On July 13, the U.S. Securities and Exchange Commission (SEC) finalized regulations that rescind provisions adopted by the Trump-era SEC in 2020 requiring proxy advisors to provide their voting recommendations to public companies no later than they provide them to their institutional investor and other clients. A companion rule requiring proxy advisors to share directly with their clients the public company responses to their voting recommendations also was rescinded. In its press release accompanying the 3 – 2 vote to rescind these requirements, the SEC stated: “The final amendments aim to avoid burdens on proxy voting advice businesses that may impair the timeliness and independence of their advice.”
The final amendments also delete the 2020 final regulation changes made to the proxy rules’ liability provision requiring proxy advisors to disclose material information such as the proxy advisor’s “methodology, sources of information, or conflicts of interest.” The SEC’s logic in deleting this rule is legalistic, as it removes the affirmative safe harbor requirement that such information be disclosed in a proxy advisor’s voting recommendations to clients; however, because these communications are still considered by the SEC to be proxy solicitations, proxy advisors could still be liable for a material misstatement or omission of material facts regarding its methodology, sources of information or conflicts of interest.
The SEC believes that it makes sense to delete this disclosure requirement because even though proxy advisors do have established methodologies for formulating their voting advice, the SEC recognizes that this process often requires subjective determinations and the exercise of professional judgment. The SEC believes that exercising this discretion should not subject proxy advisors to legal liability in the event a company holds a differing view about how the proxy advisor reached its voting recommendation decision.
Eliminating this rule requiring disclosure of material information also eliminates the requirement of specific disclosures under the 2020 final rules, along with the accompanying safe harbors. We referenced these rules in a July 27, 2020 blog post:
If this seems to be a rule change that only an SEC lawyer can understand, we share that sentiment. If the entire part of the 2020 final regulation referenced above is deleted, as a matter of policy, that is certainly within the SEC’s prerogative. What confuses us somewhat is that the SEC removed the specific conflicts of interest disclosure in item (1), but then reiterated that that proxy advisors must still disclose potential conflicts under the proxy solicitation rules. It is unclear to us whether proxy advisors would meet those proxy solicitation rules by reverting to using a generic statement about potential conflicts or whether they would still use a communication with a company-specific disclosure when communicating to companies their proxy voting advice. We also understand the nuance that proxy advisors must still be afforded legal protections when exercising judgment, but we are not quite sure why the SEC did not retain the requirement mandating that methodologies must be disclosed.
In the end, the SEC’s amendments might not change the landscape very much. The two largest proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis, have either maintained or implemented many of the now rescinded safe harbor requirements, and we would think their current approach would continue going forward.
Even prior to the 2020 final regulations, both advisors have made their proxy voting policies and development methodologies publicly available via their respective websites (we think ISS provides many more details than does Glass Lewis). After the final regulations were issued, Glass Lewis permitted companies to respond to voting recommendations with a Report Feedback Statement that would be shared directly with its clients (however, companies would be required to purchase the Glass Lewis report to offer this feedback). ISS has not taken a similar step to permit company feedback directly to investors.
Both proxy advisors have included language in their respective reports that responds to the question of potential conflicts of interest, with links available for clients to get additional information if they find it necessary to fulfill their fiduciary obligations to do so. ISS included its disclosure even before the 2020 final regulations were published to clarify its policies and procedures as it offered companies the ability to purchase services directly from ISS. Glass Lewis added its disclosure in 2021 as it introduced its own corporate services offering to companies.
