November 18, 2021

Proxy Advisors: SEC Proposes Rescinding Parts of 2020 Rules

Yesterday, by a 3-2 vote of the Commissioners, the SEC approved a 71-page rule proposal on proxy voting advice that would unwind two parts of the “proxy advisor” rules adopted in mid-2020. Those rules were intended to give companies more of an opportunity to review & respond to proxy advisors’ voting recommendations & reports. They were a long time coming and were widely celebrated by many folks on the corporate side – although there were also some questions about how the new processes would affect proxy season timetables and voting behaviors. Yesterday’s action was criticized by the US Chamber of Commerce, as well as by Commissioner Peirce and Commissioner Roisman. Meanwhile, Commissioner Lee and Commissioner Crenshaw issued statements in support of the proposal.

The new proposal does not come as a huge surprise in light of SEC Chair Gary Gensler’s directive earlier this year to reconsider and refrain from enforcing the rules, which had been scheduled to go into effect December 1st. One of the reasons the SEC says that it has changed course is because of the industry’s effort to “self-regulate” through the “Best Practice Principles,” which I’ve written about a few times. Anyway, here’s an excerpt from the SEC’s Fact Sheet that explains the impact this new proposal will have if adopted:

Proxy Rule Exemptions for Proxy Voting Advice

The 2020 rules added conditions in Rule 14a-2(b)(9)(ii) to exemptions from the proxy rules’ information and filing requirements that proxy advisory firms often rely on. First, those conditions require proxy advisory firms to make their advice available to the companies that are the subject of their advice at or before the time that they make the advice available to their clients. Second, the conditions require proxy advisory firms to provide their clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding the proxy advisory firms’ proxy voting advice by registrants who are the subject of the advice.

Investors and others have expressed concerns that those conditions will impose increased compliance costs on proxy advisory firms and impair the independence of their proxy voting advice. The proposed amendments address those concerns by rescinding Rule 14a-2(b)(9)(ii) as well as the related safe harbors and exclusions from those conditions.

Liability Rule for Proxy Voting Advice

The 2020 rules also amended Rule 14a-9, which prohibits false or misleading statements, to add Note (e), which sets forth examples of material misstatements or omissions related to proxy voting advice. Specifically, Note (e) provides that the failure to disclose material information regarding proxy voting advice could be misleading.

Investors and others have expressed concerns that Note (e) may increase proxy advisory firms’ litigation risks, which could impair the independence and quality of their proxy voting advice. The proposed amendments would rescind Note (e) to Rule 14a-9 while affirming that the rule applies to material misstatements of facts contained in proxy voting advice. The proposing release also presents Commission guidance regarding the application of Rule 14a-9 to statements of opinion contained in proxy voting advice.

The comment period will be open for 30 days after the proposed amendments are published in the Federal Register. We’ll be posting memos in our “Proxy Advisors” Practice Area. Now, I just need to revisit the latest edits to our “Proxy Advisors” Handbook and plan to undo a bunch of them…

Liz Dunshee