U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler has directed the Commission to consider whether it should revisit 2019 guidance and 2020 rule amendments regarding proxy voting advice.
In a related move, the SEC has suspended enforcement of rules that consider recommendations made by proxy advisory firms to be solicitations under securities law.
At stake is whether the SEC ultimately keeps the recent changes in place that require proxy advisory firms to disclose their business conflicts and subject those firms to the same anti-fraud rules as public companies. The changes have come under harsh criticism from the two largest proxy advisory firms – Institutional Shareholder Services (ISS) and Glass Lewis – pension plans, and shareholder advocates.
Proxy System Reform
In 2018, the SEC held a series of roundtable discussions to learn more about timely issues facing proxy advisory firms, including the ownership thresholds for submitting shareholder proposals. The views of ISS and Glass Lewis are important to such matters since investors rely on their opinions on thousands of shareholder ballot items each year.
Two camps emerged from the discussions. Investment advisers saw no reason for the change and were supportive of the in-depth analysis and work performed by proxy advisory firms to recommend how shareholders should cast their votes. Small companies cited potential conflicts of interest that arise when proxy advisory firms serve as consultants and challenges in correcting misinformation.
Input the SEC received from the roundtables and comment letters led to a 2019 interpretation and subsequent guidance that said advice provided by firms such as ISS and Glass Lewis were solicitations and made clear that the failure to disclose material information about proxy voting advice may constitute a potential violation of the antifraud provision of the proxy rules.
In 2020, the Commission provided supplemental guidance to assist investment advisers in assessing how to consider additional information from issuers that may become more readily available because of the proxy solicitation rule amendments. The guidance also addressed circumstances where investment advisers use a proxy advisory firm’s electronic vote management system as well as disclosure and client consent obligations when investment advisers use those services for voting.
Legal Action and Controversy
Litigation filed by ISS and a hedge fund’s recent boardroom coup at a major energy firm has stirred the debate.
ISS sued the SEC in 2020 for imposing several burdensome new obligations on proxy advisory firms by requiring them to share their recommendations and analyses with issuers that could impose potential liability for making alleged misstatements or omissions. The National Association of Manufacturers, meanwhile, filed a motion in federal court in support of the SEC’s stricter oversight of proxy advisory firms.
Glass Lewis, meanwhile, cited the “compelling” evidence presented by a hedge fund voting its shares that shareholder value was increasingly at threat if the energy firm did not develop a better response and strategy to cope with the global energy transition.
Until the SEC provides added clarity on its role in regulating proxy voting advice, compliance personnel and those with an active role in corporate governance should familiarize themselves with recent developments and possible outcomes.
Importantly, in 2019 & 2020 the SEC issued guidance to investment advisers that outlines their responsibilities under Rule 206(4)-6 of the Investment Advisers Act of 1940 (the “Advisers Act”) pertaining to proxy voting. Both of these guidance statements currently remain enforced, so Chief Compliance Officers of investment advisory firms that vote proxies for clients should confirm they are performing such services in line with Rule 206(4)-6 and these statements.
The consultants at Core Compliance & Legal Services have extensive knowledge in this and other compliance areas and can help you with ensuring that your policies, procedures, and internal controls are in line with applicable regulations. Contact us at (619) 278-0020 or online at corecls.com.
 See https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/news/2021/07_2021_IAA_Newsletter.email@example.com%20&_cldee=bWljaGVsbGUuamFja29AY29yZWNscy5jb20%3d&recipientid=contact-486f0808741fe71180ebc4346bad526c-cb20a7707c4844839e845f45b9346179&esid=ec208e25-61de-eb11-bacb-000d3a8b592b#page=8 and https://www.sec.gov/news/public-statement/gensler-proxy-2021-06-01
 See https://lrus.wolterskluwer.com/news/securities-regulation-daily/sec-to-reexamine-clayton-era-rules-on-proxy-advisory-firms/142369/
 See https://www.wsj.com/articles/gensler-blesses-the-proxy-duopoly-11624486538
 See https://www.sec.gov/rules/interp/2019/ia-5325.pdf and https://www.sec.gov/rules/policy/2020/ia-5547.pdf.