The Securities and Exchange Commission (the SEC or Commission) continues to address controversy regarding the proxy voting system and the influence of proxy advisory firms (Proxy Advisors). On November 17, 2021, the SEC proposed to amend portions of Rules 14a-2 and 14a-9, in response to concerns about the timeliness and independence of proxy voting advice as well as risks of litigation and compliance costs for proxy voting advice businesses. 1
Proxy Advisors, such as Glass Lewis and Institutional Shareholder Services (ISS), help shareholders exercise their right to vote, provide voting advice, and facilitate the vote execution process. In July 2020, the SEC adopted rules that, among other things, required Proxy Advisors to adopt principles-based policies to make proxy voting advice available to the subject companies no later than the time it is disseminated to the Proxy Advisor’s clients, and to notify clients of company responses. Initially, these rules were intended to give companies further opportunity to review and respond to Proxy Advisors’ voting recommendations and reports. Under the rules adopted in July 2020, each of these requirements could be satisfied by meeting the requirements of a non-exclusive safe harbor that included ensuring that companies that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the Proxy Advisor’s clients, and providing its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants who are the subject of such advice, in a timely manner before the security holder meeting. For more information, see our August 5, 2020 client alert, “SEC adopts amendments to proxy advice rules and updates guidance for investment advisers.”2
Subsequent to the adoption of these rules, investors and others have expressed concerns that these conditions impose increased compliance costs on Proxy Advisors, impair the independence of their voting advice, and increase litigation risks for the proxy advisory business. Therefore, the SEC has proposed amendments to ease burdens on Proxy Advisors. The SEC noted, “the goal of the proposed amendments is to avoid burdens on [proxy voting advice businesses] PVABs that may impede and impair the timeliness and independence of their proxy voting advice and subject them to undue litigation risks and compliance costs, while simultaneously preserving investors’ confidence in the integrity of such advice.”
Proposed rule amendments
The SEC proposes the following amendments to portions of Rules 14a-2 and 14a-9:
- Rescind requirements of the non-exclusive safe harbor conditions that require proxy advisory firms to:
- Ensure that companies that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the Proxy Advisor’s clients.
- Provide its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants who are the subject of such advice, in a timely manner before the security holder meeting.
- Remove specific examples of material misstatements or omissions related to proxy voting advice.
The amendments will not impact other aspects of final rules adopted in 2020. Proxy voting advice remains a solicitation subject to the proxy rules.
A 30-day public comment period for the proposal expired on December 27, 2021. Comments submitted to date are available on the SEC’s website.3
Companies that hold annual shareholders meetings, or that may hold special shareholder meetings, including registered investment companies and business development companies, should be aware of the proposed amendments as they impact proxy voting advice businesses that may disseminate influential advice on their company proposals.