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Article | Executive Pay Memo North America

SEC regulations on proxy advisors delayed until the 2022 proxy season

Governance Advisory Services |Executive Compensation
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By Steve Seelig and Brian Myers | July 27, 2020

Securities and Exchange Commission rules will permit companies to rebut the voting advice provided by proxy advisors.

This week, in a 3 – 1 vote, the Securities and Exchange Commission (SEC) finalized regulations that will change how proxy advisory firms interact with public companies and their institutional investor clients regarding proxy voting recommendations. The final rules make some changes to the regulations proposed last November while maintaining their main thrust. Proxy advisors will not be required to comply with the final regulations until December 1, 2021, which means they would not apply until the 2022 proxy season.

The key element of the amended proxy rules codifies the view that proxy voting advice produced by proxy voting advice businesses generally constitutes a solicitation. A proxy advisor may become exempt from the resulting onerous information and filing requirements by taking the following steps:

  • Accompany its proxy voting advice with specified conflicts of interest disclosures.
  • Publicly disclose written policies and procedures designed to ensure that it will provide public companies with proxy voting advice at or before the time it sends such advice to its clients.
  • Create a mechanism to apprise its clients in a timely manner before the shareholder meeting of any company-issued written statements regarding its proxy voting advice.

Because the above steps reflect a move to principles-based guidance in the final rules, the SEC added a non-exclusive safe harbor for proxy advisors to provide assurance they have met the written policies and procedures requirements. A proxy advisor can be assured it satisfies the requirements if its written policies and procedures are reasonably designed to:

  • Provide companies with a copy of its proxy voting advice, at no charge, no later than when it is sent to clients. Conditions may be included requiring companies to:
    • File their definitive proxy statement at least 40 calendar days before the shareholder meeting.
    • Acknowledge that the proxy voting advice will only be used internally and will not be published or otherwise shared except with their employees or advisors.
  • Provide some form of electronic notice to clients that the company has filed, or intends to file, a statement regarding the advice as additional soliciting materials (and include an active hyperlink to those materials on EDGAR — the Electronic Data Gathering, Analysis and Retrieval system used at the SEC — when available).

The SEC does not mandate that any proxy advisor must provide similar opportunities for companies that may file less than 40 calendar days before the shareholder meeting, although if it did, it would remain within the safe harbor. Similarly, a proxy advisor may forego using the safe harbor if it wants to impose more restrictive prohibitions on sharing information for companies to whom it delivers its proxy voting advice. Finally, a proxy advisor can use an alternative approach to make its clients aware that the company has filed additional proxy materials.

Exception for custom policies:

The above rules do not apply to proxy voting advice to the extent such advice is based on “custom voting policies” that are proprietary to a proxy advisor’s business’s client. The SEC provides some explanation of what it means by custom policies in the preamble to the regulations:

"Proxy voting advice businesses typically provide investment advisers, institutional investors, and other clients with a variety of services that relate to the substance of voting decisions, such as: providing research and analysis regarding the matters subject to a vote; promulgating their generally applicable benchmark voting policies (a “benchmark policy”) or specialty voting policies (a “specialty policy”), such as a socially responsible policy, a sustainability policy, or a Taft-Hartley labor policy, that their clients can use; and making specific voting recommendations to their clients on matters subject to a shareholder vote, either based on the proxy voting advice business’s benchmark or specialty policies or based on custom voting policies that are proprietary to a proxy voting advice business’s clients (“custom policy”). This advice is often an important factor in the clients’ proxy voting decisions. Clients may use the proxy voting advice business’s recommendations in a variety of ways, including as an alternative or supplement to their own internal resources in analyzing matters when deciding how to vote."

As the SEC describes the current landscape, it appears that custom policies are a limited subset of all voting policies so that the exception would apply only to the small swath of business clients with their own proprietary voting policies. We do wonder if this exception could change how proxy advisors will interact with their clients in developing policies, with the notion that perhaps more client policies would be considered proprietary and not subject to the new regulations.

Disclosures not required:

Some noteworthy items have been omitted from the final regulations:

  • Conflicts of interest disclosures of proxy advisors need not be made public. Only clients of proxy advisors would see these disclosures. Beneficial owners of investment funds and companies would not have access to these disclosures. The SEC has some concerns that to provide this guidance would potentially undermine the information barriers put in place between the consulting and proxy advice sides the business’s operations.
  • Proxy advisors do not need to disclose their methodology, sources of information or standards used, including the research that generates a voting recommendation and the extent and/or effectiveness of its controls and procedures in ensuring the accuracy of facts relied upon. The SEC received comments that data accuracy was not a widespread issue, which influenced its thinking on information sources not needing disclosure. The SEC also determined that clients of proxy advisors would not need any of this information to help make voting decisions about the voting advice. The SEC also was persuaded that these disclosures could contain proprietary information, with potential competitive consequences to proxy advisors.

What might happen next:

Regulation of proxy advisors has been the subject of litigation over the past several years, and it is reasonable to expect the threshold issue of proxy advisors being subject to the proxy solicitation rules to be challenged. This may happen quickly, as this part of the regulations goes into effect within 60 days of the regulations’ publication in the Federal Register. That leaves a bit of time for the issue to be litigated before the 2020 proxy season.

In the medium term, companies can expect to see published versions of policies and procedures, with details of exactly how and when companies would see proxy advisor voting recommendations and the how company supplemental filings would be communicated to proxy advisor clients.

Authors

Senior Director, Executive Compensation (Arlington)

Governance Team Lead, North America & Director, Executive Compensation (Arlington)

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