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 a 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.
– “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 than 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.
-Liz Dunshee, TheCorporateCounsel.net July 23, 2020
