SEC Amends Proxy Rules Applicable to Voting Advice
On July 22, 2020, the Securities and Exchange Commission adopted rules and related guidance on proxy voting advice. The rules purport to take a “principles-based” approach to the regulation of proxy voting advice and respond to calls of companies wanting more opportunity to review and respond to the voting recommendations of proxy advisors. The rules attempt to ensure that clients of proxy advisors have access to company responses prior to shareholder meetings and require proxy advisors to disclose potential conflicts of interest.
Final Proxy Rule Amendments
Among other things, the rules:
- codify the SEC’s longstanding view that proxy voting advice generally constitutes a solicitation under federal proxy rules;
- clarify that the failure to disclose material information about proxy voting advice may constitute a potential violation of antifraud rules; and
- provide that proxy advisory firms have exemptions from certain information and filing requirements if they:
- provide conflicts of interest disclosures in their proxy voting advice or in electronic medium used to deliver the advice; and
- publicly disclose written policies and procedures reasonably designed to ensure that (i) companies that are the subject of proxy voting advice have access to the advice prior to or at the time the advice is disseminated and (ii) their clients have a mechanism by which they can be informed of written statements regarding the proxy voting advice from companies that are the subject of such
The rules provide a non-exclusive “safe harbor” that satisfy this second condition. Specifically, the proxy advisory firms must provide:
- companies with their voting advice, free of charge, no later than when they send it to clients, but may condition this obligation on the requirements that companies (i) file their definitive proxy statements at least 40 calendar days before their shareholder meetings and (ii) use the advice only for their “internal purposes and/or in connection with the solicitation” and will not publish or otherwise share the advice except with the companies’ employees or advisers; and
- notice to their clients on their electronic platforms or through email or other electronic means that a company has filed, or informed the proxy advisory firms of their intention to file, additional solicitation materials setting forth the company’s response to the advice (and hyperlink to these materials if filed on EDGAR).
The safe harbor providing for prior or concurrent review of proxy voting advice will assist companies who meet the 40-calendar day definitive proxy filing schedule. Currently, many companies have to pay for or register to access reports containing proxy voting advice.
Proxy advisory firms have until December 1, 2021 to implement the new procedures. Institutional Shareholder Services has a lawsuit pending against the SEC challenging the SEC’s authority to regulate it. As this lawsuit was stayed pending the adoption of these rules, we may see more developments.
The SEC also issued supplemental guidance to investment advisers regarding their proxy voting responsibilities. Prior SEC guidance discussed how rules under the Investment Advisers Act of 1940 relate to an investment adviser’s exercise of voting authority on behalf of its clients.
The supplemental guidance will assist investment advisers in assessing how to consider company responses to recommendations by proxy advisory firms that may become more readily available to investment advisers as a result of the amendments to the solicitation rules under the Exchange Act. This includes circumstances in which the investment adviser utilizes a proxy advisory firm’s electronic vote management system that “pre-populates” the adviser’s ballots with suggested voting recommendations or for voting execution services.
To address this practice of “robovoting,” the guidance reiterates that investment advisers owe a fiduciary duty to disclose all material facts of the investment advisory relationship between the advisers and their clients, and should consider whether the use of automated voting features is a material fact that should be disclosed. The guidance also states that an investment adviser should consider whether its policies and procedures address circumstances where it becomes aware that a company intends to file or has filed additional soliciting materials with the SEC after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline for proxies to be voted at a shareholder meeting.
The supplemental guidance is effective upon publication in the Federal Register.
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