Legal Alert: More Developments from the SEC and Proxy Advisory Firms

As we explained in our September 2019 Snapshot, on August 21, 2019, the SEC issued new guidance regarding the role of proxy advisors in the proxy voting process. We expect this guidance to play an important role in the upcoming 2020 proxy season, as the SEC further defines the voting obligations of registered investment advisors and seeks to promote greater accountability on the part of the proxy advisory firms.

The SEC followed this guidance on November 5, 2019 with proposed rules governing proxy advisors and their investment advisor clients. The SEC intends to improve the accuracy and transparency of proxy voting advice with these proposed rules. If adopted, the proposed rules would represent a significant change in the manner in which proxy advisors interact with both issuers and investment advisors. Specifically, the proposed rules would further increase the scrutiny of proxy advisory firm recommendations, and give public companies a greater opportunity to challenge adverse advice.

At least one proxy advisory firm appears to have issues with the SEC’s recent efforts. Institutional Shareholder Services has commenced litigation against the SEC to set aside certain of the SEC’s actions.

November 2019 Proposed Rules
The proposed amendments would amend Exchange Act Rule 14a-1(l), to clarify that a solicitation includes any proxy voting advice making a recommendation to a shareholder as to its vote, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee. However, voting advice provided in response to an unprompted request would not constitute a solicitation.

The definition of proxy voting advice as a solicitation makes proxy voting advice subject to the anti-fraud provisions of Rule 14a-9. The SEC’s proposed amendments to Rule 14a-9 would highlight the types of information that a proxy advisory firm may need to disclose to avoid potential liability, including, among other things: (a) the business’s methodology, (b) sources of information, (c) conflicts of interest, and (d) the use of standards or requirements that materially differ from relevant SEC standards or requirements.

The SEC’s proposed rules would also revise the exemptions to the information and filing requirements of the proxy rules under Rule 14a-2(b). Proxy advisory firms relying on these exemptions would be required to: (a) disclose material conflicts of interest in their proxy voting advice; (b) give registrants and certain other soliciting persons an opportunity to review and provide feedback on proxy voting advice before it is issued; and (c) on request, include in proxy voting advice a hyperlink or analogous electronic medium directing the recipient to a written statement that sets forth the registrant’s or soliciting person’s views on the proxy voting advice.

Separately, the SEC proposed rules to update the shareholder proposal process. The proposed rules would increase the minimum thresholds for shareholders to submit and resubmit proposals on corporate ballots. Critics have argued for years that the thresholds required in order to submit proposals are too low, encouraging frivolous proposals, or proposals that only pertain to a small subset of the shareholders.

ISS's Challenge
ISS filed a lawsuit in the District Court for the District of Columbia to set aside the SEC’s actions. In a public statement, ISS CEO Gary Retelny said, “We believe litigation to be necessary to prevent the chill of proxy advisers’ protected speech and to ensure the timeliness and independence of the advice that shareholders rely on to make decisions with regards to the governance of their publicly traded portfolio companies.” ISS’s complaint alleges several reasons that the new SEC guidance should be set aside, including the allegation that the SEC’s guidance exceeds its statutory authority under section 14(a) of the Exchange Act.

Takeaways
The SEC’s position that proxy advisory firms may have Rule 14a-9 liability could provide a basis on which public companies may challenge proxy advisor recommendations it believes are based on inaccurate data or faulty methodologies. The guidance and proposed rules may generate additional disclosure by proxy advisors, and more opportunities for issuers to respond to proxy advice.

If you have interest in providing comments to the SEC, please contact us.

The articles below from Bloomberg Businessweek and The Economist brought to our attention by Gary Kreider provide additional color:

• New Proxy Voting Rules Take Aim at Powerful Advisory Firms, Bloomberg Businessweek, November 14, 2019
• Proxy Advisers Come Under Fire, The Economist, November 14, 2019

Should you have any questions or need assistance, please contact us.

James C. Kennedy
513.579.6599
JKennedy@kmklaw.com 

F. Mark Reuter
513.579.6469
FReuter@kmklaw.com 

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.