On November 5, 2019, the US Securities and Exchange Commission (SEC) proposed amendments (the "Proposal") to proxy solicitation rules that are designed to enhance the accuracy and transparency of the information that proxy advisory firms, such as Institutional Shareholder Services Inc. (ISS) and Glass Lewis, provide to investors and others who vote on behalf of investors.1

The Proposal would add conditions to the exemptions from the information and filing requirements of the proxy solicitation rules that proxy advisory firms currently rely on. In addition, it would codify recent SEC guidance regarding when the provision of proxy voting advice constitutes a solicitation for the purposes of the proxy rules. The Proposal would also provide examples to clarify when failure to disclose certain information in the proxy voting advice could be considered misleading.

Comments on the Proposal are due 60 days after publication in the Federal Register. The Proposal contemplates a one-year transition period after final amendments are adopted.

Background

The Proposal results from the SEC's examination of issues surrounding proxy advisory firms and the proxy voting process over the course of many years, during which time the SEC had the opportunity to consider viewpoints representing various constituencies. For example, the SEC issued a concept release in 2010 on the US proxy system, often referred to as the "proxy plumbing" release, which, among other topics, addressed the role and legal status of proxy advisory firms and potential regulatory responses.2 Then in 2013, the SEC staff held a roundtable on the use of proxy advisory firms, which was followed by Staff Legal Bulletin No. 20 in 2014 providing guidance with respect to the availability and requirements of two federal proxy rule exemptions that proxy advisory firms may seek to rely on. In November 2018, the SEC staff hosted another roundtable on the proxy process, with one of the three panels devoted to a discussion of proxy advisory firms. To facilitate discussion at the roundtable, the staff of the Division of Investment Management withdrew two no-action letters addressing investment advisers' use of recommendations of independent third parties to vote client proxies that were previously issued to Egan-Jones Proxy Services (May 27, 2004) and Institutional Shareholder Services, Inc. (September 15, 2004).3

On August 21, 2019, the SEC issued an interpretive release providing guidance on how the current proxy rules apply to proxy voting advice (Proxy Voting Advice Guidance), which became effective upon its publication in the Federal Register on September 10, 2019.4

For more information on the Proxy Voting Advice Guidance, see our Legal Update "SEC Issues Guidance on the Application of the Proxy Rules to Voting Advice," dated August 27, 2019.5 Thereafter, on October 31, 2019, ISS sued the SEC in the US District Court for the District of Columbia, asserting that the Proxy Voting Advice Guidance was unlawful and seeking declaratory and injunctive relief. However, the Proxy Voting Advice Guidance remains in effect at this time.

Proposed Amendments to Proxy Solicitation Exemptions

Rule 14a-2(b) under the Securities Exchange Act of 1934 provides exemptions from the information and filing requirements of the SEC's proxy solicitation rules. (These exemptions do not exempt proxy solicitations from the antifraud requirements of Rule 14a-9, as discussed below.)

Proxy advisory firms typically rely on one or both of the following two exemptions:

  • Rule 14a-2(b)(1), which generally exempts solicitations by persons who do not seek the power to act as proxy and do not have a substantial interest in the subject matter of the communication beyond their interest as shareholders.
  • Rule 14a-2(b)(3), which generally exempts proxy voting advice furnished by an advisor to any other person with whom the advisor has a business relationship.

The Proposal would add two new conditions to these exemptions applicable to persons furnishing proxy voting advice that constitutes a solicitation.

Proposed Conflict of Interest Disclosure Condition. New Rule 14a-2(b)(9)(i) would add conflict of interest disclosure conditions to the availability of the Rule 14a-2(b)(1) and Rule 14a-2(b)(3) exemptions for proxy advisory firms. This proposed amendment would require proxy voting advice, and any electronic medium used to deliver it, to contain prominent disclosure of:

  • Any material interests, direct or indirect, of the proxy voting advice business (or its affiliates) in the matter or parties concerning which it is providing the advice;
  • Any material transaction or relationship between the proxy voting advice business (or its affiliates) and the registrant, another soliciting person, shareholder proponent, or affiliates of any of the foregoing (as determined using publicly available information) connected with the matter covered by the proxy voting advice;
  • Any other information regarding the interest, transaction, or relationship of the proxy voting advice business (or its affiliates) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction, or relationship; and
  • Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction, or relationship.

According to the proposing release, it would not be sufficient to provide conflict of interest disclosures upon request; they would have to be included in the proxy voting advice report. These conflict of interest disclosures have to be "sufficiently detailed so that clients of proxy voting advice businesses can understand the nature and scope of the interest, transaction, or relationship to appropriately assess the objectivity and reliability of the proxy voting advice they receive." Among other things, this disclosure, depending on the circumstances, could require the approximate dollar amount involved when necessary for the client of the proxy advisory firm to adequately assess the potential effects of the conflict of interest. The proposing release expressly advised that 3 Mayer Brown | SEC Proposes Proxy Voting Advice Rule Amendments "[b]oilerplate language that such relationships or interests may or may not exist would be insufficient for purposes of satisfying this condition to the exemptions."

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.