Yesterday I wrote on the SEC’s open meeting during which the Commissioners voted 3-2 to publish interpretive guidance on proxy advisory firms, and I promised to write again when the guidance is published in the Federal Register or otherwise made available. Well, the SEC posted the guidance the same day, so here is the follow-up.

Among the key factors cited by the SEC as evidence that the proxy advisory firms recommendations constitute a “solicitation” are that the firms seek “to influence the voting of proxies by shareholders” and “market their expertise in researching and analyzing matters submitted to a shareholder vote for the purpose of assisting their clients in making voting decisions at shareholder meetings.”

Listening to the two dissenting Commissioners, one could discern that the most controversial part of the guidance was the examples of the types of information that a proxy advisory firm “should consider” disclosing in order to avoid potential violations of Rule 14a-9, which are as follows:

  • an explanation of the methodology used to formulate its voting advice on a particular matter (including any material deviations from the provider’s publicly-announced guidelines, policies, or standard methodologies for analyzing such matters) where the omission of such information would render the voting advice materially false or misleading;

To the extent that the proxy voting advice is materially based on a methodology using a group of peer companies selected by the proxy advisory firm, the disclosure may need to include the identities of the peer group members used as part of its recommendation and the reasons for selecting these peer group members as well as, if material, why its peer group members differ from those selected by the company. For example, such disclosure may be needed for a voting recommendation on a company’s advisory vote on an executive compensation proposal that is based on a comparison of the company’s executive compensation policies to those of other companies selected by the proxy advisory firm.

  • to the extent that the proxy voting advice is based on information other than the company’s public disclosures, such as third-party information sources (g., third-party research or publications, commercial or financial information databases, or ratings or rankings published by third parties), disclosure about these information sources and the extent to which the information from these sources differs from the public disclosures provided by the company if such differences are material and the failure to disclose the differences would render the voting advice false or misleading; and
  • disclosure about material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts.

The dissenting Commissioners argued that, as a practical matter, the proxy advisory firms will view these examples as “required.” I suppose that we will learn soon enough if that is true. Because these are interpretations of existing rules, rather new rules, they are effective immediately.