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The rules are changing for Proxy Voting Advice Businesses (PVAB), with approval by the SEC of new guidelines. The SEC’s final rule statement (published July 22, 2020) explains, “The Securities and Exchange Commission (“Commission”) is adopting amendments to its rules governing proxy solicitations so that investors who use proxy voting advice receive more transparent, accurate, and complete information on which to make their voting decisions, without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice. The amendments add conditions to the availability of certain existing exemptions from the information and filing requirements of the Federal proxy rules that are commonly used by proxy voting advice businesses.”
Adding further insights is the following two-part, in-depth review provided by Mike Melbinger, Partner Winston Strawn Chicago.
Follow-Up on SEC Final Rules for Proxy Voting Advice Businesses – Part 2
(first published July 24, 2020)
Earlier this week, I posted on the SEC’s[i] Open Meeting to vote on new rules applicable to proxy voting advice businesses (PVABs) such as ISS[ii] and Glass Lewis[iii] proxy advisory firms and summarized the new final rules (SEC Approves Final Rules to Reign in Proxy Voting Advice Businesses). As promised, today I will provide a few more details. As with the proposed rules, the final rules impose two new requirements on PVABs requiring them to:
- Adopt and disclose conflict of interest policies, and
- Provide (A) their proxy voting advice to the corporation that is subject such advice no later than the time when the PVAB provides the advice to its clients and (B) a mechanism by which the PVAB’s clients can reasonably be expected to become aware of any written statements in response to the proxy voting advice from the subject corporation.
The rules also provide a non-exclusive safe harbor provision under which a PVAB will be deemed to satisfy the requirements of item 2 if it has written policies and procedures that are reasonably designed to provide subject corporations with a copy of its proxy voting advice, at no charge, no later than the time such advice is disseminated to the business’s clients, so long as the corporation (i) files its proxy statement at least 40 calendar days before the annual shareholder meeting, and (ii) expressly acknowledged that it will only use the proxy voting advice for its internal purposes and/or in connection with the solicitation and will not publish or otherwise share the PVAB’s advice except with the corporation’s employees or advisers. In response to commenters’ concerns, the SEC eliminated its proposed review mechanism, which would have allowed corporations to review and provide feedback on voting advice before the PVAB provide such advice to its clients.
Finally, the rules clarify that the requirements of item 2 do not apply to proxy voting advice to the extent such advice is based on custom voting policies that are proprietary to a PVAB’s client.
SEC Approves Final Rules to Reign in Proxy Voting Advice Businesses- Part 1
(first published July 22, 2020)
Together with most executive compensation professionals, this blog has been closely following the multi-year saga of attempts by the SEC and Congress to reign in the proxy voting advice businesses (PVABs) such as ISS and Glass Lewis (which control more than 95% of the market). Readers will recall that in November 2019, the SEC proposed rules on proxy advisory firms, similar to the terms of the interpretive guidance (SEC Proposes Rules on Proxy Advisory Firms). Today, the SEC voted 3-1 to approve and adopt the final rules to “provide investors who use proxy voting advice with more transparent, accurate, and complete information on which to make voting decisions, without imposing undue costs or delays.”
I will provide more detail on the final rules as soon as they are published. However, from the descriptions of the rules provided during the open meeting, it appears that the rules are more flexible and less restrictive in the requirements they impose on the PVABs. The proposal for two levels of issuer/corporation review in advance of publication is gone. Instead, a PVAB must provide its voting recommendations to an affected corporation before or at the same time it provides that recommendation to its investment advisor clients. Additionally, the PVAB must provide to its investment advisor clients (i) notice of an affected corporation’s intent to file a response to the PVAB’s proxy advice, regardless of whether the corporation actually files a response, and (ii) a hyperlink to any actual issuer response.
Commissioner Roisman’s statement in support begins:
Out of all the feedback we received, one point seemed to be universally acknowledged: proxy voting advice businesses play a significant role in the proxy voting system as it has developed. Their voting advice is used by many investment advisers and institutional investors who manage money and vote on behalf of Main Street investors. Proxy voting advice businesses’ clients believe their advice is material and market-moving. The fact that these few businesses have assumed such a far-reaching role in our markets as they do today compelled us to look to see whether our current rules continue to further our mission or whether updates are appropriate given these changes in our markets. Our review demonstrates that Commission action is not only appropriate, but perhaps overdue.
Commissioner Lee delivered a spirited statement in opposition to the final rules, titled Paying More For Less: Higher Costs for Shareholders, Less Accountability for Management, which seemed designed to provide ammunition to the proxy advisory businesses for their ongoing or future litigation to stop the rules.
They are still designed to, and will, increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations. The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.
These rules may not be the last act in the saga. Readers will recall that ISS previously filed a lawsuit in federal court challenging the SEC’s authority to regulate it, and the SEC and Chairman Clayton filed an unopposed motion to hold the ISS’s lawsuit in abeyance “until the earlier of January 1, 2021 or the promulgation of final rules.” Now that the rules are final, ISS may continue to pursue its lawsuit. Additionally, the rules were adopted by a 3-2 vote, with all three Republican-appointed commissioners voting in favor and both of the Democratic-appointed commissioner voting against. Although none of the rules approved by a 3-2 vote during the Obama administration were reversed by the current administration, in these contentious political times, one could imagine further revision under a new/different administration.
[i] Security and Exchange Commission
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