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Securities Alert

July 23, 2020

SEC Amends Proxy Rules for Proxy Voting Advice and Issues Supplemental Guidance on Proxy Voting Responsibilities of Investment Advisers

Amendments Codify Prior Guidance that Proxy Voting Advice Is a “Solicitation,” Add Conditions to Exemptions Relied on by Proxy Advisory Firms

By Gary M. Brown, Mike Bradshaw

Continuing its focus on the proxy process and possible improvements to the ability of shareholders to exercise their voting rights,[1] the SEC adopted amendments to the proxy rules on July 22, 2020 designed to ensure that clients of proxy voting advisory firms (such as ISS and Glass Lewis) have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions.[2] The amendments aim to facilitate the ability of users of proxy voting advice — investors and others who vote on investors’ behalf — to make informed voting decisions without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice.

Proxy Advice Constitutes “Solicitation” – Rules 14a-1(l) and 14a-9. First, consistent with its “longstanding” view, the SEC amended the definition of the terms “solicit” and “solicitation” in Rule 14a-1(l) to specify that proxy voting advice generally constitutes a solicitation within the meaning of Exchange Act Section 14(a). New paragraph (A) to Rule 14a-1(l)(1)(iii) indicates when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules. In addition, new paragraph (v) to Rule 14a-1(l)(2) codifies the SEC’s view that a person who furnishes proxy voting advice only in response to an unprompted request is not deemed to be a solicitation. A correlative amendment to Rule 14a-9 (the anti-fraud provision of the proxy rules) added to the list of examples of potentially misleading statements or omissions the failure to disclose material information regarding proxy voting advice, such as the advisory firm’s methodology, sources of information, or conflicts of interest.

Principles-Based Conditions Added to Certain Exemptions. Proxy advisory firms historically have relied upon either Rule 14a-2(b)(1) (the “no power/no form” exemption) or Rule 14a-2(b)(3) (the “business advisor” exemption) to provide exemptions from the information and filing requirements of the SEC’s proxy rules. The amendments now expressly condition the availability of those exemptions on two principles-based requirements that the SEC indicated reflect market practices designed to ensure that: (1) companies that are the subject of proxy voting advice have that advice made available to them in a timely manner, and (2) clients of proxy advisory firms have an efficient and timely means of becoming aware of any written responses by companies to proxy voting advice.

A new Rule 14a-2(b)(9) sets forth two conditions that proxy advisory firms, in order to rely upon either of the exemptions described above, must meet. Specifically:

  • Condition 1. They must include in their proxy voting advice (or in an electronic medium used to deliver the advice) prominent disclosure of: (i) any interest, transaction or relationship of the firm (or its affiliates) that is material to assessing the objectivity of its advice in light of the circumstances of the particular interest, transaction, or relationship; and (ii) any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction, or relationship.
  • Condition 2. They must have adopted and publicly disclosed written policies and procedures reasonably designed to ensure that (i) companies that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the proxy advisory firm’s clients; and (ii) the proxy advisory firm provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by companies that are the subject of such advice, in a timely manner before the shareholder meeting.

To give assurance to a proxy advisory firm that its written policies and procedures satisfy the above principles-based conditions, new Rule 14a-2(b)(9) includes the following non-exclusive “safe harbors”:

  • Condition 1 “Safe Harbor.” A proxy advisory firm will be deemed to satisfy Condition 1 if its written policies and procedures are reasonably designed to provide companies with a copy of its proxy voting advice, at no charge, no later than the time it is disseminated to the business’s clients. The safe harbor also specifies that such policies and procedures may include conditions requiring companies to (i) file their definitive proxy statement at least 40 calendar days before the shareholder meeting and (ii) expressly acknowledge that they will only use the proxy voting advice for their internal purposes and/or in connection with the solicitation and will not publish or otherwise share the proxy voting advice except with the company’s employees or advisers.
  • Condition 2 “Safe Harbor.” A proxy advisory firm will be deemed to satisfy Condition 2 if its written policies and procedures are reasonably designed to provide notice on its electronic client platform or through email or other electronic means that the company has filed, or has informed the proxy advisory firm that it intends to file, additional soliciting materials setting forth the company’s statement regarding the advice (and if it includes an active hyperlink to those materials on EDGAR when available).

Supplemental Guidance Regarding Proxy Voting Responsibilities of Investment Advisers. The SEC also supplemented its prior guidance regarding the proxy voting responsibilities of investment advisers in light of the SEC’s amendments to the proxy solicitation rules.[3] The prior guidance discussed how the fiduciary duty and Rule 206(4)-6 under the Investment Advisers Act of 1940 relate to an investment adviser’s exercise of voting authority on behalf of its clients. The new guidance is designed to assist investment advisers in assessing how to consider a company’s responses to recommendations by proxy advisory firms that may become more readily available to investment advisers as a result of the amendments to the proxy solicitation rules, which are described above. This would include circumstances in which the investment adviser utilizes a proxy advisory firm’s electronic vote management system that “pre-populates” the adviser’s ballots with suggested voting recommendations or for voting execution services.

The supplemental guidance follows a Q&A format and provides examples to help facilitate compliance. For example, the new guidance states that an investment adviser should consider whether its policies and procedures address circumstances in which the investment adviser has become aware that a company intends to file or has filed additional soliciting materials with the SEC after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline. The new guidance also addresses disclosure obligations and client consent when investment advisers use automated services for voting.

Effective and Compliance Dates. The amendments to the proxy rules are effective 60 days after publication in the Federal Register; however, proxy voting advisory firms subject to the amended rules are not required to comply with the Rule 14a-2(b)(9) amendments until December 1, 2021. The SEC was careful to note, however, that the delayed compliance date does not apply to the revised definition of “solicitation” or to the additional guidance set forth in Rule 14a-9 (the anti-fraud rule). The new investment adviser guidance will be effective upon publication in the Federal Register.

The above is only a summary of the changes made to the proxy rules, and you should contact one of the authors or your primary Nelson Mullins contact for specific advice as needed.

[1] See, e.g., Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Exchange Act Release No. 86721 (Aug. 21, 2019); Commission Guidance Regarding Voting Responsibilities of Investment Advisers, Investment Advisers Act Release No. 5325 (Aug. 21, 2019); and Concept Release on the U.S. Proxy System, Exchange Act Release No. 62495 (July 14, 2010).

[2] Exchange Act Release No. 89372 (July 22, 2020).

[3] Investment Advisers Act Release No. 5547 (July 22, 2020).