SEC Reverses Certain Rules Regulating Proxy Advisory Firms

Capital Markets

On July 13, 2022, the SEC adopted amendments (the “Final Rule”) to the 2020 proxy rules (the “2020 Rules”) governing proxy advisory firms such as Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co.  The 2020 Rules established several new requirements for proxy advisory firms and caused concern among investors about their ability to receive independent proxy voting advice in a timely manner.  The Final Rule is expected to address these concerns while maintaining investors’ access to transparent, accurate, and materially complete information to help them determine how to vote.

The Final Rule rescinds (1) two conditions in the Rule 14a-2(b)(9)(ii) exemptions from the 2020 Rules’ information and filing requirements and (2) Note (e) to the Rule 14a-9 liability provisions, which sets forth examples of material misstatements or omissions related to proxy advice.

Removal of the Rule 14a-2(b)(9)(ii) Conditions. Rule 14a-2(b)(9)(ii) required that, in order to qualify for the exemptions from the 2020 Rules’ information and filing requirements, proxy advisory firms must (1) make their advice available to a company subject to that advice by the time it is relayed to the proxy advisory firms’ clients and (2) provide the proxy advisory firms’ clients with a means of becoming aware of a company’s statement in response before the relevant shareholder meeting.  In rescinding Rule 14a-2(b)(9)(ii), the SEC noted that the benefits of the rule do not outweigh the potential adverse effects on the cost, timeliness, and independence of proxy voting advice.

Removal of Note (e) to Rule 14a-9. The 2020 Rules added Note (e) to the Rule 14a-9 liability provisions that prohibit false or misleading statements for all solicitations.  Note (e) provided that that the failure to disclose material information regarding proxy voting advice, such as a proxy advisory firm’s methodology, sources of information, or conflicts of interest, are examples of omissions that can be misleading under Rule 14a-9.  The SEC rescinded Note (e) to clarify that proxy voting advice does not pose heightened concerns over other forms of solicitation generally addressed in Rule 14a-9 and that proxy advisory firms do not have a unique obligation to disclose their methodology, sources of information, and conflicts of interests. However, the SEC noted that the deletion of Note (e) does not affect the scope of Rule 14(a)-9 or its application to proxy voting advice and that material misstatements and omissions of material fact in proxy solicitation material remain subject to liability under Rule 14a-9. 

While the Rule 14a-2(b)(9)(ii) conditions and Note (e) to Rule 14a-9 have been rescinded, several aspects of the 2020 Rules remain in effect.  Proxy voting advice generally remains a solicitation and proxy advisory firms are still subject to liability under Rule 14a-9.  Proxy advisory firms also need to satisfy Rule 14a-2(b)(9)’s conflict of interest disclosure requirements to qualify for exemptions from the 2020 Rules’ information and filing requirements.

Despite the Final Rule’s amendments, ISS intends to continue its litigation challenging the 2020 Rules and the guidance on which they are based.  ISS recently reiterated its view that the SEC’s “decision to regulate a form of independent investment advice as though it were a solicitation of a specific outcome in a shareholder vote exceeds the agency’s statutory authority, is contrary to law, and is arbitrary and capricious.” Oral arguments in the case take place later this month.  The Final Rule will be effective on September 19, 2022.

S. Halle Vakani is co-chair 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 governance 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.