Insights
Enforcement of Proxy Advisor Rules Paused Pending Further SEC Review
On June 1, 2021, SEC Chair Gary Gensler issued a public statement directing staff of the Division of Corporation Finance (the “Staff”) “to consider whether to recommend further regulatory action regarding proxy voting advice.” The statement came almost a year after the SEC adopted amendments (“Amendments”) to its proxy solicitation rules codifying its guidance (“Guidance”) on proxy voting advice, including that given by influential proxy advisory firms like Institutional Shareholder Services Inc. (“ISS”) and Glass, Lewis & Co. While proxy advisors originally had until December 1, 2021 to comply with the Amendments, the Staff confirmed in a separate statement (the “Staff Statement”) that it will pause any enforcement action based on the Guidance or Amendments until it completes its review.
The Staff will now consider whether to recommend that the SEC revisit various aspects of the proxy advisor rules. The Staff will focus on the definition of solicitation and whether it should encompasses proxy voting advice, including the Guidance relating to the definition of “solicitation.” The Staff will consider conditions proxy advisors must meet to qualify for exemptions from filing proxy solicitation materials (including requirements to disclose conflicts of interest and providing companies with the opportunity to respond to voting recommendations at or prior to the time such recommendations are released) and the circumstances that would cause proxy advice to be “misleading” within the SEC antifraud rules. The Staff also plans to examine the specific examples of material misstatements or omissions related to proxy voting advice contained in the Amendments.
It is uncertain what the Staff’s recommendations will be on the proxy advisor rules and whether the SEC will ultimately revise its Guidance and the Amendments, though the issue of whether and how to regulate proxy advisory firms remains a long-standing, contentious issue. On the one hand, reporting companies generally welcomed the Guidance and Amendments, which they view as offering a means to respond to negative voting recommendations, flag errors in the recommendations, and have more of a voice in proxy voting outcomes. Notably, more than 300 companies signed a February 2019 Nasdaq letter calling for the SEC to take “strong action to regulate proxy advisory firms.” As expected, however, proxy advisory firms strongly oppose this position, with ISS suing the SEC in 2019 over its attempt to regulate the proxy advisor business. That litigation is being held in abeyance until December 31, 2021 or the promulgation of final rule amendments addressing proxy voting advice, whichever is earlier. In the interim, the Staff has confirmed that should the Amendments remain in place with the current compliance date, it will not recommend any enforcement action based on the Guidance or the Amendments for a reasonable period of time after any resumption by ISS of its litigation.
The Guidance, Amendments, and SEC and Staff statements can be found here:
Guidance: https://www.sec.gov/rules/interp/2019/34-86721.pdf
Amendments: https://www.sec.gov/rules/final/2020/34-89372.pdf
SEC Chair Statement: https://www.sec.gov/news/public-statement/gensler-proxy-2021-06-01
Staff Statement: https://www.sec.gov/news/public-statement/corp-fin-proxy-rules-2021-06-01
Donald R. Reynolds and S. Halle Vakani are members of the Capital Markets practice group of Wyrick Robbins, which represents public company clients across a broad range of industries in connection with their SEC reporting and corporate matters, and significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.