The SEC Sets the Pendulum Swinging With Proposed Proxy Advice Amendments

The 2020 rules codified the Commission’s interpretation that proxy voting advice generally constitutes a “solicitation” subject to the proxy rules and added two new conditions to the exemptions that proxy advisory firms generally rely on to avoid the proxy rules’ information and filing requirements. Those conditions were conflicts of interest disclosure requirements and a requirement, contained in Rule 14a-2(b)(9)(ii) (the “Policy Conditions”) that each proxy advisory firm adopt and publicly disclose written policies and procedures designed to reasonably ensure that (i) companies that are the subject of proxy voting advice have such advice made available to them at or prior to the time such advice is more widely disseminated and (ii) the proxy advisory firms provide their clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding the firm’s proxy voting advice by the companies that are the subject of such advice in a timely manner before the shareholder meeting. The 2020 rules also amended the Note to Rule 14a-9, which prohibits false or misleading statements, to include specific examples of material misstatements or omissions related to proxy voting advice.

The proposed rule amendments would (i) amend Rule 14a-2(b)(9) to remove the Policy Conditions¹ and (ii) amend Rule 14a-9 to remove Note (e) to that rule, which sets forth specific examples of material misstatements or omissions related to proxy voting advice. The proposed rule amendments would leave the other aspects of the 2020 rules intact, including that proxy voting advice would remain a solicitation subject to the proxy rules and the requirement that proxy advisory firms provide conflicts of interest disclosure in order to rely on the exemptions to the proxy rules’ information and filing requirements. In proposing to rescind portions of its 2020 rules, the Commission points to recent policies and procedures adopted by leading proxy advisory firms, and clarifies its position that the SEC does not interpret Rule 14a-9 to subject proxy advisory firms to liability for statements of opinion even if the company subject to the review is of a different opinion.

The release of the proposed amendments and request for comment triggered strong words from the commissioners, with Commissioner Caroline A. Crenshaw highlighting investor concerns over the degree to which proxy voting advice is independent from a corporation’s involvement and Commissioner Allison Herren Lee stating that “we didn’t get the balance right in last year’s final rules.”² Commissioners Hester M. Peirce and Elad L. Roisman could not have come out in stronger opposition, however, and their strongly worded dissents to the Commission’s proposal raises a broader and more important question about whether companies can expect years of back-and-forth from the SEC on issues like the regulation of proxy advisory firms and other topics that lie in political battlegrounds, including topics that fall under the universal umbrella of ESG. It is possible that navigating uncertainty out of the SEC needs to rapidly become a top priority for public companies as we head into the new year.

¹ The proposed amendments would delete the Policy Conditions contained in Rule 14a-2(b)(9)(ii) and would also delete paragraphs (iii), (iv), (v) and (vi) of Rule 14a-2(b)(9), which contain safe harbors and exclusions from the Policy Conditions contained in Rule 14a-2(b)(9)(ii).

² Statement on Proxy Voting Advice, Commissioner Caroline A. Crenshaw (Nov. 17, 2021) available here; and Statement on Proposed Amendments Related to Proxy Voting Advice, Commissioner Allison Herren Lee (Nov. 17, 2021), available here.