SEC commissioners in a 3-1 vote Wednesday approved sweeping changes to rules governing proxy advisory firms.
The rule amendments make clear that proxy voting advice generally constitutes a solicitation; requires proxy advisory firms to disclose conflicts of interests to clients; allows 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 obliges proxy advisory firms to provide clients with access to any response the company provides to the voting advice "in a timely manner before those clients vote," said Commissioner Elad L. Roisman, who spearheaded the commission's efforts on this issue.
Also, the rule-making codifies that the failure to disclose material information regarding proxy voting advice, "such as the proxy voting advice business' methodology, sources of information, or conflicts of interest" could, depending on the particular facts and circumstances, be misleading within the meaning of the rule.
"Each of these changes bring improvements to the status quo for investors and our markets," Mr. Roisman said in prepared remarks. "Proxy voting advice businesses have long relied on different exemptions to our federal proxy rules, resulting in a patchwork of practices for disclosing their conflicts of interest. They have also developed very different practices regarding whether or how they engage with registrants or communicate with clients regarding those registrants' perspectives on voting advice."
In her dissent, Allison Herren Lee, the commission's lone Democrat, called the rules unwarranted, unwanted and unworkable. Among her concerns, Ms. Lee said with respect to the rule-making's central provision — "a forced opportunity for issuers to review and provide feedback on proxy voting advice" — opposition outweighed support by more than 3 to 1 during the comment period.
While the final rule is better than what was proposed in November — when the commission unveiled the proposal that called for giving companies the opportunity to make revisions to proxy advice before distribution to clients — Ms. Lee said it's still problematic. "Compared to the status quo, these rules still raise all of the infirmities that investors identified, including that they increase issuer involvement, and impose significant new costs and delays," Ms. Lee said.
Institutional investors and investor groups have generally opposed the SEC's efforts, saying it's a solution in search of a problem and would hurt the independence of proxy recommendations.
The Council of Institutional Investors said in a statement that it was relieved to see the pre-review portion of the proposal removed but is still concerned the SEC’s decision could result in proxy advice distribution delays, driving up costs for investors, impairing the independence of proxy advice and causing uncertainty for institutional investors.
“The SEC has not established a compelling case to tighten regulation of proxy advisory firms, and we are concerned that it has adopted untested and unvetted requirements that could have adverse effects on investors’ ability to get the timely and unbiased proxy advice they need to act as stewards of the companies they own,” said Amy Borrus, executive director at CII.
The CII is disappointed the SEC did not first issue a revised proposal and draft guidance and seek public comment, Ms. Borrus added. “The SEC should regulate based on firm legal grounds and evidence, not pressure from business lobbyists seeking to strengthen corporate control of the proxy voting process,” she said.
The business community, led by the U.S. Chamber of Commerce and the National Association of Manufacturers, has been clamoring for new regulations on this matter, in large part because they say proxy advisory firms have become too influential and don't sufficiently disclose conflicts of interest.
Jay Timmons, president and CEO of the National Association of Manufacturers, called the new rules a "major win" and said in a statement that the SEC's actions "will reduce proxy firms' influence on important business decisions and instead empower manufacturers to prioritize investors' long-term best interests, allowing us to better lead our country's recovery and renewal at this critical time."
The amendments will be effective 60 days after publication in the Federal Register, but affected proxy advisory firms are not required to comply until Dec. 1, 2021.
Glass Lewis and Institutional Shareholder Services Inc. control about 97% of the proxy advisory market. In a statement, ISS President and CEO Gary Retelny said the measures taken by the SEC “serve as a blow to institutional investors seeking to judiciously monitor portfolio companies.”
Mr. Retelny added, “Despite seemingly reducing the previously contemplated burden on proxy advisers, the new rules, coupled with the new guidance for investment advisers, will hinder investors’ ability to vote in a timely, cost-effective and objective manner.”
A Glass Lewis spokesman said he will not comment “until we have a chance to thoroughly review the final rules.”
In a separate 3-1 vote Wednesday, the commission approved additional guidance concerning investment advisers’ use of automated voting features offered by proxy advisory firms. The guidance calls on advisers to consider whether they have sufficient procedures in place to address scenarios where an issuer intends to file or has filed additional soliciting materials with the SEC after the adviser has received the proxy advisory firm’s voting recommendation but before the vote submission deadline.
“With the help of such features, a client could effectively ‘set-it-and-forget-it,’ allowing the proxy voting advice business to produce recommendations that determine the client’s vote, without further action by the client,” Mr. Roisman said.
The guidance also addresses disclosure obligations and client consent when investment advisers use automated services for voting. The final text wasn’t immediately posted on the SEC’s website or Federal Register but will be effective once the latter happens.
In August, the SEC approved guidance clarifying how an investment adviser’s fiduciary duty relates to an adviser’s proxy voting on behalf of clients, particularly if the investment adviser retains a proxy advisory firm.
Karen L. Barr, president and CEO of the Investment Adviser Association, said in a statement that it was difficult to understand why the commission felt compelled to issue additional guidance for advisers since the guidance it issued last year — “without notice and comment” — is comprehensive.
“While the final proxy voting rules and new guidance adopted by the SEC this morning have been modified from the initial proposal in response to widespread criticism — including from the IAA — we continue to believe that the SEC’s actions represent bad policy,” Ms. Barr said. “They represent a major step backwards for corporate governance and will make it more difficult for investment advisers to use the services of proxy advisory firms to fulfill their proxy voting responsibilities on behalf of their clients.”