March 31, 2022
Shocking Recension and Amendment of the Proxy Adviser Rule Threatens Shareholder Democracy
In November 2021, the U.S. Securities and Exchange Commission’s (the “SEC” or “Commission”) proposed recensions and amendments to the proxy adviser rule under the Investment Advisers Act of 1940. The SEC’s proposed rules have ignited debates on whether the proposed rules have achieved its intended goal— to “strike a more appropriate balance,” by avoiding impairing the timeliness and independence of proxy advisors’ proxy voting advice, while preserving investors’ confidence in the integrity of such advice.
This article discusses the proxy adviser rule, detailing distinctions between the newly proposed amendments and the 2020 Final Rules. This article will further examine potential implications of the amendments and provide recommendations to advisers in response to the SEC’s newly proposed amendments.
II. Background and Summary
The SEC’s proposed amendments to the federal proxy rules governing proxy voting advice has recently garnered widespread attention and criticism. The SEC has deviated from tradition by rescinding rules that were recently adopted in July 2020 (the “2020 Final Rules”). The SEC has not only proposed to rescind the newly adopted rules but has further proposed amendments that eliminate the 2020 Final Rules’ requirement that proxy advisers adopt policies and procedures for engagement with registrants that are the subject of their proxy voting advice. The proposed amendments would also rescind the 2020 changes made to the proxy rules’ liability provision to clarify the scope of proxy advisory firms’ liability for their advice.
The Commission now faces criticism from the U.S. Chamber of Commerce and investors who have voiced concerns over the degree to which proxy voting advice is independent from corporate involvement. Additionally, the SEC is now confronted with whether the recensions will implicitly favor corporate special interests resulting in conflicts of interests where proxy adviser’s biased recommendations is reflected in actual votes and shareholder value is diluted.
III. What is the Proxy Voting Rule?
Investment advisers owe each of their clients a duty of care and loyalty with respect to services undertaken on the clients’ behalf, including proxy voting. Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended (“Advisers Act”), requires an investment adviser who exercises voting authority with respect to client securities to adopt and implement written policies and procedures that are reasonably designed to ensure that the registered investment adviser (“RIA”) votes proxies in the best interest of its clients.
The Advisers Act Rule 206(4)-6 (the “Proxy Voting Rule”) requires RIAs that exercise voting authority over client securities to:
Under rule 204-2, as amended, advisers must retain:
(i) their proxy voting policies and procedures;
(ii) proxy statements received regarding client securities;
(iii) records of votes they cast on behalf of clients;
(iv) records of client requests for proxy voting information; and,
(v) any documents prepared by the adviser that were material to determining how to vote or to abstain, to memorialize the basis for the decision.
IV. Proxy Voting Advice Businesses: Solicitation
The Commission’s 2020 amended rules governing proxy solicitations were designed to ensure that clients of proxy voting advice businesses (“PVAB”) have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions. The amendments aim to 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.
Additionally, the Commission’s 2020 amended rules conditioned the availability of certain existing exemptions from the information and filing requirements of the federal proxy rules commonly used by proxy voting advice businesses upon compliance with additional disclosure and procedural requirements.
Finally, the Commission amended Securities Exchange Act of 1934 Rule 14a-9, the antifraud provision of the federal proxy rules, to clarify that, depending upon the particular facts and circumstances at issue, the failure to disclose certain information in proxy voting advice may be considered materially misleading within the meaning of the Rule.
Under the 2020 amendments, in order for proxy voting advice businesses to rely on these exemptions, they must satisfy the following conditions of new Rule 14a-2(b)(9):
V. SEC Newly Proposed Amendments:
On November 17, 2021, the SEC voted to propose amendments to its rules governing proxy voting advice. The proposed amendments would rescind two rules applicable to proxy voting advice businesses that the Commission adopted in 2020. Specifically, the Commission is proposing to rescind conditions to the availability of two exemptions from the Proxy Rules’ informational and filing requirements on which proxy voting advice businesses often rely as well as eliminate Note (e) to Rule 14a-9. The proposed amendments are discussed in further detail below.
Proposed Amendments to Rule 14A-2(B)(9)
Those conditions of Rule 14A-2(B)(9) require that: (1) registrants that are the subject of proxy voting advice have such advice made available to them in a timely manner, and (2) clients of proxy voting advice businesses are provided with a means of becoming aware of any written responses by registrants to proxy voting advice. Since its ratification, investors and others have expressed concerns that these conditions will impose increased compliance costs on PVABs and impair the independence and timeliness of their proxy voting advice.
Consequently, the Commission has proposed to amend Rule 14a-2(b)(9) by deleting paragraph (ii) and rescinding the Rule 14a-2(b)(9)(ii) conditions. The Rule 14a-2(b)(9)(ii) conditions require that PVABs adopt and publicly disclose written policies and procedures reasonably designed to ensure that (A) registrants that are the subject of their proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the PVABs’ clients and (B) the PVABs provide their clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding their proxy voting advice by registrants who are the subject of such advice, in a timely manner before the relevant shareholder meeting (or, if no meeting, before the votes, consents or authorizations may be used to effect the proposed action).
The proposed amendments would also delete paragraphs (iii), (iv), (v) and (vi) of Rule 14a-2(b)(9), which contain safe harbors and exclusions from the Rule 14a-2(b)(9)(ii) conditions. As discussed above, the Rule 14a-2(b)(9)(ii) conditions were intended to benefit shareholders by improving the overall mix of available information to allow them to make more informed voting decisions. While the goal of facilitating more informed voting decisions remains unchanged, the Commission believes that the continued concerns expressed by the investors who rely on proxy voting advice to make their voting decisions warrants a reassessment of the appropriate means to achieve that goal.
Proposed Amendment to Rule 14A-9
Under Rule 14A-9, Note (e) sets forth examples of what may, depending on the particular facts and circumstances, be misleading within the meaning of Rule 14a-9 with respect to proxy voting advice. Specifically, Note (e) to Rule 14a-9 provides that the failure to disclose material information regarding proxy voting advice, “such as the [PVAB’s] methodology, sources of information, or conflicts of interest” could, depending upon particular facts and circumstances, be misleading within the meaning of the rule.
The Commission has proposed to delete Note (e) to Rule 14a-9. As discussed above, Note (e) sets forth examples of what may, depending on the particular facts and circumstances, be misleading within the meaning of Rule 14a-9 with respect to proxy voting advice. Although Note (e) was intended to clarify the potential implications of Rule 14a-9 for proxy voting advice under existing law, it appears instead to have unintentionally created a misperception that the addition of Note (e) to Rule 14a-9 purported to determine or alter the law governing Rule 14a-9’s application and scope, including its application to statements of opinion.
The Commission has opined that the proposed deletion of Note (e) is intended to address that misperception and thereby reduce any resulting uncertainty that could lead to increased litigation risks or the threat of litigation and impaired independence of proxy voting advice.
VI. Practical Tips: