SEC Adopts Amendments to Rescind 2020 Rules Regulating Proxy Advisers

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