SEC Adopts Amendments to Proxy Voting Advice Rules

The U.S. Securities and Exchange Commission Wednesday adopted amendments to its rules governing proxy voting advice, representing another step forward in what has been a fraught regulatory process.

SEC Chair Gary Gensler, in a statement said, the final amendments aim to avoid burdens on proxy voting advice businesses that may impair the timeliness and independence of their advice. The amendments also address misperceptions about liability standards applicable to proxy voting advice, Gensler says, while preserving investors’ confidence in the integrity of such advice.

“I am pleased to support these amendments because they address issues concerning the timeliness and independence of proxy voting advice, which would help to protect investors and facilitate shareholder democracy,” Gensler says. “It is critical that investors who are the clients of these proxy advisory firms are able to receive independent and timely advice.”

As outlined in a press release distributed after the vote by the SEC, Wednesday’s final amendments rescind two rules applicable to proxy voting advice businesses that the Commission adopted in 2020. Specifically, the final amendments rescind conditions to the availability of two exemptions from the proxy rules’ information and filing requirements on which proxy voting advice businesses often rely.

These conditions require that, first, public companies? that are the subject of proxy voting advice have such advice made available to them in a timely manner, and second, that clients of proxy voting advice businesses are provided with a means of becoming aware of any written responses by those companies to proxy voting advice. The SEC’s release states that institutional investors and other clients of proxy voting advice businesses have continued to express concerns that these conditions could impose increased compliance costs on proxy voting advice businesses and impair the independence and timeliness of their proxy voting advice.

The final amendments also delete the 2020 changes made to the proxy rules’ liability provision. As explained in the SEC’s release, although the 2020 changes were intended to clarify the application of this liability provision to proxy voting advice, they instead created a risk of confusion regarding the application of this provision to proxy voting advice, undermining the goal of the 2020 changes.

The final amendments address the confusion while affirming that proxy voting advice generally is subject to liability under the proxy rules, the SEC says. Finally, the adopting release rescinds guidance that the Commission issued in 2020 to investment advisers regarding their proxy voting obligations.

The vote on the rule amendments comes more than a year after Gensler signaled that the SEC would revisit the proxy voting framework established by the SEC during 2019 and 2020 under the leadership of the Trump administration. Then-SEC Chair Jay Clayton argued those amendments would facilitate the ability of those who use 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.”

In the simplest terms, the Trump-era Securities and Exchange Commission adopted amendments to its rules that exempt persons furnishing proxy voting advice from the information and filing requirements of the federal proxy rules. In addition, the changes amended the definition of “solicitation” in Exchange Act Rule 14a-1(l) to specify that it includes proxy voting advice, with certain exceptions.

From the moment of their proposal through Wednesday’s vote, these rule amendments have raised the ire of the proxy voting industry and many of its clients. Immediately after the vote, the proxy voting advisory firm Institutional Shareholder Services issued a statement with mixed interpretation of the regulatory update.*

“While we applaud the Commission for removing some of the 2020 rule’s more draconian provisions, the rule should have been rescinded in its entirety,” the statement reads. “As investors and their representatives made abundantly clear in two rounds of public comments, the proxy rule is a solution in search of a problem. Today’s action misses the mark by failing to address the most critical defect; namely, the reclassification of proxy advice provided in a fiduciary capacity as proxy solicitation. We firmly believe the Commission’s decision to regulate a form of independent investment advice as though it were a solicitation of a specific outcome in a shareholder vote exceeds the agency’s statutory authority, is contrary to law, and is arbitrary and capricious. That is why we filed our suit challenging the 2020 rule and the 2019 guidance on which the rule was based. Oral arguments in the case are scheduled for late this month.”

Glass Lewis, another prominent provider that has commented in opposition to the Trump-era rules, has not yet responded to a request for comment about Wednesday’s vote.

The Council of Institutional Investors, a nonprofit association of public, corporate, union and other pension and benefit funds with combined assets under management of approximately $4 trillion, Wednesday issued a statement applauding the SEC for eliminating the “onerous provisions in rules the Commission adopted in 2020 that could have harmed the independence, cost and timeliness of proxy voting advice. Institutional investors, the primary customers of proxy voting advisory firms, did not request or support the provisions.”

The CII added, however, that the SEC’s action “does not address the foundational determination in the 2020 rules that proxy advice is a proxy solicitation under the federal securities laws. That continues to be a source of confusion and unnecessary costs for the Commission, investors, proxy advisors and other market participants. Classifying proxy advice as solicitation potentially subjects proxy advisory firms to burdensome filing rules and challenges their independence and free speech rights in conducting the financial analysis that informs their proxy voting advice.”

Alternately, the American Securities Association, which has been a vocal supporter of the Trump-era framework, quickly issued a statement bemoaning the SEC’s  vote.

“Today, the U.S. Securities Exchange Commission finalized rules that would gut the proxy adviser reforms adopted in 2020 and proposed undoing reforms to the shareholder proposal system under Rule 14a-8—both reforms the American Securities Association strongly supported,” the ASA statement reads. “Today’s actions will cost public companies and their American investors millions of dollars. By removing anti-fraud liability and conflict disclosures from the proxy process, the SEC has guaranteed that monopoly rents continue to flow to proxy advisers.” 

*Editor’s note: CIO is owned by Institutional Shareholder Services (ISS). ISS has been involved in litigation seeking to halt the implementation of the proxy voting rule changes.

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