As blogged last week on Riches, the SEC issued proxy advisor-related guidance aimed at proxy advisory firms (PAFs) and investment advisers (IAs) who retain them in connection with their proxy voting responsibilities in the form of: (i) Interpretation and Guidance Regarding the Applicability of the Proxy Rules to Proxy Voting Advice ("Proxy Voting Advice Release") and (ii) Guidance Regarding Proxy Voting Responsibilities of Investment Advisers ("Proxy Voting Responsibilities Guidance"), respectively.
As provided and further detailed in the SEC's press release and Fact Sheet and this Gibson Dunn memo, the Proxy Voting Advice Release affirms that PAF proxy voting advice constitutes a solicitation under the federal proxy rules subject to the anti-fraud provisions of Exchange Act Rule 14a-9. Rule 14a-9 prohibits a 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, or omitting any material fact necessary to make the statements not false or misleading.
Importantly, the release notes that Rule 14a-9 extends to opinions, reasons, recommendations, or beliefs that are disclosed as part of a solicitation, and specifically provides that where such opinions, recommendations, or similar views are provided, PAFs may need to disclose additional information (e.g., the underlying facts, assumptions, limitations, and other information) so that these views don't raise Rule 14a-9 concerns, such as, for example:
- An explanation of the methodology used to formulate their voting advice on a particular matter
- Information sources other than the issuer's public disclosures, and the extent to which the information from these sources differs in any material respect from the issuer's disclosures
- Any material conflicts of interest that arise in connection with providing the proxy voting advice in reasonably sufficient detail so that the client can assess the relevance of those conflicts
The Proxy Voting Responsibilities Guidance aims to facilitate IAs' compliance with their proxy voting responsibilities on behalf of their clients - particularly if they retain a PAF - in accordance with their fiduciary duties and Rule 206(4)-6 of the Investment Advisers Act of 1940, which requires IAs' adoption and implementation of written policies & procedures designed to ensure that they vote proxies in the best interests of their clients. The guidance is in a Q&A format and includes non-exhaustive, non-prescriptive examples that emphasize (among other things) IAs' consideration of individual client objectives that may warrant tailored client voting policies and issuer-specific factors that may call for a more robust analysis of particular voting matters - both of which bear on PAF scope of services, methodologies and information sources used in formulating voting recommendations and related quality control factors, conflict-of interest disclosure and mitigation, and other key considerations.
With regard to potential factual errors, incompleteness or methodological weaknesses in the PAF's research or voting recommendations analysis specifically, IAs are advised to consider the effectiveness of the PAF's policies & procedures for obtaining information that supports its voting recommendations, and consider, and possibly communicate with their PAFs about the firm's:
- Engagement with issuers, including the PAF's process for ensuring that it has complete and accurate information about the issuer and each particular matter, and its process, if any, for IAs to access the issuer’s views about the firm’s voting recommendations in a timely and efficient manner
- Efforts to correct any identified material deficiencies in their analysis
- Disclosure to the IA regarding the sources of information & methodologies used in formulating voting recommendations or executing voting instructions
- Consideration of factors unique to a specific issuer or proposal when evaluating a matter subject to a shareholder vote
In his remarks, Commissioner Roisman - whom Chair Clayton charged with leading the Commission's efforts on proxy plumbing and other proxy process improvements (previously reported on here) - signaled more to come in the near-term on proxy rule-related actions, including proposed rules to amend the shareholder proposal submission/resubmission thresholds and proposed rule amendments on PAFs' reliance on the Exchange Act Rule 14a-2(b) proxy solicitation exemptions.
Both IAs and PAFs are encouraged to review their policies and practices relative to the new guidance in advance of the 2020 proxy season. The guidance and interpretation will be effective upon publication in the Federal Register.
See also these Statements from SEC Chair Jay Clayton, and Commissioner Peirce; these dissenting Statements from Commissioners Lee and Jackson; and additional information & analysis on our Proxy Advisors page.