advice is provided to the clients of the proxy advisory firm; and (2) proxy advisory firms provide their clients with a means to receive information about any written statements regarding the firm’s proxy voting advice made by companies that are the subject of such advice, and that clients receive any such information prior to a shareholder meeting.
Examples of Misleading Omissions in Proxy Voting Recommendations
The Proxy Advice Amendment also amends Rule 14a-9 under the Proxy Rules to include examples of when omitting certain information from a proxy voting recommendation could, depending on the circumstances, be considered to be misleading by the SEC. Examples of such omissions include the failure to disclose information relating to a proxy advisory firm’s methodology for making recommendations, sources of information and conflicts of interest.
The Proxy Advice Amendment will be effective 60 days after publication in the Federal Register and proxy advisory firms must comply with the revised exemptions to the information and filing requirements (Rule 14a-2(b)(9) of the Proxy Rules) by December 1, 2021. Importantly, this transition period does not extend to any other part of the Proxy Advice Amendment.
Supplemental Guidance to Investment Advisers
In addition to the rule amendments described above, the SEC provided additional guidance to investment advisers regarding their proxy voting responsibilities in light of the Proxy Advice Amendment. This supplemental guidance builds on the SEC’s 2019 guidance referenced above, which discusses how the fiduciary duty and Rule 206(4)-6 under the Investment Advisers Act of 1940 relate to an investment adviser’s exercise of proxy voting authority on behalf of its clients. Because the amended rules are designed to provide investment advisers with additional information regarding a proxy advisory firm’s voting advice (and a subject company’s written comments relating thereto), the supplemental guidance seeks to instruct investment advisers on what to do with such additional information. Among other things, the guidance advises that an investment adviser should consider whether its policies and procedures address circumstances in which it might become aware that an issuer intends to file or has filed additional soliciting materials with the SEC after the investment adviser has received the proxy advisory firm’s voting recommendation but before the voting submission deadline. The supplemental guidance also addresses disclosure obligations and client consent obligations when investment advisers use proxy ballots pre-populated by proxy advisory firms and automated voting services.
The supplemental guidance has been published on the SEC’s website and will become effective upon its publication in the Federal Register.
The Proxy Advice Amendment continues SEC’s recent focus on reforms to proxy voting rules. Although the Proxy Advice Amendment, as adopted, did not include several provisions that had been included in the initial rule proposal in light of industry pushback, the resulting amendments do create additional obligations for investment advisory firms with respect to voting proxies. Advisers should conduct comprehensive reviews of their policies, procedures and practices in light of the new rules and guidance.