By John Filar Atwood
The SEC’s proposal to rescind recently adopted rules addressing proxy voting advice businesses has divided industry stakeholders who have outlined their opposing positions in recent comment letters to the Commission. Proponents feel that the adopted rules unfairly favor the viewpoints of company management and impose unnecessary burdens on voting advice businesses, while opponents believe the rules support transparency and accuracy in the proxy voting process.
In July 2020, the Commission adopted amendments to the exemptions from the proxy rules for proxy voting advice businesses (PVABs). Among other things, the final rules codified the Commission’s interpretation that proxy voting advice generally constitutes a “solicitation” subject to the proxy rules.
The rules also added new conditions to two exemptions that PVABs generally rely on to avoid the proxy rules’ information and filing requirements, including that registrants have proxy voting advice made available to them at or prior to the time such advice is disseminated to the PVAB’s clients. A PVAB also must provide its clients with a mechanism by which they can become aware of any written statements regarding its proxy voting advice in a timely manner before the shareholder meeting (together, the Rule 14a-2(b)(9)(ii) conditions. The Commission also amended the note to Rule 14a-9, which prohibits false or misleading statements, to include specific examples of material misstatements or omissions related to proxy voting advice.
Since the adoption of the final rules, institutional investors and other PVAB clients have voiced concerns about the rules’ impact on their ability to receive independent proxy voting advice in a timely manner. In addition, the Commission has seen PVABs develop industry-wide best practices and improve their own business practices to address the concerns that were the impetus for the 2020 rules. Accordingly, in November the Commission proposed to amend Rule 14a-2(b)(9) to remove the Rule 14a-2(b)(9)(ii) conditions, and to amend Rule 14a-9 to remove Note (e) to that rule, which sets forth specific examples of material misstatements or omissions related to proxy voting advice.
Unfairly favors management. The North American Securities Administrators Ass’n. (NASAA) supports the proposals, and expressed its view that the Rule 14a-2(b)(9)(ii) conditions burden PVABs and shareholders unnecessarily, and unfairly privilege the views of company management. In its comment letter, NASAA said that it is unnecessary to require PVABs to disseminate the views of company management because they have ample opportunities to make their positions known, and responsive proxy materials are publicly available on the EDGAR database.
The kinds of investors who use the services of PVABs, NASAA continued, are sophisticated enough to know where to find a company’s written statements if they are interested. The current requirements tilt the playing field in favor of company management and create unequal access to the proxy solicitation process, In NASAA’s opinion. The existing rule does not require a PVAB to afford these opportunities to any other stakeholders, even shareholder proponents with respect to their own proposals, which can further marginalize their voices, NASAA said.
NASAA supports the proposed deletion of Note (e) from Rule 14a-9, which appears to have created the perception that issuers may use the threat of litigation to pressure PVABs to change their proxy advice, methodologies, analyses, and sources of information. Regardless of whether any such suits are , NASAA is concerned that the risk perceived by PVABs could create a dynamic that impairs the independence and objectivity of their proxy voting advice.
Full rescission. The Council of Institutional Investors (CII) also favors the rescission of the Rule 14a-2(b)(9)(ii) conditions, as well as the related Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers. CII believes that neither the 14a-2(b)(9)(ii) conditions nor the guidance were intended to benefit investors. Rescinding the conditions and the guidance would give proxy advisers and investors more flexibility to select mechanisms that best serve the needs of investors and adapt to evolving market practices, according to CII.
With respect to the removal of Note (e) of Rule 14a-9, CII agreed with the SEC’s view that subjecting proxy advisers to Rule 14a-9 liability creates uncertainties that unnecessarily increase the litigation risk to proxy advisers and potentially increase the cost and impair the independence of the proxy voting advice. We believe removing Note (e) in combination with amending Rule 14a-9 to include an express statement about the application of Rule 14a-9 to proxy adviser recommendations and determinations would substantially reduce those uncertainties.
CII went a step further than NASAA and suggested that the Commission rescind the 2020 final rules in their entirety. The group noted that the final rules are built on the SEC’s determination that proxy voting advice delivered to an investor requesting that advice constitutes a “solicitation” under 1934 Act Section 14(a). In CII’s view, the breadth of the Commission’s definition of a solicitation will likely continue to be a source of questions and confusion, and it is unclear that when challenged the definition will survive judicial scrutiny.
Opposition. The Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) opposes the November amendments, saying that changes to the final rules before they have fully taken effect raise concerns about the Commission’s deliberative process and harm the SEC’s reputation as an independent regulator that is free from political agendas.
The CCMC believes that if the SEC is serious about proceeding with proposed amendments in an open fashion, it should rescind the November proposals and issue an advanced notice of proposed rulemaking. In this way, all interested parties would be permitted to provide input and inform the Commission’s deliberations on whether to reopen the 2020 final rules, the CCMC said.
The CMC argued that if the Commission will not rescind the proposals, it should extend the comment period for another 60 days. The group said that 30 days is inadequate for meaningful feedback on amendments to a rule grounded in over a decade of careful deliberations spanning the tenure of multiple SEC Chairs.
According to the CCMC, the 30-day comment period does not permit adequate time to collect and assess relevant data from the most recent proxy season. This reinforces the perception that the comment period is a “check-the-box exercise,” the CCMC stated, rather than an effort to obtain meaningful feedback to inform the Commission’s actions.
Nasdaq’s views. In its comment letter, Nasdaq noted that the 2020 final rules were overwhelmingly supported by public companies because it provided a review-and-comment mechanism that would result in better informed voting decisions by investment advisers. In comparing the final rules with the November proposals, Nasdaq said, it must conclude that the proposals reverse many of the transparency gains in the final rules, which it believes contained common sense solutions to enhance the dialogue between proxy advisers and companies.
Nasdaq cited surveys that found that more than 80 percent of companies and retail investors supported the final rules. The final rules reflect the culmination of the SEC’s careful consideration of public comments submitted in response to a proposed rule, comments on an earlier concept release, and several public roundtables, Nasdaq said.
Nasdaq noted that it has long supported proxy advisory reforms on the principle that transparency forms the bedrock of securities laws disclosures, and should equally apply to proxy advisory firms because institutional investors increasingly rely on them to inform their voting decisions. In Nasdaq’s opinion, the 2020 final rules benefitted proxy advisory firms by enhancing investor confidence that their voting advice is based on factually correct, reliable information.
Nasdaq argued that the proposals undermine the transparency provided by the final rules by repealing carefully tailored mechanisms that balanced the need for accurate information with the demand for timely and objective voting advice.