Client Alert

SEC Proposes Rule Changes Addressing Proxy Advisory Firms and Shareholder Proposals

13 Nov 2019

On November 5, 2019, the U.S. Securities and Exchange Commission (the “SEC”) proposed two sets of rule amendments that, if adopted, would play a prominent role in guiding the manner in which companies, shareholders, and proxy advisory firms engage with one another in future proxy seasons. 

First, the SEC proposed amendments to Rules 14a-1(l), 14a-2(b) and 14a-9 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which relate to proxy solicitations. The proposed rule amendments would address how these rules may apply with respect to the provision of proxy voting advice to shareholders by proxy advisory firms, such as Institutional Shareholder Services, Inc. (“ISS”) and Glass Lewis.[1]

Second, the SEC proposed amendments to Exchange Act Rule 14a-8, which establishes the manner in which shareholders may submit a proposal for inclusion in a company’s proxy materials. The proposed rule amendments would revise the eligibility requirements in Rule 14a-8(b), the one-proposal limit in Rule 14a-8(c), and the resubmission thresholds in Rule 14a-8(i)(12).[2]

Both sets of rule proposals are subject to a public comment period of 60 days after publication in the Federal Register.

Proposed Rule Amendments Regarding Proxy Voting Advice

Background

In August 2019, the SEC published an interpretative release addressing proxy advisory firms. In the interpretive release, the SEC stated that, under Exchange Act Rule 14a-1(l), proxy voting advice provided by proxy advisory firms generally constitutes a solicitation subject to the federal proxy rules.[3] While such solicitations are exempt from filing requirements, they remain subject to Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.  The SEC’s guidance describes what a person or entity providing proxy voting advice should consider when determining the information it may need to disclose in order to avoid a potential violation of Rule 14a-9.

In October 2019, ISS filed a lawsuit in federal court seeking declaratory and injunctive relief, alleging that the SEC’s August 2019 interpretive guidance is unlawful because it: (i) exceeds the SEC’s statutory authority under Exchange Act Section 14(a); (ii) constitutes a substantive rule that the SEC failed to promulgate pursuant to the notice-and-comment rulemaking procedures specified in the Administrative Procedures Act; and (iii) is arbitrary and capricious.[4]

Proposed Proxy Rule Amendments for Proxy Voting Advice

The SEC’s proposals would amend Exchange Act Rule 14a-1(l), which defines the terms “solicit” and “solicitation,” to specify the circumstances when a person or entity that furnishes proxy voting advice (which the SEC refers to as a “proxy voting advice business”) will be deemed to be engaged in a solicitation subject to the proxy rules. A proposed amendment to Rule 14a-1(2) also would codify the SEC’s interpretive guidance that voting advice provided by a person, such as a broker-dealer or an investment adviser, in response to an unprompted request for such advice, would not constitute a “solicitation.”

Under the SEC’s proxy rules, any person engaging in a proxy solicitation is generally subject to the filing and information requirements, unless an exemption applies to the solicitation. While certain types of solicitations are exempt from the filing and information requirements, Rule 14a-9, the anti-fraud provision of the proxy rules, still applies to these exempt solicitations.  Proxy voting advice businesses typically rely upon the exemptions in Rule 14a-2(b)(1) and Rule 14a-2(b)(3) to provide proxy voting advice without complying with the filing and information requirements of the proxy rules. Rule 14a-2(b)(1) generally exempts solicitations by persons who do not seek the power to act as a proxy for shareholders and do not have a substantial interest in the subject matter of the communication beyond their interest as a shareholder. Rule 14a-2(b)(3) generally exempts proxy voting advice that is furnished by an advisor to any other person with whom the advisor has a business relationship. These exemptions were adopted before proxy voting advice businesses played a significant role in the proxy voting process.

The SEC is proposing to adopt new paragraph (b)(9) to Rule 14a-2 that would establish conditions to the availability of the exemptions specified in paragraphs (b)(1) and (b)(3) which would apply specifically to persons furnishing proxy voting advice that would constitute a solicitation under Rule 14a-1(l)(1)(iii)(A) (as it is proposed to be revised). The proposed rule would specify that the exemptions in paragraphs (b)(1) and (b)(3) of Rule 14a-2 would not be available to a proxy voting advice business unless all of the conditions below are satisfied:

  • The proxy voting advice business includes in its proxy voting advice and in any electronic medium used to deliver the proxy voting advice prominent disclosure of:
    • Any material interests, direct or indirect, of the proxy voting advice business (or its affiliates) in the matter or parties concerning which it is providing the advice;
    • Any material transaction or relationship between the proxy voting advice business (or its affiliates) and the company, another soliciting person, shareholder proponent, or affiliates of any of the foregoing (as determined using publicly available information) connected with the matter covered by the proxy voting advice;
    • Any other information regarding the interest, transaction, or relationship of the proxy voting advice business (or its affiliates) that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction, or relationship; and
    • Any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction, or relationship;
  • The proxy voting advice business provides the company or any other person conducting a solicitation (other than a solicitation exempt under Rule 14a-2) covered by its proxy voting advice, prior to the distribution of that advice to its clients:
    • A copy of such proxy voting advice that the proxy voting advice business intends to deliver to its clients for a review and feedback period of no less than five business days, if the company or other soliciting person has filed its definitive proxy statement at least 45 calendar days before the security holder meeting date, or if no meeting is held, at least 45 calendar days before the date the votes, consents or authorizations may be used to effect the proposed action; or
    • A copy of such proxy voting advice that the proxy voting advice business intends to deliver to its clients for a review and feedback period of no less than three business days, if the company or other soliciting person has filed its definitive proxy statement less than 45 calendar days, but at least 25 calendar days, before the security holder meeting date, or if no meeting is held, less than 45 calendar days, but at least 25 calendar days, before the date the votes, consents or authorizations may be used to effect the proposed action; and
    • No earlier than the expiration of the period described in the prior two bullet points, as applicable, and no later than two business days prior to delivery of the proxy voting advice to its clients, a final notice of voting advice which must include a copy of such proxy voting advice that the proxy voting advice business will deliver to its clients, including any revisions to such advice made by the proxy voting advice business after the review and feedback period provided pursuant to the prior two bullet points, as applicable; and
  • If requested by the company or any other person conducting a solicitation (other than a solicitation exempt under Rule 14a-2) prior to expiration of the review period described above, the proxy voting advice business would be required to include in its proxy voting advice and in any electronic medium used to deliver the proxy voting advice an active hyperlink or any other analogous electronic medium that leads to the company’s or other soliciting person’s, as applicable, statement regarding the proxy voting advice.

A proxy voting advice business would be under no obligation to comply with conditions to provide the proxy voting advice for review and to provide a link to the company’s or other soliciting person’s views on the proxy voting advice if the company or other soliciting person has not filed its definitive proxy statement at least 25 calendar days before the security holder meeting date (or if no meeting is held, at least 25 calendar days before the date the votes, consents or authorizations may be used to effect the proposed action). Further, once the two business day period referenced above has expired, the proxy voting advice business would be under no further obligation to provide the company or any other soliciting person with additional opportunities to review its proxy voting advice with respect to the same meeting. The SEC proposes to adopt a note indicating that a proxy voting advice business may require the company or other soliciting person, as applicable, to enter into an agreement to maintain the confidentiality of any materials it receives under this review regime and refrain from publicly commenting on those materials, provided that the terms of such confidentiality agreement: (i) shall be no more restrictive than similar types of confidentiality agreements that the proxy voting advice business requires of the recipients of the proxy voting advice; and (ii) shall cease to apply once the proxy voting advice business provides its advice to one or more recipients. The proxy voting advice business would not be required to comply with the review process described above if the company or other soliciting person does not enter into such a confidentiality agreement.

The proposed amendments would also provide that an immaterial or unintentional failure to comply with the conditions of proposed Rule 14a-2(b)(9) will not result in the loss of the exemptions in Rule 14a-2(b)(1) or 14a-2(b)(3), so long as: (i) the proxy voting advice business made a good faith and reasonable effort to comply; and (ii) to the extent that it is feasible to do so, the proxy voting advice business uses reasonable efforts to substantially comply with the condition as soon as practicable after it becomes aware of its noncompliance. Further, failure to comply with the conditions of new Rule 14a-2(b)(9) would not create a new private right of action for companies against proxy voting advice businesses.

The proposed rule amendments also would modify Rule 14a-9 to include examples of when the failure to disclose certain information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. The examples include the proxy advisory firm’s methodology, sources of information, conflicts of interest, or use of standards that materially differ from relevant standards or requirements that the SEC sets or approves.

Proposed Rule Amendments Regarding Shareholder Proposals

Background

Rule 14a-8 requires companies that are subject to the federal proxy rules to include in their proxy materials shareholder proposals that satisfy the rule’s procedural and substantive requirements. One procedural requirement – Rule 14a-8(b) – establishes, among other requirements, a share ownership threshold that a shareholder must satisfy to have its proposal considered for inclusion in a company’s proxy materials. The SEC has not updated this ownership threshold since 1998. 

Another requirement – Rule 14a-8(i)(12) – permits companies to exclude a shareholder proposal that “deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company’s proxy materials within the preceding 5 calendar years” if the matter was voted on at least once in the last three years and did not receive a specified percentage of votes. These “resubmission thresholds” also have not been updated since 1998.

SEC Chairman Jay Clayton noted that the rule proposals “follow from the staff’s extensive experience with shareholder proposals and recognize the significant changes that have taken place in our markets in the decades since these regulatory requirements were last revised, including, in particular, the types and use of communications, the types and frequency of shareholder-company engagement and the substantial shift to investing through mutual funds and ETFs, rather than directly by Main Street investors.” 

Proposed Rule Amendments

The proposed amendments to Rule 14a-8(b) would:

  • Update the current requirement that a proponent hold at least $2,000 or 1 percent of a company’s securities for at least one year to be eligible to submit a proposal. The proposal would eliminate the 1 percent threshold and establish the following three alternative thresholds, any one of which a shareholder could satisfy to be eligible to submit a proposal:
    • continuous ownership of at least $2,000 of the company’s securities for at least three years;
    • continuous ownership of at least $15,000 of the company’s securities for at least two years; or
    • continuous ownership of at least $25,000 of the company’s securities for at least one year.
  • Require that a proponent who elects to use a representative for the purpose of submitting a shareholder proposal provide documentation to make clear that the representative is authorized to act on the proponent’s behalf and to provide a meaningful degree of assurance as to the proponent’s identity, role, and interest in a proposal that is submitted for inclusion in a company’s proxy statement.
  • Require that each proponent state that he or she is able to meet with the company, either in person or via teleconference, no less than 10 calendar days, or more than 30 calendar days, after submission of the shareholder proposal, and provide contact information as well as business days and specific times that the shareholder-proponent is available to discuss the proposal with the company.

The proposed amendments to Rule 14a-8(c) would:

  • Apply the one-proposal rule to “each person” rather than “each shareholder” who submits a proposal, such that a proponent would not be permitted to submit one proposal in his or her own name and simultaneously serve as a representative to submit a different proposal on another shareholder’s behalf for consideration at the same meeting.
  • Provide that a representative would not be permitted to submit more than one proposal to be considered at the same meeting, even if the representative were to submit each proposal on behalf of different shareholders.

The proposed amendments to Rule 14a-8(i)(12) would:

  • Modernize the current resubmission thresholds of 3 percent, 6 percent, and 10 percent for matters voted on once, twice, or three or more times in the last five years, respectively, with thresholds of 5 percent, 15 percent, and 25 percent, respectively; and
  • Add a new provision that would allow for exclusion of a proposal that has been previously voted on three or more times in the last five years, notwithstanding having received at least 25 percent of the votes cast on its most recent submission, if the proposal:
    • received less than 50 percent of the votes cast; and
    • experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.

Next Steps: Addressing Proxy Issues

The SEC has undertaken an effort to address a number of the “proxy plumbing” issues that have been the subject of consideration for several years, including: (i) the quality and mix of information provided to shareholders and how that information is provided; (ii) the costs and burdens of the proxy system on companies and shareholders; (iii) whether the voices of long-term retail investors “are being underrepresented, misrepresented or selectively represented in corporate governance;” (iv) shareholder proposals; and (v) the role of proxy advisory firms. The SEC’s two rule proposals on shareholder proposals and proxy advisory firms represent the most significant step forward in addressing these long-standing issues.


[1] Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice, Rel. No. 34-87457 (Nov. 5, 2019).

[2] Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, Rel. No. 34-87458
(Nov. 5, 2019).

[3] Commission Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice, Rel. No. 34.86721 (Aug. 21, 2019).

[4] Institutional Shareholder Services Inc. v. Securities and Exchange Commission and Walter Clayton III, Case No. 1:19-cv-03275 (D.D.C. 2019).

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