As noted in our August Client Alert, the SEC provided interpretations and guidance to proxy advisory firms stating that advice provided by such firms generally constitutes a “solicitation” under the federal proxy rules, thus subjecting such advice to potential federal securities laws liability. During an open meeting on November 5, 2019, SEC commissioners again voted 3-2 along party lines to propose formal amendments to the Exchange Act proxy rules governing proxy solicitations by proxy advisory firms.
The SEC noted the significant role that institutional investors play in today’s market, owning “by some estimates, between 70 and 80 percent of the market value of U.S. public companies.” Because these institutional investors have holdings in many public companies, they have increasingly relied on proxy advisory firms to provide advice on how to vote on proposals at annual and special meetings of stockholders. Because this advice may be an important factor, or the most important factor, in an institutional investor’s voting decision, the SEC believes that proxy advisory firms are uniquely situated in today’s market to exercise authority over a sizable number of shares that are voted annually. Given these realities, the SEC states that “it is vital that proxy voting advice be based on the most accurate information reasonably available and that the businesses providing such advice be sufficiently transparent with their clients about the processes and methodologies used to formulate the advice.” Because the SEC has determined that proxy voting advice constitutes a solicitation, the SEC has asserted rulemaking authority over proxy advice to ensure that it enables investors and investments advisors to make informed investment decisions.
Proposed codification under Rule 14a-1(a) and Section 14(a) that such advice is a solicitation
Section 14(a) provides rules to ensure that proxy solicitations do not contain deceptive or inadequate disclosure. As the term solicitation is not defined, the SEC has broad authority to determine which solicitations are governed by Section 14(a). The SEC proposed to modify Rule 14a-1(a) to make clear that the terms “solicit” and “solicitation” include any voting advice that makes a recommendation to a stockholder as to a stockholder proposal, where such advice is furnished by a person who markets expertise as a provider of such advice and sells such advice for a fee. Under this definition, the SEC states that unprompted requests to investment advisers for voting advice is not a solicitation.
Proposed amendments to Rule 14a-2(b)
Under SEC rules, anyone engaging in a proxy solicitation is generally subject to filing and information requirements to ensure materially complete and accurate information is furnished to stockholders. The SEC recognizes that these requirements may deter otherwise useful communications without providing additional protection to investors. Thus the SEC may exempt certain solicitations, including solicitations from those who do not seek to act as a proxy or have a substantial interest in the proposal. Recognizing that proxy voting advice plays a valuable role in the voting process, the SEC has proposed to exempt such advice from the filing and information requirements so long as the proxy advisory firms disclose any conflicts of interest and provide issuers with an opportunity to review and comment on such advice in advance. An issuer would also have an opportunity to provide a statement in response to the advice. The proposed amendments to Rule 14a-2(b) also provide a safe harbor for proxy advisory firms who make a good faith and reasonable effort to comply with the rule.
Proposed amendments to Rule 14a-9
Finally, under Rule 14a-9, which prohibits any proxy solicitation from containing false or misleading statements or omissions with respect to any material fact, the SEC proposed additional examples of what information may need to be disclosed so that such statements are not misleading, including the “methodology used to formulate the proxy voting advice, sources of information on which the advice is based, or material conflicts of interest that arise in connection with providing the advice, without which the proxy voting advice may be misleading.”
As discussed previously, these moves are part of a series of proxy voting reforms targeted by the SEC following Commissioner Jay Clayton’s announcement in 2018 that Commissioner Elad L. Roisman would lead the SEC’s efforts to improve the proxy voting process and infrastructure.
Michael Best’s Securities & Capital Markets team has experts who advise investment advisers and public companies on compliance with the SEC regulations. Please do not hesitate to contact a member of the Securities & Capital Markets team for additional information on this guidance.