New SEC Rules Could Alter the Proxy Voting Process; Here’s What Companies Should Know

Published: August 2020

 

Although uncertain, there are several potential implications of the new SEC rules — from raising the importance of company statements in response to a proxy firm’s recommendations to a lag in proxy voting, resulting in less visibility of potential voting outcomes. In any case, effective shareholder communication will be more important than ever.


New SEC amendments to proxy rules approved last month will change the relationship between companies, their institutional shareholders and the proxy advisors that make voting recommendations to these investors.

The new rules state that the advice provided by proxy advisory firms — of which, ISS and Glass Lewis make up more than 90% of the market — constitute a “solicitation.” As such, they are subject to applicable disclosure and filing requirements under the SEC proxy rules, unless they comply with the following:
  • Adopt policies designed to provide companies access to their research reports before or at the same time that they are given to the proxy advisory firm’s investor clients;
  • Adopt policies based on how they will make investors aware of company statements or responses to the proxy advisory firm’s voting guidance; and
  • Disclose material conflicts of interest arising from providing instruction to companies or consulting with investors prior to publishing voting advice.

The rules are “principles-based” and, therefore, permit proxy advisors to determine for themselves how they wish to comply with the exemption. However, they do provide a “safe harbor” that would satisfy the exemption, including:
  • Offering initial voting recommendations to companies for free no later than when they are sent to investors, provided the issuer files its proxy statement at least 40 days before the meeting and expressly acknowledges that the voting advice is internal and can only be shared with its advisors (e.g., compensation consultants, outside legal counsel). It’s important to note that sharing updated voting recommendations with companies is not a requirement.
  • Providing electronic notice to investors that a company has filed a response to the voting advice or has stated its intent to do so.

The SEC also codified that proxy voting advice is subject to the anti-fraud provisions of the federal securities laws. For example, if a proxy advisor failed to disclose material information regarding its advice (such as the advisor’s methodology, sources of information or conflicts of interest), or if it makes false statements, it would potentially be in violation and subject to potential enforcement action.

The SEC adopted these amendments by a 3-1 vote along party lines. The final rules were modified from the original proposal in November 2019 (and discussed in our article here). At the time, the SEC considered mandating that proxy advisors allow companies to review the proxy voting advice before firms sent it to their investor clients. However, many investors opposed that provision, saying it could potentially decrease the objectivity of the advice, and ultimately it was dropped from the final rules. The new rules do encourage proxy firms to provide advance copies of their voting recommendations to issuers, which ISS currently offers to S&P 500 companies.

Following the proposed rules, ISS filed a lawsuit challenging the SEC’s authority. The parties agreed to a stay in the lawsuit until the SEC adopted the final rules. It remains to be seen whether ISS will move ahead with its lawsuit now that the final rules have been adopted, but some observers believe this is likely.

ISS and Glass Lewis have said that they are in the process of making some determinations about their policies and procedures and how to adapt their business models to the new rule. We expect that it will take some time before we learn how they will provide their initial voting advice to companies, notify investors of company responses and disclose their conflicts of interest.

Corresponding Supplemental Guidance for Investors

In conjunction with the proxy advisory rules, the SEC issued a supplemental guidance for investment advisers that addresses how they should consider a company’s statements that relate to proxy advisory firms’ recommendations on an issuer’s proxy proposals. The guidance focuses on investment advisers’ use of proxy advisors’ automated voting processes that pre-populate the investment advisers’ ballots with suggested voting recommendations or automatically submit votes.

The new guidance, which takes effect immediately, requires investment advisers to consider and evaluate any information provided by companies in response to proxy advisors’ voting advice before finalizing their votes.

To demonstrate that an investment adviser is making voting determinations in its client’s best interest, the adviser should consider whether its policies and procedures regarding automated voting are designed to allow adequate time to consider and analyze any new information and determine whether it impacts its voting decision. This is provided the information becomes available sufficiently in advance of a voting submission deadline.

One possible consequence of the guidance is that more institutional investors might delay voting until very shortly prior to a shareholder meeting, resulting in less advanced visibility for companies into potential voting decisions and outcomes.

What Comes Next?

While differences of opinion remain, the SEC staff believes that the final rule amendments covering proxy advisory firms will provide companies with timely access to proxy advisor research and voting advice that can impact key votes at shareholder meetings. Ultimately, this would enhance engagement between all interested parties. The SEC also believes that the rule amendments and guidance will improve the transparency, accuracy and completeness of information available to investors. 

Some investment advisers that use automatic voting will likely revisit their procedures to accommodate a review of company statements and information. However, these anticipated benefits will likely be accompanied, at least initially, by increased complexity and delays in the voting process as proxy advisors and investors navigate new procedures to comply with the latest requirements. Companies should use the time before the new rules take effect next year to consider how they might mitigate these challenges. For example, do your disclosures tell your story in a way that is clear and compelling, ensuring nothing is left open to interpretation? Have you established robust engagement channels with your shareholders?

The SEC’s principles-based approach allows each proxy advisor to develop its own policies and procedures in order to qualify for the exemption from the solicitation rules. We will continue to keep you apprised of the developments well in advance of the adoption of these new policies in December 2021, in time for the 2022 proxy season.

If you have questions about this topic or other corporate-governance-related matters, please contact one of the authors or write to rewards-solutions@aon.com.

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