The chairman of the Securities and Exchange Commission has instructed the staff to review the Trump administration’s proxy adviser rules and whether to recommend further regulatory action regarding proxy voting advice.
“In particular, the staff should consider whether to recommend that the Commission revisit its 2020 codification of the definition of solicitation as encompassing proxy voting advice, the 2019 Interpretation and Guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 Rule Amendments, among other matters,” Chairman Gary Gensler said in a June 1 statement.
Non-enforcement
As part of the directive, the SEC also advised that the Division of Corporation Finance will not recommend enforcement action based on the 2019 Interpretation and Guidance or the 2020 Rule Amendments during the period in which the Commission is considering further regulatory action.
In September 2019, the Commission issued an interpretation and guidance addressing the application of the proxy rules to proxy voting advice businesses. And in July 2020, the Commission adopted amendments to Rules 14a-1(l), 14a-2(b), and 14a-9 concerning proxy voting advice.
Those amendments codified the Commission’s view that proxy voting advice generally constitutes a “solicitation” as defined in Rule 14a-1(l), adopted Rule 14a-2(b)(9) to add new conditions to two exemptions from the proxy rules’ information and filing requirements that proxy voting advice businesses often use. They also amended the Note to Rule 14a-9 to include specific examples of material misstatements or omissions related to proxy voting advice.
Given the growing influence that proxy advisory firms have with retail investors, institutional investors and investment advisers, the July 2020 rule sought to address concerns about potential conflicts of interest that may affect the recommendations made by the proxy voting advice businesses, and whether registrants have an adequate opportunity to respond to proxy voting advice before votes.
Under the amendments, proxy voting advice businesses that want to rely on exemptions from the information and filing requirements of the proxy rules must: provide clients with tailored and comprehensive disclosure about their conflicts of interest; and establish policies and procedures designed to ensure companies that are the subject of their voting advice are able to see and respond to such advice in a timely manner.
In underscoring its view that proxy voting advice generally constitutes a solicitation, the new rules also provided that a failure to disclose material information about proxy voting advice may constitute a potential violation of the antifraud provision of the proxy rules.
The rule amendments became effective on Nov. 2, 2020. But to limit disruptions during the peak proxy season, proxy voting advice businesses are not required to comply with the amendments to Rule 14a-2(b)(9) until Dec. 1, 2021.
In the June 1 statement, the SEC further advises that if the new regulatory action leaves the 2020 exemption conditions in place with the current Dec. 1, 2021, compliance date, the staff will not recommend any enforcement action based on those conditions for what is described as “a reasonable period of time” after any resumption by proxy advisory firm Institutional Shareholder Services of its litigation challenging the 2020 amendments and the 2019 Interpretation and Guidance.
For its part, Institutional Shareholder Services, which was strongly opposed to the new rules, applauded the SEC’s move. “We welcome the SEC’s announced decision to consider revisiting its proxy adviser rulemaking, which we believe was ill-conceived, inconsistent with the law, and pushed through under the previous administration against the wishes of investors the agency is meant to protect,” President and CEO Gary Retelny said in a statement. “We look forward to participating in the upcoming rulemaking process and encourage all good governance supporters to do the same.”
What’s the Rush?
In the meantime, Commissioners Hester Peirce and Elad Roisman questioned the move to revisit and delay enforcement of the rules. “We are open to seeing what, if any, changes to our rules the staff recommends and to working with our colleagues to consider such recommendations. We find it difficult, however, to imagine what has changed in the roughly ten months since the Commission last considered this issue that would call into question such recently adopted requirements,” they argued in a June 1 statement.
The two Republican-leaning Commissioners further observe that the compliance date for the exemption conditions “is still months away,” making it challenging to know how the requirements will work in practice or to evaluate further changes without considering new data. “We find it even harder to understand how the Commission would justify a departure from its longstanding legal interpretation about proxy solicitation,” Peirce and Roisman contend.
