On June 1, Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (the SEC) issued a statement directing SEC staff to re-examine the SEC’s rules that were finalized last year regulating proxy voting advice businesses.
SEC rulemaking on proxy advisory firms
On August 21, 2019, the SEC issued its interpretation that voting advice communications from proxy advisory firms are generally solicitations that are subject to SEC antifraud rules prohibiting proxy solicitations from containing materially false or misleading statements and provided guidance on the responsibilities of investment advisers which use services of proxy advisory firms. (See our Osler Update, “SEC issues guidance regarding activities of proxy advisory firms”).
On November 5, 2019, the SEC proposed amendments to U.S. rules regarding proxy voting advice provided by professional firms (the 2019 proposed rules). (See our Osler Update, “SEC proposes amendments to proxy rules applying to proxy advisory firms”). The amendments were proposed in response to complaints by corporations regarding the transparency and quality of the proxy voting advice issued, and potential conflicts of interest of the proxy advisors. The proposed amendments included:
- A requirement to disclose any material conflicts of interest, direct or indirect, that arise in connection to the advice.
- A requirement to provide the issuers with an advance draft of the proposed advice for review and comment, where the minimum review period depends upon how early the issuers have filed their definitive proxy materials with the SEC.
- A requirement to provide clients of the proxy advisory firms with a link to the issuer’s comments on the advice upon the issuer’s request.
The SEC issued final rules on July 22, 2020 (the 2020 finalized rules). (See our Osler Update, “SEC finalizes amendments to proxy rules applying to proxy advisory firms”). In the 2020 finalized rules, the SEC substantially pared back its proposal to require proxy advisory firms to provide issuers with a draft of their report, and a minimum period of time to rebut it and to distribute the rebuttal to clients of the proxy advisory firm. In particular:
- The requirement to provide prescribed advance notice to the issuer was replaced by an obligation only to make the proxy voting advice available to the issuer at or prior to the time the advice is circulated to the proxy advice firm’s clients.
- The requirement, if requested by the issuer, to provide clients of the proxy voting firm with a link to the issuer’s rebuttal at the time the proxy advisory firm releases its advice, was replaced with an obligation to provide a mechanism by which the proxy advisory firm’s clients can reasonably be expected to become aware of any written statements made by the issuers with regard to the advice in a timely manner before the shareholder meeting.
- The requirements would not apply to contested matters, most mergers and certain asset transactions.
Developments in Canada regarding proxy advisory firms
On July 9, 2020, the Ontario Capital Markets Modernization Taskforce (the Taskforce) released its consultation report with proposed recommendations intended to modernize and enhance the efficiency and competitiveness of Ontario’s capital markets. The recommendations included a recommendation modeled on the 2019 proposed rules to require proxy advisory firms to provide issuers with a right of prior review of a draft of the proxy advisory firm’s advice, and for any rebuttal by the issuer to be included in the materials disseminated to the proxy advisory firm’s clients. (See our Osler Update, “Ontario securities taskforce seeks feedback on modernization report”).
Despite the decision by the SEC less than two weeks later to backtrack from such proposals, the Taskforce chose not to make any substantive changes to its recommendations with respect to proxy advisory firms in the Taskforce’s final report issued in January of this year. (See our Osler Update, “Ontario Capital Markets Modernization Taskforce Final Report: A set of thoughtful ideas or a blueprint for change?”).
In light of the direction being given to SEC staff by the SEC Chairman, it is likely that any future SEC proposals will further backtrack from the 2019 proposed rules. As a result, it seems unlikely that Canadian securities regulators will be inclined to adopt the Taskforce’s recommendations on proxy advisory firms.