On July 22, the U.S. Securities and Exchange Commission (SEC) adopted controversial rule amendments that will impose additional disclosure and procedural requirements on proxy advisors like ISS and Glass Lewis as conditions for being able to continue relying on exemptions from the information and filing requirements of the federal proxy rules.1 In light of these amendments, the SEC also concurrently published supplemental guidance to assist investment advisers in fulfilling their proxy voting responsibilities, particularly when relying on proxy advisors for their advice and/or voting execution platforms.2
The final rules reflect a principles-based approach as opposed to the more prescriptive framework the SEC had proposed in November 2019.3 They give proxy advisors significant flexibility to determine the way in which they will satisfy their new obligations, including by leveraging their current practices and procedures.
The proxy solicitation rule amendments will make a proxy advisor’s reliance on the proxy rule exemptions contingent on the proxy advisor:
- Providing clients with enhanced disclosures about conflicts of interest.
- Adopting and publicly disclosing written policies and procedures reasonably designed to ensure that:
- Companies that are the subject of proxy voting advice have such advice made available to them at or before the time the advice is disseminated to the proxy advisors’ clients; and
- The proxy advisor provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding proxy voting advice by companies that are the subject of such advice, in a timely manner before the shareholder meeting (or, if no meeting, before the votes, consents or authorizations may be used to effect the proposed action).
The SEC also adopted rule amendments to:
- Codify its interpretation that the furnishing of proxy voting advice by proxy advisors generally constitutes a “solicitation” subject to the proxy rules.
- Clarify that the omission of certain information from proxy voting advice may, depending on the particular facts and circumstances, potentially violate the antifraud provisions of the proxy rules.
The rule amendments and supplemental guidance were each approved by a 3-1 vote, with Chair Clayton and Commissioners Peirce and Roisman voting in favor. Commissioner Lee dissented, arguing that the rule amendments are unwarranted, severely limit the ability of shareholders to hold company management accountable and make it more difficult and expensive for investors to vote in reliance on proxy voting advice.
The rule amendments will become effective 60 days following their publication in the Federal Register. The final rules provide for a one-year transition period after the publication of the final rules to give proxy advisors sufficient time to develop processes and systems to comply with certain aspects of the new rules. Specifically, proxy advisors will not be required to comply with the amendments to Exchange Act Rule 14a-2(b)(9) until December 1, 2021.4 The supplemental guidance will become effective upon publication in the Federal Register.
The amendments were informed, in part, by extensive feedback the SEC Staff received during its November 2018 roundtable on the proxy process and thousands of comment letters submitted since, including in response to the November 2019 proposing release. The final rules mark the culmination of a decade-long debate about the appropriate regulatory response to the role – and arguably outsized influence – of proxy advisors.
In our view, the rule amendments will have minimal impact on public companies and proxy advisors, in part because they give proxy advisors wide latitude to comply with the new obligations, which in some cases can be satisfied through existing policies and practices (see box below). To continue its efforts in reforming the U.S. proxy system, the SEC plans to adopt final rules relating to the use of universal proxies and procedural requirements and resubmission thresholds for shareholder proposals by October 2020.
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