SEC Issues Supplemental Guidance Concerning Proxy Voting Responsibilities of Investment Advisers
The Securities and Exchange Commission today voted to adopt amendments to its rules governing proxy solicitations 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. 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.
“The majority of our Main Street investors participate in our public markets through ownership of mutual funds and ETFs managed by professional market participants,” said Chairman Jay Clayton. “Today’s actions ensure that those who take on the responsibility of investing and voting on behalf of our Main Street investors have the accurate and decision useful information necessary to make an informed voting decision for the benefit of those investors.”
The amendments condition 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: (1) registrants that are the subject of proxy voting advice have such advice made available to them in a timely manner, and (2) 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.
In addition, the amendments codify the Commission’s longstanding view that proxy voting advice generally constitutes a solicitation under the proxy rules, and make clear that the failure to disclose material information about proxy voting advice may constitute a potential violation of the antifraud provision of the proxy rules.
The Commission also supplemented its prior guidance regarding the proxy voting responsibilities of investment advisers in light of the Commission’s amendments to the proxy solicitation rules. This Commission action provides supplemental guidance to assist investment advisers in assessing how to consider additional information from issuers that may become more readily available as a result of the proxy solicitation rule amendments. The guidance also addresses circumstances where the investment adviser utilizes a proxy advisory firm’s electronic vote management system as well as disclosure and client consent obligations when investment advisers use these services for voting.
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SEC Open Meeting
July 22, 2020
Rule Amendments for Proxy Voting Advice
The Securities and Exchange Commission today adopted amendments to its rules that exempt persons furnishing proxy voting advice from the information and filing requirements of the federal proxy rules. The Commission’s amendments are intended to ensure that clients of proxy voting advice businesses receive more transparent, accurate, and complete information on which to make voting decisions, without imposing undue costs or delays that could adversely affect the timely provision of proxy voting advice.
In addition, consistent with the Commission’s longstanding view, 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 also provide additional illustrative examples to the proxy rules’ antifraud provision in Exchange Act Rule 14a-9.
The Commission’s adoption of these amendments is part of its ongoing focus on the proxy process and possible improvements to this process and the ability of shareholders to exercise their rights to vote on corporate matters. It follows the Commission’s recent guidance clarifying the applicability of the federal proxy rules to proxy voting advice and the proxy voting responsibilities of investment advisers, roundtables on the proxy process in 2018 and proxy advisory services in 2013, and the publication of its Concept Release on the U.S. proxy system in 2010.
Rule 14a-1(l). The Commission is amending the definition of the terms “solicit” and “solicitation” in Rule 14a-1(l) to codify its longstanding view that proxy voting advice generally constitutes a solicitation within the meaning of Section 14(a) of the Exchange Act. New paragraph (A) to Rule 14a-1(l)(1)(iii) specifies the circumstances in which a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules. In addition, new paragraph (v) to Rule 14a-1(l)(2) codifies the Commission’s view that proxy voting advice provided by a person who furnishes such advice only in response to an unprompted request shall not be deemed to be a solicitation.
Rules 14a-2(b)(1) and 14a-2(b)(3). The amendments revise Rules 14a-2(b)(1) and (b)(3), which provide exemptions from the information and filing requirements of the proxy rules. Under the amendments, in order for proxy voting advice businesses to rely on these exemptions, they must satisfy the following conditions of new Rule 14a-2(b)(9):
- They must provide specified conflicts of interest disclosure in their proxy voting advice or in an electronic medium used to deliver the proxy voting advice [Rule 14a-2(b)(9)(i)]; and
- They must have adopted and publicly disclosed written policies and procedures reasonably designed to ensure that:
- Registrants that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the proxy voting advice business’s clients [Rule 14a-2(b)(9)(ii)(A)]; and
- The proxy voting advice business provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by registrants who are the subject of such advice, in a timely manner before the security holder meeting [Rule 14a-2(b)(9)(ii)(B)].
To give assurance to a proxy voting advice business that its written policies and procedures satisfy the above principles-based requirements, the new rules include the following non-exclusive safe harbors:
- A proxy voting advice business will be deemed to satisfy the requirements of Rule 14a-2(b)(9)(ii)(A) if its written policies and procedures are reasonably designed to provide registrants with a copy of its proxy voting advice, at no charge, no later than the time it is disseminated to the business’s clients. The safe harbor also specifies that such policies and procedures may include conditions requiring registrants to (i) file their definitive proxy statement at least 40 calendar days before the security holder meeting and (ii) expressly acknowledge that they will only use the proxy voting advice for their internal purposes and/or in connection with the solicitation and will not publish or otherwise share the proxy voting advice except with the registrant’s employees or advisers.
- A proxy voting advice business will be deemed to satisfy the requirements of Rule 14a-2(b)(9)(ii)(B) if its written policies and procedures are reasonably designed to provide notice on its electronic client platform or through email or other electronic means that the registrant has filed, or has informed the proxy voting advice business that it intends to file, additional soliciting materials setting forth the registrant’s statement regarding the advice (and include an active hyperlink to those materials on EDGAR when available).
Rule 14a-9. The amendments modify Rule 14a-9 to include examples of when the failure to disclose certain material information in proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule. These examples include material information about the proxy voting advice business’s methodology, sources of information, or conflicts of interest.
The amendments will be effective 60 days after publication in the Federal Register, but affected proxy voting advice businesses subject to the final rules are not required to comply with the Rule 14a-2(b)(9) amendments until December 1, 2021.
Supplemental Guidance Regarding Proxy Voting Responsibilities of Investment Advisers
The Commission has also supplemented prior guidance issued to investment advisers regarding their proxy voting responsibilities. The prior guidance discussed how the fiduciary duty and rule 206(4)-6 under the Investment Advisers Act of 1940 relate to an investment adviser’s exercise of voting authority on behalf of its clients. This supplemental guidance will assist investment advisers in fulfilling their proxy voting responsibilities in light of these amendments to the solicitation rules under the Exchange Act.
The supplemental guidance assists investment advisers in assessing how to consider issuer responses to recommendations by proxy advisory firms that may become more readily available to investment advisers as a result of the amendments to the solicitation rules under the Exchange Act. This includes circumstances in which the investment adviser utilizes a proxy advisory firm’s electronic vote management system that “pre-populates” the adviser’s ballots with suggested voting recommendations or for voting execution services.
For example, the supplemental guidance states that an investment adviser should consider whether its policies and procedures address circumstances where the investment adviser has become aware that an issuer intends to file or has filed additional soliciting materials with the Commission after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline. The supplemental guidance also addresses disclosure obligations and client consent when investment advisers use automated services for voting.
The supplemental guidance follows a question and answer format, similar to the prior guidance, and provides examples to help facilitate compliance.
The supplemental guidance will be published on the Commission’s website and in the Federal Register. The guidance will be effective upon publication in the Federal Register. We encourage investment advisers to review their policies and procedures in light of the guidance. To the extent that firms identify operational or other questions in the course of that review, we encourage them to contact the staff of the Division of Investment Management.