On July 22, the U.S. Securities and Exchange Commission (SEC) voted to adopt amendments (Amendments) to certain of its rules governing proxy solicitations under the Securities Exchange Act of 1934 (Exchange Act). The Amendments are designed to ensure that clients of proxy voting advice businesses have reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions, without imposing undue costs or delays that could negatively impact the timely provision of proxy voting advice. The Amendments are largely similar to those that were first proposed by the SEC on November 5, 2019 (Proposal), with some exceptions discussed below.
Highlights of the Amendments include the following:
- Rule 14a-1(l). Consistent with the Proposal, the SEC adopted an amendment to Exchange Act Rule 14a-1(l), modifying the definition of the terms “solicit” and “solicitation” to add new paragraph (A) to Rule 14a-1(l)(1)(iii) to include within the definition any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee. Adoption of this amendment codifies the long-held SEC position that providing proxy voting advice generally constitutes a solicitation under the federal proxy rules. Rule 14a-1(l) is further amended under the Amendments to clarify that “solicitations” do not include the furnishing of any proxy voting advice by a person only in response to an unprompted request.
- Rules 14a-2(b)(1) and 14a-2(b)(3). These Amendments revise the exemptions from the information and filing requirements provided in Exchange Act Rule 14a-2(b), such that proxy voting advice businesses relying on these exemptions would be required to adhere to the following conditions:
- They must include prominent disclosure of material conflicts of interest as specified in new Rule 14a-2(b)(9)(i) in their proxy voting advice to clients, adopting the requirement substantially as proposed in the Proposal; and
- They must have adopted and publicly disclosed written policies and procedures reasonably designed to ensure the following: (i) registrants that are the subject of the proxy voting advice disseminated have such advice made available to them at or before the advice is circulated to the proxy voting advice business’s clients (new Rule 14a-2(b)(9)(ii)(A)); and (ii) the proxy voting advice business provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants who are the subject of such advice, in a timely manner before the security holder meeting (new Rule 14a-2(b)(9)(ii)(B)).
- New Rules 14a-2(b)(9)(ii)(A) & (B) differed from the requirements included in the Proposal and were characterized by the SEC as less prescriptive and more “principles-based” requirements, with each including the following non-exclusive safe harbors: (i) a proxy voting advice business will be deemed to satisfy Rule 14a-2(b)(9)(ii)(A) if its written policies and procedures are reasonably designed to provide registrants with a copy of its proxy voting advice, at no charge, no later than the time it is disseminated to the business’ clients – and the proxy advice business’s policies and procedures may include conditions requiring registrants to (a) file their definitive proxy statement at least 40 calendar days before the security holder meeting and (b) expressly acknowledge that they will only use the proxy voting advice for their internal purposes and/or in connection with the solicitation, and will not publish or otherwise share the proxy voting advice except with the registrant’s employees or advisers; (ii) the proxy voting advice business will be deemed to satisfy the requirements of Rule 14a-2(b)(9)(ii)(B) if its written policies and procedures are reasonably designed to inform clients receiving advice, whether on an electronic client platform, via email or other electronic means (and further includes an active hyperlink to those materials on EDGAR when available), that the registrant that is the subject of such advice has notified the business that it intends to file or has filed additional soliciting materials regarding the advice.
- Rule 14a-9. Largely consistent with the Proposal, the Amendments also supplement Rule 14a-9 to include instances in which the failure, when furnishing proxy voting advice, to disclose certain material information could be considered false or misleading. Such material information could include information about the proxy voting advice business’ methodology, sources of information, or conflicts of interest.
The Amendments’ effective date is 60 days after publication in the Federal Register, but the SEC has provided a transition period through December 1, 2021 with respect to Rule 14a-2(b)(9), based on commenter feedback and the SEC’s interest in limiting unnecessary disruptions during the peak proxy season. The transition period only applies with respect to the Amendments to Rule 14a-2(b)(9) and does not extend to the Amendments to Rule 14a-1(l) and Rule 14a-9. Because these other Amendments codify existing SEC interpretations and guidance, and do not impose new obligations that necessitate significant time for preparation, the SEC did not believe the same rationale for a transition period existed.
In conjunction with the Amendments, the SEC also supplemented, in question and answer format, prior issued guidance regarding investment advisers’ proxy voting responsibilities. According to the SEC, the supplemental guidance is intended to further clarify how the fiduciary duty and Rule 206(4)-6 under the Investment Advisers Act of 1940 relate to an investment adviser’s exercise of voting authority on behalf of its advisory clients. It also encourages investment advisers and proxy advisory firms to review relevant policies and practices in light of the guidance in advance of the next proxy season.
The SEC’s final rule is available at: https://www.sec.gov/rules/final/2020/34-89372.pdf.
The SEC’s guidance is available at: https://www.sec.gov/rules/policy/2020/ia-5547.pdf.