United States: SEC Proposes Rules Targeting Proxy Advisory Firms

The U.S. Securities and Exchange Commission has proposed amendments to the proxy solicitation rules, directly targeting proxy advisory firms (Release No. 34‑87457). Consistent with the updated interpretative guidance the SEC put out on Aug. 21, 2019 (and described in our prior alert), the rules proposed on Nov. 5, 2019, would codify the SEC's recent interpretation that voting advice put out by proxy advisory firms are "solicitations" subject to the antifraud rules, and add additional conditions that must be met in order for proxy advisory firms to rely on the filing exemptions that have historically been available to them. If adopted, the proposed rules will require additional conflict of interest disclosure by proxy advisory firms in their vote recommendation materials, give subject companies the opportunity to review and comment on proxy advisory firms' recommendations prior to publication and potentially require the proxy advisory firm to include a hyperlink to a response statement from the company with such recommendations.

Below is a detailed review of the proposal and each of these elements.

The SEC is seeking public comment on the proposals consistent with its normal rulemaking effort, with a standard 60‑day comment period following publication in the Federal Register. The proposed rule includes a proposed transition period that if adopted would effectively mean final rules will not be in effect for the 2020 proxy season (but could be in effect for the 2021 proxy season if adopted reasonably expeditiously).

Proposed Codification of the Commission's Interpretation of "Solicitation" under Rule 14a‑1(l) and Section 14(A)

The SEC is proposing to codify its interpretation, as released in Aug. 2019, that proxy voting advice constitutes a "solicitation" under Rule 14a‑1). The proposed addition to the definition of solicitation Rule 14a‑1(l)(1)(iii) reads:

"(iii) The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy, including:

(A) Any proxy voting advice that makes a recommendation to a security holder as to its vote, consent, or authorization on a specific matter for which security holder approval is solicited and that is furnished by a person that markets its expertise as a provider of such proxy voting advice, separately from other forms of investment advice and sells such proxy voting advice for a fee."

The SEC has stated that its goal with this rule is to clarify that the terms "solicit" and "solicitation" include any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee. This clearly identifies proxy advisory firms, such as Institutional Shareholder Services and Glass Lewis, as making solicitations.

The proposed rule carefully argues that the term "solicitation" has always been interpreted broadly, and likely has generally encompassed the activities of proxy advisory firms as "communications to securities holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy." The SEC identified several factors under the existing framework to support this, including their inclusions of "vote recommendations," advertising of their expertise in analyzing matters subject to a proxy vote, receiving a fee for their analysis and providing their recommendations shortly prior to votes.

Perhaps with an eye on the lawsuit filed by ISS challenging its August interpretation, the SEC did proactively respond to one potential concern to the proposed addition, namely that it could include any advice given by any third-party adviser. The SEC also proposed adding an amendment to Rule 14a‑1(l)(2), which lists exceptions to the definition of solicitation, to also exclude "the furnishing of any proxy voting advice by a person who furnishes such advice only in response to an unprompted request." With this carveout, the addition becomes more starkly limited to just the proxy advisory firms that provide proxy voting advice as a central part of its business.

In the SEC's request for comments, its questions included (i) whether to codify the interpretation, (ii) whether the unprompted requests requirement is satisfactory, (iii) whether the codification may unintentionally sweep in communications from other parties, such as investment advisers, that should not fall within the definition of "solicitation," and (iv) whether it should be expanded to include other activities.

Proposed Amendments to Rule 14a‑2(b)

The SEC also proposed amendments to Rule 14a‑2(b), which provides an exemption to the filing requirements for certain solicitations. To the extent that advice given by proxy voting advisory firms has constituted solicitations, these businesses have typically relied upon the exemptions in Rule 14a‑2(b)(1) (exempting solicitations by persons who do not seek the power to act as proxy for a shareholder and do not have a substantial interest in the subject matter of the communication beyond their interest as a shareholder) and Rule 14a‑2(b)(3) (exempting proxy voting advice furnished by an adviser to any other person with whom the adviser has a business relationship) to avoid the filing and information requirements generally required for solicitations under the federal proxy rules. With the proposed codification of the solicitation definition to proxy advisory firms, these businesses will need to rely on these exemptions to avoid SEC filings for every company for which they make a recommendation.

The SEC's proposed amendments would impose three new conditions that apply solely to persons furnishing proxy voting advice that constitutes a solicitation within the scope of proposed Rule 14a‑1(l)(1)(iii)(A) and that seek to rely on the exemptions in Rules 14a‑2(b)(1) and 14a‑2(b)(3). These conditions are described more fully below, but generally require that proxy voting advice businesses:

  • Provide expansive, detailed disclosure of direct or indirect material interests or conflict involving the proxy advisory business;
  • Provide the registrant with notice and review periods for the materials prior to distribution to clients; and
  • Provide a link to any responsive statement provided by the registrant regarding the voting recommendations.

Conflicts of Interest Disclosure

The first requirement would impose substantive disclosure obligations on a proxy voting advice business in the materials it provides as part of its voting advice. While acknowledging that Rule 14a‑2(b)(3) does currently require disclosure of significant relationships and material interests, the SEC argues that this standard has generally been met by vague or boilerplate disclosure. The SEC identified several potential conflicts of interest that it believes should be disclosed to better inform voters. These include proxy advisory firms earning fees for advising companies on corporate governance and compensation policies while also being paid to give recommendations on these companies' upcoming shareholder votes and corporate governance ratings. The proposed new rule would use a principles‑based approach and require proxy voting advice businesses to disclose the following as a condition to using either the Rules 14a‑2(b)(1) or (b)(3) exemptions:

  • 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 (i) the registrant (or any of the registrant's affiliates), (ii) another soliciting person (or its affiliates), or (iii) a shareholder proponent (or its affiliates), in connection 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 affiliate) 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.

The SEC included several requests for comments regarding the conflict of interest disclosure, including whether (i) proposed Rule 14a‑2(b)(9)(i) is sufficient to elicit appropriate conflicts of interest disclosure from proxy voting advisers, (ii) particular qualitative or quantitative information should be required in such disclosure, (iii) alternative thresholds or language for the proposed conflicts of interests disclosure should be considered (e.g., the "direct or indirect material interest" from Item 404 of Regulation S‑K or the "any substantial interest" standard for covered persons under Item 5 of Schedule 14A).

Registrants' and Other Soliciting Persons' Review of Proxy Voting Advice

The second proposed condition for proxy advisory firms seeking to rely on the Rule 14a‑2(b)(1) or (b)(3) exemptions is a requirement to provide companies with an opportunity to review and provide feedback to proxy solicitors in advance of dissemination to clients. Proposed Rule 14a‑2(b)(9)(ii) would require that, subject to certain conditions, the proxy voting advice business provide registrants and certain other soliciting persons covered by its proxy voting advice a limited amount of time to review and provide feedback on the advice before it is disseminated to the business's clients, with the length of time provided depending on how far in advance of the shareholder meeting the registrant or other soliciting person has filed its definitive proxy statement.

The proposed timing of this review and feedback period is as follows:

Timing of Definitive Proxy Statement Filing in Relation to Shareholder Meeting Required Review Period
At least 45 calendar days Company must have at least five business days to review and provide feedback
Less than 45 calendar days but at least 25 calendar days Company must have at least three business days to review and provide feedback
Less than 25 calendar days The proxy voting advice business is not required to provide its voting advice to the company


This proposed review period would add wrinkles for companies planning the timing of their proxy statements, especially those companies who currently file their proxy statement at least 40 calendar days prior to the shareholder meeting to rely on the "e‑Proxy" rules.

In addition to the review and feedback period, a proxy voting advice business would also be required to provide companies and certain other soliciting persons with a final notice of voting advice, reflecting any updates made following the company's feedback.

While the proposed rules would not require proxy voting advice businesses to accept any suggested revisions by the registrant, the SEC emphasized that proxy voting advice subject to the Rule 14a‑2(b) exemptions is not exempt from Rule 14a‑9 liability, which prohibits materially misleading misstatements or omissions in proxy solicitations. This further drives home the SEC's overarching position that proxy advisory firms are potentially liable for the statements made in their voting recommendations, and these firms will need to think carefully in deciding how to incorporate feedback from registrants to their voting recommendations.

The SEC's requests for comment regarding this notice and review period include (i) whether it is appropriate to provide registrants the opportunity to review such recommendations, (ii) whether the proposed notice and review timeframes are appropriate (and what impact they would have on companies and proxy advisers), and (iii) the extent to which disputes between proxy voting advice businesses and registrants about issues that are factual in nature versus differences of opinion about methodology, assumptions or analytical approaches.

Link to Registrant's Responses

The third condition added to Rule 14a‑2(b)(9) as a condition to the Rules 14a2(b)(1) and 14a‑2(b)(3) exemptions is that a proxy voting advice business must, upon request, include in its proxy voting advice and in any electronic medium used to deliver the advice a hyperlink (or other analogous electronic medium) that leads to the company's statement about the proxy advisory firm's voting advice. While this gives the company the ability to have a direct response to the proxy advisory firm's position, a company will also need to keep in mind that its statement would also constitute a "solicitation" as defined in Rule 14a‑1(l), be subject to the anti‑fraud prohibitions of Rule 14a‑9, and be subject to the filing requirements of Rule 14a‑12, which would necessitate that the response be filed as supplemental proxy materials no later than the date that the proxy voting advice, and thereby the company's statement, is first published, sent or given to shareholders.

While the proposed rule does not explicitly prohibit "robo‑voting," or the practice of some proxy advisory firms of providing voter execution services (pre‑population and automatic submission), the SEC did include as a question in its request for comment whether the exemptions in Rules 14a‑2(b)(1) and 14a‑2(b)(3) should be further amended to require automatic submission of votes to be disabled in instances where a company has submitted a response to the voting advice, or whether other conditions should be included requiring client action prior to any automatic voting system.

Proposed Amendments to Rule 14a‑9

Rule 14a‑9 prohibits any proxy solicitation from containing false or misleading statements with respect to any material fact at the time and in the light of the circumstances under which the statements are made.

The SEC's interpretive guidance in Aug. 2019 specifically addressed the application of Rule 14a‑9 to proxy voting advice, stating that: "Any person engaged in a solicitation through proxy voting advice must not make materially false or misleading statements or omit material facts, such as information underlying the basis of its advice or which would affect its analysis and judgments, that would be required to make the advice not misleading. For example, the provider of the proxy voting advice should consider whether, depending on the particular statement, it may need to disclose [certain] types of information to avoid a potential violation of Rule 14a‑9."

In its proposed rule, the SEC would amend the list of examples provided in the Note to Rule 14a‑9 to specifically include examples applicable to proxy voting advice businesses. The proposed addition would include in the description examples of statements that may be false or misleading depending upon particular facts and circumstances:

"Failure to disclose material information regarding proxy voting advice covered by § 240.14a‑1(l)(1)(iii)(A), such as the proxy voting advice business's methodology, sources of information, conflicts of interest or use of standards that materially differ from relevant standards or requirements that the Commission sets or approves."

The proposed rule then provides specific relevant examples of this guidance focused on the last part of this statement—standards that differ from SEC rule requirements. The SEC noted that if a proxy voting advice business were to recommend to vote against an audit committee director on the basis that the director is not independent under the proxy voting advice business's independence standard for audit committee members, and such standard is more limiting than the SEC's rules, it may be necessary for the proxy voting advice business to make clear that its recommendation is based on its own different independence standard, rather than the SEC's standard, in order for such recommendation to be not misleading.

Another example provided was if a proxy advice business were to recommend a vote against a say‑on‑pay vote of a smaller reporting company, disclosure may be required if the rationale for the recommendation is because the smaller reporting company is taking advantage of the reduced compensation disclosure requirements they can choose to use, even if contrary to the proxy advisory business's recommended disclosure.

Transition Period

If adopted, the SEC has proposed a one‑year transition period after the publication of a final rule in the Federal Register prior to its effectiveness.


These proposed rules provide a clear continuation of the position the SEC staked out in its Aug. 2019, interpretative guidance. If adopted, the rules will create substantially greater requirements for proxy advisory firms, give companies much greater ability to correct mistakes in their recommendations, potentially call out issues with these firms' methodologies and otherwise provide a more readily accessible rebuttal argument for adverse recommendations.  Even while this proposal is pending, given the SEC's recent interpretative guidance, we recommend that companies begin being more proactive in requesting advance copies of, and reviewing, proxy advisory firm recommendations and reaching out to them to identify any potential factual mistakes or issues, putting the onus on the proxy advisory firms to make the correction, as well as requesting an opportunity to provide a response with the proxy advisory firm recommendation. ​​​​​​​​​​​

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
11 Dec 2019, Other, Los Angeles, United States

Fenwick counsel Robert Brownstone will be lead chair in this highly interactive colloquium providing a deep understanding and practical advice regarding major e-discovery challenges facing organizations today.

12 Dec 2019, Conference, New Orleans, United States

Robert Brownstone will present on December 12 at 3:15pm on The E-Workplace: Privacy Issues and Cyber Security.

27 Jan 2020, Conference, California, United States

One of the most visible and highly-regarded securities and corporate law conferences in the country, the Securities Regulation Institute reaches prominent attorneys from both firm and in-house practices.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions