SEC Withdraws Two No-Action Letters Concerning Proxy Advisory Firms

The Securities and Exchange Commission’s (the “SEC“) Division of Investment Management has announced the withdrawal of two no-action letters[1] that provided guidance to registered investment advisers regarding their use of proxy advisory firms consistent with Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended (the “Proxy Rule“). [2]

Under the Proxy Rule, registered investment advisers exercising voting authority with respect to client securities are required to adopt and implement written policies and procedures reasonably designed to ensure that they vote proxies in the best interest of such clients (including how advisers address any material conflicts of interest with their clients). The two withdrawn no-action letters addressed how advisers could determine whether a proxy advisory firm relied upon to vote client proxies would be independent where the advisory firm receives compensation from an issuer for providing advice on corporate governance issues. Subsequently, Staff Legal Bulletin No. 20 (June 30, 2014)[3] (the “Bulletin“) incorporated and expanded upon the guidance provided by these no-action letters. There is no indication that the Bulletin has been revoked by the Update, and therefore the withdrawal of these no-action letters should not affect the general use of proxy advisory firms by advisers relying on the guidance in the Bulletin.

The withdrawal of these no-action letters comes ahead of the SEC’s upcoming Roundtable discussion on the proxy process (expected to be held in November 2018). The staff will engage with market participants at the Roundtable regarding topics such as the voting process, retail shareholder participation and the role of proxy advisory firms, including the staff’s guidance in the Bulletin. The staff indicated that it expects to utilize what it learns from the Roundtable in any future recommendations to the SEC with respect to proxy advisory firms.

In an unusual development, Commissioner Robert J. Jackson Jr. issued an individual statement expressing concerns about “misguided and controversial efforts to regulate proxy advisors,” which he described as “a top priority for corporate lobbyists.” The statement goes on to say that he worries these contentious issues will distract from what Commissioner Jackson sees as the urgent need to fix the basic mechanics of corporate democracy.

We expect guidance on this issue to continue to evolve, and will provide updates regarding future developments.