On July 13, the U.S. Securities and Exchange Commission (SEC) voted to adopt amendments to federal proxy rules and rescind two rules adopted in 2020. The first rescinded rule required proxy advisors to provide their voting recommendations to public companies no later than they provide them to their institutional investor and other clients. A second companion rule requiring proxy advisors to provide clients company-issued written responses to proxy voting advice also was rescinded. In its press release accompanying the 3 – 2 vote to eliminate 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 SEC’s 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.” Deleting this rule 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 voted to delete this disclosure requirement because it believes that even though proxy advisors have established methodologies for formulating their voting advice, this process often can be subjective, and that proxy advisors exercising this discretion should not be held legally liable if a company disagrees with how the voting recommendation decision was reached.
Eliminating this rule also eliminates the requirement of specific disclosures under the 2020 final rules, along with the accompanying safe harbors.1
The SEC’s amendments might not change the proxy voting advice landscape much. The two largest proxy advisors, Institutional Shareholder Services (ISS) and Glass Lewis, have already either maintained or implemented many of the now rescinded safe harbor requirements.
Starting before the 2020 final regulations, both advisors have made their proxy voting policies and development methodologies publicly available via their respective websites. 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 Corporate Solutions, a wholly owned subsidiary of ISS. Glass Lewis added its disclosure in 2021 as it introduced its own corporate services offering to companies.
ISS recently announced that it would continue to pursue its lawsuit against the SEC challenging its decision “to regulate a form of independent investment advice as though it were a solicitation of a specific outcome in a shareholder vote.” In its original complaint, ISS argued that if its voting recommendations were considered proxy solicitations, it would be open both to SEC enforcement actions and to lawsuits from companies that disagree with the internal guidelines it uses to make voting recommendations. ISS would like the court to limit these causes of action, arguing that its obligation as a registered investment advisor to act in its clients’ (institutional investors’) best interests is a sufficient regulatory enforcement mechanism.
1 For more information on the 2020 rules, see “SEC regulations on proxy advisors delayed until the 2022 proxy season,” Executive Pay Memo North America, July 2020.
