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At an open meeting yesterday, the SEC adopted amendments to its proxy solicitation rules, which are intended to give companies a more meaningful opportunity to review and respond to proxy advisors’ voting recommendations, ensure that proxy advisor clients have access to those responses prior to the meeting, and require the advisory firms to disclose potential conflicts of interest. The rules were adopted by a 3-1 vote, with Commissioner Allison Herren Lee issuing this dissenting statement. CII also issued a statement expressing disappointment with the rules.

Here are the high points, which are explained in more detail in the SEC’s Fact Sheet (also see Mike Melbinger’s blog and this blog from Cooley’s Cydney Posner – and we’re posting memos in our “Proxy Advisors” Practice Area).

– “Solicitation” Includes Proxy Advice for a Fee: Consistent with the Commission’s longstanding view, the changes amend the definition of “solicitation” in Exchange Act Rule 14a-1(l) to specify that it includes proxy voting advice, with certain exceptions.

– New Conditions for Exempt Solicitations: Under amendments to Rules 14a-2(b)(1) & 14a-2(b)(3), in order for proxy voting advice businesses to rely on the exemptions from information and filing requirements (which are essential for them to be able to carry out their business), they must satisfy the conditions of new Rule 14a-2(b)(9), including disclosure of conflicts of interest and adoption & disclosure of policies that allow for companies to review & respond to the voting recommendations. New Rule 14a-2(b)(9) also establishes non-exclusive safe harbors that will allow proxy advisors to meet the conditions.

– Application of Antifraud Rule to Proxy Advice: The amendments modify Rule 14a-9 to include examples of when the failure to disclose certain material information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. These examples include material information about the proxy voting advice business’s methodology, sources of information, or conflicts of interest.

It is worth noting that the “registrant review” provisions of the final rule are less demanding that those that were originally proposed. That original proposal would have obligated advisors to provide companies with a copy of their advice in order to permit them to identify errors or other problems with the analysis in advance of their release, and would have also required proxy advisors to provide the company with a final report no later than two business days prior to its dissemination to their clients.

The amendments will be effective 60 days after publication in the Federal Register, but affected proxy voting advice businesses subject to the final rules are not required to comply with the Rule 14a-2(b)(9) amendments until December 1, 2021. At least that’s the plan – ISS has a pending lawsuit against the SEC challenging the agency’s ability to regulate it. The parties agreed to stay the lawsuit until the SEC adopted final rules. Now that the rules are in place, the real fight may be just beginning.

Proxy Advisors: SEC Supplements Guidance for Investment Advisers

Also yesterday, the SEC supplemented its 2019 guidance to investment advisers about their proxy voting responsibilities, and the steps they could take to demonstrate that they’re making voting decisions in a client’s best interest. As noted in Cydney Posner’s blog, that guidance:
“recommended that investment advisers satisfy their own fiduciary duties of care and loyalty and obligations to act in their clients’ best interests, in part, through careful oversight of proxy advisory firms (i.e., investment adviser as ‘enforcer’), such as by monitoring and analyzing the methodology and processes of proxy advisory firms, including their processes for engagement with companies and procedures to address errors.”

The supplemental guidance addresses how investment advisers should consider company responses to proxy advisor voting recommendations. This includes circumstances in which the investment adviser utilizes a proxy advisory firm’s electronic vote management system that “pre-populates” the adviser’s ballots with suggested voting recommendations or for voting execution services (so-called “robo-voting”). It also addresses their disclosure obligations and client consent requirements when using automated voting services. Here’s an excerpt:

An investment adviser should consider, for example, whether its policies and procedures address circumstances where the investment adviser has become 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 submission deadline. In such cases, if an issuer files such additional information sufficiently in advance of the submission deadline and such information would reasonably be expected to affect the investment adviser’s voting determination, the investment adviser would likely need to consider such information prior to exercising voting authority in order to demonstrate that it is voting in its client’s best interest.

Proxy Advisors: “Best Practices” Get New Oversight

Last week, the “Best Practices Principles Group” for shareholder voting research announced the appointment of an oversight committee to monitor the Principles that govern proxy advisor signatures, including ISS, Glass Lewis and Minerva Analytics. I most recently blogged about the BPPG last year when they updated the best practices from their original 2014 iteration. The international board includes:

– Six institutional investor representatives – including Amy Borrus of CII

– Three public company representatives – including Hope Mehlman of Regions Financial

– Two independent academic representatives

Among other responsibilities, the oversight board will conduct an annual review of the public reporting of each BPPG Signatory and present that information publicly. Congrats to Amy, Hope and the other members for being involved in this initiative.

– Liz Dunshee