Follow-Up on SEC Final Rules for Proxy Voting Advice Businesses
On Wednesday, I posted on the SEC’s Open Meeting to vote on new rules applicable to proxy voting advice businesses (“PVABs”), such as ISS and Glass Lewis proxy advisory firms, and summarized the new final rules (SEC Approves Final Rules to Reign in Proxy Voting Advice Businesses). As promised, today I will provide a few more details. As with the proposed rules, the final rules impose two new requirements on PVABs requiring them to:
Adopt and disclose conflict of interest policies (among the examples listed by the SEC of circumstances where the interests of a PVAB may diverge materially from the interests of the clients who utilize it advice include, a PVAB providing voting advice to its clients on proposals to be considered at the annual meeting of a corporation while the PVAB also earns fees (or is seeking to earn fees) from that corporation for providing advice on corporate governance and compensation policies), and
Provide (A) their proxy voting advice to the corporation that is subject such advice no later than the time when the PVAB provides the advice to its clients and (B) a mechanism by which the PVAB’s clients can reasonably be expected to become aware of any written statements in response to the proxy voting advice from the subject corporation.
The rules also provide a non-exclusive safe harbor provision under which a PVAB will be deemed to satisfy the requirements of Item 2 if it has written policies and procedures that are reasonably designed to provide subject corporations with a copy of its proxy voting advice, at no charge, no later than the time such advice is disseminated to the business’s clients, so long as the corporation (i) files its proxy statement at least 40 calendar days before the annual shareholder meeting, and (ii) in response to commenters’ concerns, the SEC eliminated its proposed review mechanism, which would have allowed corporations to review and provide feedback on voting advice before the PVAB provide such advice to its clients, expressly acknowledged that it will only use the proxy voting advice for its internal purposes and/or in connection with the solicitation and will not publish or otherwise share the PVAB’s advice except with the corporation’s employees or advisers.
The rules do not require that a PVAB engage with corporations in a review-and-feedback process before issuing its voting advice, although many commenters strongly supported this aspect of the proposed rules. Instead, the SEC adopted “a more flexible, principles-based, and less intrusive solution.” (Of course, many other commenters strongly opposed the feedback process requirement.) However, the SEC “encourages cooperation and an open dialogue between the parties to the extent that it facilitates productive efforts to improve the quality of proxy voting advice for the benefit of shareholders.”
The final rules do not require a PVAB to alter its advice in response to feedback from a subject corporation.
Finally, the rules clarify that the requirements of Item 2 do not apply to proxy voting advice to the extent such advice is based on custom voting policies that are proprietary to a PVAB’s client.
The amendments will be effective 60 days after publication in the Federal Register, but PVABs subject to the final rules are not required to comply with the Rule 14a-2(b)(9) amendments until December 1, 2021.
Also on Wednesday, the SEC issued Supplemental Guidance Regarding Proxy Voting Responsibilities of Investment Advisers. Generally, I believe this to be of less interest to readers of this blog. However, in the Supplemental Guidance, the SEC suggests that an investment adviser that uses automated voting (also called robo-voting), which may result in the adviser casting its vote before it receiving a corporation’s response to the PVAB’s advice, should consider whether its policies and procedures are reasonably designed to address this new information. The SEC states that “these disclosures may be necessary for the investment adviser to provide sufficiently specific information so that a client is able to understand the role of automated voting in the investment adviser’s exercise of voting authority.” The supplemental guidance for investment advisers will be effective upon publication in the Federal Register.
ISS released a statement from its president and CEO reading, in part, “The rule, passed today along party lines, is based on the view that the provision of proxy voting advice constitutes a solicitation, a premise which we believe is inconsistent with the plain meaning of the federal securities laws. This issue was at the heart of the lawsuit which we initiated against the SEC last year and it continues to be of concern to ISS.” This statement, made without a trace of irony by the business that purports to tell every other business in America what best practices to follow, suggests that ISS may continue with its lawsuit in federal court challenging the SEC’s authority to regulate it, which had been held in abeyance until the promulgation of final rules. Stay tuned!
-Mike Melbinger, CompensationStandards.com July 24, 2020
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