June 2, 2021

Proxy Advisors: SEC Won’t Enforce Last Year’s Rules, Pending Possible Reversal

Yesterday, in response to a directive from SEC Chair Gary Gensler, Corp Fin announced that:

1. It’s considering whether to recommend that the Commission revisit the proxy advisor rules that were adopted last summer – which would require proxy advisors to meet new conditions beginning December 1st of this year – and the Commission-level interpretive guidance that was issued the year before.

2. The Staff won’t recommend enforcement action to the Commission during the period in which the SEC is considering further regulatory action.

3. In the event that new regulatory action leaves the 2020 exemption conditions in place with the current December 1, 2021 compliance date, the staff will not recommend any enforcement action based on those conditions for a reasonable period of time after any resumption by Institutional Shareholder Services Inc. of its litigation challenging the 2020 amendments and the 2019 Interpretation and Guidance. (ISS v. SEC, 1:19-cv-3275 (D.D.C.)

This is the latest chapter in the long, ongoing saga over proxy advisors. The 2020 rules and 2019 guidance define proxy advice as a “solicitation” and would require proxy advisors to disclose conflicts of interest and adopt policies that allow for companies to review & respond to voting recommendations, in order to be exempt from the information & filing requirements that would otherwise apply to a solicitation. The amendments also specify what circumstances would cause proxy advice to be “misleading” within the meaning of anti-fraud rules.

The rules were celebrated by many companies, but proxy advisors and their investor clients criticized the proposal process, took issue with the Commission’s statutory authority, and felt that the substance of the rules would delay and impair the proxy voting process. This, in turn, made some companies worry that the proxy voting timeline would become even more compressed. As mentioned in yesterday’s Staff statement, ISS even sued the SEC over its efforts to regulate the industry, and appeared to be moving forward with that proceeding as recently as last August.

In light of those issues and the fact that the compliance date has not yet arrived, I’ve been wondering whether we’d see some steps to unwind (or not defend) the rules. Some are pondering whether this is the beginning of a trend of “back & forth” rulemaking, which would create uncertainty.

Commissioners Hester Peirce and Elad Roisman issued a response to Chair Gensler’s statement yesterday, saying that the 2020 rules were the result of an unassailable process and that there is no data yet to evaluate whether the rules work in practice. Meanwhile, CII called yesterday’s directive “Christmas in June for investors.”

Liz Dunshee