On November 17, 2021, the U.S. Securities and Exchange Commission proposed amendments to the federal proxy rules that would partially roll back final rules regarding proxy voting advice adopted in July 2020 (the “2020 Final Rules”). Most notably, the proposed amendments would eliminate the 2020 Final Rules’ requirement that proxy advisors adopt policies and procedures for engagement with registrants that are the subject of their proxy voting advice. The goal of the proposed amendments is to avoid burdens on proxy advisory firms that may impede and impair the timeliness and independence of proxy voting advice and subject them to undue litigation risks and compliance costs.
Many boards and management teams will need to review the latest voting policies and guidelines from the proxy advisory firms for the upcoming proxy season. The proposed amendments may limit a company’s ability to review and comment on proxy voting advice provided to its investors.
In the United States, two proxy advisory firms—ISS and Glass Lewis—serve almost the entire market, providing proxy advisory services to thousands of funds each year that each exercise voting authority over a significant number of shares. Given the widespread reliance on the services of such a small number of proxy advisors, the SEC has recognized that voting advice from these firms has the potential to influence the outcomes of matters subject to a shareholder vote.
In July 2020, the Commission adopted final rules regarding proxy voting advice provided by proxy advisory firms. The 2020 Final Rules were intended to help ensure that investors who use proxy voting advice receive more transparent, accurate and complete information on which to make their voting decisions.
The 2020 Final Rules did, among other things, the following:
- Amended Rule 14a-1(l) to codify the Commission’s interpretation that proxy voting advice generally constitutes a “solicitation” subject to the proxy rules;
- Adopted Rule 14a-2(b)(9) to add new conditions to two exemptions that proxy advisors generally rely on to avoid the proxy rules’ information and filing requirements. Those conditions include:
- New conflicts of interest disclosures in Rule 14a-2(b)(9)(i); and
- A requirement in Rule 14a-2(b)(9)(ii) that a proxy advisor adopt and publicly disclose written policies and procedures reasonably designed to ensure that (A) registrants that are the subject of proxy voting advice have such advice made available to them at or prior to the time such advice is disseminated to the proxy advisor’s clients and (B) the proxy advisor 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 registrants that are the subject of such advice, in a timely manner before the security holder meeting;
- Amended the note to Rule 14a-9, which prohibits false or misleading statements, to include specific examples of material misstatements or omissions related to proxy voting advice.
Proposed Amendment to Rule 14a-2(b)(9)
The proposed amendments would remove the conditions set forth in Rule 14a-2(b)(9)(ii), which are set to allow registrants that are the subject of voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to clients and also requires proxy advisors to provide clients with access to any response the registrant provides on voting advice before those clients vote. According to the Proposing Release, both ISS and Glass Lewis have adopted policies and procedures that provide their clients and registrants with some of the opportunities and access to information that would have been required pursuant to the Rule 14a-2(b)(9)(ii) conditions, which helps to address some of the concerns regarding the transparency, accuracy and completeness of proxy voting advice.
The proposed amendments do not represent a wholesale reversal of the 2020 Final Rules; proxy advisors would continue to be subject to Rule 14a-2(b)(9)’s conflicts of interest disclosure requirement.
Proposed Amendment to Rule 14a-9
The Commission also reaffirmed its position that proxy voting advice is a “solicitation” and, as such, is subject to Rule 14a-9’s prohibition against material misstatements and omissions. Rule 14a-9 “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.” The rule also requires that solicitations “must not omit to state any material fact necessary in order to make the statements therein not false or misleading.”
The proposed amendments would remove Note (e) to Rule 14a-9 that provides examples of situations in which the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the federal proxy rules. According to the Proposing Release, the proposed deletion of Note (e) is intended to address the misperception that a proxy advisor could be liable under Rule 14a-9 solely because of a difference in opinion regarding proxy voting advice. The Commission clarified its view that a proxy advisor would not face liability under Rule 14a-9 for exercising its discretion to rely on a particular analysis, methodology or set of information when formulating its voting recommendations.
Public Comment Period
The SEC will accept comments on the issues raised in the Proposing Release for 30 days after the release is published in the Federal Register.
If you have questions regarding the matters contained in this publication, please contact one of the lawyers listed below or your regular Baker Botts contact.
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