Final SEC rules make it easier for companies to challenge proxy adviser voting recommendations

July 24, 2020

At an open meeting July 22, the SEC voted 3-1 to adopt final amendments to its proxy solicitation rules requiring proxy advisers, such as Institutional Shareholder Services and Glass Lewis, to disclose conflicts of interest and adopt policies giving companies an opportunity to respond to proxy adviser voting recommendations. The SEC also issued supplemental guidance to investment advisers to ensure they vote proxies in their clients’ best interests, including by directing them to factor company responses into their decision-making. In response to stakeholder pushback, the final rule is less burdensome on proxy advisers than the rule proposed last November which, for example, would have required them to give companies up to five days to preview the recommendations and comment on the advice before distribution to clients. The voting recommendation and company response provisions generally won’t apply until the 2022 proxy season.

 

Proxy adviser regulation. A key component of the “principles-based” rules require proxy advisers to (1) disclose conflicts of interest, and (2) adopt and disclose written policies and procedures that give companies a chance respond to voting recommendations. Proxy advisers would be deemed to be in compliance with the required written policies and procedures if they follow these two safe harbors:

  • Give companies a chance to review voting recommendations at no charge “at or prior to” the time they are given to the proxy adviser’s clients
  • Allow companies to respond to the proxy adviser’s recommendations by giving notice to investors through email or other electronic means (including a hyperlink to the response)

Proxy advisers can impose conditions on access to the voting recommendations, such as by requiring companies to file their proxy statement at least 40 calendar days before the meeting and commit to using the voting advice report only for internal purposes.

 

Supplemental guidance for investment advisers. The guidance includes steps investment advisers can take to demonstrate that they are making voting determinations in clients’ best interests. For example, an investment adviser’s policies and procedures should address circumstances where it becomes aware that a company intends to respond to a proxy adviser voting recommendation — particularly when the investment adviser uses a proxy adviser’s voting system that “pre-populates” ballots with the proxy adviser’s voting recommendations (so-called “robo-voting”). 

 

Effective dates. The amendments will become effective 60 days after publication in the Federal Register, but proxy advisers have until Dec. 1, 2021 to comply with the conflict of interest disclosures and adopt written policies and procedures to allow for company feedback. The supplemental guidance for investment advisers will be effective on publication in the Federal Register.  

Amy Knieriem
Amy Knieriem

Senior Principal, Senior Legal Consultant

Carol Silverman
Carol Silverman

Partner, Senior Legal Consultant

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