Interpretation and Guidance Regarding the Applicability of the Proxy Rules

On August 21, 2019, the SEC issued an interpretation and related guidance regarding the applicability of certain rules to proxy advisory firms.  The SEC interpretation imposes new regulatory oversight on proxy advisory firms that clarifies that proxy advisers are subject to Rule 14a-9 and the anti-fraud rules concerning materially false or misleading statements.

We expect proxy advisory firms will provide additional disclosures in in their reports in response to the guidance, such as:

  • Explanations of the methodology used to formulate voting advice;
  • Disclosures of peer group companies used by proxy advisory firms, including the names of those companies that are different than the ones selected by issuers and why firms decided to use those peers;
  • Disclosures of third party information sources, such as publications, databases, ratings or rankings published by third parties; and
  • Disclosures about material conflicts of interest in reasonably sufficient detail.

Although some proxy advisory firms have become increasingly transparent in recent years, the most significant updates to the disclosures by proxy advisory firms will likely relate to conflicts of interest. The SEC has recently issued guidance to investment advisers on fulfilling their proxy voting responsibilities to clients, which included a more thorough discussion about how to evaluate and consider the proxy advisory firms’ conflicts of interest.  We expect the discussion in that guidance on how to analyze and evaluate potential conflicts of interest will likely inform related SEC expectations of proxy advisory firms.

KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.


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