On July 13, 2022, the Securities and Exchange Commission (the “SEC”) finalized rule amendments (the “Amendments”), proposed in November 2021, updating regulations governing proxy voting advice. The Amendments, approved by the Commissioners on a party line vote, roll back portions of Rule 14a-2(b)(9)(ii) (together with its related supplemental SEC guidance, the “2020 Rule”), which was adopted in 2020 and which had, prior to the Amendments, required proxy voting advice businesses (“PVABs”) either to engage in certain discussions with companies prior to publishing voting recommendations or risk liability for any misstatement of material fact in such recommendations. The Amendment will be effective September 19, 2022.
Proxy Rule Conditions for Proxy Voting Advice
As drafted, the 2020 Rule required PVABs to adopt, and publically disclose, certain written policies and procedures in connection with their voting recommendations to avoid potential liability for any misstatements or inaccuracies in the recommendations. Such policies were designed to ensure that:
- PVAB’s made their voting recommendations available to the subject companies at, or prior to, sharing the advice with their shareholder clients; and
- PVAB’s provided the subject companies a mechanism to respond to their voting recommendations, such that the PVAB’s shareholder clients would receive the responses before those shareholders could vote.
The original 2020 Rule was intended to address public companies’ concerns that PVABs, such as Institutional Shareholder Services (“ISS”) and Glass Lewis, had a significant amount of influence on matters submitted to shareholder vote, but were not subject to adequate regulatory scrutiny. PVABs’ individualized voting recommendations have historically had a significant effect on such votes, which address matters such as election of directors, merger transactions, executive compensation and ESG-related or other shareholder proposals. The 2020 Rule gives a board of directors an opportunity to respond to negative voting recommendations from PVABs that the board might believe were based on inaccurate or incomplete information. In adopting the 2020 Rule, Jay Clayton, then SEC Chairman, indicated that the rule both empowered investors with more information and reduced some of the excessive power that PVABs were seen to have over corporate affairs.
The 2020 Rule was opposed by PVABs and certain institutional investors who expressed concerns that the Rule increased compliance costs, created timeliness risks, limited PVABs’ independence, and did little to protect investors. One concern was that the processes to be established meant it would be significantly more costly for PVABs to adopt voting recommendations opposed to a Board’s recommendation than recommendations in line with the Board’s, and so could influence its recommendations. PVABs further argued that they had continued to develop industry-wide best practices to address the concerns that were the impetus for the 2020 Rule. This opposition cumulated in the adoption of the Amendments, which remove the specific provisions of the 2020 Rule discussed. In explaining this change of course, the SEC stated that, “we are no longer persuaded that the potential benefits of those conditions sufficiently justify the risks they pose to the cost, timeliness, and independence of proxy voting advice and believe that the final amendments strike a better policy balance.”
Liability Rule for Proxy Voting Advice
Despite the above rollback, the Amendments leave intact the 2020 Rule’s reclassification of PVABs’ advice as “solicitation” as defined in Rule 14a-1. As such, they codifiy PVABs as subject to existing proxy rules, including those imposing liability for materially misleading or false statements and requiring conflicts of interest.
Prior to the Amendments, ISS had filed a complaint against the SEC relating to the 2020 Rules and their related guidance, seeking to enjoin the rules that declare that proxy advice constitutes a solicitation. While it “applaud[ed] the Commission for removing some of [the 2020 Rule]’s more draconian provisions,” ISS maintains its prior position that the 2020 Rule “should have been rescinded in its entirety.”1 Pending the results of this suit, the provisions of the 2020 Rule remaining in effect continue to classify proxy voting advice as a solicitation subject to the proxy rules, including liability under Rule 14a-9 for material misstatements or omissions of fact.