On July 13, 2022, the U.S. Securities and Exchange Commission (SEC) adopted rule amendments that rescind significant parts of rules the SEC adopted in July 2020 governing proxy voting advice furnished by proxy advisors such as Institutional Shareholder Services, Inc. and Glass, Lewis & Co.1 The SEC, by a 3-2 vote, adopted the rule amendments as proposed in November 2021.2 The SEC’s stated purpose for the action is “to avoid burdens on [proxy advisors] that may impede and impair the timeliness and independence of their proxy voting advice and avoid misperceptions regarding the application of Rule 14a-9 liability to proxy voting advice, while also preserving investors’ confidence in the integrity of such advice.”3
In July 2020, the SEC adopted rule amendments to (1) codify its view that proxy voting advice generally constitutes a “solicitation” subject to the federal proxy rules, (2) clarify that the omission of certain information from proxy voting advice may, depending on the particular facts and circumstances, violate the anti-fraud provisions and (3) impose additional disclosure and procedural requirements on proxy advisors as conditions for being able to continue relying on exemptions from the information and filing requirements of the federal proxy rules.4
As part of the 2020 amendments, the SEC added Note (e) to Exchange Act Rule 14a-9 as a new example of the type of information that, depending on the particular facts and circumstances, may be misleading if omitted from proxy voting advice, including the failure to disclose material information regarding the proxy voting advice, such as the proxy advisor’s methodology, sources of information or conflicts of interest. The addition — which largely codified existing SEC guidance — was designed to give proxy advisor clients greater insight as to the processes and methodologies proxy advisors use to formulate their proxy voting recommendations.5
The 2020 amendments also added two new conditions in Rule 14a-2(b)(9)(ii) that would require proxy advisors to do the following to rely on the exemptions from the proxy rules’ information and filing requirements: (1) make their proxy voting advice available to companies before or at the time it is provided to clients and (2) provide clients with a way to reasonably be expected to become aware of any written statements by the company regarding the proxy advisor’s proxy voting advice in a timely manner before the annual shareholder meeting. The rule amendments took effect on November 2, 2020, and proxy advisors were required to comply with the new conditions by December 1, 2021. See the Sidley Update available here for more details.
In June 2021, SEC Chair Gary Gensler issued a statement directing the SEC staff to consider whether to recommend further regulatory action regarding proxy voting advice and to “revisit” prior rules and guidance.6 Concurrently, the SEC’s Division of Corporation Finance announced that it would not recommend enforcement action based on such rules and guidance while the SEC considers potential changes.7
On November 17, 2021, the SEC proposed rule amendments that would rescind two key aspects of the 2020 rules, purportedly to address investor concerns about the impact those rules had on the ability of proxy advisors to deliver timely, independent proxy voting advice to clients. On July 13, 2022, the SEC adopted those rule amendments as proposed. First, the new rules delete Note (e) from Rule 14a-9 while affirming that proxy advisors may still be subject to liability under Rule 14a-9 for a materially misleading statement or omission of fact, including with respect to its methodology, sources of information or conflicts of interest. Second, the new rules remove the Rule 14a-2(b)(9)(ii) conditions and related safe harbors and exclusions. Relatedly, the SEC rescinded supplemental guidance it published in 2020 to assist investment advisers in fulfilling their proxy voting responsibilities, particularly when relying on proxy advisors, because the guidance was partially driven by the adoption of the Rule 14a-2(b)(9(ii) conditions.8
In coming to its decision to adopt the rule amendments, the SEC determined that (1) Note (e) created a risk of confusion about the application of Rule 14a-9 to proxy voting advice and (2) “the potential informational benefits to investors of [the conditions in Rule 14a-2(b)(9)(ii)] do not sufficiently justify the risks they pose to the cost, timeliness, and independence of proxy voting advice.”9
The SEC explained in the adopting release that Rule 14a-9’s prohibition on material misstatements will not result in liability for “mere differences of opinion” regarding proxy voting advice. The SEC reiterated its understanding that there are three instances in which a statement of opinion may be actionable under Rule 14a-9 as a misstatement or omission of material fact: (1) if a proxy advisor’s statement of opinion falsely describes its view as to how it believes clients should vote, (2) if a proxy advisor’s statement of opinion includes “embedded statements of fact” that are not true or (3) if a proxy advisor fails to include in its opinion material facts regarding how it its opinion was determined and such facts differ from how a reasonable investor would interpret the opinion.
Among other things, the two dissenting Commissioners took issue with the SEC’s amendment of the rules just two years after their adoption and the short comment period for the rule proposal. Commissioner Hester Peirce expressed concerns about the impact “[c]hanging course so dramatically with so little justification” may have on the SEC’s credibility,10 and Commissioner Mark Uyeda emphasized that “the deletion of Note (e) fails to provide regulatory clarity” and “the 30-day comment period for the proposal was insufficient under the circumstances” and ill-timed in that it overlapped with several major holidays.11
The new rules and rescission of the supplemental guidance will take effect on September 19, 2022.
1Proxy Voting Advice, SEC Release No. 34-95266 (Jul. 13, 2022), available here (“Adopting Release”).
2Proxy Voting Advice, SEC Release No. 34-93595 (Nov. 17, 2021), available here.
3Adopting Release.
4Exemptions from the Proxy Rules for Proxy Voting Advice, SEC Release No. 34-89372 (Jul. 22, 2020), available here.
5Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Release No. 34-86721 (Aug. 21, 2019), available here.
6SEC Chair Gary Gensler, “Statement on the application of the proxy rules to proxy voting advice,” (Jun. 1, 2021), available here.
7SEC Division of Corporation Finance, “Statement on Compliance with the Commission’s 2019 Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice and Amended Rules 14a-1(1), 14a-2(b), 14a-9,” (Jun. 1, 2021), available here.
8Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, SEC Release No. IA-5547 (Jul. 22, 2020), available here.
9SEC Fact Sheet: “Proxy Voting Advice,” available here.
10SEC Commissioner Hester M. Peirce, “U-Turn: Comments on Proxy Voting Advice,” (Jul. 13, 2022), available here.
11SEC Commissioner Mark T. Uyeda, “Statement on Final Rule Amendments on Proxy Voting Advice,” (Jul. 13, 2022), available here.
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