By Rodney F. Tonkovic, J.D.
The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness has written to the SEC to express its concerns over the agency's plans to review the proxy advisor rule adopted in July 2020. The letter contrasts the abrupt cessation of enforcement with the decade-long examination of the role of proxy advisory firms underlying the rulemaking process. Ideally, the Chamber says, the SEC should let the rule go into effect and then assess what needs improvement. Given that Commission staff have decided not to enforce the rule, the Chamber formally suggests that the SEC revisit key provisions of the rule proposal and consider further strengthening the proxy advisor rule in the future.
The new proxy rule. In July 2020, the Commission adopted regulations requiring greater transparency from proxy advisors about their conflicts of interest and greater access by registrants and clients to registrant comments on proxy voting advice. Earlier, in August 2019, the SEC approved an interpretation regarding proxy voting advisers, stating that proxy voting advice provided by proxy advisory firms generally constitutes a "solicitation" under the federal proxy rules and providing related guidance about the application of the proxy antifraud rule to proxy voting advice.
Enforcement pause. The rules became effective in November 2020, but there was a transitional period during which compliance with some portions of the regulation was not immediately required. Controversial since the proposal stage, the new regulations met with strong opposition, including, for example, a lawsuit filed against the SEC by proxy advisory firm ISS, seeking relief in response to its proxy guidance and calling it "unlawful." Finally, in June 2021, the Division of Corporation Finance announced that its staff was considering revisiting the amendments and that it would not recommend enforcement action. This decision was met with a mix of praise and skepticism.
The Chamber is wary. The Center's letter, written on behalf of the Chamber, contrasts the lengthy regulatory process leading up to the adoption of the proxy advisor rule with the "abrupt" decision to suspend its enforcement. While the rulemaking was the product of a decade-long examination of the role of proxy advisory firms, the decision to suspend enforcement, the letter says, is void of evidence or arguments for why non-enforcement is in the best interest of investors. Plus, the Chamber is concerned about the precedent set by the decision to effectively ignore a recent rule, stating that this action "raises serious concerns about the Commission’s deliberative process, and harms the SEC’s reputation as an independent regulator that is free from political agendas."
The letter first notes that the proxy advisor rule is grounded in years of evidence and data regarding flaws in the proxy advisory system that harm investors and competition, and that the SEC should prioritize effective oversight and enforcement of the rule. Under the leadership of both parties, the Commission has been grappling with addressing problems with proxy advisors for over a decade. In addition, the letter observes that there were significant changes between the proposal and the final rule that incorporated concerns raised by proxy advisors. In contrast, there was no underlying rationale or transparency behind the announcement that the rule would not be enforced. This approach, the Chamber says, substitutes the judgment of SEC staff for that of the commissioners and undermines the thorough rulemaking process.
Next, the Chamber believes that the Commission should preserve its longstanding view that proxy advice constitutes a "solicitation" under the Federal proxy rules. It is unclear to the Chamber why it is necessary to review this matter when the Commission has defined proxy advice as a solicitation for years and without controversy. The Chamber urges the SEC to reject proxy advisors' efforts to change this longstanding position, characterizing their efforts as an open attempt to avoid oversight and accountability.
Finally, the Chamber recommends that as the SEC considers further regulatory action, it should revisit unfinalized provisions from the November 2019 proposed rule. The letters remarks that the "thoughtful" approach would be to let the rule go into full effect in order to gather data and experience associated with the application of the rule. That said, the Chamber formally suggests that the SEC revisit key provisions of the 2019 rule proposal and consider further strengthening the Proxy Advisor Rule in the coming years. For example, the proposal included provisions to address "robovoting" and would also have imposed explicit requirements to disclose conflicts of interest.
In sum, the Chamber says that the Commission must justify its sudden reversal of the "carefully considered evolution of proxy advisor regulation over the past decade." The letter states that the Chamber hopes this reversal is not an effort to appease "the proxy advisor oligopoly and a minority of activists that wish to preserve the status quo." The effectiveness of the proxy advisor reforms was dependent on the SEC enforcing its own rules, and this outcome can no longer be taken for granted, the letter observes.