The Securities and Exchange Commission (SEC) capped a nearly decade-long regulatory review process last week when it voted to adopt amendments to rules regarding proxy voting advice and provide updated guidance to investment advisors on their proxy voting responsibilities and use of proxy advisors. However, the decision by the SEC to take a principles-based approach to the proxy rules grants proxy advisors latitude to determine how they will implement these rules. Given this approach by the SEC, along with a range of other factors including possible legal challenges to the rule and the potential for a change in leadership at the SEC tied to the outcome of the presidential election, there is significant uncertainty about how, or if, these rules will become fully operational and what the direct impacts of their implementation will be.
Rule Amendments for Proxy Voting Advice
Though the rule amendments will become effective 60 days after publication in the Federal Register, there are two key compliance dates for when they will become operational – this fall and December 1, 2021. The aspects of the rules that are scheduled to go into effect this fall include:
- Codification that proxy voting advice is a solicitation under the proxy rules and as a result is subject to antifraud rules
- The addition of several examples of the types of information that the SEC believes to be material and without which proxy advice could be considered misleading and potentially in violation of the antifraud provision of the proxy rules. These examples include the methodology used to formulate proxy advice, sources of information used to create proxy advice or conflicts of interest disclosure
Notable changes to proxy rules that proxy advisors will be required to comply with beginning December 1, 2021, include:
- Clarification of the conditions under which proxy advisors can be exempted from the information and filing requirements of proxy rules. Specifically, to avoid being required to comply with those requirements, a proxy advisor must:
- Disclose material conflicts of interest — such as whether an activist investor is a research client or whether the subject company is a consulting client of the proxy advisor — in research reports and/or on digital platforms or other electronic means;
- Disclose the policies and procedures used to identify and address such conflicts;
- Have policies and procedures to ensure that issuers have, at no charge, access to copies of the reports covering their meetings prior to or when reports are distributed to proxy advisor clients;
- Provide its clients with an email or electronic system that allows them to be notified in a timely manner if a company intends to or has filed written statements or additional soliciting materials regarding its advice (including an active hyperlink to EDGAR when available)
- The rules include certain exemptions, including for clients who vote according to a custom policy and for non-exempt solicitations regarding certain M&A or contested director elections
- The SEC also provided two non-exclusive “safe harbors” to proxy advisors in regard to the new policies and procedures:
- Proxy advisors may require issuers to file their definitive proxy statement 40+ calendar days before the shareholder meeting and may also require companies to acknowledge they will only use reports for internal purposes and/or in connection with a solicitation
Supplemental Guidance Concerning Proxy Voting Responsibilities of Investment Advisors
The SEC’s new supplemental guidance on investor fiduciary duty as it pertains to proxy voting responsibilities builds on prior guidance from August 2019 relating to investment advisors’ duty of care and loyalty in the exercising of voting power. The new guidance calls for investment advisors to disclose 1) the extent and circumstances under which they use “automatic” voting and 2) how their policies and procedures address proxy voting in instances where they are aware that companies intend to or have filed additional soliciting materials.
Given the long lead time given for implementation of the proxy rules and discretion given to proxy advisors in how they comply with the rules, the direct impact on issuers will be more muted in the near-term. The proxy rule amendments will prompt greater transparency and specificity from proxy advisors around potential conflicts of interest as well as the process and methodology used in making their voting recommendations. The supplemental guidance may prompt investment advisors, particularly those that rely on proxy advisor policies, to reevaluate their approach to proxy voting and potentially create a custom proxy voting policy.
The SEC’s rulemaking opens a new chapter in the continuing evolution of the relationship among issuers, investors and proxy advisors. Though there is not yet full visibility into how the rules and guidance will impact how shareholders make their voting decisions, alterations to voting dynamics will only increase the importance of effective shareholder engagement. Direct engagement that takes into account the policies and procedures of each shareholder will continue to be the most meaningful and sustainable path for companies to build strong and successful relationships with their investors.