Legal Alert: SEC Interpretation and Guidance Regarding the Applicability of the Proxy Rules

Introduction
On August 21, 2019 the Securities and Exchange Commission (the “SEC”) issued an interpretation and related guidance regarding the applicability of certain rules to proxy advisory firms. Among other items, the interpretation provides that the proxy voting advice given by proxy advisory firms will generally constitute a “solicitation” under the federal proxy rules, which will affect the disclosures given by such firms in their public filings in order to comply with proxy anti-fraud rules.

Overview of Interpretation and Guidance
The SEC interpretation imposes new regulatory oversight on proxy advisory firms that clarifies that proxy advisers are subject to Rule 14a-9 and the anti-fraud rules concerning materially false or misleading statements. Based upon this interpretation, we expect to see additional disclosure in the upcoming proxy season from proxy advisory firms on the following items:

•  An explanation of the methodology used to formulate its voting advice on a particular matter;
• The disclosure of peer group companies used by the proxy advisory firm, including the names of those that are different than the ones selected by the issuer and why the firm decided to use those peers;
• Disclosure of third party information sources, such as publications, databases, ratings or rankings published by third parties; and
• Disclosure about material conflicts of interest in reasonably sufficient detail.

Conclusion
Although the most prominent proxy advisory firms have become increasingly transparent in recent years, particularly with respect to methodology and peer group disclosures, we believe the most significant updates to the disclosures by proxy advisory firms will relate to conflicts of interest. On the same day as the issuance of the interpretation discussed above, the SEC also issued guidance to investment advisers on fulfilling their proxy voting responsibilities to clients, which included a more thorough discussion about how to evaluate and consider the proxy advisory firms’ conflicts of interest. While not completely analogous, we think the discussion in that guidance on how to analyze and evaluate potential conflicts of interest in that release will be similar to what the SEC expects from proxy advisory firms.

The SEC Interpretation and Guidance re: Applicability of the Proxy Rules is available here.

The SEC Guidance re: Proxy Voting Responsibilities of Investment Advisers is available here.

KMK Legal Alerts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.