Back to drawing board on proxy rules ... again

For years leading up to the Securities and Exchange Commission's July 2020 decision to amend certain rules governing proxy advisory firms, the debate raged as to what changes should be made and whether any changes were needed at all.

And although the debate never really went away as the issue headed to court, SEC Chairman Gary Gensler put the matter front and center once more on June 1 when he directed staff to consider recommending further regulatory action on the issue.

Additionally, on June 1, the SEC's division of corporation finance said it will not recommend enforcement actions related to the proxy rule amendments. The amendments went into effect last year, but affected proxy advisory firms are not required to comply until Dec. 1, 2021.

"It's Christmas in June for investors," Amy Borrus, Washington- based executive director of the Council of Institutional Investors, a non-partisan organization that represents asset owners with combined global assets of about $4 trillion, said in a statement.

"Last year's controversial proxy advice rule was a solution in search of a problem," she added in a phone interview. "Institutional investors, who are the clients of proxy advisory firms, did not seek it, nor did they support the SEC's actions on proxy advice."

Broadly, investor groups criticized the SEC's actions last year while the business community welcomed them.

In July, the SEC, in a 3-1 vote with Republicans in control, approved sweeping changes to rules governing proxy advisory firms. The rule amendments made clear that proxy voting advice generally constitutes a solicitation; required proxy advisory firms to disclose conflicts of interests to clients; allowed companies that are the subject of voting advice to be able to access that advice prior to or at the same time as the advice is disseminated to clients; and obliged proxy advisory firms to provide clients with access to any response the company provides on voting advice before those clients vote.

Also, the rule-making codified that the failure to disclose material information regarding proxy-voting advice, like methodology, sources of information, or conflicts of interest could be deemed misleading.

Mr. Gensler has now directed staff to weigh recommending further action. "The staff should consider whether to recommend that the commission revisit its 2020 codification of the definition of solicitation as encompassing proxy-voting advice, the 2019 interpretation and guidance regarding that definition, and the conditions on exemptions from the information and filing requirements in the 2020 rule amendments, among other matters," he said in a statement.

In August 2019, the SEC issued an interpretation that proxy-voting advice provided by proxy advisory firms generally constitutes a "solicitation" under the federal proxy rules and provided related guidance about the application of the proxy anti-fraud rule to proxy-voting advice.

"We really like the fact that they're going to re-examine this determination that was made some time ago that proxy-advice givers are somehow in the category of solicitors, which we never understood," said Kurt Schacht, head of advocacy for CFA Institute in Washington. "It is merely advice."

After Mr. Gensler's confirmation in April, Democrats now have a 3-2 majority at the SEC.

The U.S. Chamber of Commerce, a longtime proponent of stricter oversight for proxy advisory firms, does not think the reforms need to be revisited, according to a statement from Tom Quaadman, Washington-based executive vice president of the Chamber's Center for Capital Markets Competitiveness. "We are confident that based on the transparent process used by the SEC and the experiences of public companies, the current proxy-voting reforms enacted in 2019 bring transparency and accountability to an opaque system while strengthening protections for individual investors," he said.

Cynthia M. Krus, a Washington-based partner at Eversheds Sutherland (US) LLP who advises companies on proxy contests, said the SEC's decision to revisit the rules injects further uncertainty for issuers and shareholders alike.

"There's clearly an issue here so we've got to work our way to a balanced conclusion for everybody," she said. "With two large firms that take up a substantial portion of the market, having them dictate their practices without any regulatory oversight is potentially problematic."

Ms. Krus added, "I have no issue with revisiting and reviewing it; my fear is that we end up with nothing and that ... there's no more transparency, there's no more discussion about any particular conflicts."

Glass Lewis & Co. and Institutional Shareholder Services Inc. control about 97% of the proxy advisory market.

Both firms welcomed Mr. Gensler's announcement. "As we said at the time, those rules were unneeded and a potential impediment to our ability to continue to provide our investor clients with the timely and objective proxy advice they need," Glass Lewis said in a statement.

Gary Retelny, president and CEO at ISS, said in a separate statement that the SEC's 2020 rule-making was "ill-conceived, inconsistent with the law, and pushed through under the previous administration against the wishes of investors the agency is meant to protect."

On the same day the SEC said it would revisit the proxy rule amendments, it filed a motion in the U.S. District Court for the District of Columbia to stay a case brought against it by ISS.

ISS originally filed a complaint in October 2019, after the SEC proposed the rule-making but before it was finalized. In January 2020, the lawsuit was placed on hold until final rules were adopted. Oral arguments in the case were slated for June 7, but after the SEC filed its motion and ISS did not object, the arguments were vacated. The case will be frozen until the SEC promulgates new rules or Dec. 31, whichever comes first, according to the SEC's filing.

"Holding the case in abeyance will conserve judicial resources and the resources of the parties," the SEC said in the filing. "Further regulatory action on the items Chair Gensler has directed staff to consider revisiting could substantially narrow or moot some or all of ISS's claims."

The National Association of Manufacturers, another longtime advocate of stricter oversight of proxy advisory firms, was "disheartened by the SEC's decision to abandon its defense of these vital reforms just days before a federal judge was to hear oral arguments outlining ... why this lawful, reasonable and minimally burdensome rule must be upheld," Linda Kelly, Washington-based NAM's senior vice president and general counsel, said in a statement. NAM in October filed a motion seeking to intervene in the case on behalf of the SEC.

If the SEC does "decide to move forward, any changes must be proposed via notice-and-comment rule-making with robust opportunities for the public to weigh in on the SEC's new approach," Aric Newhouse, NAM's senior vice president of policy and government relations, added in the statement.

Laura D. Richman, Chicago-based counsel at Mayer Brown LLP, said the SEC under the new administration has a lot on its agenda, so action on this issue may not come soon.

"The staff can only do so much at the same time and there has been a very strong push on ESG rule-making, they've also reopened the comment period for universal proxies, so there's a lot going on," she said. "I wouldn't expect a recommendation and a proposal all that quickly."

SEC goes back to drawing board on proxy advisory rules ... again

The SEC is considering further regulatory action on its proxy adviser rules, much to the chagrin or delight of respective stakeholders.