SEC Changes to Shareholder Proxy Rules RE Shareholder Proposals and Voting Advice and Implications for Corporate Governance
By: Ashley Riley, RBFL Student Editor
This past Fall, the SEC finalized amendments to Exchange Act Rules regarding proxy voting advice and solicitation, as well as shareholder proposals. Amendments to section 14a-1(l) of the Exchange Act will explicitly define the services rendered by proxy advisors as “solicitation.” This will make it illegal to solicit proxy services without conforming to the SEC anti-fraud guidelines presented, giving the SEC broad discretion in defining what “solicitation” means in respect to proxy voting advice. The amendment to Rule 14a-(2)(b)(9) requires that in order to utilize the information and filing exemptions under Rules 14a-2(b)(1) and 14a-2(b)(3), proxy advisors are required to disclose any material conflicts of interest to their clients in advance of solicitation of their services. The final rule adopted a broader principles-based system regarding the dialogue between proxy advisors and registrant firms rather than the proposed rule’s hard requirement of a review opportunity for registrants to provide feedback and make changes on the proxy report before the final distribution of the advice.
Proxy advisory firms may need to adapt to the timing and disclosure obstacles that the amendments create by finding ways to become more efficient in their disclosures, or reworking timelines for research to dispersal. With the aim of the amendments being focused on rectifying the issue of false or misleading information in reports generated by proxy advisors, there may be ambiguity on what constitutes what constitutes “false” or “misleading” under the SEC standards, which could potentially lead to further delays and possibly even, what some have anticipated, “frivolous” litigation. Implications of these changes can have substantial cost and time effects on the proxy voting and shareholder proposal processes of large companies. Those resisting the amendments being made to the proxy advisory process (e.g., the Council of Institutional Investors) argue that the additional burdens placed on proxy advisors will significantly increase costs to both the proxy advisors as well as their clients, thus depleting the value of the service and information they are providing. The time and money that will go into researching, monitoring, and reporting every potential conflict of interest proxy advisors could have with a client would be extremely time consuming for advisors and potentially delay their reports. Further, the principles-based approach to registrant involvement might be additionally time consuming, and could compromise material that is intended to be confidential for specific clients. These types of delays could de-value the advice and other services that proxy advisors provide.
The amendments to the shareholder proposal process appear to alter the corporate governance landscape, in terms of stimulating discussion and decision making on social, environmental, and other “political” issues. The stricter threshold requirements have the potential to significantly alter shareholder boards rights and powers, by decreasing the number of shareholders that will have the ability to submit or resubmit proposals—seemingly disproportionally effecting smaller-scale shareholders. The changes made to the shareholder proposal thresholds can substantially impact participation of retail investors. Given the amount of resistance to the amendments from industry players and the seemingly minimal effects, the amendments would appear to not be worth the costs. The SEC does not specifically identify what the inadequacies in current disclosure practices to justify the amendment to proxy rules for voting advice, which makes the necessity of the amendment to proxy advising questionable.
Sources:
Exemptions from the Proxy Rules for Proxy Voting Advice, 17 C.F.R. § 240 (July 22, 2020).
Cydney Posner, SEC adopts amendments regarding proxy advisory firms, Cooley, (July 22, 2020) https://cooleypubco.com/2020/07/22/sec-amendments-proxy-advisory-firms/.
Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, 84 Fed. Reg. 66518 at 66529 (proposed Dec. 4, 2019) (to be codified at 17 C.F.R. pt. 240).
Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a-8, 84 Fed. Reg. 66458 (proposed Dec. 4, 2019) (to be codified at 17 C.F.R. pt. 240).
Abe Friedman et. al., SEC Proposed Rule Amendments on Shareholder Proposals and Proxy Advisors: Implications for Issuers, Investors and Proxy Advisors, Harv. L. Sch. F. on Corp. Governance (Dec. 9, 2019).
Concept Release on the U.S. Proxy System, Release No. 34–62495 (Jul. 14, 2010) [75 FR 42982 (July 22, 2010)] (‘‘Concept Release’’), at 42983-42984.
Letter from Paul Schott Stevens, President and CEO, Investment Company Institute, to Vanessa A. Countryman, Secretary, Securities and Exchange Commission (Mar. 2, 2020) (on file with the Harvard Law School Forum on Corporate Governance).
Tom Zanki, SEC’s Shareholder Voting Proposals Endure Heavy Criticism, Law 360 (Feb. 7, 2020, 10:12 PM), https://www.law360.com/articles/1242028/sec-s-shareholder-voting-proposals-endure-heavy-criticism.
David F. Larcker, et. al., The Big Thumb on the Scale: An Overview of the Proxy Advisory Industry, Harv. L. Sch. F. on Corp. Governance (Jun. 14, 2018).
Memorandum from S.P. Kothari on Analysis of Data Provided by Broadridge Financial Solutions, Inc. to File S7-23-19, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (Aug. 14, 2020)(on file on SEC website) https://www.sec.gov/comments/s7-23-19/s72319-7645492-222330.pdf.