On July 13, 2022, the Securities and Exchange Commission (the “SEC”) adopted amendments (the “Amendments”) to the rules governing proxy voting advice that were adopted in 2020.^[1] The Amendments rescind several rules governing proxy advisory firms, or proxy voting advice businesses (“PVABs”), less than a year after those rules required compliance.

The Amendments reaffirm the SEC’s interpretation that proxy voting advice is considered a solicitation and thereby subject to the proxy rules and anti-fraud provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), while simultaneously eliminating a condition required for PVABs to avail themselves of certain exemptions from the requirement to file proxy materials with the SEC.

Background

PVABs serve an important role within the proxy voting process of publicly traded companies by providing research and recommendations on corporate matters up to vote to the large institutional investors that comprise their client base. As institutional investors have continued to represent a growing majority of shares in the financial markets, PVABs’ proxy voting recommendations can exercise significant influence over voting outcomes. In response to this outsized influence, the SEC adopted several rules (the “2020 Final Rules”) intended to “enhance the transparency, accuracy, and completeness of the information provided to clients of [PVABs] in connection with their voting decisions.”^[2]

A key provision of the 2020 Final Rules was the codification of the SEC’s longstanding interpretation that proxy voting advice would generally constitute a “solicitation” subject to the proxy voting rules, including the information and filing requirements, of Section 14(a) of Exchange Act.  However, it was not the SEC’s intention to cause PVABs to file numerous proxy statements in connection with the provision of proxy voting advice and, instead, the SEC made clear that PVABs should be eligible for the benefits of tailored exemptions from the proxy rules’ information and filing requirements.^[3] To that end, the 2020 Final Rules sought to further regulate PVABs by adding two key conditions that must be met before a PVAB can obtain an exemption from the proxy voting rules:

• PVABs must provide clients with conflict of interest disclosures (“Rule 14a-2(b)(9)(i)”); and
• PVABs must adopt and publicly disclose written policies and procedures reasonably designed to ensure that:
  • PVABs provide the registrants that are the subject of the proxy voting advice with that advice at or prior to disseminating it to the PVAB’s clients; and
  • PVABs must provide their clients with a mechanism to apprise themselves of the registrant’s written responses to the voting advice in a timely manner before the security holder meeting (“Rule 14a-2(b)(9)(ii)”).

Finally, the 2020 Final Rules also made clear that proxy voting advice is subject to the proxy rules’ anti-fraud provisions by amending Rule 14a-9 of the Exchange Act, which prohibits false or misleading statements and material omissions. The 2020 Final Rules added Note (e) to Rule 14a-9 which provided a non-exhaustive list of fact patterns in which a lack of disclosure would be considered misleading, such as a PVAB’s failure to disclose its “methodology, sources of information, or conflicts of interest” under certain circumstances.

Some commenters supported the 2020 Final Rules — in particular the conditions requiring PVABs to provide registrants with advance notice of the proxy advice — as allowing registrants to address such advice in a timely manner before shareholder votes and limiting the power of PVABs to “essentially unilaterally control the outcome of shareholder votes.”^[4] However, there were many negative reactions to the 2020 Final Rules, including assertions that the Rule 14a-2(b)(9)(ii) condition would “impair the independence of proxy voting advice, impede the timeliness of proxy voting advice, and increase PVABs’ compliance costs.”^[5] Other commenters simply noted that many PVABs already voluntarily adopted similar policies and were incentivized to engage with registrants regarding proxy advice absent concrete regulations.^[6]

The addition of potential disclosure violations deemed misleading via Note (e) to Rule 14a-9 also received substantial opposition. Notably, some commenters argued that Note (e) added significant litigation risk and uncertainty to providing proxy voting advice where PVABs were deemed to not provide enough disclosure regarding their methodology or even where the subject registrants merely disagreed with the “analysis and voting recommendations regardless of whether the advice contains factual errors.”^[7] While the SEC disagreed with some of these interpretations, the comments were enough for the SEC to propose amendments to the 2020 Final Rules before they even required full compliance.^[8]

Overview of the Amendments

Importantly, the Amendments do not alter the SEC’s interpretation, codified in the 2020 Final Rules, that proxy voting advice generally constitutes a solicitation. PVABs must still qualify for an exemption to the proxy voting rules to avoid filing proxy materials in connection with the provision of proxy voting advice. However, the Amendments make it significantly easier to fit within an exemption by rescinding the Rule 14a-2(b)(9)(ii) condition in its entirety. Thus, the Amendments eliminate the requirement for PVABs to provide advance (or simultaneous) notice of their proxy voting advice to the subject registrant. Resultantly, PVABs are also no longer required to provide their clients with a mechanism to respond to the subject registrant’s comments to such advice before the shareholder meeting. The Amendments notably keep intact the Rule 14a-2(b)(9)(i) condition requiring PVABs to provide clients with conflict of interest disclosures in order to qualify for an exemption from the information and filing requirements of the proxy rules.

In addition, the Amendments respond to the uncertainty and confusion arguably provided by the addition of Note (e) to Rule 14a-9 by deleting the note entirely. Despite the deletion of Note (e), the SEC noted its disagreement with the interpretation that the 2020 Final Rules were intended to “affect the scope of Rule 14a-9 or its application to proxy voting advice” — rather, it is the SEC’s general view that proxy voting advice has always been subject to anti-fraud liability pursuant to Rule 14a-9, regardless of the 2020 Final Rules or the Amendments, and accordingly that the Amendments do not immunize or “weaken the application of Rule 14a-9” thereto. [9] The SEC further noted that, despite some PVABs’ fears that the addition of Note (e) would subject proxy voting advice to liability based on “mere differences of opinion,”^[10] Rule 14a-9 liability does not generally extend to opinions as supported by the Supreme Court’s decisions in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund^[11] and Virginia Bankshares, Inc. v. Sandberg.^[12] In Omnicare, the Supreme Court held that “a sincere statement of pure opinion is not an ‘untrue statement of material fact’” even if the belief is wrong.^[13] Accordingly, the SEC argues that a PVAB will not face liability for exercising its discretion in regards to a voting analysis or use of a particular methodology, unless it was possible to show the PVAB’s opinion statements were misleading in one of the ways Omnicare identified, such as a showing that the PVAB actually “falsely described” its own opinion.^[14]

SEC Motivation and Objectives

The SEC’s quick revisit to the 2020 Final Rules occurred because the SEC was “no longer persuaded that the potential benefits of [the 2020 Final Rules] sufficiently justify the risks they pose to the cost, timeliness, and independence of proxy voting…”^[15] In particular, the SEC argued that the Rule 14a-2(b)(9)(ii) condition was no longer justified based on its determination that many of the leading PVABs had voluntarily adopted practices of providing subject registrants ways to communicate their views regarding the PVABs’ voting advice as required by the condition.^[16] In particular, the SEC noted that Glass Lewis, one of the largest PVABs, already provided subject registrants with its proxy voting advice and allowed them the opportunity to review the research and data underlying the advice in advance.^[17] While conceding that PVAB practices are more limited than the 2020 Final Rules conditions in some regards, the SEC seems convinced that there are market based incentives for PVABs to maintain practices providing added communication between PVABs, subject registrants, and clients that approximate the Rule 14a-2(b)(9)(ii) condition.^[18]

Further, the SEC argued that any benefit to investors in the form of timely access to additional information as a result of the Rule 14a-2(b)(9)(ii) condition would be reduced by the added costs and time restraints placed on PVABs in supplying the information.^[19] The SEC also acknowledged that, despite an initial motivation to reduce errors in proxy voting advice supplied to clients of PVABs, the 2020 Final Rules were not supported by any SEC finding with regard to the prevalence of such errors.^[20]

Finally, in regards to the deletion of Note (e) from Rule 14a-9, the SEC seems largely motivated to eliminate any confusion expressed by commenters worried of additional litigation risk, while vehemently maintaining that the Amendments do not change the fact that proxy voting advice is subject to the relevant anti-fraud provisions.^[21] The SEC also noted its satisfaction with the protections provided by Omnicare in relation to liability arising from statements of opinion that occur when PVABs offer voting advice and choose certain methodologies.^[22]

The Amendments will take effect on September 19, 2022. For now, the 2020 Final Rules remain in effect and PVABs must comply with the additional requirements that took effect in December of 2021.