The Securities and Exchange Commission (SEC) voted Wednesday to adopt amendments to its rules governing proxy solicitations, at the same time publishing new guidance meant to help financial advisers apply the amended rules.
SEC Chairman Jay Clayton says the final rule amendments, which have been modified from the proposed version published last year, are designed to ensure that clients of proxy voting advice businesses have “reasonable and timely access to more transparent, accurate and complete information on which to make voting decisions.”
Clayton says the amendments aim to facilitate the ability of those who use proxy voting advice—investors and others who vote on investors’ behalf—to make “informed voting decisions without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice.”
In the simplest terms, the Securities and Exchange Commission adopted amendments to its rules that exempt persons furnishing proxy voting advice from the information and filing requirements of the federal proxy rules. In addition, the changes amend the definition of “solicitation” in Exchange Act Rule 14a-1(l) to specify that it includes proxy voting advice, with certain exceptions. The changes further provide additional illustrative examples to the proxy rules’ anti-fraud provision in Exchange Act Rule 14a-9.
Clayton says the amendments can be understood as “conditioning” the availability of two exemptions from certain of the federal proxy rules often used by proxy voting advice businesses “on compliance with tailored and comprehensive conflicts of interest disclosure requirements.” The exemptions are also conditioned on two principles-based requirements designed to ensure that, first, registrants who are the subject of proxy voting advice have such advice made available to them in a timely manner, and second, that clients of proxy voting advice businesses are provided with an efficient and timely means of becoming aware of any written responses by registrants to proxy voting advice.
“These conditions reflect certain observed market practices and are intended to ensure that proxy voting advice clients have access to information that is more transparent, accurate and complete,” Clayton says.
While these rule modifications may sound esoteric, they are serious business for the advisory and proxy voting industry, sources say. Many parties, in fact, are voicing harsh criticism of the finalization of the rule amendments. For example, Karen Barr, president and CEO of the Investment Adviser Association (IAA), flatly calls the rule amendments “bad policy” in a statement shared with PLANADVISER.
“While the final proxy voting rules and new guidance adopted by the SEC this morning have been modified from the initial proposal in response to widespread criticism—including from the IAA—we continue to believe that the SEC’s actions represent bad policy,” Barr says. “They represent a major step backwards for corporate governance and will make it more difficult for investment advisers to use the services of proxy advisory firms to fulfill their proxy voting responsibilities on behalf of their clients.”
Barr says she appreciates that the SEC has apparently considered input from the adviser community.
“But, it is hard for us to understand why [the SEC] felt compelled to issue additional guidance for advisers,” Barr says. “The guidance it issued last August—without notice and comment—is comprehensive. It focuses squarely on considerations for advisers that use proxy advisory firms and, in our view, directly addresses all the concerns the Commission says it has. We will have additional comments once we have had the opportunity to review the full details of the new rules and guidance.”
Echoing that sentiment is Gary Retelny, president and CEO of Institutional Shareholder Services (ISS).
“While the rules adopted today may appear less draconian than originally envisioned, they nevertheless serve as a blow to institutional investors seeking to judiciously monitor portfolio companies,” Retelny says. “As Commissioner [Allison] Lee noted, these rules are ‘unwarranted, unwanted and unworkable.’ Despite seemingly reducing the previously contemplated burden on proxy advisers, the new rules, coupled with the new guidance for investment advisers, will hinder investors’ ability to vote in a timely, cost-effective, and objective manner. The rule, passed today along party lines, is based on the view that the provision of proxy voting advice constitutes a solicitation, a premise which we believe is inconsistent with the plain meaning of the federal securities laws. This issue was at the heart of the lawsuit which we initiated against the SEC last year and it continues to be of concern to ISS.”
On the other side of the fence is the American Securities Association (ASA), which is applauding this development and framing it as a win for “mom-and-pop” investors—a characterization that is by no means shared by the SEC’s critics.
“ASA applauds Chairman Clayton for modernizing the proxy advisory process in a way that prioritizes America’s mom-and-pop investors and retirements savers over special interests,” says Chris Iacovella, ASA CEO. “These reforms will increase the accountability and transparency of the proxy advisory industry, and incentivize small business capital formation. American companies of all sizes will now be able to weigh-in on critical issues before investors vote and can be confident that voting is based upon accurate information.”
Editor’s note: PLANADVISER Magazine is owned by Institutional Shareholder Services (ISS). ISS has filed a lawsuit seeking to halt the implementation of the new proxy voting rules.