As described in more detail below, the proposals would:
- Codify the SEC’s interpretation, announced by the SEC in an August 2019 interpretive release, that proxy voting advice provided by a proxy advisory firm generally constitutes a solicitation under the federal proxy rules.
- Amend the rules exempting proxy advisory firms from many of the proxy rules to condition the exemptions on:
- Providing additional disclosures about material conflicts of interest.
- Providing companies and other soliciting persons the opportunity to review and provide feedback on proxy voting advice before it is provided to a proxy advisory firm’s clients, subject to certain conditions.
- Providing companies and other soliciting persons the opportunity to provide a hyperlink, to be included in the proxy voting advice, that leads to the company’s or other soliciting person’s statement regarding the proxy voting advice.
The SEC approved the release of the proposals by a divided vote of 3 to 2, accompanied by both supporting and dissenting statements from Commissioners. In addition, prior to the release, ISS filed a lawsuit against the SEC on October 31, 2019 seeking to enjoin the SEC’s August 2019 interpretation that advice by a proxy advisory firm generally constitutes a solicitation under the federal proxy rules and to have the interpretation declared invalid. Considering the extent of differing views on these subjects, it is uncertain whether these proposals will be adopted and become effective in their current form. At the same time, the proposals and resolution of the lawsuit may influence the conduct of proxy solicitations and interactions between public companies, institutional investors and proxy advisory firms.
Codification of the SEC’s Interpretation of “Solicitation”
Current Rule—Rule 14a-1(l) defines a solicitation to include, among other things, a “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy,” and includes communications by a person seeking to influence the voting of proxies by shareholders, regardless of whether the person itself is seeking authorization to act as a proxy.
Proposed Amendment—as noted above, the proposed amendment would codify the SEC’s August 2019 interpretation of “solicitation” in connection with proxy advisory firm recommendations by amending Rule 14a-1(l)(1)(iii), “to make clear that the terms ‘solicit’ and ‘solicitation’ include any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee.” Additionally, the proposed amendment to Rule 14a-1(l)(2) would specifically exclude from the definition of solicitation “the furnishing of any proxy voting advice furnished by a person who furnishes such advice only in response to an unprompted request.” The SEC noted that it believes “that providing voting advice to a client where the client’s request for the advice has been invited and encouraged by the person’s marketing, offering, and selling such advice should be distinguished from advice provided by a person only in response to an unprompted request from its client.”
Revisions to Availability of Exemptions from Certain Requirements of Proxy Rules
Current Rule—Rule 14a-2(b)(1) and Rule 14a-2(b)(3) provide certain exemptions from the information and filing requirements of the proxy rules (e.g., preparing a proxy statement with the information prescribed by Schedule 14A) for persons engaging in a proxy solicitation. Rule 14a-2(b)(1) generally exempts solicitations by persons who do not seek the power to act as proxy for a shareholder and do not have a substantial interest in the subject matter of the communication beyond their interest as a shareholder. Rule 14a-2(b)(3) generally exempts proxy voting advice furnished by an advisor to any other person with whom the advisor has a business relationship. These exempt solicitations remain subject to the antifraud provisions of the federal proxy rules under Rule 14a-9.
Proposed Amendment—the proposed amendments to Rule 14a-2(b) would subject proxy advisory firms, which the amended rules refer to as “proxy voting advice businesses,” giving advice within the scope of the proposed Rule 14a-1(l)(1)(iii) to the following additional conditions if the proxy advisory firms seek to rely on the exemptions in Rule 14a-2(b)(1) and Rule 14a-2(b)(3).
Conflicts of Interest
The proposed amendments would require additional disclosures of material conflicts of interest in proxy advisory firms’ proxy voting advice. Proposed Rule 14a-2(b)(9)(i) would require the following disclosures:
- Any material interests, direct or indirect, of the proxy voting advice business (or its affiliates) in the matter or parties concerning which it is providing the advice.
- Any material transaction or relationship between the proxy voting advice business (or its affiliates) and (i) the registrant (or any of the registrant’s affiliates), (ii) another soliciting person (or its affiliates), or (iii) a shareholder proponent (or its affiliates), in connection with the matter covered by the proxy voting advice.
- Any other information regarding the interest, transaction or relationship of the proxy voting advice business (or its affiliate) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction or relationship.
- Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction or relationship.
Review and Feedback
The proposed amendments would add a requirement for a proxy advisory firm to provide registrants and other soliciting persons a standardized opportunity to review and provide feedback on proxy voting advice before the proxy advisory firm disseminates the voting advice to its clients. Proposed Rule 14a-2(b)(9)(ii) would require a review and feedback period with a length that depends on the amount of time between filing the definitive proxy statement and the shareholder meeting.
For example, if a definitive proxy statement is filed at least 25 but less than 45 calendar days before the date of the shareholder meeting, the proxy advisory firm would be required to provide at least three business days to review and provide feedback. If the definitive proxy statement is filed at least 45 days before the date of the shareholder meeting, the review and feedback period would be at least five business days. However, if the definitive proxy statement is filed less than 25 days before the meeting, the proposed rule does not require a review and feedback period.
Practice note: The proposed rule creates a practical requirement for a company or other soliciting person to file its definitive proxy materials at least 25 calendar days before a shareholder meeting in order to take advantage of the review and feedback process. This is generally comparable to stock exchange and other recommendations to allow 20 to 30 days before a shareholder meeting to solicit proxies and similar requirements for periods from 20 business days to 40 calendar days for proxy statements relying on incorporation by reference or a Notice of Internet Availability of Proxy Materials under the “notice and access” rules.
Final Notice of Voting Advice
In addition to the review and feedback period, if applicable, proposed Rule 14a-2(b)(9)(ii) would require proxy advisory firms to provide a final notice of voting advice no later than two business days before the proxy advisory firm disseminates its voting advice to its clients. The notice would allow registrants and other soliciting persons to determine the extent to which the proxy voting advice has changed and whether to provide a statement in response to the advice and request that the voting advice include a hyperlink to the response statement.
Hyperlink to Response to Voting Advice
In addition, proposed Rule 14a-2(b)(9)(iii) would require proxy advisory firms to include a hyperlink in their proxy voting advice, if requested, that leads to a written response by the registrant or other soliciting person to the proxy voting advice. The written response must be provided to the proxy advisory firm no later than the expiration of the proposed two business day final notice period described above.
Practice note: A written response statement under the proposed rule by the company or other soliciting person would still be subject to the antifraud provisions of Rule 14a-9 and would need to be filed as additional soliciting materials pursuant to Rule 14a-6.
Additional Examples of Misleading Statements
The proposal would amend Rule 14a-9 to add examples of information that proxy advisory firms may need to disclose to avoid making false or misleading statements under the rule.
Current Rule—Rule 14a-9 prohibits any proxy solicitation from containing false or misleading statements with respect to any material fact at the time and in the light of the circumstances under which the statements are made. Rule 14a-9 provides the following four examples of what may be misleading within the meaning of the rule:
- Predictions as to specific future market values.
- Material which directly or indirectly impugns character, integrity or personal reputation, or directly or indirectly makes charges concerning improper, illegal or immoral conduct or associations without factual foundation.
- Failure to so identify a proxy statement, form of proxy and other soliciting material as to clearly distinguish it from the soliciting material of any other person or persons soliciting for the same meeting or subject matter.
- Claims made prior to a meeting regarding the results of a solicitation.
Proposed Amendment—The amended rule would add the following example of a potentially false and misleading statement or omission:
- Failure to disclose material information regarding proxy voting advice covered by proposed Rule 14a-1(l)(1)(iii), such as the proxy voting advice business’s methodology, sources of information, conflicts of interest or use of standards that materially differ from relevant standards or requirements that the SEC sets or approves.
Comment Period
The proposed amendments will be subject to a 60-day public comment period once published in the Federal Register.