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Article | Executive Pay Memo North America

SEC to pause implementation of proxy advisor rules

Governance Advisory Services |Executive Compensation
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By Steve Seelig and Brian Myers | June 3, 2021

Democratic SEC Chair Gensler directs SEC staff to revisit Trump-era changes with an eye toward revision and/or repeal

Remember all those new proxy advisor guidelines and regulations adopted by the Securities and Exchange Commission (SEC) in July 2020 to be effective for the 2022 proxy season? They might never be implemented in light of a June 1 statement by SEC Chair Gary Gensler, who asked the staff of the SEC Division of Corporate Finance to take a comprehensive look at whether those rules should stand in their current form and, if not, how they should be revised. In response, the Division of Corporate Finance issued a statement that it would pause any actions to enforce those guidelines and regulations until it completes its review.

Soon after these statements were issued, the SEC and Institutional Shareholder Services Inc. (ISS) asked a federal court to suspend a suit by ISS challenging the Trump-era rules until the SEC review is completed.

We’ve written extensively on how the 2019 guidance directed proxy advisors to provide greater insight into their voting recommendation methodologies and provided clarity on how they engage with companies in formulating those recommendations (“SEC guidance may change how companies interact with proxy advisors” and “SEC proposal could expand dialogue between public companies and proxy advisors”). We also provided a detailed analysis of the 2020 final regulations (“SEC regulations on proxy advisors delayed until the 2022 proxy season”), which codify that proxy voting advice generally constitutes a solicitation and mandate that companies could rebut the voting advice as part of the transmittals provided by proxy advisors to institutional investors.

Willis Towers Watson viewpoint

Many or most of these rules now may never be implemented in their current form. With the Biden administration’s overarching focus on climate change as well as environmental, social and governance (ESG) issues, we see this pause as an opportunity to assess the role of proxy advisors in seeking actions in those areas. On the one hand, the SEC could decide that proxy advisors should continue to act as they have in the past, calibrating their voting methodologies in-house, based on the advice of their institutional investor clients. Certainly, many objections were voiced during the last SEC regime as to whether there were any actual issues with the proxy advisor process, and this action may simply be a move to repeal these more draconian SEC proxy advisor rules.

On the other hand, the SEC may be interested in recalibrating its rules to be more prescriptive about what issues proxy advisors must consider in offering their voting recommendations. Perhaps new rules would mandate that proxy advisors review ESG-related issues explicitly as part of their voting recommendations. Of course, how progress in these areas should be measured is a larger issue companies and the SEC are wrestling with, which may resolve itself in the form of SEC-mandated ESG disclosures.

We will keep you posted on new developments as they arise.

Authors

Senior Director, Executive Compensation (Arlington)

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

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