On July 13, 2022, the Securities and Exchange Commission ("SEC") adopted amendments to its rules governing proxy advisory firms such as Institutional Shareholder Services and Glass Lewis.1 The amendments, among other things, rescind recently-adopted requirements that companies be timely informed of proxy voting advice of which they are the subject and that proxy advisory firm clients be provided with company responses to such proxy voting advice. These requirements were designed with the idea that "more complete and robust information and discussion leads to more informed investor decision-making." However, based on investor feedback and further evaluation, the SEC subsequently concluded that "the potential informational benefits to investors of the….conditions do not sufficiently justify the risks they pose to the cost, timeliness, and independence of proxy voting advice on which many investors rely."
In July 2020, the SEC adopted rules codifying the SEC’s interpretation that proxy voting advice constitutes a "solicitation" subject to the proxy solicitation rules of Regulation 14A (the "2020 Rules").2 Prior to the adoption of the 2020 Rules, proxy advisory firms had generally relied on two exemptions from these requirements, set forth in Rules 14a-2(b)(1) and (3), to avoid the proxy rules’ information and filing requirements. The 2020 Rules added two new conditions that had to be met in order for proxy advisory firms to rely on these exemptions:
- conflicts of interest disclosure requirements; and
- a requirement that proxy advisory firms adopt and disclose written policies and procedures designed to (i) ensure that firms make their advice available to the subject company at or before the time that they make the advice available to their clients, and (ii) provide the clients with a mechanism by which they could reasonably be expected to become aware of any written statements by companies in response to such advice (the "Rule 14a-2(b)(9)(ii) conditions").
The expanded exemption did not exempt qualified proxy voting advice from Rule 14a-9’s prohibition against liability for false and misleading statements. The 2020 Rules added Note (e) to Rule 14a-9, to provide examples of what might constitute prohibited false and misleading statements in proxy voting advice.3
Rescission of Proxy Rule Exemptions for Proxy Voting Advice
The Rule 14a-2(b)(9)(ii) conditions were intended to benefit institutional investors and investment advisers, and the underlying investors they serve. However, these beneficiaries and others who rely on proxy advisory firm voting advice expressed concerns about the 2020 Rules’ impact on their ability to receive independent proxy voting advice in a timely manner. In response to these concerns, in November 2021 the SEC proposed amendments that would, among other things, rescind the Rule 14a-2(b)(9)(ii) conditions. The SEC has adopted these amendments as proposed, rescinding Rule 14a-2(b)(9)(ii) and the related safe harbors and exclusions from those conditions.
The amendments did not remove the requirement for conflict of interest disclosure from the Rule 14a-2(b)(9) exemption.
Rescission of Liability Rule for Proxy Voting Advice
The 2020 Rules added Note (e) to Rule 14a-9, which provided that the failure to disclose material information regarding proxy voting advice, including the firm’s methodology, sources of information, and conflicts of interest, could be misleading. The final amendments delete Note (e), which the SEC concluded created a risk of confusion regarding the application of Rule 14a-9 to proxy voting advice, which unnecessarily increases the litigation risk to proxy advisory firms and impairs the independence of the proxy voting advice that investors use to make their voting decisions. The deletion is also intended to address any "misperception that [the SEC’s] adoption of Note (e) purported to determine or alter the law governing Rule 14a-9’s application and scope, including its application to statements of opinion," in order to reduce any resulting uncertainty that could lead to increased litigation risks, or the threat of litigation, and impaired independence of proxy voting advice.4
The amendments did not remove the codification of the SEC’s view that proxy voting advice constitutes a "solicitation" subject to the proxy rules.
The reversal of many of the components of the 2020 Rules removes an avenue for companies to correct errors in proxy voting advice, give feedback on such advice and ensure investors are aware of such feedback. It also signals the current SEC’s view that proxy advisory firms generally protect investors, and that if they err in their voting advice, the resort available to the relatively large number of investors dependent on them is liability under Rule 14a-9, assuming the errors rise to such level. However, in practice, these amendments are unlikely to represent much of a change for public companies, since in the summer of 2021 the SEC Staff announced that it would not recommend enforcement action on the matters covered by the 2020 Rules. As a result, issuers and proxy advisory firms continued to operate under the prior rules. In addition, the adopting release points out that this rulemaking did not represent a wholesale reversal of the 2020 rulemaking, noting that:
- Proxy voting advice generally remains a solicitation subject to the proxy rules, including liability under Rule 14a-9 for material misstatements or omissions of fact;
- In order to rely on the exemptions from the proxy rules’ information and filing requirements set forth in Rules 14a-2(b)(1) and (3), proxy advisory firms will still have to satisfy Rule 14a-2(b)(9)’s conflicts of interest disclosure requirements; and
- The deletion of Note (e) does not affect the scope of Rule 14a-9 or its application to proxy voting advice.
Critics, including SEC Commissioner Hester Peirce, point out the potential "regulatory whiplash" of amending rules so recently adopted, without full information about the impact and costs of the 2020 Rules. The uncertainty created by the changing of recently-adopted policies could be confusing to market participants.5 In addition, the two dissenting Commissioners took issue with the short comment period for the rule proposal and Commissioner Peirce expressed concerns about the impact "[c]hanging course so dramatically with so little justification" may have on the SEC’s credibility.6
The final rules are being challenged in court in two separate cases, both of which allege that the SEC has exceeded its authority and failed to follow the appropriate federal process for policy revision. One suit has been filed by the US Chamber of Commerce, the Business Roundtable and the Tennessee Chamber of Commerce & Industry in the US District Court for the Middle District of Tennessee7 and the other was filed by a group of plaintiffs that includes the National Association of Manufacturers and Natural Gas Services Group Inc. in the US District Court for the Western District of Texas.8
The final amendments and the rescission of the guidance will be effective 60 days after publication in the Federal Register.
1 See, the fact sheet, press release and final rule.
2 The July 2020 final rules are available here.
3 In connection with the 2020 Rules, the SEC also issued supplemental guidance to investment advisers about their proxy voting obligations, which was prompted, in part, by the SEC’s adoption of the conditions set forth in Rule 14a2(b)(9)(ii). The adopting release rescinds the supplemental guidance, noting consideration of comment letters on the November 2021 proposing release and existing obligations and considerations regarding proxy voting under the Investment Advisers Act of 1940.
4 The adopting release also reaffirms the SEC’s position that "Rule 14a-9 liability does not extend to mere differences of opinion….Rule 14a-9 prohibits misstatements or omissions of ‘material fact.’ …Thus, to state a claim under Rule 14a-9, it would not be enough to allege that a PVAB’s opinions—regarding, for example, its determination to select a particular analysis or methodology to formulate its voting recommendations or the ultimate voting recommendations themselves—were wrong."
5 See statement of Commissioner Peirce, available here.
6 Id. See also, statement of Commissioner Uyeda, available here.
7 The complaint is available here.
8 The complaint is available here.
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