In an open meeting today, the SEC adopted amendments to the proxy voting advice (i.e., proxy advisor) rules and proposed amendments to Rule 14a-8. Both actions were approved along party lines, with SEC Chair Gensler and Commissioners Crenshaw and Lee voting in favor, and Commissioners Peirce and Uyeda voting against.
Proxy Advisory Firms
The final proxy advisory firm (“PAF”) rule, which is largely consistent with the proposed rule issued in November 2021 (which the Society opposed):
- Rescinds the requirements established by the final rule adopted by the Commission in July 2020 (which the Society supported – see our July 2020 report here) that proxy advisors: (i) make available to companies their proxy voting advice at or before the time they make it available to their investor clients, and (ii) notify investor clients of companies’ written statements about that proxy voting advice;
- Eliminates Note (e) to Rule 14a-9 of the July 2020 rule, which aimed to clarify, by example, when the failure to disclose material information regarding proxy voting advice could be misleading and thus actionable under Rule 14a-9, and discusses the limited circumstances under which statements of opinion would subject PAFs to liability under Rule 14a-9; and
- Rescinds the 2020 supplemental guidance regarding the proxy voting responsibilities of investment advisers. That guidance addressed investment advisers’ use of automated proxy voting systems hosted by proxy advisory firms, which have amounted to “robo-voting” in the views of many issuers.
Today’s final rule leaves intact the determination that proxy voting advice is a solicitation subject to the proxy rules (including liability under Rule 14a-9 for material misstatements or omissions of fact) and the conflicts of interest disclosure requirements that were memorialized in the July 2020 rule.
See the SEC’s Fact Sheet; these statements from SEC Chair Gary Gensler and Commissioners Lee, Crenshaw, Peirce (dissenting), and Uyeda (dissenting); and "SEC rescinds Trump-era proxy-voting rules, makes it harder for companies to exclude proposals" (Pensions & Investments).
Shareholder Proposals
The proposed amendments to Rule 14a-8 purport to clarify the standards for these three bases for exclusion of shareholder proposals from the proxy statement:
- Rule 14a-8(i)(10) (substantial implementation) provides a basis for exclusion if the company has already “substantially implemented” the proposal. The proposed amendments would allow exclusion under this provision only if the company has already implemented all of the “essential elements” of the proposal, a determination that is proposed to be based on the degree of specificity of the proposal and its stated primary objectives.
- Rule 14a-8(i)(11) (duplication) provides a basis for exclusion if the proposal “substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company's proxy materials for the same meeting.” The proposed amendments would define “substantial duplication” as a proposal that addresses the same subject matter and seeks the same objective by the same means.
- Rule 14a-8(i)(12) (resubmission) provides a basis for exclusion if a proposal “addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years” if the matter was voted on at least once in the last three years and did not receive specified minimum levels of shareholder support (5%, 15%, 25%, if voted on once, twice or three or more times, respectively) in the most recent vote. The proposed amendments would define a resubmission as a proposal that substantially duplicates a prior proposal, e., if it “addresses the same subject matter and seeks the same objective by the same means.”
The release further notes that the SEC reaffirms the standards it articulated in 1998 for purposes of determining the availability of the ordinary business exclusion (Rule 14a-8(i)(7)):
In the 1998 Adopting Release, supra note 10, the Commission stated: “The policy underlying the ordinary business exclusion rests on two central considerations. The first relates to the subject matter of the proposal. . . .[P]roposals relating to [ordinary business] matters but focusing on sufficiently significant social policy issues . . .generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote. . . . The second consideration relates to the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” The Commission also clarified that specific methods, time-frames, or detail do not necessarily amount to micromanagement and are not dispositive of excludability.
As previously reported, the SEC’s policy shift in November 2021 on the ordinary business exclusion, reflected in Staff Legal Bulletin No. 14L, rescinded the longstanding company-specific approach to Rule 14a-8’s “ordinary business” exception and replaced it with a “broad societal impact” approach, has been associated with an increase in E&S-related shareholder proposals and reduced average shareholder support (see Society Comment Letter: “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” note 46).
The overall effect of the proposed amendments is to further limit the circumstances under which these exclusions would be available to companies.
Comments on the proposed rule are due in 60 days (September 12, 2022). The Society plans to comment. If you are interested in participating as a drafter or a reviewer for this letter, please contact Sheryl Jarvis at SJarvis@societycorpgov.org. We plan to convene a kickoff call next week.
See the SEC’s Fact Sheet and these statements from SEC Chair Gary Gensler and Commissioners Lee, Peirce (dissenting), and Uyeda (dissenting).