SEC Amends Proxy Rules to Tighten Requirements on Proxy Advisory Firms
On July 22, 2020, the Securities and Exchange Commission (the “SEC”) released its much-anticipated final amendments to its rules with respect to proxy voting advice businesses (the “Amendments”). The SEC first issued their proposed amendments concerning proxy advisory firms in November 2019 (the “Proposals”). Overall, the final Amendments represent a more tempered approach to regulation of proxy advisory firms than the original Proposals; specifically, the Amendments abandon the requirement for proxy advisory firms to provide registrants with an advance review and opportunity to comment on their reports. The Amendments also codified much of the SEC’s long-held guidance with respect to these entities. While the Amendments will certainly increase disclosure and regulatory requirements on proxy advisory firms, the amendments should have little practical effect on investors.
Proxy Advisory Services are “Solicitations”
The SEC amended the terms “solicit” and “solicitation” under Rule 14a-1(l) to clarify that advice given by proxy advisory firms constitute solicitations. The amended terms further describe a proxy advisor as a “person who markets its expertise as a provider of such proxy voting advice, separately from other forms of investment advice, and sells such proxy voting advice for a fee.”1 Notably, the SEC also reaffirmed an exception to this definition, that proxy voting advice furnished by a person only in response to an unprompted request shall not be deemed a “solicitation” under the proxy rules. The Amendments confirm the SEC’s position that proxy advice is subject to the federal proxy rules – including the filing of proxy statements – unless an exemption applies.
Despite clarifying that proxy advisory services are in fact solicitations, the Amendments also provide a path for such advisory firms to avoid the administrative burden and costs of complying with the proxy rules with respect to the many companies on which the firms report by providing an exemption to the information and filing requirements if the advisory firm meets certain conditions. The Amendments include new Rule 14a-2(b)(9), which provides that proxy advisory firms may rely on these exemptions (including waiver of the requirement to file a proxy statement) if the following conditions are met:
(i) The proxy voting advice business includes specified conflicts of interest disclosure in its proxy voting advice or in an electronic medium used to deliver the proxy voting advice;2 and
(ii) They must have adopted and publicly disclosed written policies and procedures reasonably designed to ensure that:
- Registrants that are the subject of such proxy voting advice shall have such advice made available to them, at no charge, at or prior to the time such advice is distributed to the proxy voting advice business’s clients; and
- The proxy voting advice business provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants who are the subject of such advice, in a timely manner before the security holder meeting.3
By meeting the above requirements, the advice given by the proxy advisory firms will be considered an “exempt solicitation” not requiring a definitive proxy statement to be on file with the SEC or other information disclosure requirements to be met. The Commission further elucidated “safe harbor” examples of policies and procedures under which the proxy advisory firms will be deemed to have met the above requirements.
Carve-Out for Merger and Contested Solicitations
Most notably, the Amendments do not include the originally proposed requirement that proxy voting advice businesses provide the registrant with an advance copy of their report and the opportunity for comment, which could have provided ample opportunity for abuse by aggressive issuers and their counsel. While at first blush investors may be concerned that new Rule 14a-2(b)(9)(ii) would still provide that registrants receive the proxy advisors’ reports before investors, the SEC has in fact specifically carved merger and contested solicitations out of the requirements of this new rule.4 The SEC recognized that the unique and fast-paced nature of these solicitations would make sending a copy of the proxy advisors’ report “at or prior to” the time it is provided to their clients burdensome and likely without a meaningful value-add, as substantially all registrants and other soliciting persons engaged in these types of solicitations will likely already be closely following the release of the proxy advisors’ report.
It should be noted that while the SEC has carved these types of solicitations out of the broad requirement, the proxy advisory firms are not required to avail themselves of this option. Indeed, the carve-out only applies to “that portion” of the voting advice report that relates to a merger or contested solicitation and most proxy advisory firms issue multiple recommendations in one report. Proxy advisory firms will then be required to either redact their recommendations with respect to merger and contested matters from advance copies of the proxy voting advice report sent to registrants or issue separate reports – one with respect to mergers and contested matters and one with respect to all other matters to be considered at the meeting.
Finally, the Amendments modify Rule 14a-9 to include examples of when a proxy voting advice business’s failure to disclose certain material information in their proxy advice could be deemed misleading within the meaning of the rule. Specifically, the Amendments state that failure to disclose “the proxy voting advice business’s methodology, sources of information, or conflicts of interest” may, depending on the particular facts and circumstances, be deemed to be material misleading under Rule 14a-9.5
The Amendments will become effective 60 days after their publication in the Federal Registrar. However, affected proxy voting advice businesses will not be required to comply with the Rule 14a-2(b)(9) requirements until December 1, 2021, so there is time to prepare.