Last Monday, June 30, the Division of Investment Management and the Division of Corporation Finance of the SEC released Staff Legal Bulletin No. 20 on “Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms,” following complaints by corporations that such advisers have too much influence. Among the key points and interesting items in SLB 20 are the following:

  • SLB 20 sets forth specific things that an investment adviser should ascertain when considering whether to retain or continue retaining any particular proxy advisory firm to provide proxy voting recommendations, including in Q&A 2, among other things, “the adequacy and quality of the proxy advisory firm’s staffing and personnel; the robustness of its policies and procedures regarding its ability to (i) ensure that its proxy voting recommendations are based on current and accurate information and (ii) identify and address any conflicts of interest and any other considerations that the investment adviser believes would be appropriate in considering the nature and quality of the services provided by the proxy advisory firm.” [emphasis added] 

Continuing in Q&A 5, “For example, an investment adviser may determine that a proxy advisory firm’s recommendation was based on a material factual error that causes the adviser to question the process by which the proxy advisory firm develops its recommendations. In such a case, the staff believes that the investment adviser should take reasonable steps to investigate the error, taking into account, among other things, the nature of the error and the related recommendation, and seek to determine whether the proxy advisory firm is taking reasonable steps to seek to reduce similar errors in the future.”

Note that many of us have had issues with the accuracy of the information upon which some proxy advisor firms have relied.

  • If a proxy advisory firm only distributes reports containing recommendations, it will be able to rely on the exemption from the information and filing requirements of the federal proxy rules in Rule 14a-2(b)(1). However, if a proxy advisory firm determines that it has a significant relationship or a material interest with the company or a security holder proponent that requires disclosure for purposes of relying on Rule 14a-2(b)(3), the proxy advisory firm must provide the recipient of its advice with notice of the presence of a significant relationship or a material interest, which is sufficient to “enable the recipient to understand the nature and scope of the relationship or interest, including the steps taken, if any, to mitigate the conflict, and provide sufficient information to allow the recipient to make an assessment about the reliability or objectivity of the recommendation.”
  • SLB 20 is not a rule. However, SLB 20 flatly states that, although the SEC Staff recognizes that proxy advisory firms may need to make changes to their current systems and processes in light of the new guidance, the Staff “expects any necessary changes will be made promptly, but in any event in advance of next year’s proxy season.”

It remains to be seen whether the Bulletin will lead to any changes or reaction by the proxy advisory firms. Corporations may need to be aggressive (or at least proactive) to gain any benefit or result from the Bulletin. Stay tuned to this blog for more.