On July 13, 2022, the U.S. Securities and Exchange Commission (“SEC” or “the Commission”) announced that it has adopted amendments (the “2022 Amendments”) to its rules governing proxy advisory firms such as Institutional Shareholder Services (“ISS”) and Glass Lewis (“GL”). The amendments rescind key portions of rules adopted by the SEC just two years ago (“the 2020 Amendments”) that increased regulation of proxy advisors after public companies and governance observers expressed concerns about their practices.The 2022 Amendments have removed the requirements that call for proxy advisory firms claiming an exemption from proxy filing rules for solicitations to provide their proxy voting advice to subject companies and provide their clients with company responses to their advice, which were put in place by the 2020 Amendments. While reiterating in the release for the 2022 Amendments that it views proxy voting advice as subject to the proxy rules, including liability for material misstatements or omissions of fact, the SEC voted to delete specific examples of what may, depending on the particular facts and circumstances, be considered misleading to investors with respect to proxy voting advice. The Commission also stated that proxy advisors themselves may be liable for material misstatements of fact, or omissions of material fact, including, depending on the facts and circumstances, with regard to their methodology, sources of information, or conflicts of interest.
Proxy advisory firms provide an array of services to help investment advisers and institutional investor clients manage their substantive and procedural proxy voting needs. With holdings in hundreds, if not thousands, of different companies, it can be difficult for investment firms to devote significant time to consider each of these companies’ annual and special meeting vote solicitations. These investors may retain proxy voting advisors for data analysis (particularly on executive compensation or equity plans), to assist them on how to vote on company proposals and to handle other aspects of the voting process. ISS and GL are the market leaders in this industry.
For many years, companies and others criticized proxy advisory firms for having an outsized influence on the proxy voting process (and therefore the business operations of companies), for the accuracy and soundness of information used to formulate their recommendations, for having potential conflicts of interests involving, among other things, their consulting businesses and proxy recommendation services and for a lack of transparency in the recommendations made. In response to these assertions and in recognition of the unique and important role proxy advisors play in the proxy voting process, in the 2020 Amendments, the SEC adopted a series of amendments to its proxy voting rules that apply to these firms.
Following a change in presidential administration and the commencement of litigation challenging the 2020 Amendments, in June 2021, new SEC Chair Gensler directed the SEC’s staff to consider recommending to the Commission that it revisit the 2020 Amendments, including the conditions on exemptions from proxy filing rules for solicitations. In response, the Division of Corporation Finance stated that it would not recommend enforcement action based on the 2020 Amendments, and the SEC’s 2019 interpretation that proxy advice is a “solicitation” under the proxy rules. In July 2022, the SEC announced approval of the 2022 Amendments.
The crux of the 2022 Amendments is a recission of key aspects of the 2020 Amendments; accordingly, we describe the core provisions of the 2020 Amendments in some detail below. The 2020 Amendments:
- Codified the SEC’s longstanding interpretation that proxy voting advice is a “solicitation” under SEC proxy rules and, as such, is subject to liability under the proxy rules for materially false or misleading statements to specifically include proxy voting advice of the type typically provided by proxy advisory firms; and
- Imposed the following requirements that proxy advisory firms must meet to avoid subjecting their proxy voting advice to filing and certain other requirements of the proxy rules:
- Prominent disclosures of conflicts of interests involving the firm and parties that may have an interest in the matter at hand and procedures in place to identify and address such conflicts;
- An obligation to provide companies (and other proxy soliciting persons, as applicable) with an opportunity to review and provide feedback on proxy voting advice before it is issued and then to provide companies with a final notice of its voting advice; and
- Mandatory inclusion in the voting advice report of a hyperlink to the company’s view regarding that advice
The 2022 Amendments remove the requirements that proxy advisory firms claiming an exemption from proxy filing rules for solicitations must provide their proxy voting advice to subject companies and that they must provide their clients with company responses to their advice. The conditions in the 2020 Amendments related to conflicts of interest remain in place.
The SEC also voted to delete from the proxy rules some specific examples of what may, depending on the particular facts and circumstances, be considered misleading to investors with respect to proxy voting advice. However, the Commission did take care to note in the introduction section of the release for the 2022 Amendments 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. Thus, a proxy advisory firm may be liable under such rule for a material misstatement of fact, or an omission of material fact, including, depending on the facts and circumstances, with regard to its methodology, sources of information, or conflicts of interest.
WHERE DO WE GO FROM HERE?
The 2022 Amendments, which removed key requirements of the 2020 Amendments, is a significant victory for proxy advisory firms.
However, in practice, it likely does not ultimately represent much of a change for public companies given the SEC staff’s announcement in the summer of 2021 that it would not recommend enforcement action on the matters covered by the 2020 Amendments. As a result, issuers and proxy advisory firms have continued to operate under the rules in place prior to the 2020 Amendments.
In 2013, the largest proxy advisory firms, including ISS and GL, formed the Best Practices Principles Group, a proxy advisory firm self-regulatory group (“BPPG”). The stated goal of the group is to provide greater understanding about the services proxy advisory firms provide. The BPPG issued a voluntary set of principles for the conduct of shareholder voting research and analysis services. Potentially in reaction to proposed regulations in the United States and the European Union, in 2020, the BPPG added an independent oversight committee charged with monitoring BPPG members’ compliance with the standards of conduct. The independent operating committee expects to issue an annual report discussing BPPG members’ compliance levels and feedback received from companies and other parties.
In practice, there have been some improvements in engagement between proxy advisory firms and companies in the last few years. ISS will provide companies with a copy of their proxy voting advice reports free of charge (albeit after they have been provided to clients). ISS and GL tout their willingness to meet with companies in the proxy “off season” to discuss topics of mutual interest; “in season” meetings with ISS are possible when significant issues are in question. While ISS no longer provides S&P 500 companies with an advance copy of reports to identify errors, ISS and GL both have processes for reporting errors through their websites.
EFFECTIVE DATE AND TRANSITION PERIODS
The amendments will be effective 30 days after publication in the Federal Register.