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On Friday, I blogged about how the SEC’s Division of Investment Management issued this statement that – ahead of the upcoming “proxy plumbing” roundtable – it was withdrawing two no-action letters granted in 2004 to ISS and Egan-Jones Proxy Services. In that blog, I gave some initial thoughts that related mainly to SEC Chair Clayton’s statement about informal Staff guidance in general. Here’s some of my thoughts about IM’s withdrawal in particular:

1. What Does This Mean for the “Proxy Plumbing” Roundtable? – I worry that this means that the upcoming “proxy plumbing” roundtable (date not set yet; likely in November) – and perhaps the SEC’s “proxy plumbing” project as a whole – will focus mainly on proxy advisors. There is so much more to tackle than just proxy advisor reform, as Commissioner Jackson articulated nicely in his statement last week.

2. Any “Real World” Impact? – I doubt IM’s withdrawal of the two no-action letters will cause investors to suddenly drop their use of proxy advisors. It’s standard practice for an adviser to avoid a conflict by delegating the responsibility to someone who doesn’t have the same conflict.

3. Withdrawal Didn’t Change the Law? – There is a solid argument that last week’s withdrawal of the ’04 letters hasn’t really changed the law. That “conflicts” law was on the books before the letters were issued – see this ’03 adopting release (in particular, see the section about resolving conflicts of interest). The letters didn’t create a safe harbor. In fact, the letters probably never should have been issued because the requests were motivated by a competitive spat between Egan-Jones and ISS.

The ’03 adopting release was a Commission action, not a Staff one. I should also note that last week’s withdrawal didn’t extend to Staff Legal Bulletin No. 20. That 2014 bulletin – issued by both IM and Corp Fin – provides guidance to advisers on voting client proxies and retaining proxy advisory firms, and makes reference to both of the withdrawn no-action letters. SLB #20 promises to be a big topic of conversation during the proxy plumbing roundtable.

4. How Much Do Companies Rely on Proxy Advisors? – As I’ve blogged several times over the years, be careful what you wish for if you’re hoping for the demise of proxy advisors (a different issue than conflicts). If proxy advisors disappear, that means there will be a need for more shareholder engagement as companies try to ascertain how their biggest shareholders intend to vote. And even if companies are willing & able to staff up their corporate secretary departments to facilitate that, that might not be the case for investors themselves. In other words, your phone calls may go unanswered – and you may get deep into the proxy season without a firm sense of knowing how your votes will turn out. I blogged about this initially way back when – and again a year later.

Do Courts Give Deference to SEC Staff Guidance?

As for the notion that SEC Staff guidance doesn’t carry the force of law, that may be true – but there are cases that indicate Staff guidance has some influence with the judiciary. For example, here’s an excerpt from Ganino v. Citizens Utilities (US Court of Appeals – 2nd Cir.; 9/00):

With respect to financial statements, the SEC has commented that various “[q]ualitative factors may cause misstatements of quantitatively small amounts to be material.”   SEC Staff Accounting Bulletin (“SAB”) No. 99, 64 Fed.Reg. 45150, 45152 (1999) (to be codified at 17 C.F.R. pt. 211, subpt.   B) (representing interpretations and practices followed by the SEC’s Division of Corporation Finance and the Office of the Chief Accountant in administering disclosure requirements of federal securities law).6  Of particular relevance to this action are the following:

- whether the misstatement masks a change in earnings or other trends
- whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise[.]

Id.   Unlike, for example, a rule promulgated by the SEC pursuant to its rulemaking authority, see 15 U.S.C. § 78w(a), SAB No. 99 does not carry with it the force of law.   See, e.g., Christensen v. Harris County, 529 U.S. 576, 120 S.Ct. 1655, 1662-63, 146 L.Ed.2d 621 (2000) (explaining that interpretations contained in opinion letters, like those in policy statements, agency manuals, and enforcement guidelines, which are not, for example, the result of a formal adjudication or notice-and-comment process, lack the force of law);  General Elec. Co. v. Gilbert, 429 U.S. 125, 141, 97 S.Ct. 401, 50 L.Ed.2d 343 (1976) (stating that courts may give less weight to guidelines than to administrative regulations which Congress has declared shall have the force of law or to regulations which, under the enabling statute, may themselves supply the basis for imposition of liability) (superseded by statute on other grounds).  

Nonetheless, because SEC staff accounting bulletins “constitute a body of experience and informed judgment,” Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944), and SAB No. 99 is thoroughly reasoned and consistent with existing law-its non-exhaustive list of factors is simply an application of the well-established Basic analysis to misrepresentations of financial results-we find it persuasive guidance for evaluating the materiality of an alleged misrepresentation.   See Christensen, 529 U.S. 576, 120 S.Ct. at 1663 (quoting Skidmore, 323 U.S. at 140, 65 S.Ct. 161);  Gilbert, 429 U.S. at 125, 97 S.Ct. 401.

Another example is U.S. v Miller, 833 F.3d 274 (D.C. Cir., Mar. 15, 2016): “We defer to [The SEC staff Guidance in Release 1092] because of the SEC’s expertise and the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” (internal cites and quotes omitted).

Tomorrow’s Webcast: “Blockchain in M&A”

Tune in tomorrow for the DealLawyers.com webcast – “Blockchain in M&A” – to hear Potter Anderson’s Chris Kelly, Matt O’Toole and Mike Reilly discuss the implications of blockchain technology for M&A transactions – as well as what it may mean for busted deals & the inevitable litigation that follows. Please print these “Course Materials” in advance.

– Broc Romanek