[Federal Register Volume 84, Number 233 (Wednesday, December 4, 2019)]
[Proposed Rules]
[Pages 66518-66559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24475]
[[Page 66517]]
Vol. 84
Wednesday,
No. 233
December 4, 2019
Part III
Securities and Exchange Commission
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17 CFR Part 240
Amendments to Exemptions From the Proxy Rules for Proxy Voting Advice;
Proposed Rule
Federal Register / Vol. 84 , No. 233 / Wednesday, December 4, 2019 /
Proposed Rules
[[Page 66518]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-87457; File No. S7-22-19]
RIN 3235-AM50
Amendments to Exemptions From the Proxy Rules for Proxy Voting
Advice
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing amendments to its rules governing proxy solicitations to help
ensure that investors who use proxy voting advice receive more
accurate, transparent, and complete information on which to make their
voting decisions, in a manner that does not impose undue costs or
delays that could adversely affect the timely provision of proxy voting
advice. The proposed amendments would condition the availability of
certain existing exemptions from the information and filing
requirements of the federal proxy rules for proxy voting advice
businesses upon compliance with additional disclosure and procedural
requirements. In addition, the proposed amendments would codify the
Commission's interpretation that proxy voting advice generally
constitutes a solicitation within the meaning of the Securities
Exchange Act of 1934. Finally, the proposed amendments would amend the
proxy rules to clarify when the failure to disclose certain information
in proxy voting advice may be considered misleading within the meaning
of the rule, depending upon the particular facts and circumstances at
issue.
DATES: Comments should be received by February 3, 2020.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File Number S7-22-19 on the subject line.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-22-19. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (http://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly.
We or the staff may add studies, memoranda, or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Daniel S. Greenspan, Senior Counsel,
Office of Rulemaking, Division of Corporation Finance, at (202) 551-
3430, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: We are proposing amendments to 17 CFR
240.14a-1(l) (``Rule 14a-1(l)''), 17 CFR 240.14a-2 (``Rule 14a-2''),
and 17 CFR 240.14a-9 (``Rule 14a-9'') under the Securities Exchange Act
of 1934 [15 U.S.C. 78a et seq.] (``Exchange Act'').\1\
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\1\ Unless otherwise noted, when we refer to the Exchange Act,
or any paragraph of the Exchange Act, we are referring to 15 U.S.C.
78a of the United States Code, at which the Exchange Act is
codified, and when we refer to rules under the Exchange Act, or any
paragraph of these rules, we are referring to title 17, part 240 of
the Code of Federal Regulations [17 CFR 240], in which these rules
are published.
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Table of Contents
I. Introduction
II. Discussion of Proposed Amendments
A. Proposed Codification of the Commission's Interpretation of
``Solicitation'' Under Rule 14A-1(l) and Section 14(a)
B. Proposed Amendments to Rule 14a-2(b)
1. Conflicts of Interest
2. Registrants' and Other Soliciting Persons' Review of Proxy
Voting Advice and Response
C. Proposed Amendments to Rule 14a-9
D. Transition Period
III. Economic Analysis
A. Introduction
1. Overview of Proxy Voting Advice Businesses' Role in the Proxy
Process
B. Economic Baseline
1. Affected Parties and Current Regulatory Framework
2. Certain Industry Practices
C. Benefits and Costs
1. Benefits
2. Costs
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Require Proxy Voting Advice Businesses To Include Full
Registrant Response in the Businesses' Voting Advice
2. Different Timing for, or Number of, Reviews
3. Public Disclosure of Conflicts of Interest
4. Require Additional Mandatory Disclosures in Proxy Voting
Advice
5. Require Disabling of Pre-Populated and Automatic Voting
Mechanisms
6. Exempt Smaller Proxy Voting Advice Businesses From the
Additional Conditions to the Exemptions
IV. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Incremental and Aggregate Burden and Cost Estimates for the
Proposed Amendments
V. Small Business Regulatory Enforcement Fairness Act
VI. Initial Regulatory Flexibility Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Small Entities Subject to the Proposed Rules
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Duplicative, Overlapping, or Conflicting Federal Rules
F. Significant Alternatives
VII. Statutory Authority
I. Introduction
Annual and special meetings of publicly-traded corporations, where
shareholders are provided the opportunity to vote on various matters,
are a key component of corporate governance. For various reasons,
including the widely dispersed nature of public share ownership, most
shareholders do not attend these meetings in person. Proxies are the
means by which most shareholders of publicly traded companies exercise
their right to vote on corporate matters.\2\ Congress vested in the
Commission the broad authority to oversee the proxy solicitation
process when it originally enacted the Exchange Act in 1934.\3\ As
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the securities markets have become increasingly more sophisticated and
complex, and the intermediation of share ownership and participation of
various market participants has grown in kind,\4\ the Commission's
interest in ensuring fair, honest and informed markets, underpinned by
a properly functioning proxy system, dictates that we regularly assess
whether the system is serving investors as it should.\5\
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\2\ See Concept Release on the U.S. Proxy System, Release No.
34-62495 (Jul. 14, 2010) [75 FR 42982 (July 22, 2010)] (``Concept
Release''), at 42984.
\3\ See Regulation of Communications Among Shareholders, Release
No. 34-31326 (Oct. 16, 1992) [57 FR 48276 (Oct. 22, 1992)]
(``Communications Among Shareholders Adopting Release''), at 48277
(``Underlying the adoption of section 14(a) of the Exchange Act was
a Congressional concern that the solicitation of proxy voting
authority be conducted on a fair, honest and informed basis.
Therefore, Congress granted the Commission the broad `power to
control the conditions under which proxies may be solicited' . . .
.'').
\4\ See Concept Release, supra note 2, at 42983 (``This
complexity stems, in large part, from the nature of share ownership
in the United States, in which the vast majority of shares are held
through securities intermediaries such as broker-dealers or banks .
. .'').
\5\ See, e.g., id. at 43020 (``The U.S. proxy system is the
fundamental infrastructure of shareholder suffrage since the
corporate proxy is the principal means by which shareholders
exercise their voting rights. The development of issuer, securities
intermediary, and shareholder practices over the years, spurred in
part by technological advances, has made the system complex and, as
a result, less transparent to shareholders and to issuers. It is our
intention that this system operate with the reliability, accuracy,
transparency, and integrity that shareholders and issuers should
rightfully expect.'').
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One of the defining characteristics of today's market is the
significant role played by institutional investors,\6\ which today own,
by some estimates, between 70 and 80 percent of the market value of
U.S. public companies.\7\ Investment advisers voting on behalf of
clients and other institutional investors, by virtue of their
significant holdings (often on behalf of others, including retail
investors) in many public companies, must manage the logistics of
voting in potentially hundreds, if not thousands, of shareholder
meetings and on thousands of proposals that are presented at these
meetings each year, with the significant portion of those voting
decisions concentrated in a period of a few months.\8\
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\6\ See generally Janette Rutterford & Leslie Hannah, The Rise
of Institutional Investors, Financial Market History: Reflections on
the Past of Investors Today (David Chambers & Elroy Dimson eds.,
2017); Lucian A. Bebchuk, Alma Cohen & Scott Hirst, The Agency
Problems of Institutional Investors, 31 J. Econ. Perspectives,
Summer 2017, at 89; Marshall E. Blume & Donald B. Keim,
Institutional Investors and Stock Market Liquidity: Trends and
Relationships, SSRN Electronic Journal (2012), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2147757.
\7\ Compare Charles McGrath, 80% of equity market cap held by
institutions, Pensions & Investments (Apr. 25, 2017), https://www.pionline.com/article/20170425/INTERACTIVE/170429926/80-of-equity-market-cap-held-by-institutions, with Broadridge & PwC, 2018
Proxy Season Review, ProxyPulse 1 (Oct. 2018), https://www.pwc.com/us/en/governance-insights-center/publications/assets/pwc-broadridge-proxypulse-2018-proxy-season-review.pdf (estimating that
institutions own 70% of public company shares). This report also
notes that institutional investors have significantly higher voter
participation rates than retail investors, casting votes
representing 91 percent of all the shares they held in 2018,
compared to only 28 percent for retail investors during the same
period. Id. at 2.
\8\ The Investment Company Institute (``ICI'') has stated that
during the 2017 proxy season, registered investment funds cast more
than 7.6 million votes on 25,859 proxy proposals on corporate proxy
ballots and that the average mutual fund voted on 1,504 separate
proxy proposals for U.S.-listed portfolio companies (figures exclude
companies domiciled outside the U.S.). See Morris Mitler et al.,
Funds and Proxy Voting: The Mix of Proposals Matters, Investment
Company Institute (Nov. 5, 2018), https://www.ici.org/viewpoints/view_18_proxy_environment; Letter from Paul Schott Stevens,
President and CEO of ICI (March 15, 2019) (``ICI Letter''), at 3. In
addition, the Ohio Public Employees Retirement System has noted that
it receives in excess of 10,000 proxies in any given proxy season.
See Letter from Karen Carraher, Executive Director & Patti Brammer,
Corporate Governance Officer, Ohio Public Employees Retirement
System (Dec. 13, 2018) (``OPERS Letter''), at 2. Unless otherwise
indicated, comment letters cited in this release are to the
Commission's Roundtable on the Proxy Process held Nov. 15, 2018
(``2018 Proxy Roundtable''), available at https://www.sec.gov/proxy-roundtable-2018.
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Investment advisers and other institutional investors often retain
proxy advisory firms to assist them in making their voting
determinations on behalf of clients and to handle other aspects of the
voting process.\9\ For purposes of this release, we refer to these
firms and any person who markets and sells proxy voting advice as
``proxy voting advice businesses.'' \10\ Unless otherwise indicated,
the term ``proxy voting advice'' as used in this release refers to the
voting recommendations provided by proxy voting advice businesses on
specific matters presented at a registrant's shareholder meeting or for
which written consents or authorizations from shareholders are sought
in lieu of a meeting, along with the analysis and research underlying
the voting recommendations, and delivered to the proxy voting advice
business's clients through any means, such as in a standalone written
report or multiple reports, an integrated electronic voting platform
established by the proxy voting advice businesses, or any combination
thereof.\11\
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\9\ See generally GAO Report to Congress, Corporate Shareholder
Meetings--Proxy Advisory Firms' Role in Voting and Corporate
Governance Practices (Nov. 2016) (``2016 GAO Report''); GAO Report
to Congress, Corporate Shareholder Meetings--Issues Relating to
Firms that Advise Institutional Investors on Proxy Voting (June
2007) (``2007 GAO Report''); see also Commission Guidance Regarding
Proxy Voting Responsibilities of Investment Advisers, Release No.
IA-5325 (Aug. 21, 2019) [84 FR 47420 (Sept. 10, 2019)] (``Commission
Guidance on Proxy Voting Responsibilities''), at 5; Letter from Gary
Retelny, President and CEO of Institutional Shareholder Services,
Inc. (Nov. 7, 2018) (``ISS Letter''), at 1.
\10\ See proposed Rule 14a-1(l)(iii)(A).
\11\ The reference to ``proxy voting advice,'' as used in this
release, is not intended to encompass (1) research reports or data
that are not used to formulate the voting recommendations or (2)
administrative or ministerial services.
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Proxy voting advice businesses typically provide institutional
investors and other clients a variety of services that relate to the
substance of voting, such as: Providing research and analysis regarding
the matters subject to a vote; promulgating general voting guidelines
that their clients can adopt; and making voting recommendations to
their clients on specific matters subject to a shareholder vote, either
based on the proxy voting advice business's own voting guidelines or on
custom voting guidelines that the client has created.\12\ This advice
is often an important factor in the clients' proxy voting decisions.
Clients use the information to obtain a more informed understanding of
different proposals presented in the proxy materials, and as an
alternative or supplement to using their own internal resources when
deciding how to vote.\13\
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\12\ ISS Letter, supra note 9.
\13\ See Commission Guidance on Proxy Voting Responsibilities,
supra note 9 (``Contracting with proxy advisory firms to provide
these types of functions and services can reduce burdens for
investment advisers (and potentially reduce costs for their clients)
as compared to conducting them in-house.''); see also OPERS Letter,
supra note 8, at 1 (``However, with limited staff and resources, it
is extremely difficult to devote the necessary time and attention to
the thousands of proxies we receive each proxy season. Consequently,
OPERS has chosen to partner with a proxy advisory firm, which allows
us to fulfill our engagement and governance obligations in a more
productive and efficient manner.''); Letter from Kenneth A. Bertsch,
Executive Director, Council of Institutional Investors (Nov. 8,
2018) (``CII Letter''), at 16 (``Proxy research firms, while
imperfect, play an important and useful role in enabling effective
and cost-efficient independent research, analysis and informed proxy
voting advice for large institutional shareholders, particularly
since many funds hold shares of thousands of companies in their
investment portfolios.'').
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Proxy voting advice businesses may also provide services that
assist clients in handling the administrative tasks of the voting
process, typically through an electronic platform that enables their
clients to cast votes more efficiently.\14\ In some cases, proxy voting
advice businesses are given authority to execute votes on behalf of
their clients in accordance with the clients' general guidance or
specific instructions.\15\ One way a proxy voting advice business may
assist clients with voting execution is through an electronic vote
management system that allows the proxy voting advice business to (1)
populate each client's ballots with recommendations
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based on that client's voting instructions to the business (``pre-
population''); and (2) submit the client's ballots to be counted.
Clients utilizing such services may choose to review the proxy voting
advice business's pre-populated ballots before they are submitted or to
have them submitted automatically, without further client review
(``automatic submission'').\16\
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\14\ See Commission Guidance on Proxy Voting Responsibilities,
supra note 9.
\15\ Id.
\16\ See, e.g., Letter from Katherine Rabin, Chief Executive
Officer, Glass, Lewis & Co., LLC (Nov. 14, 2018) (``Glass Lewis
Letter''), at 2, 4 (describing how ballots are populated and
submitted).
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Proxy voting advice businesses play an integral role in the proxy
voting process by providing an array of voting services that can help
clients manage their proxy voting needs and make informed investment
decisions.\17\ Although estimates vary, each year proxy voting advice
businesses provide voting advice to thousands of clients that exercise
voting authority over a sizable number of shares that are voted
annually.\18\ Accordingly, proxy voting advice businesses are uniquely
situated in today's market to influence these investors' voting
decisions.
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\17\ Id.; see Letter from Yves P. Deniz[eacute], Senior Managing
Director, Teachers Insurance and Annuity Association of America
(June 10, 2019) (``TIAA Letter''), at 3, 6, 7 (``Proxy advisory
services are a crucial part of [TIAA's] voting process. . . . Every
year, [TIAA] completes a proxy voting review of more than 3,000 U.S.
and 11,000 global companies and processes more than 100,000 unique
agenda items. . . . [W]e rely on proxy advisory firms to gather and
synthesize the information we need to make informed voting decisions
in a timely and efficient manner.''); Letter from Michael Garland,
Assistant Comptroller, Office of N.Y.C. Comptroller (Jan. 2, 2019)
(``NYC Comptroller Letter''), at p. 4 of enclosed statement before
the Senate Banking Committee on Dec. 8, 2018 (``During the peak of
U.S. proxy season . . . the number of meetings and votes is very
large, putting a premium on having a high-quality, efficient
process, to which the proxy advisory firms are indispensable.'');
OPERS Letter, supra note 8, at 2 (``OPERS receives in excess of
10,000 proxies in any given proxy season. We have determined it is
more operationally efficient to use the workflow of our proxy
advisory firm to cast votes on these matters.''); Letter from Gail
C. Bernstein, General Counsel, Investment Adviser Association (Dec.
31, 2018) (``IAA Letter''), at 2 (``[P]roxy advisory firms . . .
provide important support, particularly voting-related
administration services. Indeed, investment advisers of all sizes
would face extreme logistical difficulty if they were unable to use
these services to assist in the mechanics of voting proxies and for
research.'').
\18\ One major proxy voting advice business, Institutional
Shareholder Services, Inc. (``ISS''), reported that it had
approximately 2,000 institutional clients. See The ISS Advantage,
Institutional Shareholder Services, available at https://www.issgovernance.com/about/about-iss/ (last visited Sept. 20,
2019). Another major firm, Glass, Lewis & Co., LLC (``Glass
Lewis''), reported that, as of 2019, it had ``1,300+ clients,
including the majority of the world's largest pension plans, mutual
funds, and asset managers, who collectively manage more than $35
trillion in assets.'' See Company Overview, Glass Lewis, available
at https://www.glasslewis.com/company-overview/ (last visited Sept.
20, 2019).
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Given these market realities, it is vital that proxy voting advice
be based on the most accurate information reasonably available and that
the businesses providing such advice be sufficiently transparent with
their clients about the processes and methodologies used to formulate
the advice.\19\ This is especially true when proxy voting advice
businesses provide advice to investment advisers, which often make
voting determinations on behalf of investors. The Commission has a
strong interest in protecting those investors by ensuring that
information provided by proxy voting advice businesses enables
investment advisers to make informed voting determinations on
investors' behalf.\20\ In this regard, because proxy voting advice
provided by proxy voting advice businesses generally constitutes a
``solicitation'' subject to the federal proxy rules,\21\ it is
important that our rules governing the proxy solicitation process are
working to achieve these goals. In recent years, registrants,
investors, and others have expressed concerns about proxy voting advice
businesses.\22\ As described in more detail below, these concerns have
focused on the accuracy and soundness of the information and
methodologies used to formulate proxy voting advice businesses'
recommendations as well as potential conflicts of interest that may
affect those recommendations. Given proxy voting advice businesses'
potential to influence the voting decisions of investment advisers and
other institutional investors,\23\ who often vote on behalf of others,
we are concerned about the risk of proxy voting advice businesses
providing inaccurate or incomplete voting advice (including the failure
to disclose material conflicts of interest) that could be relied upon
to the detriment of investors. In light of these concerns, we are
proposing amendments to the federal proxy rules that are designed to
enhance the accuracy, transparency of process, and material
completeness of the information provided to clients of proxy voting
advice businesses when they cast their votes, as well as amendments to
enhance disclosures of conflicts of interest that may materially affect
the proxy voting advice businesses' voting advice.
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\19\ See, e.g., Concept Release, supra note 2, at 8 (``[T]he
proxy system involves a wide array of third-party participants . . .
including proxy advisory firms . . . the increased reliance on these
third parties . . . adds complexity to the proxy system and makes it
less transparent to shareholders and to issuers.''). The Commission
has previously conducted rulemaking in this area, as well as engaged
with the public through various forums and statements on these
issues. See, e.g., Commission Interpretation and Guidance Regarding
the Applicability of the Proxy Rules to Proxy Voting Advice, Release
No. 34-86721 (Aug. 21, 2019) [84 FR 47416 (Sept. 10, 2019)]
(``Commission Interpretation on Proxy Voting Advice''); 2018 Proxy
Roundtable, supra note 8; 2013 Roundtable on Proxy Advisory Services
(Dec. 5, 2013), available at https://www.sec.gov/spotlight/proxy-advisory-services.shtml; Proxy Voting by Investment Advisers,
Release No. IA-2106 (Jan. 31, 2003), 68 FR 6585 (Feb. 7, 2003)
(``2003 Proxy Voting Release'').
\20\ In addition, the Commission recently issued guidance
regarding how an investment adviser's fiduciary duty and Rule
206(4)-6 under the Investment Advisers Act of 1940 [15 U.S.C. 80b]
(the ``Advisers Act'') relate to an investment adviser's exercise of
voting authority on behalf of clients. See Commission Guidance on
Proxy Voting Responsibilities, supra note 9, at 3. Proxy voting
advice businesses also provide their services to a range of clients
other than investment advisers, and those clients would also benefit
from improvements in the quality of the voting advice they receive.
\21\ See Commission Interpretation on Proxy Voting Advice, supra
note 19 at 4; infra Section II.A.
\22\ See, e.g., infra notes 24 and 70. See generally comment
letters submitted in connection with the 2018 Proxy Roundtable,
supra note 8; comment letters submitted in connection with the 2013
Roundtable on Proxy Advisory Services, supra note 19, available at
https://www.sec.gov/comments/4-670/4-670.shtml.
\23\ See supra note 17.
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In undertaking this rulemaking effort, we acknowledge the existence
of a wider public debate about the role and impact of proxy voting
advice businesses in the proxy voting system.\24\
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The focus of our rule proposal, however, is not on all aspects of proxy
voting advice businesses' role in the proxy process. Rather, it is on
measures that, if adopted, would address certain specific concerns
about proxy voting advice businesses and would help to ensure that the
recipients of their voting advice make voting determinations on the
basis of materially complete and accurate information. The proposed
amendments are designed to achieve these purposes without generating
undue costs or delays that might adversely affect the timely provision
of proxy voting advice.
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\24\ For example, representatives of the registrant and retail
investor communities have expressed concerns about the oversight and
accountability over proxy voting advice businesses. See, e.g.,
Letter from Darla Stuckey, President and CEO, Society for Corporate
Governance (Nov. 9, 2018) (``Soc. for Corp. Gov. Letter''), at 4
(``There is no regulatory regime that governs the manner in which
[proxy advisory firms] develop their policies or form the
recommendations or ratings they make.''); Letter from Henry D.
Eickelberg, Chief Operating Officer, Center on Executive
Compensation (March 7, 2019) (``Center on Exec. Comp. Letter''), at
1 (noting a ``concerning lack of accountability'' for proxy advisory
firms); Letter from James L. Martin, 60 Plus Association (Oct. 5,
2018); Letter from Nan Bauroth, Member, Main Street Investors
Coalition Advisory Council (Jan. 25, 2019); Letter from Rasa Mokhoff
(March 11, 2019); Letter from Pauline Yee (Apr. 9, 2019), at 1;
Letter from Marie Reed (Apr. 16, 2019), at 1; Letter from
Christopher Burnham, President, Institute for Pension Fund Integrity
(Apr. 29, 2019), at 3; Letters from Bernard S. Sharfman (Oct 8,
2018, Oct. 12, 2018, and Nov. 27, 2018); Letter from Tom D. Seip
(Oct. 20, 2010), at 4-6, available at https://www.sec.gov/comments/s7-14-10/s71410.shtml; Letter from Mark Latham, Founder,
VoterMedia.org (Sep. 29, 2010), at 5-6, available at https://www.sec.gov/comments/s7-14-10/s71410.shtml; Letter from Wachtell,
Lipton, Rosen & Katz (Oct. 19, 2010) (``Wachtell Letter''), at 4-6,
available at https://www.sec.gov/comments/s7-14-10/s71410.shtml
(commenting in response to the Concept Release, supra note 2); 38th
Annual SEC Government-Business Forum on Small Business Capital
Formation (Aug. 14, 2019) (at which participants developed
recommendations for reform of the proxy solicitation system,
including ``effective oversight of proxy advisory firms''); James R.
Copland, David F. Larcker & Brian Tayan, Proxy Advisory Firms--
Empirical Evidence and the Case for Reform, Manhattan Institute 6
(May 2018), available at https://media4.manhattan-institute.org/sites/default/files/R-JC-0518-v2.pdf. Others, however, have
expressed skepticism about these concerns. See, e.g., Sagiv Edelman,
Proxy Advisory Firms: A Guide for Regulatory Reform, 62 Emory L.J.
1369, 1409 (2013) (concluding that ``[t]he concerns of the critics
of proxy advisory firms are overstated and distort how proxy
advisory firms function and are used by their clients''); Stephen
Choi, Jill Fisch & Marcel Kahan, The Power of Proxy Advisors: Myth
or Reality?, 59 Emory L.J. 869, 905-06 (2010) (estimating that the
impact of proxy advisory firms' voting recommendations on actual
voting outcomes is far less than commonly attributed); TIAA Letter,
supra note 17, at 5 (asserting that the correlation between proxy
advisory firms' recommendations and the voting patterns of their
clients is due more to the firms' alignment with their clients'
voting philosophy than the clients' overreliance on the voting
advice); CII Letter, supra note 13, at 15 (citing a lack of
compelling evidence that additional regulation of proxy advisory
firms is necessary).
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We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed rule amendments. When
commenting, it would be most helpful if you include the reasoning
behind your position or recommendation.
II. Discussion of Proposed Amendments
A. Proposed Codification of the Commission's Interpretation of
``Solicitation'' Under Rule 14a-1(l) and Section 14(a)
Exchange Act Section 14(a) \25\ makes it unlawful for any person to
``solicit'' any proxy with respect to any security registered under
Exchange Act Section 12 in contravention of such rules and regulations
prescribed by the Commission.\26\ The purpose of Section 14(a) is to
prevent ``deceptive or inadequate disclosure'' from being made to
shareholders in a proxy solicitation.\27\ Section 14(a) grants the
Commission broad authority to establish rules and regulations to govern
proxy solicitations ``as necessary or appropriate in the public
interest or for the protection of investors.'' \28\
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\25\ 15 U.S.C. 78n(a).
\26\ Registrants only reporting pursuant to Exchange Act Section
15(d) are not subject to the federal proxy rules, while foreign
private issuers are exempt from the requirements of Section 14(a).
17 CFR 240.3a12-3(b).
\27\ J.I. Case Co. v. Borak, 377 U.S. 426, 432 (1964); see S.
Rep. No. 1455, 73d Cong., 2d Sess., 74 (1934) (``In order that the
stockholder may have adequate knowledge as to the manner in which
his interests are being served, it is essential that he be
enlightened not only as to the financial condition of the
corporation, but also as to the major questions of policy, which are
decided at stockholders' meetings.''); H.R. Rep. No. 1383, 73d
Cong., 2d Sess., 14 (1934) (explaining the need for ``adequate
disclosure'' and ``explanation''); Communications Among Shareholders
Adopting Release, supra note 3, at 48277.
\28\ 15 U.S.C. 78n(a); see Borak, 377 U.S. at 432 (noting the
``broad remedial purposes'' evidenced by the language of Section
14(a)); S. Rep. No. 73-792, 2d Sess., at 12 (1934) (``The committee
recommends that the solicitation and issuance of proxies be left to
regulation by the Commission.''); H.R. Rep. No. 1383, 73d Cong., 2d
Sess., 14 (1934) (explaining the intention to give the Commission
the ``power to control the conditions under which proxies may be
solicited'').
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The Exchange Act does not define what constitutes a
``solicitation'' for purposes of Section 14(a) and the Commission's
proxy rules. Accordingly, the Commission has exercised its rulemaking
authority over the years to define what communications are
solicitations and to prescribe rules and regulations when necessary and
appropriate to protect investors in the proxy voting process.\29\ The
Commission first promulgated rules in 1935 to define a solicitation to
include any request for a proxy, consent, or authorization or the
furnishing of a proxy, consent or authorization to security
holders.\30\ Since then, the Commission has amended the definition as
needed to respond to new market practices that have raised investor
protection concerns.\31\
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\29\ See 15 U.S.C. 78n(a); 15 U.S.C. 78c(b); 15 U.S.C. 78w.
\30\ See Exchange Act Release No. 34-378, 1935 WL 29270 (Sept.
24, 1935).
\31\ The Commission revised the definition in 1938 to include
any request for a proxy, regardless of whether the request is
accompanied by or included in a written form of proxy. See Release
No. 34-1823 (Aug. 11, 1938) [3 FR 1991 (Aug. 13, 1991)], at 1992. It
subsequently revised the definition in 1942 to include ``any request
to revoke or not execute a proxy.'' See Release No. 34-3347 (Dec.
18, 1942) [7 FR 10653 (Dec. 22, 1942)], at 10656.
Courts have also taken a broad view of solicitation, with one
noting that a report provided by a broker-dealer to shareholders of
the target company in a contested merger constituted a solicitation
because it advised the shareholders that one bidder's offer was
``far more attractive'' than the other and therefore was a
communication reasonably calculated to affect the shareholders'
voting decisions. See Commission Interpretation on Proxy Voting
Advice, supra note 19, at 5 n.13 (citing Union Pac. R.R. Co. v.
Chicago & N.W. Ry. Co., 226 F. Supp. 400, 408 (N.D. Ill. 1964)); see
also Long Island Lighting Co. v. Barbash, 779 F.2d 793, 796 (2d
Cir.1985) (stating that the proxy rules applied not only to direct
requests to furnish, revoke or withhold proxies, but also to
communications which may indirectly accomplish such a result and
finding newspaper and radio advertisements that encouraged citizens
to advocate for a state-run utility company to be solicitation made
in connection with an upcoming director election); SEC v. Okin, 132
F.2d 784, 786 (2d Cir. 1943) (holding that the defendant shareholder
who sent a letter to fellow shareholders in connection with an
annual meeting asking them not to sign any proxies for the company
was engaged in a solicitation).
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In particular, the Commission expanded the definition of a
solicitation in 1956 to include not only requests for proxies, but also
any ``communication to security holders under circumstances reasonably
calculated to result in the procurement, execution, or revocation of a
proxy.'' \32\ This expanded definition was prompted by recognition that
some market participants were distributing written communications
designed to affect shareholders' voting decisions well in advance of
any formal request for a proxy that would have triggered the filing and
information requirements of the federal proxy rules.\33\ Since 1956,
the Commission understood its definition of a solicitation to be broad
and applicable regardless of whether persons communicating with
shareholders were seeking proxy authority for themselves.\34\
Recognizing the breadth of this definition, the Commission adopted an
exemption from the information and filing requirements of the federal
proxy rules for communications by persons not seeking proxy authority,
but continued to include such communications within the definition of a
``solicitation.'' \35\ The Commission also adopted another exemption
from the information and filing requirements for proxy voting advice
given by advisors to their clients under certain circumstances, but
likewise continued to include such advice within the definition of
``solicitation,'' subject to an exception discussed below.\36\ By
adopting these exemptions, the Commission removed requirements that
were considered unnecessary for these forms of solicitations, in order
for shareholders to have access to more sources of
[[Page 66522]]
information when voting, though the antifraud provisions of the proxy
rules continued to apply.
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\32\ 17 CFR 240.14a-1(l)(1)(iii); see Adoption of Amendments to
Proxy Rules, Release No. 34-5276 (Jan. 17, 1956) [21 FR 577 (Jan.
26, 1956)], at 577; see also Broker-Dealer Participation in Proxy
Solicitations, Release No. 34-7208 (Jan. 7, 1964) [29 FR 341 (Jan.
15, 1964)] (``Broker-Dealer Release''), at 341 (``Section 14 and the
proxy rules apply to any person--not just management, or the
opposition. This coverage is necessary in order to assure that all
materials specifically directed to stockholders and which are
related to, and influence their voting will meet the standards of
the rules.'').
\33\ See generally Communications Among Shareholders Adopting
Release, supra note 3.
\34\ See id. at 48276 (adopting Exchange Act Rule 14a-2(b)(1)).
\35\ See id.
\36\ See Shareholder Communications, Shareholder Participation
in Corporate Electoral Process and Corporate Governance Generally,
Release No. 34-16356 (Nov. 21, 1979) [44 FR 68764 (Nov. 29, 1979)]
(``1979 Adopting Release''), at 68766.
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The Commission has previously observed that the breadth of the
definition of a solicitation may result in proxy advisory firms being
subject to the federal proxy rules because they provide recommendations
that are reasonably calculated to result in the procurement,
withholding, or revocation of a proxy and that, as a general matter,
the furnishing of proxy voting advice constitutes a solicitation.\37\
Most recently, the Commission issued an interpretative release
regarding the application of the federal proxy rules to proxy voting
advice.\38\ As the Commission explained in that release, the
determination of whether a communication is a solicitation depends upon
both the specific nature and content of the communication and the
circumstances under which the communication is transmitted.\39\ The
Commission noted several factors that indicate proxy advisory firms
generally engage in solicitations when they give proxy voting advice to
their clients, including:
---------------------------------------------------------------------------
\37\ See Concept Release, supra note 2, at 43009; see also
Broker-Dealer Release, supra note 32, at 341.
\38\ Commission Interpretation on Proxy Voting Advice, supra
note 19.
\39\ See Question and Response 1 of Commission Interpretation on
Proxy Voting Advice, supra note 19, at 6; see also Concept Release,
supra note 2 at 43009 n.244.
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The proxy voting advice generally describes the specific
proposals that will be presented at the registrant's upcoming meeting
and presents a ``vote recommendation'' for each proposal that indicates
how the client should vote;
Proxy advisory firms market their expertise in researching
and analyzing matters that are subject to a proxy vote for the purpose
of assisting their clients in making voting decisions;
Many clients of proxy advisory firms retain and pay a fee
to these firms to provide detailed analyses of various issues,
including advice regarding how the clients should vote through their
proxies on the proposals to be considered at the registrant's upcoming
meeting or on matters where shareholder approval is sought; and
Proxy advisory firms typically provide their
recommendations shortly before a shareholder meeting or authorization
vote,\40\ enhancing the likelihood that their recommendations will
influence their clients' voting determinations.\41\
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\40\ See, e.g., Letter from Maria Ghazal, Senior Vice President
and Counsel, Business Roundtable (June 3, 2019) (``Business
Roundtable Letter 2''), at 9 (``[R]ecent survey results support the
contention that a spike in voting follows adverse voting
recommendations by ISS during the three-business day period
immediately after the release of the recommendation.''); Transcript
of Roundtable on the Proxy Process, at 242 (Nov. 15, 2018),
available at https://www.sec.gov/files/proxy-round-table-transcript-111518.pdf (``2018 Roundtable Transcript''); Frank Placenti, Are
Proxy Advisors Really A Problem?, American Council for Capital
Formation 3 (Oct. 2018), http://accfcorpgov.org/wp-content/uploads/2018/10/ACCF_ProxyProblemReport_FINAL.pdf.
\41\ Commission Interpretation on Proxy Voting Advice, supra
note 19, at 8.
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Where these or other significant factors (or a significant subset
of these or other factors) is present,\42\ the proxy advisory firms'
voting advice generally would constitute a solicitation subject to the
Commission's proxy rules because such advice would be ``a communication
to security holders under circumstances reasonably calculated to result
in the procurement, withholding or revocation of a proxy.'' \43\
Furthermore, the Commission explained that such advice generally would
be a solicitation even if the proxy advisory firm is providing
recommendations based on the client's own tailored voting guidelines,
and even if the client chooses not to follow the advice.\44\
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\42\ Such other factors may include the fact that many proxy
advisory firms' recommendations are typically distributed broadly.
\43\ See Question and Response 1 of Commission Interpretation on
Proxy Voting Advice, supra note 19, at 9.
\44\ Id.
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We are proposing to codify this Commission interpretation by
amending Rule 14a-1(l). The proposed amendment would add paragraph (A)
to Rule 14a-1(l)(1)(iii) \45\ to make clear that the terms ``solicit''
and ``solicitation'' include any proxy voting advice that makes a
recommendation to a shareholder as to its vote, consent, or
authorization on a specific matter for which shareholder approval is
solicited, and that is furnished by a person who markets its expertise
as a provider of such advice, separately from other forms of investment
advice, and sells such advice for a fee. We believe the furnishing of
proxy voting advice by a person who has decided to offer such advice,
separately from other forms of investment advice, to shareholders for a
fee, with the expectation that its advice will be part of the
shareholders' voting decision-making process, is conducting the type of
activity that raises the investor protection concerns about inadequate
or materially misleading disclosures that Section 14(a) and the
Commission's proxy rules are intended to address.\46\ We further
believe that the regulatory framework of Section 14(a) and the
Commission's proxy rules, with their focus on the information received
by shareholders as part of the voting process, is well-suited to
enhancing the quality and availability of the information that clients
of proxy voting advice businesses are likely to consider as part of
their voting determinations.\47\
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\45\ The proposed amendment is intended to make clear that proxy
voting advice provided under the specified circumstances constitutes
a solicitation under current Rule 14a-1(l)(1)(iii). It is not
intended to amend, limit, or otherwise affect the scope of Rule 14a-
1(l)(1)(iii).
\46\ We understand that investment advisers may discuss their
views on proxy voting with clients or prospective clients, as part
of their portfolio management services or other common investment
advisory services. Such discussions could be prompted (such as in
the case of a client or prospective client that has asked the
adviser for its views on a particular transaction) or unprompted.
For example, a mutual fund board may request that a prospective
subadviser discuss its views on proxy voting, including particular
types of transactions such as mergers or corporate governance. The
proposed amendments are not intended to include these types of
communications as solicitations for purposes of Section 14(a).
Instead, the proposed amendments are intended to apply to entities
that market their proxy voting advice as a service that is separate
from other forms of investment advice to clients or prospective
clients.
\47\ We understand that a proxy voting advice business might, if
applicable requirements are met, be registered as an investment
adviser and subject to additional regulation under the Advisers Act
and the Commission's rules thereunder. However it is not unusual for
a registrant under one provision of the securities laws to be
subject to other provisions of the securities laws when engaging in
conduct that falls within the other provisions. Given the focus of
Section 14(a) and the Commission's proxy rules on protecting
investors who receive communications regarding their proxy votes, it
is appropriate that proxy voting advice businesses be subject to
applicable rules under Section 14(a) when they provide proxy voting
advice.
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We recognize that the major proxy voting advice businesses may use
more than one benchmark voting policy or set of guidelines in
formulating their voting recommendations on a particular matter to be
voted on at a shareholder meeting (or for which written consents or
authorizations are sought in lieu of a meeting). For example, a proxy
voting advice business may offer differing voting recommendations on a
matter based on the application of its benchmark policy or specialty
voting policies, such as a socially responsible policy, a
sustainability policy, or a Taft-Hartley labor policy. The voting
recommendations formulated under the benchmark policy and each of these
specialty policies would be considered to be separate communications of
proxy voting advice under proposed Rule 14a-1(l)(1)(iii)(A) and for
purposes of the proposed rule amendments discussed below.
We also recognize that the term ``solicit'' in Section 14(a)
arguably might be construed more narrowly than how the Commission has
long interpreted
[[Page 66523]]
that term. Under such a view, ``solicitation'' arguably might be
limited to requests to obtain proxy authority or to obtain shareholder
support for a preferred outcome, which might exclude certain proxy
voting advice by a person retained to provide such advice to a client.
We do not believe, however, such a narrow reading of Section 14(a) is
required or warranted, and we adhere to the Commission's longstanding
view since 1956 that any communications reasonably calculated to result
in a shareholder's proxy voting decision may be regarded as a
solicitation subject to Commission rules under Section 14(a). The term
``solicit'' did not have a single, narrow meaning when Section 14(a)
was enacted.\48\ Moreover, as discussed above, an overarching purpose
of Section 14(a) is to ensure that communications to shareholders about
their proxy voting decisions contain materially complete and accurate
information.\49\ It would be inconsistent with that goal if persons
whose business is to offer and sell voting advice broadly to large
numbers of shareholders, with the expectation that their advice will
factor into shareholders' voting decisions, were beyond the reach of
Section 14(a).\50\ The fact that shareholders may retain providers of
proxy voting advice to advance their own interests does not obviate
these concerns; to the contrary, in many circumstances it makes the
role of this advice all the more important to those shareholders'
decisions, and all the more significant in the proxy process.
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\48\ Contemporaneous dictionaries ascribed several relevant
meanings to the term ``solicit,'' including ``[t]o take charge or
care of, as business''; ``[t]o move to action''; ``[t]o approach
with a request or plea, as in selling''; and ``[t]o urge'' or
``insist upon.'' See, e.g., Webster's New International Dictionary
(2d ed. 1934); Funk & Wagnalls New Standard Dictionary of the
English Language (1932) (defining ``solicit'' as including to
``influence to action'').
\49\ See Business Roundtable v. SEC, 905 F.2d 406, 410 (D.C.
Cir. 1990) (``Proxy solicitations are, after all, only
communications with potential absentee voters. The goal of federal
proxy regulation was to improve those communications and thereby to
enable proxy voters to control the corporation as effectively as
they might have by attending a shareholder meeting.'').
\50\ Courts have expressed similar concerns that the protections
established by Section 14(a) would be hollow if the statutory
provision is interpreted in an overly narrow manner. See, e.g., SEC
v. Okin, 132 F.2d 784, 786 (2d Cir. 1943) (declining to view the
Commission's authority as strictly limited to only requests for
proxies, consents, or authorizations and stating regulation of
written communications made prior to such formal requests but [that]
are part of a continuous plan for a successful solicitation is
needed ``if the purpose of Congress is to be fully carried out.'').
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Although we adhere to the Commission's longstanding view that any
communication reasonably calculated to result in a proxy voting
decision is a solicitation, we understand that there may be
circumstances in which a person, such as a broker-dealer or an
investment adviser, may receive requests for voting advice from a
client that are unprompted by that person. The breadth of the
Commission's definition of a solicitation could raise questions about
whether such voting advice is a communication reasonably calculated to
influence proxy voting by shareholders. The Commission has expressed
the view in the past that such a communication should not be regarded
as a solicitation subject to the proxy rules.\51\ We are proposing to
codify this view through an amendment to Rule 14a-1(l)(2), which
currently lists activities and communications that do not constitute a
solicitation. As proposed, the definition of a solicitation would
exclude any proxy voting advice furnished by a person who furnishes
such advice only in response to an unprompted request.\52\
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\51\ Commission Interpretation on Proxy Voting Advice, supra
note 19 at 10 (``We view these services provided by proxy advisory
firms as distinct from advice prompted by unsolicited inquiries from
clients to their financial advisors or brokers on how they should
vote their proxies, which remains outside the definition of
solicitation.''); see Broker-Dealer Release, supra note 32, at 341
(setting forth the opinion of the SEC's General Counsel that a
broker is not engaging in a ``solicitation'' if it is merely
responding to his customer's request for advice and ``not actively
initiating the communication''); 1979 Adopting Release, supra note
36, at 68766.
\52\ See proposed Rule 14a-1(l)(2)(v).
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The proposed amendment would make clear that the federal proxy
rules do not apply to this form of proxy voting advice. We continue to
believe that providing voting advice to a client where the client's
request for the advice has been invited and encouraged by the person's
marketing, offering, and selling such advice should be distinguished
from advice provided by a person only in response to an unprompted
request from its client.\53\ The information and filing requirements of
the proxy rules \54\ (including the filing and furnishing of a proxy
statement with information about the registrant and proxy cards with
means for casting votes) or compliance with the proposed conditions of
the exemptions described below, while appropriate for a person who
chooses to actively market and sell its proxy voting advice, are ill-
suited for a person who receives an unprompted request from a client
for its views on an upcoming matter to be presented for shareholder
approval. For example, a person who does not sell voting advice as a
business and who provides such advice only in response to an unprompted
request from his or her client is unlikely to anticipate the need to
establish the internal processes necessary to comply with our proposed
new conditions to the exemptions in Rules 14a-2(b)(1) and 14a-
2(b)(3).\55\
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\53\ Some observers contend that a proxy voting advice business
that ``is contractually obligated to furnish vote recommendations
based on client-selected guidelines does not provide `unsolicited'
proxy voting advice, and thus is not engaged in a `solicitation'
subject to the Exchange Act proxy rules.'' See ISS Letter, supra
note 9, at 8. For the reasons stated in this section, we do not
agree with this view.
\54\ Rules 14a-3 through 14a-6 set forth the filing, delivery,
information, and presentation requirements for the proxy statement
and form of proxy for solicitations subject to Regulation 14A [17
CFR 240.14a-3 through 14a-6].
\55\ See supra Section II.B.
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Furthermore, the proposed amendment to Rule 14a-1(l)(2) is intended
to permit the furnishing of proxy voting advice without triggering the
federal proxy rules under circumstances that present significantly less
risk to investor protection. It is reasonable to expect that a person
who does not promote himself or herself as an expert in proxy voting
advice and provides voting advice only in response to unprompted
requests will be furnishing such advice only to a client with whom
there is an existing business relationship.\56\ We do not believe proxy
voting advice provided under these limited circumstances presents the
same investor protection or regulatory concerns as proxy voting advice
businesses engaged in widespread marketing and sale of proxy voting
advice to large numbers of investment advisers and other institutional
investors who are often voting on behalf of other investors.
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\56\ For example, a broker-dealer's role as a financial advisor
for a client on investment matters may cause the client to seek
voting advice from the broker-dealer as well. See Broker-Dealer
Release, supra note 32, at 341.
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If such advice were considered a solicitation, a person may, in the
interest of caution, decline to share his or her advice or views on the
upcoming matter with the client due to concerns about the need to file
a proxy statement or his or her inability to comply with the exemptions
from such a requirement. We believe that our proposed amendments to the
definition of a solicitation in Rule 14a-1(l) are appropriately
tailored to apply the protections of the federal proxy rules to proxy
voting advice where they are most needed and in a manner consistent
with Section 14(a).
Request for Comment
1. Should we codify the Commission interpretation on proxy voting
advice and the Commission view about unprompted requests for proxy
voting
[[Page 66524]]
advice? \57\ Would the proposed codification (adding paragraph (A) to
Rule 14a-1(l)(iii) and paragraph (v) to Rule 14a-1(l)(2)) provide
market participants with better notice as to the applicability of the
federal proxy rules?
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\57\ See Commission Interpretation on Proxy Voting Advice, supra
note 19.
---------------------------------------------------------------------------
2. Does the proposed amendment inadvertently include certain
communications made by proxy voting advice businesses or other parties,
such as investment advisers, that should not fall within the definition
of ``solicitation''? If so, which communications, and how? Are there
any revisions that we should consider that would better address these
concerns or provide greater clarity?
3. For example, the proposed amendment seeks to distinguish proxy
voting advice businesses from investment advisers who provide voting
advice as part of a broader advisory business that already is subject
to an array of investor protection regulations by referring to proxy
voting advice that is marketed and sold separately from other forms of
investment advice. Instead of the proposed approach, should we refer to
proxy voting advice that is marketed as a ``standalone service''? What
would be the advantages and disadvantages of this approach? Would any
further clarification of ``standalone services'' be required?
4. Is there a different, more appropriate way of distinguishing
proxy voting advice from other forms of investment advice?
5. Should the proposed amendment be expanded to specify any other
type of activity as constituting a solicitation?
6. Should the proposed amendment clarifying that proxy voting
advice provided by a person only in response to an unprompted request
from his or her client be limited to persons who are registered broker-
dealers or investment advisers? Should there be other limits on the
types of persons who should fall outside the definition of a
solicitation?
B. Proposed Amendments to Rule 14a-2(b)
Under the Commission's proxy rules, any person engaging in a proxy
solicitation, unless exempt, is generally subject to filing and
information requirements designed to ensure that materially complete
and accurate information is furnished to shareholders solicited by the
person. Among other things, the person making the solicitation is
required to prepare a proxy statement with the information prescribed
by Schedule 14A,\58\ together with a proxy card in a specified format,
file these materials with the Commission, and furnish them to every
shareholder who is solicited.\59\ Schedule 14A requires extensive
information to be included in the proxy statement, such as descriptions
of matters up for shareholder vote, securities ownership information of
certain beneficial owners and management, disclosures of the
registrant's executive compensation and related party transactions,
and, for certain matters, financial statements. Once a proxy statement
is furnished to shareholders, any other written communications that
constitute solicitations must be filed with the Commission as
additional soliciting materials no later than the date they are first
sent to shareholders.\60\
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\58\ 17 CFR 240.14a-101.
\59\ 17 CFR 240.14a-3(a).
\60\ 17 CFR. 240.14a-6(b).
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Over the years, the Commission has recognized that these filing and
information requirements may, in certain circumstances, impose burdens
that deter communications useful to shareholders, and in such
circumstances, may not be necessary to protect investors in the proxy
voting process.\61\ Accordingly, the Commission has exempted certain
kinds of solicitations from the filing and information requirements of
the proxy rules, subject to various conditions, where such requirements
are not necessary for investor protection. Rule 14a-9, the antifraud
provision of the federal proxy rules, still applies, however, to these
exempt solicitations.\62\
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\61\ See, e.g., Communications Among Shareholders Adopting
Release, supra note 3, at 49278 (``[S]hareholders can be deterred
from discussing management and corporate performance by the prospect
of being found after the fact to have engaged in a proxy
solicitation. The costs of complying with [the proxy] rules also has
meant that . . . shareholders and other interested persons may
effectively be cut out of the debate regarding proposals . . . .'').
\62\ 17 CFR 240.14a-9.
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For example, Rule 14a-2(b)(1) generally exempts solicitations by
persons who do not seek the power to act as proxy for a shareholder and
do not have a substantial interest in the subject matter of the
communication beyond their interest as a shareholder.\63\ This
exemption was primarily intended to enable such shareholders to freely
communicate with other shareholders on matters subject to a proxy vote,
subject to other requirements outside of the proxy rules, such as
Section 13(d) of the Exchange Act and the rules thereunder.\64\ Another
exemption, Rule 14a-2(b)(3), generally exempts proxy voting advice
furnished by an advisor \65\ to any other person with whom the advisor
has a business relationship. This exemption was designed to remove an
impediment to the flow of such advice to shareholders from advisors
such as financial analysts, investment advisers, and broker-dealers who
may be especially familiar with the affairs of registrants.\66\
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\63\ Specifically, Rule 14a-2(b)(1) provides that Sections
240.14a-3 to 240.14a-6 (other than paragraphs 14a-6(g) and 14a-
6(p)), Section 240.14a-8, Section 240.14a-10, and Sections 240.14a-
12 to 240.14a-15 do not apply to:
Any solicitation by or on behalf of any person who does not, at
any time during such solicitation, seek directly or indirectly,
either on its own or another's behalf, the power to act as proxy for
a security holder and does not furnish or otherwise request, or act
on behalf of a person who furnishes or requests, a form of
revocation, abstention, consent or authorization. Provided, however,
that the exemption set forth in this paragraph shall not apply to
[various interested parties, including the registrant, its officers
and directors, and other persons likely to benefit from successful
solicitation.]
17 CFR 240.14a-2(1).
\64\ See Communications Among Shareholders Adopting Release,
supra note 3, at 48280.
\65\ When the Commission adopted this rule (formerly Rule 14a-
2(b)(2)), it made clear that ``advisor'' should be understood to
mean ``one who renders financial advice in the ordinary course of
[its] business.'' See 1979 Adopting Release, supra note 36, at
68767. As the Commission stated, ``The definition [of advisor]
focuses on persons with financial expertise and who are likely to be
particularly familiar with information about corporate affairs which
may be pertinent to voting decisions.'' Id. Rule 14a-2(b)(3)
reflects this by making the exemption contingent, among other
things, on the advisor rendering financial advice in the ordinary
course of [its] business. See Rule 14a-2(b)(3)(i).
\66\ See 1979 Adopting Release, supra note 36, at 68766.
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These exemptions, however, have remained subject to various
limitations and conditions designed to ensure that investors are
protected where the Commission's filing and information requirements do
not apply. For example, any person who wishes to rely on the Rule 14a-
2(b)(3) exemption may not receive special commissions or remuneration
from anyone other than the recipient of the advice and must disclose
any significant relationship or material interest bearing on the voting
advice.\67\ Furthermore, any person who
[[Page 66525]]
relies on Rule 14a-2(b)(1) or Rule 14a-2(b)(3) remains subject to Rule
14a-9's prohibition on false or misleading statements.
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\67\ The conditions to Rule 14a-2(b)(3) are:
(i) The advisor renders financial advice in the ordinary course
of his business;
(ii) The advisor discloses to the recipient of the advice any
significant relationship with the registrant or any of its
affiliates, or a security holder proponent of the matter on which
advice is given, as well as any material interests of the advisor in
such matter;
(iii) The advisor receives no special commission or remuneration
for furnishing the proxy voting advice from any person other than a
recipient of the advice and other persons who receive similar advice
under this subsection; and
(iv) The proxy voting advice is not furnished on behalf of any
person soliciting proxies or on behalf of a participant in an
election subject to the provisions of Sec. 240.14a-12(c).
17 CFR 240.14a-2(b)(3).
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Proxy voting advice businesses typically rely upon the exemptions
in Rule 14a-2(b)(1) and Rule 14a-2(b)(3) to provide advice without
complying with the filing and information requirements of the proxy
rules.\68\ Both exemptions, however, were adopted by the Commission
before proxy voting advice businesses played the significant role that
they now do in the proxy voting process and in the voting decisions of
investment advisers and other institutional investors.\69\ Their role
in the process today has led some to express concerns about, among
other things, the services they provide to their clients, particularly:
(i) The adequacy of disclosure of any actual or potential conflicts of
interest that could materially affect the objectivity of the proxy
voting advice; (ii) the accuracy and material completeness of the
information underlying the advice; and (iii) the inability of proxy
voting advice businesses' clients to receive information and views from
the registrant, potentially contrary to that presented in the advice,
in a manner that is consistently timely and efficient.\70\
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\68\ See Commission Interpretation on Proxy Voting Advice, supra
note 19, at 7 (discussing the ``two exemptions to the federal proxy
rules that are often relied upon by proxy advisory firms'').
\69\ See supra note 18 (providing client statistics for ISS and
Glass Lewis).
\70\ See, e.g., Soc. for Corp. Gov. Letter, supra note 24, at 1;
Business Roundtable Letter 2, supra note 40, at 10-13; Letter from
Tom Quaadman, Executive Vice President, U.S. Chamber of Commerce
Center for Capital Markets Competitiveness (Nov. 12, 2018)
(``Chamber of Commerce Letter''), at 5-8; Letter from Tony Huang,
Director, Advent Capital Management, LLC (July 29, 2019) (``Advent
Capital Letter''), at 6-7 (advocating in favor of Commission
rulemaking to reduce the ``opacity of the proxy advisory process and
the potential for financial conflicts of interest''); Wachtell
Letter, supra note 24. But commenters also submitted letters
generally disputing the need for regulatory reform of proxy advisory
firms. See, e.g., CII Letter, supra note 13, at 14; OPERS Letter,
supra note 8, at 2; NYC Comptroller Letter, supra note 17, at p. 3
of enclosed statement before the Senate Banking Committee on Dec. 8,
2018; Letter from Thomas DiNapoli, Comptroller, State of New York
(Nov. 13, 2018), at 4.
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We recognize that proxy voting advice businesses can play a
valuable role in the proxy voting process. We also believe it is
unnecessary for such businesses to comply with the filing and
information requirements of the proxy rules to the same extent as non-
exempt soliciting persons, provided other measures are in place to
protect investors. However, in light of the substantial role that proxy
voting advice businesses have in the voting decisions of their clients,
who often vote on behalf of investors, we are proposing new conditions
to the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3) that would apply
specifically to persons furnishing proxy voting advice that constitutes
a solicitation within the scope of proposed Rule 14a-
1(l)(1)(iii)(A).\71\
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\71\ See supra Section II.A. Other persons providing voting
advice that is beyond the scope of proposed Rule 14a-
1(l)(1)(iii)(A), such as financial advisors providing advice to
clients with whom they have a business relationship, will be able to
continue relying on the Rule 14a-2(b)(1) and Rule 14a-2(b)(3)
exemptions without complying with the proposed new conditions.
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We believe that our proposed rule amendments would (i) improve
proxy voting advice businesses' disclosures of conflicts of interests
that would reasonably be expected to materially affect their voting
advice, (ii) establish effective measures to reduce the likelihood of
factual errors or methodological weaknesses in proxy voting advice, and
(iii) ensure that those who receive proxy voting advice have an
efficient and timely way to obtain and consider any response a
registrant or certain other soliciting person may have to such advice.
We believe that these amendments would ensure that investment advisers,
who vote on behalf of investors, and others who rely on the advice of
proxy voting advice businesses, receive accurate, transparent, and
materially complete information when they make their voting decisions.
1. Conflicts of Interest
Proxy voting advice businesses engage in activities or have
relationships that could affect the objectivity or reliability of their
advice, which may need to be disclosed in order for their clients to
assess the impact and materiality of any actual or potential conflicts
of interest with respect to a voting recommendation.\72\ In recent
years, observers have noted the many ways in which these activities and
relationships could result in conflicts of interest.\73\ Examples
include:
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\72\ Concept Release, supra note 2, at 43011.
\73\ See 2018 Roundtable Transcript, supra note 40, at 202-16;
2016 GAO Report, supra note 9, at 32-33; 2007 GAO Report, supra note
9, at 9; Center on Exec. Comp. Letter, supra note 24, at 2-3; Soc.
for Corp. Gov. Letter, supra note 24, at 6-7; Wachtell Letter, supra
note 24, at 8-9; Timothy M. Doyle, The Conflicted Role of Proxy
Advisors, American Council for Capital Formation 6 (May 22, 2018),
available at https://corpgov.law.harvard.edu/2018/05/22/the-conflicted-role-of-proxy-advisors/ (``ACCF 2018 Report''); Edelman,
supra note 24, at 1409; Manhattan Institute, supra note 24, at 16.
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A proxy voting advice business providing voting advice to
its clients on proposals to be considered at the annual meeting of a
registrant while the proxy voting advice business also earns fees from
that registrant for providing advice on corporate governance and
compensation policies; \74\
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\74\ See, e.g., Glass Lewis Letter, supra note 16, at 9 (``For
instance, Glass Lewis strongly believes that the provision of
consulting services to corporate issuers, directors, dissident
shareholders and/or shareholder proposal proponents, creates a
problematic conflict of interest that goes against the very
governance principles for which we advocate.'').
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A proxy voting advice business providing voting advice on
a matter in which its affiliates or one of its clients has a material
interest, such as a business transaction or a shareholder proposal put
forward by that client;
A proxy voting advice business providing ratings to
institutional investors of registrants' corporate governance practices
while at the same time consulting for the registrants that are the
subject of the ratings to help increase their corporate governance
scores; and
A proxy voting advice business providing voting advice
with respect to a registrant's shareholder meeting while affiliates of
the business hold a significant ownership interest in the registrant,
sit on the registrant's board of directors, or have relationships with
the shareholder presenting the proposal in question.
These types of circumstances, where the interests of a proxy voting
advice business may diverge materially from the interests of investors,
create a risk that the proxy voting advice business's voting advice
could be influenced by the business's own interests.\75\ Although proxy
voting advice businesses have described various measures they believe
mitigate this risk,\76\ the voting decisions
[[Page 66526]]
of persons who rely on these businesses would be better informed if
they received information sufficient for them to understand and assess
these potential risks and measures.\77\ Investment advisers that use
proxy voting advice businesses for voting advice cannot fully
understand potential risks and the proxy voting advice businesses'
mitigation measures if they do not have access to sufficiently detailed
disclosure about the full extent and nature of any conflicts that are
relevant to the voting advice they receive.\78\
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\75\ See 2016 GAO Report, supra note 9, at 32-33; 2007 GAO
Report, supra note 9, at 9; see also U.S. Dep't of the Treasury, A
Financial System That Creates Economic Opportunities--Capital
Markets 31 (Oct. 2017), https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf (``Public companies also had concerns about potential
conflicts of interest that arise when a proxy advisory firm provides
voting advice to its clients on public companies while
simultaneously offering consulting services to those same companies
to improve their corporate governance rankings.'').
\76\ See, e.g., ISS Letter, supra note 9, at 10 (recognizing its
duty of loyalty to its clients as a registered investment adviser
and summarizing its various policies and procedures designed to
ensure the integrity and independence of its advice, such as: A
physical and functional firewall between ISS and ISS Corporate
Solutions, Inc. (``ICS''); providing clients with conflicts
disclosure; the inclusion of a legend in each proxy report alerting
clients to potential conflicts; and the ability of ISS clients to
obtain lists of all ICS clients); Glass Lewis Letter, supra note 16,
at 6 (discussing its policies and procedures to help monitor,
manage, and address potential conflicts and its practice of fully
disclosing to clients the existence of potential conflicts by adding
a disclosure note to the front cover of relevant proxy research
reports). However, as discussed infra, concerns remain about the
adequacy of these firms' conflicts of interest disclosures. We note
that there is no uniform set of standards that applies to the
policies and procedures utilized by the various proxy voting advice
businesses to address risks posed by conflicts of interest, the
absence of which can lead to inconsistent and inadequate disclosures
and mitigation measures.
\77\ For example, the Commission recently discussed, in a
separate release, steps that investment advisers should consider
taking when deciding whether to retain or continue retaining a proxy
advisory firm. See Question and Response 2 of Commission
Interpretation on Proxy Voting Advice, supra note 19, at 11-12.
\78\ See Chamber of Commerce Letter, supra note 70, at 3-4
(stating the Chamber's concern that conflicts of interest are
pervasive at both ISS and Glass Lewis); ACCF 2018 Report, supra note
73, at 24 (``The proxy advisory industry is immensely complex and
interwoven. Its offerings and conflicts of interest are vague and
unclear and yet the largest institutional investors, pensions, and
hedge funds vote based on ISS and Glass Lewis recommendations.'');
Wachtell Letter, supra note 24, at 8; Letter from John Okray, Vice
President and Assistant Counsel, OppenheimerFunds, Inc. (Sep. 24,
2009) (``Oppenheimer Letter''), at 2, available at https://www.sec.gov/comments/s7-13-09/s71309.shtml.
However, some clients of proxy advisory firms have expressed
that they are satisfied with their proxy advisory firms' efforts at
managing conflicts of interest and the quality of conflicts
disclosures. See, e.g., 2018 Roundtable Transcript, supra note 40,
at 211-13; CII Letter, supra note 13, at 14; OPERS Letter, supra
note 8, at 2; NYC Comptroller Letter, supra note 17, p. 3 of
enclosed statement before the Senate Banking Committee on Dec. 8,
2018.
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To help ensure that sufficient information about material conflicts
of interest is provided consistently across proxy voting advice
businesses and in a reasonably accessible manner to the clients of
proxy voting advice businesses, we are proposing amendments to the
exemptions from the proxy solicitation rules in Rules 14a-2(b)(1) and
(b)(3) to specify that they will be available to proxy voting advice
businesses only to the extent that they provide specified disclosures
about their material conflicts of interest.\79\ Rule 14a-2(b)(1)
currently does not have a specified disclosure requirement for
conflicts of interests. We recognize that the existing Rule 14a-2(b)(3)
exemption does require advisors, including proxy voting advice
businesses, to disclose to their clients the existence of significant
relationships and material interests,\80\ a condition which the
Commission adopted to address concerns that certain conflicts of
interest might negatively affect the value of an advisor's advice.\81\
However, a number of observers have expressed concerns about the
adequacy of these disclosures and have stated that more specific,
prominent disclosure about conflicts is needed to enable clients to
make a more informed assessment of proxy voting advice businesses'
voting advice.\82\ For example, some observers have asserted that the
conflicts disclosures provided by proxy voting advice businesses are
vague or boilerplate disclosures that do not provide sufficient
information about the nature of potential conflicts.\83\ In light of
these concerns, we are proposing to require that persons who provide
proxy voting advice within the scope of proposed Rule 14a-
1(l)(1)(iii)(A) include in such advice (and in any electronic medium
used to deliver the advice) the following disclosures, which are
intended to be more illuminating than what is currently specifically
required by the existing Rule 14a-2(b)(1) and (b)(3) exemptions and
specifically tailored to proxy voting advice businesses and the nature
of their conflicts: \84\
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\79\ See proposed Rule 14a-2(b)(9)(i).
\80\ See current Rule 14a-2(b)(3)(ii).
\81\ See 1979 Adopting Release, supra note 36, at 68766-67.
\82\ See, e.g., Soc. for Corp. Gov. Letter, supra note 24, at 6-
7; Wachtell Letter, supra note 24, at 8-9.
\83\ See, e.g., ACCF 2018 Report, supra note 73, at 24 (noting
that the proxy advisory industry's ``conflicts [disclosures] are
vague and unclear''); Wachtell Letter, supra note 24, at 8
(describing the current practice of ``minimal and vague disclosure,
sometimes in the form of blanket statements that simply note that
conflicts may generally exist''); Oppenheimer Letter, supra note 79,
at 2.
\84\ See proposed Rule 14a-2(b)(9)(i).
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Any material interests, direct or indirect, of the proxy
voting advice business (or its affiliates \85\) in the matter or
parties concerning which it is providing the advice;
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\85\ The term ``affiliate,'' as used in proposed Rule 14a-
2(b)(9)(i), would have the meaning specified in Exchange Act Rule
12b-2. We recognize that proxy voting advice businesses may not
necessarily have access to the information needed to determine
whether an entity is an affiliate of a registrant, another
soliciting person, or the shareholder proponent. Therefore, as
proposed, proxy voting advice businesses would only be required to
use publicly-available information to determine whether an entity is
an affiliate of registrants, other soliciting persons, or
shareholder proponents.
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Any material transaction or relationship between the proxy
voting advice business (or its affiliates) and (i) the registrant (or
any of the registrant's affiliates), (ii) another soliciting person (or
its affiliates), or (iii) a shareholder proponent (or its affiliates),
in connection 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 affiliate)
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.
As revised, the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3)
would not be available unless the disclosures required by proposed Rule
14a-2(b)(9)(i) are provided. By extending these disclosure requirements
to both Rule 14a-2(b)(1) and Rule 14a-2(b)(3), the proposed amendments
would help ensure that investment advisers and other clients that use
proxy voting advice businesses for voting advice receive the same
information about potential conflicts of interests, regardless of which
exemption a proxy voting advice business may rely upon for its proxy
voting advice.
Proposed Rule 14a-2(b)(9)(i) would augment current disclosure
requirements in Rules 14a-2(b)(1) and 14a-2(b)(3) \86\ by specifying
that enhanced disclosure about material conflicts of interest must be
included in the proxy voting advice. In addition, it would utilize a
principles-based requirement to elicit disclosure of any other
information regarding the interest, transaction, or relationship that
would be material to a reasonable investor's assessment of the
objectivity of the proxy voting advice. The disclosures provided under
these provisions should be sufficiently detailed so that clients of
proxy voting advice businesses can understand the nature and scope of
the interest, transaction, or relationship to appropriately assess the
objectivity and reliability of the proxy voting advice they receive.
This may include the identities of the parties or affiliates involved
in the interest, transaction, or relationship triggering the proposed
disclosure requirement and, when
[[Page 66527]]
necessary for the client to adequately assess the potential effects of
the conflict of interest, the approximate dollar amount involved in the
interest, transaction, or relationship. Boilerplate language that such
relationships or interests may or may not exist would be insufficient
for purposes of satisfying this condition to the exemptions.
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\86\ The exemption in Rule 14a-2(b)(1) does not currently
require conflicts of interest disclosure, while Rule 14a-2(b)(3)(ii)
requires disclosure of ``any significant relationship with the
registrant or any of its affiliates, or a security holder proponent
of the matter on which advice is given, as well as any material
interests in such matter.'' 17 CFR 240.14a-2(b)(3)(ii).
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The proposed amendments also would require a discussion of the
policies and procedures, if any, used to identify and steps taken to
address such potential and actual conflicts of interest. Such
disclosure should include a description of the material features of the
policies and procedures that are necessary to understand and evaluate
them. Examples include the types of transactions or relationships
covered by the policies and procedures and the persons responsible for
administering these policies and procedures. We believe that clients of
proxy voting advice businesses would benefit from having this
information as they assess the objectivity of the voting advice in
light of disclosures about actual or potential conflicts of interest,
develop a better understanding of the businesses' approaches for
handling conflicts of interests, evaluate whether the conflicts were
addressed effectively, and make decisions regarding whether and how to
use the voting advice.
Furthermore, the proposed conflicts of interest disclosures would
be required to be included in the proxy voting advice provided to
clients.\87\ For example, the disclosures would have to be part of the
written report, if any, containing the proxy voting advice provided to
the business's clients. To the extent that a proxy voting advice
business provides its voting advice through means of an electronic
voting platform or other electronic medium in addition to or in lieu of
a written report, proposed Rule 14a-2(b)(9)(i) also would require that
the disclosure be conveyed on such voting platform or other electronic
medium to ensure that the information is prominently disclosed
regardless of the means by which the advice is disseminated. Due to
this proposed requirement, it would be insufficient for a proxy voting
advice business only to provide such disclosures upon request from the
client. We believe that imposing an affirmative duty on proxy voting
advice businesses to provide the proposed disclosures of material
conflicts of interest is consistent with obligations to disclose
potential conflicts of interest in other contexts.\88\ The proposed
requirement also would standardize the manner in which conflicts of
interest are disclosed by proxy voting advice businesses and assure
that the required information receives due prominence and can be
considered together with proxy voting advice at the time voting
decisions are made.
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\87\ Currently, Rule 14a-2(b)(3)(ii) requires that disclosure of
conflicts-related information be conveyed to the recipient of the
proxy voting advice, but does not specify in what manner.
\88\ For example, the information about the interests of
participants in a matter presented for a vote required by Item 5 of
Schedule 14A and information about related party transactions
required by Item 404 of Regulation S-K [17 CFR 229.404] must be
affirmatively disclosed. See 17 CFR 229.404. In addition to the
existing disclosure requirements of Rule 14a-2(b)(3)(ii), some proxy
voting advice businesses are registered as investment advisers under
the Advisers Act, and therefore have obligations to disclose
conflicts of interest. The proposed requirements would apply to all
proxy voting advice businesses and are tailored to address concerns
that arise in the context of those activities. The proposed
requirements would not limit, in any way, the obligations of a proxy
voting advice business registered under the Advisers Act and would
complement existing requirements. However, where the substance of
the disclosure requirements overlap, we do not anticipate that proxy
voting advice businesses registered as investment advisers would
incur substantial duplicative costs because, in complying with the
proposed requirements, these proxy voting advice businesses will
have already needed to complete at least some of the work of
identifying conflicts and developing disclosures to explain the
conflicts.
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We are aware that some proxy voting advice businesses have asserted
that they have practices and procedures that adequately address
conflict of interest concerns.\89\ Nevertheless, we believe that
disclosure of such conflicts and any practices to address them should
be more consistent across proxy voting advice businesses so that all
clients of proxy voting advice businesses have materially complete
information upon which to make informed voting decisions.\90\ As such,
the proposed amendments would establish a baseline disclosure standard
to which a proxy voting advice business must adhere in order to avail
itself of the exemptions in Rule 14a-2(b)(1) and (3). We believe that
by requiring proxy voting advice businesses to provide standardized
disclosure regarding conflicts of interest, clients of these businesses
would be in a better position to evaluate these businesses' ability to
manage their conflicts of interest, both at the time the proxy voting
advice business is first retained and on an ongoing basis.\91\
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\89\ See supra note 76 and accompanying text.
\90\ Currently, proxy voting advice businesses have differing
ways of disclosing their conflicts of interest. ISS discloses the
details of its potential conflicts of interest, such as the
identities of the parties and the amounts involved, through its
ProxyExchange platform while Glass Lewis states that its disclosures
are on the front cover of the report with its proxy voting advice.
See ISS FAQs Regarding Recent Guidance from the U.S. Securities and
Exchange Commission Regarding Proxy Voting Responsibilities of
Investment Advisers (Oct. 17, 2019) (``ISS FAQs''), available at
https://www.issgovernance.com/file/faq/ISS_Guidance_FAQ_Document.pdf.; Glass Lewis Letter, supra note 16.
\91\ Although some commenters have advocated in favor of public
disclosure of a proxy advisory firm's conflicts of interest, in
addition to requiring disclosure in the advisor's proxy voting
advice, see, e.g., Center on Exec. Comp. Letter, supra note 24, at
2; Wachtell Letter, supra note 24, at 8, we are not proposing such a
requirement. The Commission's primary concern in proposing these
amendments to Rule 14a-2(b) is with the recipients of proxy voting
advice, including investment advisers who use that advice to make
voting decisions on behalf of clients with whom they have a
fiduciary relationship. Moreover, we are aware that some proxy
voting advice businesses may have compelling and legitimate business
reasons for limiting the dissemination of this information. For
example, ISS has stated that it maintains a strict firewall between
itself and its subsidiary, ICS, in order to control the risk that a
conflict of interest might jeopardize the independence of its proxy
voting advice business. ISS Letter, supra note 9, at 13. ISS
indicates that ``a key goal of the firewall is to keep the ISS
Global Research team from learning the identity of ICS' clients,
thereby insuring the objectivity and independence of ISS' research
process and vote recommendation.'' Id. ISS has stated that requiring
public disclosure of relevant details about ICS' clients might
compromise this information barrier and severely undermine the
company's conflict mitigation program. Id. at 14.
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Request for Comment
7. Is the text of proposed Rule 14a-2(b)(9)(i) sufficient to elicit
appropriate disclosure of a proxy voting advice business's conflicts of
interest to its clients? Are there other examples of conflicts of
interest that the Commission should take into account in considering
the text of proposed Rule 14a-2(b)(9)(i)? Is the principles-based
requirement in Rule 14a-2(b)(9)(i)(C) sufficient to capture material
information about conflicts of interest not otherwise included within
the scope of paragraphs (9)(i)(A) and (B)? Is there additional material
information that should be required?
8. Would the proposed disclosures provide clients of proxy voting
advice businesses with adequate and appropriate information about the
businesses' conflicts of interest when making their voting
determinations?
9. To what extent do existing disclosures address the concerns
discussed in this release? What additional information may be required
to ensure that they provide clients with the information clients need?
10. Is there specific information, whether qualitative or
quantitative, about proxy voting advice businesses' conflicts of
interest that they should be required to disclose? For example, should
proxy voting advice businesses be required to disclose the specific
amounts that they receive from the relationships or interests covered
by the
[[Page 66528]]
proposed conflicts of interests disclosures?
11. Would requiring specific disclosure of this sort raise
competitive or other concerns for proxy voting advice businesses? For
example, would the proposed disclosures be incompatible with firewalls
or other mechanisms used by proxy voting advice businesses to prevent
conflicts of interest from affecting the advice these businesses
provide?
12. What information would be most relevant to an investment
adviser or other client of a proxy voting advice business in seeking to
understand how the proxy voting advice business identifies and
addresses conflicts of interest?
13. Do proxy voting advice businesses consult on particular matters
where their input influences the substance of the matter to be voted on
(e.g., providing consulting services to a hedge fund with respect to
transformative transactions, such as a proxy contest where the fund is
presenting a competing slate of directors)? If so, what type of
disclosure would help investors to understand the proxy voting advice
business's role and potential conflicts of interest regarding these
situations? Is the text of proposed Rule 14a-2(b)(9)(i) sufficient to
elicit disclosure of material conflicts of interest of this type?
14. Currently, Rule 14a-2(b)(3) requires disclosure to the
recipient of the voting advice of ``any significant relationship'' with
the registrants and other parties as well as ``any material interests''
of the advisor in the matter. By contrast, disclosure under proposed
Rule 14a-2(b)(9)(i) would be required only to the extent that the
information would be material to assessing the objectivity of the proxy
voting advice. Is the terminology in each provision sufficiently clear
with respect to the types of relationships or interests that are
covered by each requirement? For example, is there sufficient clarity
on how to assess whether a relationship is ``material,'' or is
additional guidance needed? Should we consider alternative thresholds
or language for the proposed conflicts of interests disclosure
requirement of Rule 14a-2(b)(9)(i)? If so, what language should we
consider? As an alternative, should we use the same terminology as Rule
14a-2(b)(3)? Should we look instead to Item 404 of Regulation S-K,
which requires disclosure of a ``direct or indirect material
interest''? Is Item 5 of Schedule 14A, which requires disclosures of
``any substantial interest'' of the covered persons, an alternative
that we should consider?
15. Should proposed Rule 14a-2(b)(9)(i) limit the matters which a
proxy voting advice business must disclose to those that occurred on or
after a certain date, or is a more principles-based disclosure
requirement preferable?
16. Proposed Rule 14a-2(b)(9)(i) is a principles-based requirement
that does not specify the manner in which conflicts of interest should
be disclosed, so long as the disclosure is included in the proxy voting
advice business's voting advice and, if applicable, conveyed through
any electronic medium that the proxy voting advice business uses in
lieu of or in addition to a written report. Should proposed Rule 14a-
2(b)(9)(i) be more prescriptive regarding the presentation of conflicts
of interest disclosure, or is it preferable to let the proxy voting
advice business and its client determine how this information will be
presented to the client?
17. Is it important that the conflicts of interest disclosure
required by proposed Rule 14a-2(b)(9)(i) be included in the proxy
voting advice, or would providing it separately suffice?
18. To the extent that a proxy voting advice business uses a voting
platform or other electronic medium to convey its voting advice, should
we require that the conflicts of interest disclosure be conveyed in the
same manner?
19. Should we require the conflicts of interest disclosure that a
proxy voting advice business provides to its clients be made public? If
public disclosure were required, when and in what manner should the
disclosures be released to the public? Would this raise competitive or
other concerns for proxy voting advice businesses?
20. The proposed amendments are intended to promote consistency in
the disclosures proxy voting advice businesses make about their
conflicts of interest. Is the consistency of this information an
important consideration?
21. Should we require proxy voting advice businesses to include in
their disclosure to clients a discussion of the policies and procedures
used to identify, as well as the steps taken to address, any conflicts
of interest, as proposed? Do proxy voting advice businesses have
sufficient incentive to include this disclosure on their own?
22. What are the anticipated costs to proxy voting advice
businesses and their clients associated with requiring additional
conflicts of interest disclosure, as proposed? For example, what are
the costs for proxy voting advice businesses to determine whether an
entity is an affiliate of a registrant, another soliciting person, or
shareholder proponent? Should we impose structural requirements (e.g.,
like the structural reforms in the global analyst research settlements)
\92\ in addition to disclosure requirements?
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\92\ See Federal Court Approves Global Research Analyst
Settlement, SEC Litigation Release No. 18438 (Oct. 31, 2003). See
also SEC Fact Sheet on Global Analyst Research Settlements (April
28, 2003), available at https://www.sec.gov/news/speech/factsheet.htm.
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23. Are there existing regulatory models of conflicts of interest
disclosure that would be useful for us to consider? If so, what are the
alternatives that we should consider in lieu of proposed Rule 14a-
2(b)(9)(i)? For example, should we require all proxy voting advice
businesses to disclose conflicts to the same extent that their clients
(e.g., an investment adviser) would be reasonably expected to disclose
such conflicts to their own clients (e.g., the funds or retail investor
clients to whom the investment adviser provides advice)?
2. Registrants' and Other Soliciting Persons' Review of Proxy Voting
Advice and Response
a. Need for Review of Proxy Voting Advice by Registrants and Other
Soliciting Persons
For the clients of proxy voting advice businesses to be able to
rely on the voting advice they receive to make informed voting
decisions, the analysis and research supporting the advice must be
accurate and complete in all material respects.\93\ This is especially
critical when an investment adviser retains a proxy voting advice
business to provide information that will inform the adviser's voting
determinations. However, in recent years concerns have been expressed
by a number of commentators, particularly within the registrant
community, that there could be factual errors, incompleteness, or
methodological weaknesses in proxy voting advice businesses' analysis
and information underlying their voting advice that could materially
affect the reliability of their voting recommendations and could affect
voting outcomes, and that processes currently in place to mitigate
these risks are insufficient.\94\ These concerns are
[[Page 66529]]
coupled with the perception of many registrants that (i) they lack an
adequate opportunity to review proxy voting advice before it is
disseminated, (ii) there are not meaningful opportunities to engage
with the proxy voting advice businesses and rectify potential factual
errors or methodological weaknesses in the analysis underlying the
proxy voting advice before votes are cast, particularly for registrants
that do not meet certain criteria (such as inclusion in a particular
stock market index),\95\ and (iii) once the voting advice is delivered
to the proxy voting advice business's clients, which typically occurs
very shortly before a significant percentage of votes are cast and the
meeting held, it is often not possible for the registrant to inform
investors in a timely and effective way of its contrary views or errors
it has identified in the voting advice.\96\ Although communication
between proxy voting advice businesses and registrants may have
improved over time,\97\ recent feedback and studies suggest that many
registrants remain concerned about the limited ability of registrants
to provide input that might address errors, incompleteness, or
methodological weaknesses in proxy voting advice.\98\
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\93\ See Concept Release, supra note 2, at 43011 (``To the
extent that proxy advisory firms develop, disseminate, and implement
their voting recommendations without adequate accountability for
informational accuracy . . . informed shareholder voting may be
likewise impaired.'').
\94\ See, e.g., Letter from Maria Ghazal, Senior Vice President
and Counsel, Business Roundtable (Nov. 9, 2018) (``Business
Roundtable Letter 1''), at 11 (discussing examples of errors in
voting advice and registrants' interactions with proxy advisory
firms to address perceived errors); Letter from Neil Hansen, Vice
President, Investor Relations and Corporate Secretary, Exxon Mobil
Corporation (June 26, 2019) (``Exxon Letter''), at 4-5 (addressing
perceived methodological limitations of proxy advisory firms'
evaluation of executive compensation structures); Richard Levick,
`Vinny' and the Proxy Advisors: A Five Trillion Dollar Debate,
Forbes.com (Dec. 17, 2018), https://www.forbes.com/sites/richardlevick/2018/12/17/vinny-and-the-proxy-advisors-a-five-trillion-dollar-debate/#73164b9f2f4b; Placenti, supra note 40, at
10-11. But see, e.g., Letter from Kenneth A. Bertsch, Executive
Director, Council of Institutional Investors (Oct. 24, 2019)
(asserting the lack of evidence of pervasive inaccuracies in proxy
voting advice); OPERS Letter, supra note 8, at 3 (discussing the
effectiveness of OPERS' internal controls to identify and mitigate
errors in proxy reports and indicating its satisfaction with the
quality of the advice it receives from its proxy advisory firm); CII
Letter, supra note 13, at 15 (noting a lack of compelling evidence
indicating that more regulation of proxy advisory firms is necessary
or in the best interests of investors, companies, or the capital
markets generally).
\95\ See ISS Letter, supra note 9, at 10.
\96\ See, e.g., Business Roundtable Letter 1, supra note 94, at
16 (discussing survey results and testimonials supporting the
contention that a spike in shareholder voting follows adverse voting
recommendations during the period immediately after the release of
proxy voting advice); Soc. for Corp. Gov. Letter, supra note 24, at
5 (``The inability to review draft reports from proxy advisory firms
as a matter of right means that companies who want factual errors or
omissions corrected are often unable to get a response from proxy
advisory firms until it is too late, i.e., until after votes have
been cast on the basis of a recommendation that relied--at least in
part--on inaccurate or incomplete information.''); Business
Roundtable Letter 2, supra note 40, at 9 (``This high incidence of
voting immediately on the heels of the publication of proxy advisory
reports suggests, at best, that investors spend little time
evaluating proxy advisory firms' guidance and determining whether it
is in the best interests of their clients and, at worst, that they
simply outsource the vote to the proxy advisor.''); see also 2018
Roundtable Transcript, supra note 40, at 226-40.
\97\ See 2016 GAO Report, supra note 9, at 23.
\98\ See, e.g., Business Roundtable Letter 1, supra note 94, at
11; Placenti, supra note 40, at 7 (discussing the results from a
survey of one hundred public companies about the quality of
information in proxy voting advice and its impact on shareholder
voting); 2015 Proxy Season Survey, Nasdaq & U.S. Chamber of Commerce
2 (as of Sept. 24, 2019), http://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/2015-Proxy-Season-Survey-Summary.pdf
(summarizing the results of a survey of public companies' concerns
about the accuracy of information in the proxy voting advice
pertaining to their companies, as well as complaints about the
efficacy of engaging with proxy advisory firms to impact the voting
advice).
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In response, proxy voting advice businesses have pointed to
internal policies and procedures aimed at ensuring the integrity of
their research \99\ and the steps they have taken to enable feedback
from registrants before their voting advice is issued. ISS and Glass
Lewis, for example, both have systems in place to share certain
information with registrants.\100\ In the United States, ISS offers the
constituent companies of the Standard and Poor's 500 Index the
opportunity to review a draft of ISS' voting advice before it is
delivered to clients.\101\ Glass Lewis has a program that allows
registrants who participate to receive a data-only version of its
voting advice before publication to clients.\102\ In addition, Glass
Lewis implemented a pilot program for the 2019 proxy season, known as
its Report Feedback Statement (``RFS'') service, which offers U.S.
public companies and shareholder proponents the opportunity to express
differences of opinion they may have with Glass Lewis' research.\103\
Participants in this pilot program were able to submit feedback about
the analysis of their proposals, and have comments delivered directly
to Glass Lewis's investor clients along with Glass Lewis' response to
the RFS.\104\
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\99\ For example, ISS has stated that it offers all registrants
a free copy of its published analysis for their shareholder meetings
upon request, which ISS believes affords the registrants the
opportunity to bring any factual errors to ISS' attention. See ISS
Letter, supra note 9, at 9. When it does become aware of material
factual errors, ISS notes that it promptly issues a ``Proxy Alert''
to inform clients of any corrections and, if necessary, any
resulting changes in ISS' vote recommendations. Id. at 11. Glass
Lewis has similar policies to address factual errors and omissions.
See Glass Lewis Letter, supra note 16, at 6. ISS has also noted
that, as a registered investment adviser, it has a fiduciary duty of
care to make a reasonable investigation to determine that it is not
basing vote recommendations on materially inaccurate or incomplete
information. See ISS Letter, supra note 9, at 2. We note, however,
that not all proxy voting advice businesses are registered as
investment advisers. It is also important to note that there is
often disagreement between proxy voting advice businesses and
registrants over whether information in proxy voting advice should
be classified as an ``error.'' See id. at 10.
\100\ See ISS Letter, supra note 9, at 2; Glass Lewis Letter,
supra note 16, at 6-7; see also 2016 GAO Report, supra note 9, at 28
(summarizing the issuer-review programs of ISS and Glass Lewis).
\101\ See ISS Letter, supra note 9, at 10. ISS states that
drafts of its proxy advice are always provided on a ``best efforts''
basis and it does not guarantee that an issuer in the S&P 500 will
have an opportunity to review a draft analysis. See ISS Draft Review
Process for U.S. Issuers, ISS, https://www.issgovernance.com/iss-draft-review-process-u-s-issuers/ (last visited Sept. 20, 2019).
Participating companies need to register with ISS in advance to
receive a draft, and drafts are provided only for the reports for
annual shareholder meetings, not special meetings, nor for any
meeting where the agenda includes a merger or acquisition proposal,
proxy fight, or any item that ISS, in its sole discretion, considers
to be of a contentious nature, such as a ``vote-no'' campaign. Id.
\102\ Glass Lewis refers to this as its Issuer Data Report (IDR)
service. See Issuer Data Report, Glass Lewis, https://www.glasslewis.com/issuer-data-report/(last visited Oct. 25, 2019);
2018 Roundtable Transcript, supra note 40, at 230.
\103\ See Katherine Rabin, CEO of Glass, Lewis, & Co., Glass
Lewis' Report Feedback Service: Direct, Unfiltered Commentary from
Issuers and Shareholder Proponents, Harvard Law School Forum on
Corporate Governance and Financial Regulation, https://corpgov.law.harvard.edu/2019/03/31/glass-lewis-report-feedback-service-direct-unfiltered-commentary-from-issuers-and-shareholder-proponents/; Report Feedback Statement--Frequently Asked Questions,
Glass Lewis (May 2019), available at https://www.glasslewis.com/report-feedback-statement-service/.
\104\ Registrants generally must pay the proxy voting advice
business to obtain access to the information that they can then
review. This is true as well for the RFS service. Rabin, supra note
103 (``In order to facilitate processing and distribution, there is
a distribution fee associated with participation in the RFS service,
and subscribers must also purchase a copy of the relevant Proxy
Paper on which they wish to provide feedback.'').
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Although some proxy voting advice businesses provide opportunities
for review and feedback, these existing practices may be inadequate to
address registrants' and others' concerns and ensure that those who
make proxy voting decisions receive information that is accurate and
complete in all material respects. For example, some proxy voting
advice businesses do not provide registrants with an opportunity to
review their reports containing voting advice in advance of
distribution to their clients. Even those proxy voting advice
businesses that provide such review opportunities do not provide all
registrants with an advance copy of their reports containing their
voting advice.\105\ For example, it is our understanding that proxy
voting advice businesses do not typically extend this opportunity to
registrants with smaller market capitalization or to registrants
holding special meetings. Those registrants that do have an opportunity
to review the draft reports are often given a short period of time,
sometimes
[[Page 66530]]
with little advance notice, to provide their feedback to the proxy
voting advice business and are not given an opportunity to see the
final report sent to clients to determine the business's response, if
any, to their feedback. Finally, because a substantial percentage of
proxy votes are typically cast within a few days or less of the proxy
voting advice business's release of its proxy voting advice \106\ and
registrants often become aware of the recommendations in the proxy
voting advice only after the advice has already been distributed, it
can be difficult for the clients of proxy voting advice businesses to
obtain registrants' factual, methodological, or other objections to the
voting advice before submitting their votes.\107\ Although we recognize
that some proxy voting advice businesses have policies in which they
would issue alerts informing their clients of errors in their voting
advice or updated information released by the registrant, such policies
result in the proxy voting advice businesses, not the client,
determining whether the errors or information are material to a voting
decision and sharing such information only after their advice has
already been published.\108\ As a result, some have advocated for the
establishment of mandatory review periods that would allow registrants
a meaningful opportunity to review and provide their feedback on proxy
voting advice before the businesses provide the advice to clients and
before the clients make their voting decisions.\109\
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\105\ See 2018 Roundtable Transcript, supra note 40, at 230.
\106\ See Business Roundtable Letter 2, supra note 40, at 9.
\107\ See 2018 Roundtable Transcript, supra note 40, at 227-28
(``So once the report is issued, it is an uphill battle . . . filing
SEC solicitation materials or doing other things to try to correct
the record are very difficult.''); Placenti, supra note 40, at 3
(``[C]ompanies do not have the opportunity to adequately respond to
the recommendation, even if it is factually incorrect.'').
Registrants may file supplemental proxy materials to counter
negative proxy voting recommendations and to alert investors to any
factual or analytical errors they have identified in a proxy
advisor's advice or disagreements with regard to methodology or
analysis, but the efficacy of this is uncertain. Id. Although
shareholders have the ability to change their vote at any time prior
to the shareholder meeting, to our knowledge this seldom occurs.
There may be a number of explanations for this, including the degree
of inconvenience to a shareholder entailed in changing his or her
vote.
\108\ See, e.g., ISS FAQs Regarding Recent Guidance from the
U.S. Securities and Exchange Commission Regarding Proxy Voting
Responsibilities of Investment Advisers (Oct. 17, 2019) (``ISS
FAQs''), available at https://www.issgovernance.com/file/faq/ISS_Guidance_FAQ_Document.pdf.
\109\ See, e.g., Business Roundtable Letter 1, supra note 94, at
11; Center on Exec. Comp. Letter, supra note 24, at 3; Letter from
Gary A. LaBranche, President and CEO, National Investor Relations
Institute (Nov. 13, 2018) (``NIRI Letter''), at 4; Soc. for Corp.
Gov. Letter, supra note 24, at 5; Wachtell Letter, supra note 24, at
7 (recommending that proxy advisory firms should give registrants
the opportunity to review proxy voting advice before it is
disseminated to clients); see also, ICI Letter, supra note 8, at 13
(noting its amenability to exploring ways in which registrants'
objections to proxy voting advice could be communicated to investors
in a more timely way and convenient way, including ``pushing''
company views to clients of proxy advisory firms).
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We believe there would be value in establishing a mechanism that
would foster enhanced engagement between proxy voting advice businesses
and registrants and, as discussed below, certain other soliciting
persons (such as dissident shareholders engaged in a proxy contest), so
that investors or those who vote on their behalf would have the benefit
of the input and views of registrants and certain other soliciting
persons as they consider and potentially act on proxy voting advice.
Such a mechanism has the potential to improve the accuracy,
transparency, and completeness of the information available to those
making voting determinations. Indeed, we believe such benefits could be
realized even where the proxy voting advice business's voting
recommendation is not adverse to the registrant's or certain other
soliciting person's recommendation and no errors exist in the analysis
underlying the advice. The registrant and certain other soliciting
person may have disagreements that extend beyond the accuracy of the
data used, such as differing views about the proxy advisor's
methodological approach or other differences of opinion that they
believe are relevant to the voting advice. In these circumstances,
providing the clients of proxy voting advice businesses with convenient
access to the views of the registrant and certain other soliciting
persons at the same time they receive the proxy voting advice could
improve the overall mix of information available when the clients make
their voting decisions.\110\
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\110\ See Communications Among Shareholders Adopting Release,
supra note 3, at 48280 (``Shareholders will be better protected by
having access to as many sources of opinions relating to voting
matters as possible. . . .'').
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Accordingly, we are proposing measures intended to (i) facilitate
improved dialogue among proxy voting advice businesses and registrants
and certain other soliciting persons (including certain dissident
shareholders) before the advice is disseminated to clients of the proxy
voting advice business and (ii) provide a means for registrants and
certain other soliciting persons to communicate their views about the
advice before the proxy voting advice businesses' clients cast their
votes. We believe that establishing a process that allows registrants
and other soliciting persons a meaningful opportunity to review proxy
voting advice in advance of its publication and provide their
corrections or responses would reduce the likelihood of errors, provide
more complete information for assessing proxy voting advice businesses'
recommendations, and ultimately improve the reliability of the voting
advice utilized by investment advisers and others who make voting
determinations, to the ultimate benefit of investors.
b. Review of Proxy Voting Advice by Registrants and Other Soliciting
Persons
The proposed amendments to Rule 14a-2(b) would require one
standardized opportunity for timely review and feedback by registrants
of proxy voting advice before a proxy voting advice business
disseminates its voting advice to clients, regardless of whether the
advice on the matter is adverse to the registrant's own
recommendation.\111\ The proposal would provide the same opportunity to
review and provide feedback on the proxy voting advice to persons who
are conducting non-exempt solicitations through the use of a proxy
statement and proxy card pursuant to Regulation 14A, such as a person
soliciting proxies in support of its director nominees in a contested
election or its own proposal that is unrelated to director elections
(e.g., a solicitation by a dissident shareholder against a proposed
business combination transaction). As noted above, a registrant or
certain other soliciting person may have disagreements with the proxy
voting advice, whether factual, methodological or otherwise, which if
available to investors would help inform their voting decisions, even
in instances where the registrant or certain other soliciting person's
voting recommendation on the matter is the same as that of the proxy
voting advice business.\112\
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\111\ See proposed Rule 14a-2(b)(9)(ii).
\112\ Under our proposal, registrants and certain other
soliciting persons would have the opportunity to review and provide
feedback on the proxy voting advice, regardless of whether that
advice is adverse to the voting recommendation of the registrant or
certain other soliciting person. For ease of administration, we do
not think that our proposed requirement should put the burden on the
proxy voting advice business, registrant, or certain other
soliciting person to determine whether proxy voting advice is
``adverse'' to another person's voting recommendation. For example,
in a contested director election, it is common for a proxy voting
advice business to recommend the election of some nominees of the
registrant's slate of candidates as well as the election of some
nominees of the dissident shareholders' slate. Making a
determination whether such advice would be adverse to the registrant
or the dissident shareholder could be difficult and highly
subjective. It is also common for a proxy voting advice business to
present in a single, integrated written report its voting
recommendations on all matters to be voted at the registrant's
meeting, with its recommendations on some matters aligned with the
registrant's recommendations but recommendations on other matters
contrary to those of the registrant. Requiring the proxy voting
advice business to separate its written report so that only adverse
recommendations would be presented for review could require
additional time, burden, and cost for the proxy voting advice
business.
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[[Page 66531]]
New proposed Rule 14a-2(b)(9)(ii) would require, as one of the
conditions to the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3),
that, subject to certain conditions, the proxy voting advice business
provide registrants and certain other soliciting persons covered by its
proxy voting advice a limited amount of time to review and provide
feedback on the advice before it is disseminated to the business's
clients, with the length of time provided depending on how far in
advance of the shareholder meeting the registrant or other soliciting
person has filed its definitive proxy statement. Given the challenges
typically faced by proxy voting advice businesses to prepare and
deliver their proxy voting advice to clients within very narrow
timeframes,\113\ the proposed rule is intended to provide an incentive
for registrants and others to file their definitive proxy statements as
far in advance of the meeting date as practicable,\114\ thereby
allowing more time for proxy voting advice businesses and their clients
to formulate and consider voting recommendations.\115\ As proposed, if
the registrant (or certain other soliciting person) files its
definitive proxy statement less than 45 but at least 25 calendar days
before the date of its shareholder meeting, the proxy voting advice
business would be required to provide the registrant (or certain other
soliciting person) no fewer than three business days to review the
proxy voting advice and provide feedback as a condition of the
exemptions.\116\ However, if the registrant (or certain other
soliciting person) files its definitive proxy statement 45 calendar
days or more before its shareholder meeting, the proxy voting advice
business would be required to provide the registrant (or certain other
soliciting person) at least five business days to review the proxy
voting advice and provide feedback.\117\ To the extent that registrants
customarily file their definitive proxy materials 35-40 days in advance
of a shareholder meeting,\118\ we expect that this five-business day
period would be available to many issuers only if they file earlier
than they typically do today. In the event a registrant (or certain
other soliciting person) files its definitive proxy statement less than
25 calendar days before the meeting, the proxy voting advice business
would have no obligation under the proposed amendment to provide the
proxy voting advice to the registrant (or certain other soliciting
person) as a condition of the exemption. As proxy voting advice
businesses perform much of the work related to their voting advice only
after the filing of the definitive proxy statements describing the
matters presented for a proxy vote,\119\ we do not believe there would
be sufficient time for a meaningful assessment of the advice or
opportunity to make revisions in response to any feedback provided when
the definitive proxy statements are filed so close to the date of the
shareholder meeting.\120\ By requiring that registrants and other
soliciting persons file their definitive proxy statements at least 25
calendar days in advance of the shareholder meeting in order to avail
themselves of the review and feedback process, we believe that the
proposed amendments would afford proxy voting advice businesses a
reasonable amount of time to engage with registrants and other
soliciting persons without jeopardizing their ability to provide timely
voting advice to their clients.
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\113\ See, e.g., Letter from Donna F. Anderson, Head of
Corporate Governance & Eric Veiel, Co-Head of Global Equity, T. Rowe
Price (Dec. 13, 2018), at 3 (discussing the ``compressed'' proxy
voting process); IAA Letter, supra note 17, at 5 (noting the
``extremely tight timeline for the entire proxy voting process'').
\114\ Registrants customarily file their definitive proxy
materials 35-40 days before a shareholder meeting. The Proxy
Materials, Broadridge Financial Solutions, Inc., https://www.shareholdereducation.com/SHE-proxy_materials.html. See also 2019
Proxy Statements, Ernest & Young LLP, available at https://
www.ey.com/publication/vwluassetsdld/2019proxystatements_05133-
181us_6december2018-v2/$file/2019proxystatements_05133-
181us_6december2018-v2.pdf?OpenElement (noting that registrants
generally mail proxy statements 30 to 50 days before the annual
meeting). Furthermore, registrants using the ``notice and access''
method of delivery for proxy materials must make their proxy
materials publicly available and send the Notice of internet
Availability of the Proxy Materials at least 40 calendar days prior
to the shareholder meeting date. See Exchange Act Rule 14a-16.
\115\ See, e.g., ICI Letter, supra note 8, at 13 (``Timeliness
also is a crucial consideration. In the current compressed proxy
voting schedule, any response that a company wishes to make to a
proxy advisory firm's recommendation . . . must occur promptly, so
that investors can consider it prior to casting their votes.'').
\116\ Proposed Rule 14a-2(b)(9)(ii)(A)(2). We note that the
proxy voting advice required to be provided may include multiple
reports, if applicable, that the proxy voting advice business
produces for its clients. For example, some proxy voting advice
businesses may provide a so-called ``benchmark report,'' as well as
separate ``specialty reports'' to a client. See Exxon Letter, supra
note 94, at p. 7.
\117\ Proposed Rule 14a-2(b)(9)(A)(1). Where the registrant is
soliciting written consents or authorizations from shareholders for
an action in lieu of a meeting, the proxy voting advice business
must allow no fewer than three business days for the review and
feedback period if the registrant files its definitive soliciting
materials less than 45 but at least 25 calendar days before the
action is effective. Similarly, if the registrant files its
definitive soliciting materials for written consents or
authorizations for a proposed action at least 45 calendar days
before the expected effective date of the action, it must be given
at least five business days to review and provide feedback on the
proxy voting advice.
\118\ See supra note 114.
\119\ See ISS Letter, supra note 9, at 10 (describing the
availability of the registrant's proxy statement as the ``hard
start'' of the firm's process for formulating the proxy voting
advice that will be delivered to clients.).
\120\ Based on the staff's experience, it is relatively uncommon
for registrants or other soliciting persons to file their definitive
proxy statement so close to the date of shareholder meeting. For
example, registrants and soliciting persons typically are motivated
to file the definitive proxy statements as soon as possible in order
to maximize the period of time they have to solicit and obtain the
votes needed for approval of their proposals.
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In addition to the review and feedback period, in order to rely on
the exemptions in Rules 14a-2(b)(1) or (b)(3), a proxy voting advice
business would be required to provide registrants and certain other
soliciting persons with a final notice of voting advice. This notice,
which must contain a copy of the proxy voting advice that the proxy
voting advice business will deliver to its clients, including any
revisions to such advice made as a result of the review and feedback
period, must be provided by the proxy voting advice business no later
than two business days prior to delivery of the proxy voting advice to
its clients.\121\ This would provide registrants and certain other
soliciting persons the opportunity to determine the extent to which the
proxy voting advice has changed, including whether the proxy voting
advice business made any revisions as a result of feedback from the
registrant. We note, however, that registrants and certain other
soliciting persons would be entitled to this two-business day final
notice period whether or not they provided
[[Page 66532]]
comments on the version of proxy voting advice they received in
connection with the review and feedback period.\122\ This final notice
would allow the registrant and/or soliciting person to determine
whether or not to provide a statement in response to the advice and
request that a hyperlink to its response be included in the voting
advice delivered to clients of the proxy voting advice business.\123\
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\121\ Proposed Rule 14a-2(b)(9)(ii)(B). Both paragraphs (A)(1)
and (A)(2) of proposed Rule 14a-2(b)(9)(ii) specify that the proxy
voting advice business is required to provide the version of its
proxy voting advice that it ``intends to deliver to its clients,''
which allows for the possibility that the proxy voting advice
business may subsequently revise such advice. However, proposed Rule
14a-2(b)(9)(ii)(B) refers to the proxy voting advice that the proxy
voting advice business ``will deliver to its clients,'' which
effectively requires that the version of voting advice included in
the final notice of voting advice will be the actual voting advice
that will be disseminated to clients, including any revisions made
that were not incorporated into the advice as a result of the review
and feedback period under Rules 14a-2(b)(9)(ii)(A)(1) or (A)(2), as
applicable.
\122\ Providing this final notice of voting advice, whether or
not the registrant or certain other soliciting person chooses to
provide comments to the proxy voting advice business during the
review and feedback period, would, we believe, eliminate the
possibility that such parties might provide frivolous comments to
the proxy voting advice business during the review and feedback
period merely to preserve their right to receive the final notice of
voting advice.
\123\ See, e.g., Center on Exec. Comp. Letter, supra note 24
(recommending that registrants be allowed two opportunities to
review proxy voting advice before it is issued--the first time to
review the ``draft'' proxy report and the second time to review the
``final'' proxy report).
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Once the two-day final notice period has expired, proposed Rule
14a-2(b)(9)(ii) would not impose any obligation on the proxy voting
advice business to provide registrants or certain other soliciting
persons with any additional opportunities to review its proxy voting
advice with respect to the same shareholder meeting in order to rely on
the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3).\124\
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\124\ See Note 1 to paragraph (ii) of proposed Rule 14a-2(b)(9).
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To provide a means for proxy voting advice businesses to maintain
control over the dissemination of their proxy voting advice and
minimize the risk of unintentional or unauthorized release, our
proposed amendment would allow a proxy voting advice business to
require that registrants and certain other soliciting persons, as
applicable, agree to keep the information confidential, and refrain
from commenting publicly on the information, as a condition of
receiving the proxy voting advice.\125\ The terms of such agreement
would apply until the proxy voting advice business disseminates its
proxy voting advice to one or more clients and could be no more
restrictive than similar types of confidentiality agreements the proxy
voting advice business uses with its clients.\126\
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\125\ See Note 2 to paragraph (ii) of proposed Rule 14a-2(b)(9).
\126\ We note by way of analogy that express agreements to
maintain material non-public information in confidence are
sufficient to exempt communication of such information from
triggering the public disclosure requirements of Regulation FD [17
CFR 243.100 to 103] (``Regulation FD''). See 17 CFR
243.100(b)(2)(ii).
We also recognize that certain proxy voting advice businesses
currently have policies that expressly prohibit the businesses from
considering or using any material non-public information provided by
registrants during their engagement with the businesses. These
policies also call for the registrants to promptly disclose to the
public any non-public information shared with the businesses or any
commitments with respect to future actions or behavior during the
engagement process. See FAQs: Engagement on Proxy Research, ISS,
https://www.issgovernance.com/contact/faqs-engagement-on-proxy-research/ (last visited Sept. 23, 2019).
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Proxy voting advice businesses would not be required to extend the
review and feedback period or final notice of voting advice to persons
conducting solicitations that are exempt pursuant to Rule 14a-2 \127\
or to proponents who submit shareholder proposals pursuant to Exchange
Act Rule 14a-8 and whose proposal will be voted upon at the
registrant's upcoming meeting. We are mindful of the potential
disruptions and costs that the proposed review and feedback period and
final notice of voting advice requirements could have on the current
practices of proxy voting advice businesses and their clients.
Therefore, we are proposing to require proxy voting advice businesses
to extend the review and feedback and final notice opportunities to
parties other than the registrant only in those instances in which the
registrant's solicitation is contested by soliciting persons who intend
to deliver their own proxy statements and proxy cards to
shareholders.\128\ We believe that the proxy voting advice businesses'
voting advice in these types of contested situations likely will be
based on the soliciting persons' proxy statements, other mandated
disclosure documents, and public statements containing substantive
information.\129\ By contrast, neither shareholder proponents nor
persons conducting exempt solicitations are required to file
substantive disclosure documents with the Commission or to make public
statements containing substantive information that proxy voting advice
businesses likely will include in their analyses. Accordingly, we
believe it is appropriate to limit the proposed review and feedback
period and final notice requirements to those solicitations where the
soliciting persons are providing mandated disclosures or other
substantive information that are likely to be part of the proxy voting
advice businesses' analyses. Providing such soliciting persons with the
same opportunity to review and provide feedback on proxy voting advice
that is afforded to registrants would ensure equality of treatment
among contesting parties and should enable investment advisers and
other clients of proxy voting advice businesses to receive more
accurate and complete information at the time they are casting votes.
---------------------------------------------------------------------------
\127\ See 17 CFR 240.14a-2. For example, under our proposal, the
review requirement would not apply to solicitations in which:
A person is soliciting that shareholders cast
``withhold'' or ``against'' votes with respect to one or more of the
registrant's director nominees, without seeking proxy authority,
which is generally a soliciting activity exempt under Rule 14a-
2(b)(1); or
a person is not acting on behalf of the registrant and
the aggregate number of persons solicited is not more than ten,
which are exempt under Rule 14a-2(b)(2).
\128\ Our proposed approach is similar to existing review and
comment practices used by certain proxy voting advice businesses,
which also differentiate such practices based on whether a matter to
be considered at the meeting is contested or not. See ISS, supra
note 126 (``Notably, during the annual meeting season, in-person
meetings are typically limited to contentious issues, including
contested mergers, proxy contests, or other special situations . . .
.'').
\129\ See supra note 126 (``ISS research and recommendations are
based exclusively on public information . . . .'').
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It is important to note that while our rule proposal would require,
as a condition of the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3),
that proxy voting advice businesses provide an opportunity for
registrants and other parties engaged in non-exempt solicitations to
review proxy voting advice and suggest revisions before the
distribution of the advice, it does not require proxy voting advice
businesses to accept any such suggested revisions.\130\ It is equally
important to recognize, however, that proxy voting advice subject to
the Rule 14a-2(b) exemptions is not exempt from Rule 14a-9 liability,
which prohibits materially misleading misstatements or omissions in
proxy solicitations.
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\130\ As proposed, the rule would leave the content of proxy
voting advice entirely within the proxy voting advice business's
discretion, the only exception being the inclusion of the
registrant's or other soliciting person's hyperlink (or other
analogous electronic medium, as discussed infra in Section
II.B.2.c.). We believe leaving the content to the proxy voting
advice businesses' discretion may allay concerns that a registrant's
or certain other soliciting person's review of proxy voting advice
could interfere with the business's objectivity and independence.
See, e.g., ISS Letter, supra note 9, at 11; Glass Lewis Letter,
supra note 16, at 8.
---------------------------------------------------------------------------
A number of alternative approaches for a review and feedback
mechanism have been suggested by commenters,\131\ with a range of
different review periods,\132\ as well as the ability of registrants to
include full written statements in the body of the proxy voting advice
business's written reports containing its advice.\133\ Others have
expressed concerns about increased
[[Page 66533]]
costs and timing pressures, emphasizing the need to consider the impact
of any additional regulation on the ability of proxy voting advice
businesses to deliver timely, cost-effective advice to their
clients.\134\ We believe the amendments we have proposed would give
registrants and certain other soliciting persons sufficient time to
assess the voting advice without being overly intrusive to proxy voting
advice businesses and their clients. In formulating the proposed review
and feedback period and notice of voting advice requirements, we have
sought to improve the quality of information available to investors
while balancing, on the one hand, the need for registrants and certain
soliciting persons to conduct a meaningful assessment of the advice and
communicate any concerns or errors regarding the advice with, on the
other hand, the concerns about imposing an undue delay or otherwise
jeopardizing the ability of proxy voting advice businesses to meet
their contractual commitments to clients and their clients' ability to
make timely and informed voting decisions.\135\ However, we are
soliciting comment on whether the proposed review and feedback period
and notice requirements are appropriate and invite comments on how this
proposed process could be revised to improve the information available
to investors and better serve the needs of the various parties involved
in the proxy process.
---------------------------------------------------------------------------
\131\ See supra note 109.
\132\ See, e.g., Center on Exec. Comp. Letter, supra note 24, at
3 (recommending ``a review period of at least five business days'');
NIRI Letter, supra note 109, at 4 (recommending review ``at least
five business days before issuance'').
\133\ See, e.g., Soc. for Corp. Gov. Letter, supra note 24, at
2; Wachtell Letter, supra note 24, at 8.
\134\ See, e.g., 2018 Roundtable Transcript, supra note 40, at
233, 251-52; see also CII Letter, supra note 13, at 15-16 (``More
regulation of proxy research firms could increase costs for pension
plans and other institutional investors, with no clear benefits. . .
. [E]xcessive regulation of proxy research firms could impair the
ability of institutional investors to promote good corporate
governance and accountability at the companies in which they own
stock.'')
\135\ See ISS Letter, supra note 9, at 10 (cautioning that the
imposition of additional burdens and requirements might be untenable
given the firm's existing time constraints) (``In many cases, ISS
has a contractual obligation to deliver proxy reports and vote
recommendations to clients ten days to two weeks in advance of the
meeting. . . . Given the limited time between the hard start of
receiving the proxy statement and the hard stop of delivering the
report to clients sufficiently in advance of the meeting, along with
the concentration of a large percentage of meetings during so called
`proxy season,' there simply is not time to afford all of the
approximately 39,000 issuers ISS covers globally the opportunity to
review draft reports.''); see also CII Letter, supra note 13, at 14-
15.
---------------------------------------------------------------------------
c. Response to Proxy Voting Advice by Registrants and Other Soliciting
Persons
In addition to the proposed review and feedback period and final
notice requirements, registrants and certain soliciting persons would
also have the option under the proposed amendments to request that
proxy voting advice businesses include in their proxy voting advice
(and on any electronic medium used to distribute the advice) a
hyperlink or other analogous electronic medium directing the recipient
of the advice to a written statement prepared by the registrant that
sets forth its views on the advice. Although registrants are able,
under the existing proxy rules, to file supplemental proxy materials to
respond to negative proxy voting recommendations and to alert investors
to any disagreements they have identified with a proxy voting advice
business's voting advice, the efficacy of these responses may be
limited, particularly given the high incidence of voting that takes
place very shortly after a proxy voting advice business's voting advice
is released to clients and before such supplemental proxy materials can
be filed.\136\ The proposed amendments would provide a more efficient
and timely means of ensuring that a proxy voting advice business's
clients, including investment advisers, are able to consider
registrants' views at the same time they are considering the proxy
voting advice and before making their voting determinations, thus
improving the overall mix of information available to them at that
time.\137\
---------------------------------------------------------------------------
\136\ See supra note 96 and accompanying text.
\137\ See Question 2 of Commission Guidance on Proxy Voting
Responsibilities, supra note 9, at 12 (discussing steps an
investment adviser could use to evaluate its compliance). We expect
that the proposed amendments to permit a registrant to review and
provide its response to proxy voting advice would aid an investment
adviser that has determined to take such steps. For example, we
expect that the proposed requirement for inclusion of a hyperlink or
other analogous electronic medium directing the recipient of the
proxy voting advice to a written statement prepared by the
registrant that sets forth the registrant's views on the advice
could assist a proxy voting advice business's clients by alerting
them to matters where, due to the differing views expressed by the
registrant, the clients' assessment of any ``pre-populated'' votes
made by the proxy voting advice business may be warranted before
such votes are submitted.
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Under proposed Rule 14a-2(b)(9)(iii), as a condition to the
exemptions found in Rules 14a-2(b)(1) and 14a-2(b)(3), a proxy voting
advice business must, upon request, include in its proxy voting advice
and in any electronic medium used to deliver the advice a hyperlink (or
other analogous electronic medium) that leads to the registrant's
statement about the proxy advisor's voting advice. To improve the
overall mix of information available to the clients of proxy voting
advice businesses, such a hyperlink (or other analogous electronic
medium) would need to be included upon request regardless of whether
the advice is adverse to the registrant's recommendation to its
shareholders.\138\ Although we considered proposing a requirement that
proxy voting advice businesses include a full written statement from
the registrant in the proxy voting advice delivered to clients, we
believe that requiring the inclusion of a hyperlink or other analogous
electronic medium is a more efficient and straightforward approach that
enables sufficient access to the registrant's statement without unduly
restricting the proxy voting advice businesses' flexibility to design
and prepare their proxy voting advice in the manner that they and their
clients prefer. A hyperlink or other analogous electronic medium would
likewise allow registrants flexibility to present their views in the
manner they deem most appropriate or effective.\139\ It is important to
note, however, that the registrant's statement would constitute a
``solicitation'' as defined in Rule 14a-1(l) and be subject to the
anti-fraud prohibitions of Rule 14a-9,\140\ as well as the filing
requirements of Exchange Act Rule 14a-12,\141\ which would necessitate
that it be filed as supplemental proxy materials no later than the date
that the proxy voting advice, and thereby the registrant's statement,
is first published, sent, or given to shareholders.\142\ To prevent
undue delays in the distribution of the proxy voting advice to clients,
[[Page 66534]]
registrants would be required to provide the hyperlink (or other
analogous electronic medium) to the proxy voting advice business no
later than the expiration of the two-day final notice period that would
be required under proposed Rule 14a-2(b)(9)(ii)(B) as a condition of
the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3).
---------------------------------------------------------------------------
\138\ See supra note 112.
\139\ In cases where the proxy voting advice is electronically
accessible, the proposed rule contemplates that the client would be
able to click on a hyperlink, for example, and be directed to the
registrant's statement. Alternatively, the client could type in the
relevant URL (web address) using a web browser on the internet.
\140\ In general, the inclusion of the hyperlink (or analogous
electronic medium) required under proposed Rule 14a-2(b)(9)(iii)
would not, by itself, make the proxy voting advice business liable
for the content of the statements made by the registrant or certain
other soliciting persons about the proxy voting advice. The
Commission has previously stated a person's responsibility for
hyperlinked information depends on whether the person has involved
itself in the preparation of the information or explicitly or
implicitly endorsed or approved the information. See Use of
Electronic Media, Release No. 34-42728 (Apr. 28, 2000) [65 FR 25843
(May 4, 2000)]. We believe our view is consistent with this
framework as a proxy voting advice business would not likely be
involved in the preparation of the hyperlinked statement and would
likely be including the hyperlink (or analogous electronic medium)
to comply with proposed Rule 14a-2(b)(9)(iii), and not to endorse or
approve the content of the statement. We seek comment on the need
for rule amendments to codify this view.
\141\ 17 CFR 240.14a-12.
\142\ Activation of the hyperlink (or other analogous electronic
medium) so that the response is publicly available would trigger the
registrant's obligation to publicly file its statement of response
pursuant to Rule 14a-6 [17 CFR 240.14a-6]. Additional soliciting
materials would be filed with the Commission on EDGAR under
submission type DEFA 14A or DFAN 14A.
---------------------------------------------------------------------------
As with the proposed review and feedback period and final notice
requirements, our proposal to require inclusion of a hyperlink (or
other analogous electronic medium) would provide other persons who are
conducting non-exempt solicitations through the use of a proxy
statement and proxy card pursuant to Regulation 14A with the same
opportunity to include in the proxy voting advice and in any electronic
medium used to deliver the advice a hyperlink (or other analogous
electronic medium) that would lead to their response to the voting
advice. We believe it is appropriate to limit the proposed requirement
to extend this opportunity to parties other than the registrant to
contested situations where shareholders and those acting on their
behalf, including investment advisers, are actively being solicited by
opposing sides through delivery of each side's own proxy statements and
proxy cards and must decide with whom they wish to vote. Accordingly,
proxy voting advice businesses would not be obligated to provide the
same opportunity to persons conducting exempt solicitations. As with
the proposed review and feedback period and final notice requirements,
we are cognizant of the costs and potential logistical complications
arising from the need to include a means for proxy voting advice
businesses' clients to access a response to the proxy voting advice
businesses' recommendations. Similarly, as discussed above, it is
likely that the disclosures in these proxy statements and other
mandated disclosure documents filed by the opposing sides, as well
other public substantive statements that they make, would be considered
by proxy voting advice businesses when formulating their voting advice.
Accordingly, in our view, clients of proxy voting advice businesses
have a greater need in non-exempt solicitations to be aware of
disagreements over facts or opinions presented in the voting advice
provided by proxy voting advice businesses. As with the registrant's
statement of response, any such statements by dissident shareholders
and other persons conducting non-exempt solicitations would constitute
a ``solicitation'' as defined in Rule 14a-1(l), and would therefore be
subject to the anti-fraud prohibitions of Rule 14a-9, and must be filed
with the Commission as additional soliciting materials pursuant to Rule
14a-12.
The timing of the review and feedback period and final notice of
voting advice under proposed Rule 14a-2(b)(9)(ii) generally would
operate as follows: \143\
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\143\ For purposes of illustration, the following chart assumes
that the registrant or other soliciting party is soliciting proxies
for a meeting of shareholders. However, the description of timing
would be identical if, in lieu of a shareholder meeting, the
registrant or other soliciting party were soliciting proxies for a
proposed action to be effected by shareholder vote, consent or
authorization.
The information in this chart is intended only as an
illustration and, as such, should be read together with the complete
text of this release.
------------------------------------------------------------------------
Action Timing
------------------------------------------------------------------------
Person conducts solicitation exempt N/A. Proposed rules do not
under Sec. 240.14a-2 or submits apply.
shareholder proposal pursuant to
Exchange Act Rule 14a-8.
Registrant and/or soliciting person N/A. Proposed rules do not
conducts non-exempt solicitation and dictate when the registrant
files definitive proxy statement for and/or soliciting person files
shareholder meeting. its definitive proxy
statement.
Proxy voting advice business provides Subject to the proxy voting
the registrant and/or soliciting advice business's discretion,
person with the version of the voting so long as it provides its
advice [dagger] that the business voting advice to the
intends to deliver to its clients registrant and/or soliciting
[proposed Rule 14a-2(b)(9)(ii)]. person and complies with the
required review and feedback
and final notice periods in
proposed Rule 14a-2(b)(9)(ii)
prior to the distribution of
such advice to the business's
clients.
Review and feedback period: If definitive proxy
Registrant and/or soliciting person has statement is filed at least 45
an opportunity to review and provide calendar days before the date
feedback, if any, on the proxy voting of the meeting, registrant and/
advice business's voting advice or soliciting person has at
[proposed Rules 14a-2(b)(9)(ii)(A)(1) least five business days to
and (A)(2)] review and provide feedback;
or
If definitive proxy
statement is filed less than
45 but at least 25 calendar
days before the date of the
meeting, registrant and/or
soliciting person has at least
three business days to review
and provide feedback; or
If definitive proxy
statement is filed less than
25 calendar days before the
date of the meeting, the proxy
voting advice business is not
required to provide its voting
advice to registrant or
soliciting person.
Proxy voting advice business may revise N/A. Subject to the proxy
its voting advice, as applicable. voting advice business's
discretion.
Final notice of voting advice: No earlier than upon expiration
Proxy voting advice business provides a of review and feedback period.
copy of its voting advice that it will Registrant and/or soliciting
deliver to its clients to allow the person has at least two
registrant and/or soliciting person to business days to provide a
assess whether or not to provide a hyperlink (or other analogous
statement with its response to the electronic medium) with its
advice [proposed Rules 14a- response, if any.
2(b)(9)(ii)(B) and 14a-2(b)(9)(iii)]
Proxy voting advice business publishes Subject to the proxy voting
its proxy voting advice to clients, advice business's discretion,
which includes an active hyperlink * but no earlier than upon
(or other analogous electronic medium) expiration of two-business day
with the registrant's and/or period allotted for the final
soliciting person's response, if notice of voting advice.
requested [proposed Rule 14a-
2(b)(9)(iii)].
* Registrant and/or soliciting person
is responsible for providing a web
address (URL) for the response and is
expected to coordinate with the proxy
voting advice business as necessary to
ensure that the hyperlink (or other
analogous electronic medium) is
functional when included in the proxy
voting advice.
Registrant holds its shareholder N/A.
meeting.
------------------------------------------------------------------------
[dagger] See supra note 121.
[[Page 66535]]
We designed proposed Rules 14a-2(b)(9)(ii) and (iii) so they would
not overly prescribe the manner in which proxy voting advice
businessess and registrants (and certain other soliciting persons)
interact with each other, but instead allow the parties the flexibility
to determine the most effective and cost-efficient methods of
compliance. Because our approach is meant to allow the parties
flexibility within this general framework, there may be a number of
market solutions capable of facilitating the parties' compliance with
this proposed review process. There may be existing providers and/or
services readily available to support the parties' needs or,
alternatively, new services and providers may emerge to satisfy demand
for effective market solutions. The parties may coordinate directly
with each other to manage the review process or they could elect to
enter into arrangements with third-party service providers who could
coordinate the process on their behalf. We recognize that there also
may be various technological solutions available to the parties that
would facilitate their coordination. For example, we note that one
commenter suggested the use of a digital portal as a draft review
mechanism, as well as for management and dissemination of the
registrant's statement in response to the proxy advisor's voting
advice.\144\
Because there may be a number of implementation details to resolve,
effective coordination between proxy voting advice businesses and
registrants (and certain other soliciting persons, as applicable) would
be needed. For example, to ensure that the hyperlink to the statement
from the registrant (or certain other soliciting persons) is activated
concurrently with the release of the proxy voting advice and that the
registrant (or certain other soliciting persons) is able to timely file
its statement of response as additional soliciting materials, it would
be necessary for the parties to coordinate the release date of the
proxy voting advice containing the active hyperlink.\145\
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\144\ See Letter from Barbara Novick, Vice Chairman, & Ray
Cameron, Managing Director, Blackrock (``Blackrock Letter'') (Nov.
16, 2018), at 3.
\145\ If the parties do not adequately coordinate the activation
of the hyperlink with the release of the proxy voting advice, there
is a risk that the hyperlink could be functional prematurely, and
therefore that the registrant's or other soliciting person's
statement of response would be publicly available before the
registrant or other soliciting person was able to comply with Rule
14a-12(b) and timely file the statement with the Commission as
additional soliciting material.
---------------------------------------------------------------------------
In light of the potentially significant adverse result for a proxy
voting advice business if it experiences an immaterial or unintentional
failure to comply with the conditions of new Rule 14a-2(b)(9),\146\ the
proposed amendments provide that such failure will not result in the
loss of the exemptions in Rules 14a-2(b)(1) or 14a-2(b)(3) so long as
(A) the proxy voting advice business made a good faith and reasonable
effort \147\ to comply and (B) 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.\148\ We believe this provision
would serve to mitigate the risk of any unintended adverse consequences
for proxy voting advice businesses as they seek to comply with the
review and feedback and other provisions that we are proposing as new
conditions to Rules 14a-2(b)(1) and 14a-2(b)(3). Also, failure to
comply with the conditions of new Rule 14a-2(b)(9) does not create a
new private right of action for registrants against proxy voting advice
businesses.
---------------------------------------------------------------------------
\146\ For example, without such an exception, a proxy voting
advice business that failed to give a registrant the full number of
days for review of the proxy voting advice due to technical
complications beyond its control, even if only a few hours shy of
the requirement, would be unable to rely on the exemptions in Rule
14a-2(b)(1) and (b)(3). Without an applicable exemption on which to
rely, the proxy voting advice business likely would be subject to
the proxy filing requirements found in Regulation 14A and its proxy
voting advice required to be publicly filed.
\147\ Similar to analogous provisions in other Commission rules,
the determination of whether there has been a good faith and
reasonable effort to comply with the proposed conditions would
depend on the particular facts and circumstances. See, e.g., 17 CFR
230.164 (providing relief for immaterial and unintentional failures
to file or delays in filing free writing prospectuses.)
\148\ See paragraph (iv) of proposed Rule 14a-2(b)(9).
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Request for Comment
24. How prevalent are factual errors or methodological weaknesses
in proxy voting advice businesses' analyses? To what extent do those
errors or weaknesses materially affect a proxy voting advice business's
voting recommendations? To what extent are disputes between proxy
voting advice businesses and registrants about issues that are factual
in nature versus differences of opinion about methodology, assumptions,
or analytical approaches?
25. As a condition to the exemptions in Rules 14a-2(b)(1) and 14a-
2(b)(3), should registrants and certain other soliciting persons be
permitted an opportunity to review proxy voting advice and provide
feedback to the proxy voting advice businesses before the businesses
provide the advice to clients, as proposed? If yes, how much time
should be given to review and provide feedback on proxy voting advice?
Are the timeframes set forth in proposed Rule 14a-2(b)(9)(ii)
appropriate? What would the impact of these proposed timeframes be on
registrants, proxy voting advice businesses, and their clients? Are
there alternative timeframes that would be more appropriate? Should we
allow a proxy voting advice business to provide its final notice of
voting advice to the registrant at any time after the registrant has
provided its comments during the review and feedback period, regardless
of whether the review and feedback period has expired? Are there
alternative conditions to the exemptions that the Commission should
consider to address the concerns regarding inaccuracies and the ability
for investors to get information that is accurate and complete in all
material respects?
26. Should the number of days for the review and feedback period be
contingent on the date that the registrant files its definitive proxy
statement? For example, should there be a longer period (e.g., five
business days instead of three) if the registrant files its definitive
proxy statement some minimum number of days before the shareholder
meeting at which proxies will be voted, as proposed? Would registrants
and other soliciting persons be likely to take advantage of the
additional time by filing their definitive proxy statements early
enough to qualify for this treatment?
27. What impact would the proposed review and feedback period and
final notice of voting advice have on the ability of proxy voting
advice businesses to complete the formulation of their voting advice
and deliver such advice to their clients in a timely manner? Are there
additional timing considerations or logistical challenges that we
should take into account?
28. Should there generally be a review and feedback period and a
final notice of voting advice, as proposed? Should we allow registrants
(and certain other soliciting persons) more or fewer opportunities to
review the voting advice than proposed? Should a proxy voting advice
business be required to provide the final notice of voting advice only
if the registrant (or certain other soliciting person) provides
comments to the proxy voting advice business during the review and
feedback period and the proxy voting advice business's revisions are
pertinent to such comments? Should the period allotted for the final
notice of
[[Page 66536]]
voting advice be two business days, as proposed? Should it be longer or
shorter?
29. Are there specific ways in which, if we allow the opportunity
for registrants and certain other soliciting persons to review and
provide feedback on the proxy voting advice, questions may arise about
possible influencing of the proxy voting advice by the reviewing
parties? How, if at all, could the independence of the advice be called
into question if other parties reviewed and commented on it? \149\ How
could we address such concerns? For example, would disclosure of the
specific comments raised by the reviewing party and the proxy voting
advice businesses' responses to this feedback help alleviate concerns
about the independence of the advice?
---------------------------------------------------------------------------
\149\ See Glass Lewis Letter, supra note 16, at 8 (noting that
its policy of not engaging with registrants during the solicitation
period preceding the shareholder meeting is due to concerns that
such engagement could be viewed as affecting the independence of the
voting advice provided to its clients).
---------------------------------------------------------------------------
30. What effect will the proposals, if adopted, have on proxy
voting advice businesses' ability to provide timely voting advice to
their clients? What are the anticipated compliance burdens and
corresponding costs that proxy voting advice businesses are expected to
incur as a result of the proposed new conditions? What impact will
these burdens and costs have on proxy voting advice businesses'
clients?
31. Should the proposed amendments allow a proxy voting advice
business to seek reimbursement from registrants and other soliciting
persons of reasonable expenses associated with the review and feedback
period and final notice of voting advice in proposed Rule 14a-
2(b)(9)(ii)? If so, what would constitute reasonable expenses and how
should these amounts be calculated? Should the calculation of these
amounts be dependent on the size or other attributes of the proxy
voting advice business, or on the size of the registrant, or number of
recommendations? Should there be limits on the amount beyond reasonable
expenses for which a proxy voting advice business can seek to be
reimbursed?
32. We proposed to limit the review and feedback period and final
notice of voting advice requirements to only registrants and soliciting
persons conducting non-exempt solicitations. Should the opportunity to
review and provide feedback and receive final notice of voting advice
also be given to other parties, such as shareholder proponents or
persons engaged in exempt solicitations, such as in ``vote no'' or
withhold campaigns?
33. Should the voting advice formulated under the custom policies
established by clients whose specialized needs are not addressed by a
proxy voting advice business's benchmark or specialty policies \150\ be
subject to the proposed review and feedback period and final notice of
voting advice requirements? Are there any confidentiality concerns,
such as the revelation of the client's investment strategies, which
would arise from the ability of registrants or others to review the
advice formulated under these customized policies? If so, is there a
need for a method for distinguishing voting advice formulated under a
proxy voting advice business's benchmark or specialty policy from
advice formulated under a client's custom policy, and what would be the
appropriate method for making this distinction? We note, for example,
at least one major proxy voting advice business asserts that it is not
the ``norm'' for its clients to adopt all or some of the business's
benchmark policy, with the ``vast majority of institutional investors''
opting for ``increasingly more detailed policies with specific views''
on the issues presented for a vote in the proxy materials.\151\
---------------------------------------------------------------------------
\150\ See supra note 116.
\151\ See Glass Lewis Letter, supra note 16, at 2.
---------------------------------------------------------------------------
34. Should the review and feedback period and final notice of
voting advice requirements be a condition to the exemptions in all
cases, as proposed, or should they be required only where a proxy
voting advice business's voting recommendations are adverse to the
reviewing party? In a proxy contest, should we require the review and
feedback period and final notice of voting advice requirements only if
voting recommendations are adverse to the reviewing party? In the case
of a split vote recommendation, who should have the right to review the
voting advice?
35. Would the proposed review and feedback period and final notice
of voting advice requirements work effectively in the context of a
contested solicitation? Are there unique challenges or specific issues
with the parties' compliance with these proposed requirements that are
foreseeable in contested solicitations?
36. Should we require the entirety of the proxy voting advice,
including separate specialty reports,\152\ to be provided to the
reviewing party or only excerpts or certain reports? If the latter,
which excerpts or reports? How should the scope of any such excerpts or
reports be determined? Should only the portions of the voting advice
that are adverse to the registrant or certain other soliciting persons
be subject to the review and feedback period and final notice of voting
advice requirements? Should we require only the factual information
and/or data underlying the advice to be provided to the reviewing
party?
---------------------------------------------------------------------------
\152\ See supra note 116.
---------------------------------------------------------------------------
37. Should proxy voting advice on certain topics or kinds of
proposals be excluded from the proposed review and feedback period and
final notice of voting advice requirements? If so, which ones? If some
are excluded, are there topics or kinds of proposals for which proxy
voting advice should always be subject to the proposed requirements?
38. Are there any risks raised by proxy voting advice businesses
providing advance copies of voting advice (e.g., misuse of material,
nonpublic information, or misappropriation of proprietary information),
and if so, how can such risks be managed?
39. Should we allow proxy voting advice businesses to require
registrants and other soliciting persons to enter into confidentiality
agreements prior to providing their proxy voting advice? If so, should
we specify any terms or parameters of the required confidentiality
agreement? For example should the rule stipulate that the terms of the
confidentiality agreement may be no more restrictive than similar types
of confidentiality agreements the proxy voting advice business uses
with its clients, as proposed? Should we stipulate in the rule that a
proxy voting advice business is not required to comply with the
proposed review and feedback period and final notice of voting advice
requirements unless the reviewing party has entered into an agreement
to keep the information received confidential? Are there similar types
of confidentiality agreements between proxy voting advice businesses
and their clients? If so, what are the terms of those agreements? Is it
appropriate for the rule to address the nature of a private contract
between two parties?
40. Can the confidentiality of information that a proxy voting
advice business would provide to registrants and other soliciting
persons under the proposal be effectively safeguarded? Would it be
feasible for a proxy voting advice business to obtain a confidentiality
agreement from the numerous registrants or soliciting persons with whom
it interacts? Could confidentiality be assured through other means?
[[Page 66537]]
41. Should proxy voting advice businesses be required to include in
their voting advice to clients a hyperlink (or other analogous
electronic medium) to the response by the registrant and certain other
soliciting persons, as a condition to the exemptions in Rules 14a-
2(b)(1) and 14a-2(b)(3)? Are there better methods of making the
response available to the clients of proxy voting advice businesses?
Should the proposed rule provide certain guidelines or limitations on
the responses (e.g., responses may cover only certain topics, such as
disagreements on facts used to formulate the proxy voting advice)?
42. Would the proposed condition that proxy voting advice
businesses include a hyperlink (or other analogous electronic medium)
directing their clients to the registrant's (or certain other
soliciting person's) statement impact clients of proxy voting advice
businesses, such as investment advisers? If so, how?
43. In our view, proxy voting advice businesses would not be liable
for the content of the registrant's (or certain other soliciting
person's) statement solely due to inclusion of a hyperlink (or other
analogous electronic medium) to such a statement in their voting
advice. Should we codify this view in the text of proposed Rule 14a-
2(b)(9)?
44. In instances where proxy voting advice businesses provide
voting execution services (pre-population and automatic submission) to
clients, are clients likely to review a registrant's response to voting
advice? Should we amend Rules 14a-2(b)(1) and 14a-2(b)(3) so that the
availability of the exemptions is conditioned on a proxy voting advice
business structuring its electronic voting platform to disable the
automatic submission of votes in instances where a registrant has
submitted a response to the voting advice? Should we require proxy
voting advice businesses to disable the automatic submission of votes
unless a client clicks on the hyperlink and/or accesses the
registrant's (or certain other soliciting persons') response, or
otherwise confirms any pre-populated voting choices before the proxy
advisor submits the votes to be counted? What would be the impact and
costs to clients of proxy voting advice businesses of disabling pre-
population or automatic submission of votes? Could there be effects on
registrants? For example, if a proxy voting advice business were to
disable the automatic submission of clients' votes, could that deter
some clients from submitting votes at all, thereby affecting a
registrant's ability to achieve quorum for an annual meeting? If we
were to adopt such a condition, what transitional challenges or
logistical issues would disabling pre-population or automatic
submission of votes present for proxy voting advice businesses, and how
could those challenges or issues be mitigated?
45. Should we permit proxy voting advice businesses to cure any
unintentional or immaterial failure to comply with the proposed
conditions so long as they make a good faith and reasonable effort, as
proposed? We have proposed that the determination of whether a good
faith and reasonable effort has been made should depend on the
particular facts and circumstances. Is there a need for further clarity
on the actions that may be needed to satisfy this standard? If so, what
would be appropriate to consider in satisfying this standard?
46. Should we prescribe a more detailed framework or establish
procedural guidelines to help proxy voting advice businesses manage
their interactions with registrants and certain other soliciting
persons under proposed Rules 14a-2(b)(9)(ii) and (iii)? If so, what
would be the appropriate framework?
47. What steps would proxy voting advice businesses need to take to
update their systems and procedures such that they would reasonably be
able to comply with the new conditions of proposed Rule 14a-2(b)(9)?
Are there other steps that proxy voting advice businesses would need to
take, such as re-negotiating contracts with their clients? What are the
associated costs that proxy voting advice businesses would be
anticipated to incur as a result? If the proposal is adopted, how much
preparatory time would a proxy voting advice business require following
adoption of the proposed amendments, to ensure that its systems and
procedures are equipped to facilitate the business's compliance with
the new rules?
48. Should proxy voting advice businesses be required to disclose
the nature (e.g., frequency, format, substance, etc.) of their
communication with registrants (and certain other soliciting persons)
to their clients or publicly?
49. What factors and/or conditions are primarily responsible for
the incidence of factual errors and methodological weaknesses in proxy
voting advice businesses' analyses? How effective would our proposal
for standardized review and feedback and opportunity to include
responses to the proxy voting advice be in addressing these factual
errors and methodological weaknesses?
50. Are there better approaches for addressing factual errors and
methodological weaknesses in proxy voting advice businesses' analyses?
51. To what extent have factual errors or methodological weaknesses
in proxy voting advice businesses' analyses resulted in impaired voting
advice or adversely affected the ability of proxy voting advice
businesses' clients to vote securities effectively?
C. Proposed Amendments to Rule 14a-9
Rule 14a-9 prohibits any proxy solicitation from containing false
or misleading statements with respect to any material fact at the time
and in the light of the circumstances under which the statements are
made.\153\ In addition, such solicitation must not omit to state any
material fact necessary in order to make the statements therein not
false or misleading.\154\ Even solicitations that are exempt from the
federal proxy rules' information and filing requirements are subject to
this prohibition, as ``a necessary means of assuring that
communications which may influence shareholder voting decisions are not
materially false or misleading.'' \155\ This includes proxy voting
advice that is exempt under Rules 14a-2(b)(1) and (b)(3). The
Commission has previously stated that the furnishing of proxy voting
advice, while exempt from the information and filing requirements,
remains subject to the prohibition on false and misleading statements
in Rule 14a-9.\156\ We continue to believe that subjecting proxy voting
advice businesses to the same antifraud standard as registrants and
other persons engaged in soliciting activities is appropriate in the
public interest and for the protection of investors. In recent
Commission guidance,\157\ we specifically addressed the application of
Rule 14a-9 to proxy voting advice, stating that:
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\153\ 17 CFR 240.14a-9.
\154\ Id.
\155\ 1979 Adopting Release, supra note 36, at 48942.
\156\ See Concept Release, supra note 2, at 43010.
\157\ See Question and Response 2 of Commission Interpretation
on Proxy Voting Advice, supra note 19, at 11.
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Any person engaged in a solicitation through proxy voting advice
must not make materially false or misleading statements or omit
material facts, such as information underlying the basis of its advice
or which would affect its analysis and judgments, that would be
required to make the advice not misleading. For example, the provider
of the proxy voting advice should consider whether, depending on the
particular statement, it may need to disclose [certain] types of
information in
[[Page 66538]]
order to avoid a potential violation of Rule 14a-9.\158\
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\158\ Id. at 12.
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The types of information a proxy voting advice business may need to
disclose could include the methodology used to formulate the proxy
voting advice, sources of information on which the advice is based, or
material conflicts of interest that arise in connection with providing
the advice, without which the proxy voting advice may be
misleading.\159\
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\159\ Id.
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Currently, the text of Rule 14a-9 provides four examples of what
may be misleading within the meaning of the rule. These are:
Predictions as to specific future market values;
Material which directly or indirectly impugns character,
integrity or personal reputation, or directly or indirectly makes
charges concerning improper, illegal or immoral conduct or
associations, without factual foundation;
Failure to so identify a proxy statement, form of proxy
and other soliciting material as to clearly distinguish it from the
soliciting material of any other person or persons soliciting for the
same meeting or subject matter; and
Claims made prior to a meeting regarding the results of a
solicitation.
Consistent with the Commission's recent guidance, we are proposing
to amend the list of examples in Rule 14a-9 to highlight the types of
information that a proxy voting advice business may, depending upon the
particular facts and circumstances, need to disclose to avoid a
potential violation of the rule. Thus, the amended rule would list
failure to disclose information such as the proxy voting advice
business's methodology, sources of information and conflicts of
interest as an example of what may be misleading within the meaning of
the rule.
In addition, we are aware of concerns that may arise when proxy
voting advice businesses make negative voting recommendations based on
their evaluation that a registrant's conduct or disclosure is
inadequate, notwithstanding that the conduct or disclosure meets
applicable Commission requirements.\160\ Without additional context or
clarification, clients may mistakenly infer that the negative voting
recommendation is based on a registrant's failure to comply with the
applicable Commission requirements when, in fact, the negative
recommendation is based on the determination that the registrant did
not satisfy the criteria used by the proxy voting advice business. If
the use of the criteria and the material differences between the
criteria and the applicable Commission requirements are not clearly
conveyed to proxy voting advice businesses' clients, there is a risk
that the clients may make their voting decisions based on a
misapprehension that a registrant is not in compliance with the
Commission's standards or requirements. Similar concerns exist if, due
to the lack of clear disclosures, clients are led to mistakenly believe
that the unique criteria used by the proxy voting advice businesses
were approved or set by the Commission.
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\160\ See, e.g., Business Roundtable Letter 1, supra note 94, at
12 (expressing concern over recommendations by proxy advisory firms
to vote against (i) directors that do not meet the firms' own
definition of ``independence'' and (ii) directors on governance
committees where the registrant has excluded shareholder proposals
through the Commission staff's no-action letter process); Letter
from Tom Quaadman, Vice President, U.S. Chamber of Commerce Center
for Capital Markets Competitiveness (Feb. 24, 2014), at 2-3,
available at https://www.sec.gov/comments/4-670/4670-12.pdf
(discussing the practice by proxy advisory firms of adopting
policies that favored annual shareholder votes on executive
compensation, notwithstanding that the Commission's Rule 14a-21(a)
[17 CFR 240.14a-21] requires such a vote no less than once every
three years); Timothy Doyle, The Realities of Robo-Voting, American
Council for Capital Formation 9 (Nov. 2018), http://accfcorpgov.org/wp-content/uploads/ACCF-RoboVoting-Report_11_8_FINAL.pdf (``[In
cases where] limited legal disclosures are actually required, a
proxy advisory recommendation drawn from an unaudited disclosure can
in many cases create a new requirement for companies--one that adds
cost and burden beyond existing securities disclosures.'').
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For example, if a proxy voting advice business were to recommend
against the election of a director who serves on the registrant's audit
committee on the basis that the director is not independent under the
proxy voting advice business's independence standard for audit
committee members, and the standard applied by the proxy voting advice
business is more limiting than the Commission's rules,\161\ it may be
necessary for the proxy voting advice business to make clear that the
business's recommendation is based on its own different independence
standard, rather than the Commission's standard, in order for such
recommendation to be not misleading.
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\161\ See Exchange Act Rule 10A-3 (specifying the independence
standards for members of the audit committee). Further, Item 407 of
Regulation S-K requires identification of each nominee for director
that is ``independent'' under the standards of independence provided
in Item 407(a)(1). 17 CFR 229.407(a)(1).
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Similarly, a concern could arise if a proxy voting advice business
recommends that clients vote against a say-on-pay proposal \162\ of a
smaller reporting company (``SRC'') \163\ that provides scaled
executive compensation disclosure in compliance with Commission rules
for SRCs,\164\ rather than the expanded disclosure required of larger
registrants.\165\ To the extent that such a proxy voting advice
business does not make clear to its clients that it is making a
negative voting recommendation based on its own disclosure criteria,
notwithstanding that the registrant has complied with the compensation
disclosure standards established by the Commission, the proxy voting
advice business's clients may misunderstand the basis for the proxy
voting advice business's recommendation.
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\162\ Rule 14a-21 under the Securities Exchange Act of 1934
requires, among other things, companies soliciting proxies for an
annual or other meeting of shareholders at which directors will be
elected to include a separate resolution subject to a shareholder
advisory vote to approve the compensation of named executive
officers.
\163\ A smaller reporting company is defined in Item 10(f)(1) of
Regulation S-K [17 CFR 229.10(f)(1)] as an issuer that is not an
investment company, an asset-backed issuer (as defined in Sec.
229.1101), or a majority-owned subsidiary of a parent that is not a
smaller reporting company and that:
(i) Had a public float of less than $250 million; or
(ii) Had annual revenues of less than $100 million and either:
(A) No public float; or
(B) A public float of less than $700 million.
\164\ See Item 402(l) of Regulation S-K. 17 CFR 229.402(l).
\165\ When the Commission adopted comprehensive amendments to
its executive compensation and related person disclosure
requirements in 2006, it expressly provided certain scaled
disclosure requirements for smaller issuers, in recognition of the
fact that: (i) The executive compensation arrangements of smaller
issuers are typically less complex than those of other public
companies and (ii) satisfying disclosure requirements designed to
capture more complicated compensation arrangements might impose new,
unwarranted burdens on small business issuers. See Executive
Compensation and Related Person Disclosure, Release No. 33-8732A [71
FR 53158 (Sept. 8, 2006)], at 53192.
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To address these concerns, the proposed amendment would add as an
example of what may be misleading within the meaning of Rule 14a-9,
depending upon particular facts and circumstances, the failure to
disclose the use of standards or requirements that materially differ
from relevant standards or requirements that the Commission sets or
approves.\166\ We
[[Page 66539]]
wish to emphasize, however, that including such an example is not meant
to imply that it would be inappropriate for proxy voting advice
businesses to use standards or criteria that are different from
Commission standards or requirements when formulating proxy voting
advice. Shareholders may use any standards or criteria when making
their proxy voting decisions, and proxy voting advice businesses and
their clients may use any standards or criteria for proxy voting
advice. By including this example, our focus is on ensuring that any
advice provided to those clients is not materially misleading with
respect to its underlying bases.
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\166\ See note (e) to proposed Rule 14a-9. We understand that
some proxy voting advice businesses currently may be providing this
type of disclosure, as well as some of the other disclosures
described in proposed note (e). Examples of standards or
requirements that the Commission approves are the listing standards
of the registered national securities exchanges, such as the New
York Stock Exchange (NYSE). The SEC supervises, and is authorized to
approve rules promulgated by, the NYSE and other national securities
exchanges pursuant to Section 19 of the Exchange Act.
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The ability of a client of a proxy voting advice business to make
voting decisions is affected by the adequacy of the information it uses
to formulate such decisions. As we recently discussed in a separate
release, investment advisers may seek information of the type we are
proposing from proxy voting advice businesses when exercising voting
authority on behalf of clients.\167\ The proposed amendments are
designed to help ensure that proxy voting advice businesses' clients
are provided the information they need to make fully informed decisions
and to clarify the potential implications of Rule 14a-9.
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\167\ See Question and Response 3 of Commission Guidance on
Proxy Voting Responsibilities, supra note 9, at 17-20.
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Request for Comment
52. Is the proposal to amend the list of examples in Rule 14a-9
necessary in light of the Commission's recent guidance specifically
underscoring the applicability of Rule 14a-9 to proxy voting advice?
\168\ Should the proposal to amend Rule 14a-9 list different or
additional examples and, if so, which examples?
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\168\ See Question and Response 2 of Commission Interpretation
on Proxy Voting Advice, supra note 19, at 11-13.
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53. To what extent do proxy voting advice businesses currently
apply their own standards or criteria that materially differ from those
set or approved by the Commission, and how well do they alert clients
to these differences when it may impact their voting advice?
54. Should the proposed amendment refer only to standards or
requirements that the Commission sets or approves or is a wider scope
(i.e., rules of other legal or regulatory bodies) more appropriate? If
a wider scope is preferable, should the regulatory standards of state
or foreign regulatory bodies also be referenced?
55. Alternatively, instead of amending Rule 14a-9 as proposed,
should we require, as an additional condition under proposed Rule 14a-
2(b)(9), that a proxy voting advice business include in its voting
advice (and in any electronic medium used to deliver the proxy voting
advice) disclosure of its use or application, in connection with such
proxy voting advice, of standards that materially differ from standards
or requirements that the Commission sets or approves?
D. Transition Period
We recognize that, if adopted, the proposed amendments would
require proxy voting advice businesses to develop processes and systems
to comply with the proposed conditions.\169\ As such, we propose to
provide a one-year transition period after the publication of a final
rule in the Federal Register to give affected parties sufficient time
to comply with the proposed new requirements. We request comment on the
specific challenges that would be posed in implementing the proposed
amendments, including those related to timing and the need for a
transition period to address these issues.
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\169\ See supra Section II.B.2.c.; supra note 145 and
accompanying text (discussing potential logistical issues associated
with the proposed amendments to allow registrants and certain other
soliciting persons the opportunity to review and respond to proxy
voting advice).
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Request for Comment
56. Are there any challenges that proxy voting advice businesses,
their clients, or registrants anticipate in undertaking to develop
systems and processes to implement the proposed amendments? If so, what
are those challenges, and how could they be mitigated?
57. Is the proposed transition period appropriate? If not, how long
should the transition period be and why? Please be specific.
58. Are there any other accommodations that we should consider for
particular types of proxy voting advice businesses, registrants, or
circumstances? Are there other transition issues or accommodations that
we should consider?
Request for Comment--General Considerations
We request and encourage interested persons to submit comments on
any aspects of the proposed amendments, other matters that may have an
impact on the amendments, and any suggestions for additional or
alternative changes. With respect to any comments, we note that they
are of the greatest assistance to our rulemaking initiative if
accompanied by supporting data and analysis of the issues addressed by
those comments, particularly quantitative information as to the costs
and benefits, and any alternatives to the proposals where appropriate.
Where alternatives to the proposal are suggested, please include
information as to the costs and benefits of those alternatives.
59. How effective would the proposed amendments be in facilitating
the ability of proxy voting advice businesses' clients to obtain the
information they need to make informed voting determinations, including
for investment advisers that are exercising voting authority on behalf
of clients?
60. Are there any other conditions that should apply to proxy
voting advice businesses seeking to rely on the exemptions in Rules
14a-2(b)(1) and (b)(3)? If so, what are these conditions?
61. Are there other approaches that are better suited to accomplish
the Commission's objectives? For example, should proxy voting advice
businesses be required to develop policies and procedures to help
ensure that conflicts of interest are dealt with appropriately and to
improve the accuracy of the information on which their proxy voting
advice is based?
62. What effect would these proposals, if adopted, have on
competition in the proxy advisory industry? Would adoption of the
proposals increase barriers to entry into the market for potential
competitors or lead to unhealthy market concentration within the proxy
advisory industry or, ultimately, lead to decline in the quality of
proxy voting advice provided to investors?
63. To the extent that adoption of the proposed amendments would
limit the ability of smaller proxy voting advice businesses or
potential new market entrants to operate and compete in the market for
these services, should they be subject to the additional conditions in
proposed Rule 14a-2(b)(9) in order to rely on the exemptions in Rules
14a-2(b)(1) and (b)(3)? If not, what should the criteria be for
determining who is not subject to Rule 14a-2(b)(9)? For example, should
we base the availability of an accommodation for smaller proxy voting
advice businesses on annual revenues, number of clients or market
share? Would investment advisers or other institutional investors be
less likely to hire proxy voting advice businesses that take advantage
of such an accommodation? Are there other accommodations we should
consider in lieu of or in addition to this exemption
[[Page 66540]]
for certain proxy voting advice businesses?
III. Economic Analysis
A. Introduction
We are proposing amendments to Exchange Act Rule 14a-2(b) to
condition the availability of existing exemptions from the information
and filing requirements of the proxy rules in Rules 14a-2(b)(1) and
(b)(3) on all proxy voting advice businesses providing the following in
connection with their proxy voting advice: (i) Enhanced conflicts of
interest disclosure; (ii) a standardized opportunity for review and
feedback by registrants and certain other soliciting persons of proxy
voting advice before a proxy voting advice business disseminates its
proxy voting advice to clients; and (iii) the option for registrants
and certain soliciting persons to request that proxy voting advice
businesses include in their proxy voting advice (and on any electronic
medium used to distribute the advice) a hyperlink or other analogous
electronic medium directing the recipient of the advice to a written
statement that sets forth the registrant's or soliciting person's views
on the proxy voting advice.\170\ We also are proposing to codify the
Commission's interpretation that, as a general matter, proxy voting
advice constitutes a solicitation within the meaning of Exchange Act
Rule 14a-1(1). Finally, we are proposing to amend the list of examples
in Exchange Act Rule 14a-9 to add as an example of a potentially
material misstatement or omission within the meaning of the rule,
depending upon particular facts and circumstances, the failure to
disclose information such as the proxy voting advice business's
methodology, sources of information, conflicts of interest, or the use
of standards that materially differ from relevant standards or
requirements that the Commission sets or approves.
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\170\ The registrant's or soliciting person's written statement
would constitute a ``solicitation'' under Exchange Act Rule 14a-1(l)
and be subject to the anti-fraud prohibitions of Exchange Act Rule
14a-9, as well as the filing requirements of Exchange Act Rule 14a-
12.
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We are sensitive to the costs and benefits of our rules. When
engaging in rulemaking that requires the Commission to consider or
determine whether an action is necessary or appropriate in the public
interest, Section 3(f) of the Exchange Act requires that the Commission
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital
formation.\171\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission to consider the effects on competition of any
rules the Commission adopts under the Exchange Act and prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\172\
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\171\ 15 U.S.C. 78c(f).
\172\ 15 U.S.C. 78w(a)(2).
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The parties affected by the proposed amendments would include proxy
voting advice businesses, clients of proxy voting advice businesses
such as investment advisers and institutional investors, retail
investors, as well as registrants and other soliciting persons.
We have considered the economic effects of the proposed amendments,
including their effects on competition, efficiency, and capital
formation. Many of the effects discussed below cannot be quantified.
Consequently, while we have, wherever possible, attempted to quantify
the economic effects expected from this proposal, much of the
discussion remains qualitative in nature. Where we are unable to
quantify the economic effects of the proposed amendments, we provide a
qualitative assessment of the potential effects and encourage
commenters to provide data and information that would help quantify the
benefits, costs, and the potential impacts of the proposed amendments
on efficiency, competition, and capital formation.
1. Overview of Proxy Voting Advice Businesses' Role in the Proxy
Process
Every year, investment advisers and other institutional investors,
whether on behalf of clients or on their own behalf, face decisions on
how to vote the shares on a significant number of matters that are
subject to a proxy vote, ranging from the election of directors and the
approval of equity compensation plans to shareholder proposals
submitted under Exchange Act Rule 14a-8.\173\ These investment advisers
and other institutional investors also face voting determinations when
a matter is presented to shareholders for approval at a special
meeting, such as a merger or acquisition or a sale of all or
substantially all of the assets of the company. As described above,
these firms play a large role in proxy voting because of their large
aggregate percentage ownership stake in many U.S. public
companies.\174\ Voting can be resource intensive, involving organizing
proxy materials, performing diligence on portfolio companies and
matters to be voted on, determining how votes should be cast, and
submitting proxy cards to be counted. To assist them in their voting
decisions, investment advisers and other institutional investors
frequently hire proxy voting advice businesses.\175\
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\173\ 17 CFR 240.14a-8; see, e.g., Blackrock Letter, supra note
144, at 1 (``[A]s a fiduciary to its clients, Blackrock engages with
portfolio companies and votes proxies globally at over 17,000
meetings annually.''); NYC Comptroller Letter, supra note 17, at 4
(``For the year ending June 30, 2018, our office cast 71,000
individual ballots at 7,000 shareowner meetings in 84 markets around
the world . . . .''); OPERS Letter, supra note 8, at 2 (``OPERS
receives in excess of 10,000 proxies in any given proxy season.'').
\174\ See supra note 8 and accompanying text. As of the end of
2018, investment companies held approximately 30 percent of the
shares of U.S.-listed equities outstanding. See 2019 Investment
Company Fact Book, Investment Company Institute (2019), https://www.ici.org/pdf/2019_factbook.pdf, at 37.
\175\ See 2016 GAO Report, supra note 9, at 5.
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Investment advisers and other institutional investors may retain
proxy voting advice businesses to perform a variety of functions,
including the following:
Analyzing and making voting recommendations on the matters
presented for shareholder vote and included in the registrants' proxy
statements;
Executing proxy votes (or voting instruction forms) in
accordance with their instructions, which may include voting the shares
in accordance with a customized proxy voting policy resulting from
consultation between a proxy voting advice business and its
client,\176\ the proxy voting advice businesses' proxy voting policies,
or the client's own voting policy;
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\176\ See ISS Letter, supra note 9, at 1 (``ISS enables our
clients to receive customized proxy voting recommendations based on
a client's specific customized voting guidelines. ISS implements
more than 400 custom voting policies on behalf of institutional
investor clients. As of January 1, 2018, approximately 85% of ISS'
top 100 clients used a custom proxy voting policy. During calendar
year 2017, approximately 87% of the total shares processed by ISS on
behalf of clients globally were linked to such policies.'').
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Assisting with the administrative tasks associated with
voting and keeping track of the large number of voting determinations;
and
Providing research and identifying potential risk factors
related to corporate governance.
In the absence of the services offered by proxy voting advice
businesses, investment advisers and other clients of these businesses
may require considerable resources to independently conduct the work
necessary to analyze and make voting determinations.
Proxy voting advice businesses generally are compensated on a fee
basis for their services, and they are able to
[[Page 66541]]
capture economies of scale for several of the services they provide,
including supplying voting advice to clients.\177\ As a consequence,
investment advisers and other institutional investors have found
efficiencies in hiring these businesses to perform voting-related
services, rather than performing them in-house.\178\
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\177\ See Chester S. Spatt, Milken Institute, Proxy Advisory
Firms, Governance, Failure, and Regulation 7 (2019) (``Spatt
2019''), available at https://www.milkeninstitute.org/sites/default/files/reports-pdf/Proxy%20Advisory%20Firms%20FINAL.pdf.
\178\ See Concept Release, supra note 2, at 42983.
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Institutional investors, who hold a majority of the votes cast in
the U.S. public equity markets, use to some extent the voting advice
provided by proxy voting advice businesses. In 2007, the GAO found that
among 31 institutional investors, large institutions relied less than
small institutions on the research and recommendations offered by proxy
voting advice businesses. Large institutional investors indicated that
their reliance on proxy voting advice businesses was limited because
they: (i) Conduct their own research and analyses to make voting
determinations and use the research and recommendations offered by
proxy voting advice businesses only to supplement such analyses; (ii)
develop their own voting policies, which the proxy voting advice
businesses are responsible for executing; and (iii) contract with more
than one proxy voting advice business to gain a broader range of
information on proxy issues.\179\ In contrast, small institutional
investors said they had limited resources to conduct their own research
and tended to rely more heavily on the research and recommendations
offered by proxy voting advice businesses.\180\ The findings of a 2016
GAO study of 11 institutional investors were similar.\181\
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\179\ See 2007 GAO Report, supra note 9, at 17-18; see also
Blackrock Letter, supra note 144, at 6 (``Blackrock's Investment
Stewardship team has more than 40 professionals responsible for
developing independent views on how we should vote proxies on behalf
of our clients.''); NYC Comptroller Letter, supra note 17, at 4
(``We have five full-time staff dedicated to proxy voting during
peak season, and our least-tenured investment analyst has 12 years'
experience applying the NYC Funds' domestic proxy voting
guidelines.''); OPERS Letter, supra note 8, at 2 (``OPERS also
depends heavily on the research reports we receive from our proxy
advisory firm. These reports are critical to the internal analyses
we perform before any vote is submitted. Without access to the
timely and independent research provided by our proxy advisory firm,
it would be virtually impossible to meet our obligations to our
members.''); 2018 Roundtable Transcript, supra note 40, at 194
(comments of Mr. Scot Draeger) (``If you've ever actually reviewed
the benchmarks, whether it's ISS or anybody else, they're very
extensive and much more detailed than small firm[s] like ours could
ever develop with our own independent research.'').
\180\ 2007 GAO Report, supra note 9, at 17-18.
\181\ See 2016 GAO Report, supra note 9, at 2.
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Research on the role of proxy voting advice businesses in proxy
voting has produced inconclusive results. For example, with respect to
the amount of influence that proxy voting advice has on proxy votes,
some studies suggest that proxy voting advice has substantial influence
on proxy votes,\182\ and some studies suggest a more limited
influence.\183\ Further, existing research has not attempted to
characterize the amount of influence that one would expect proxy voting
advice to have given the business purpose \184\ of hiring a proxy
voting advice business in the first place. As a result, existing
research provides limited information on the extent to which proxy
voting advice business clients incorporate proxy voting advice into
their voting determinations relative to what would be expected given
such an advice relationship.
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\182\ See Cindy R. Alexander, Mark A. Chen, Duane J. Seppi, &
Chester S. Spatt, Interim News and the Role of Proxy Voting Advice,
23 Rev. Fin. Stud. 4419, 4422 (2010); Alon Brav, Wei Jiang, Tao Li,
& James Pinnington, Columbia Business School Research Paper No. 18-
16, Picking Friends Before Picking (Proxy) Fights: How Mutual Fund
Voting Shapes Proxy Contests 4 (2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3101473; James R.
Copland, David F. Larcker and Brian Tayan, Stanford Business School
Closer Look Series, The Big Thumb on the Scale: An Overview of the
Proxy Advisory Industry 3 (2018), available at https://www.gsb.stanford.edu/sites/gsb/files/publication-pdf/cgri-closer-look-72-big-thumb-proxy-advisory.pdf; Manhattan Institute, supra
note 24, at 6; Albert Verdam, VU University of Amsterdam, An
Exploration of the Role of Proxy Advisors in Proxy Voting 23 (2006),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=978835.
\183\ See Stephen Choi, Jill Fisch & Marcel Kahan, The Power of
Proxy Advisors: Myth or Reality?, 59 Emory L.J. 869, 905-06 (2010);
Alon Brav, Wei Jiang, Tao Li, & James Pinnington, Columbia Business
School Research Paper No. 18-16, Picking Friends Before Picking
(Proxy) Fights: How Mutual Fund Voting Shapes Proxy Contests 35
(2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3101473. The authors find that larger mutual
fund families cast votes ``in ways completely independent from what
are recommended by the advisors.'' Alon Brav et al., supra note 182,
at 35.
\184\ For example, Spatt argues that the use of proxy advisory
firms to produce relevant information for proxy voting and to make
recommendations is an efficient market response to the cost of
producing the relevant information oneself. Spatt 2019, supra note
177, at 8.
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Additionally, research on the role of proxy voting advice
businesses in proxy voting has produced inconclusive results with
respect to the quality of voting advice. For example, proxy voting
advice businesses have been the subject of criticism for potentially
being influenced by conflicts of interest,\185\ producing voting advice
that contains inaccuracies, and utilizing one-size-fits-all
methodologies in evaluating a diverse array of registrants.\186\ To
assess the quality of voting advice, studies have sought to examine
stock market reactions to announcements by registrants that the
registrants will adopt policies consistent with those recommended by
proxy voting advice businesses.\187\ Such an approach, however, ignores
the possibility that proxy voting advice business clients may have
goals other than, or in addition to, share value maximization or may
have investment objectives that would not be achieved solely on the
basis of a positive market reaction.\188\ Because investors may be
willing to forgo share value to the extent that doing so allows the
investor to achieve other goals, we are unable conclusively to infer
recommendation quality from stock market reactions.
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\185\ For example, some proxy voting advice businesses provide
consulting services to registrants on corporate governance or
executive compensation matters, such as assistance in developing
proposals to be submitted for shareholder vote. See Concept Release,
supra note 2, at 42989. As a result, some proxy voting advice
businesses provide voting recommendations regarding a registrant to
their institutional investor clients on matters for which they may
also provide consulting services to the registrant.
\186\ See supra note 70.
\187\ See generally David F. Larcker, Allan L. McCall & Gaizka
Ormazabal, Outsourcing Shareholder Voting to Proxy Advisory Firms,
58 J.L. & Econ. 173 (2015). The authors find that when registrants
adjust their compensation program to be more consistent with
recommendations of proxy voting advice businesses, the stock market
reaction is statistically negative.
\188\ See Spatt 2019, supra note 177, at 4; Patrick Bolton, Tao
Li, Enrichetta Ravina, & Howard L. Rosenthal, Columbia Business
School Research Paper No. 18-21, Investor Ideology 37 (2019),
available at https://www.nber.org/papers/w25717.pdf; Gregor Matvos &
Michael Ostrovsky, Heterogeneity and Peer Effects in Mutual Fund
Proxy Voting, 98 J. Fin. Econ. 90 (2010); Manhattan Institute, supra
note 24, at 6; Albert Verdam, supra note 182, at 12.
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Finally, studies have shown theoretically that, given certain
assumptions, investors could be led to rely too much on proxy voting
advice.\189\ The over-reliance stems from
[[Page 66542]]
a collective action problem among shareholders with respect to voting
because shareholders do not internalize the positive externality of
their actions on other shareholders. We note, however, that this
conclusion relies on the assumption that investors have the singular
goal of share value maximization. The applicability of their results is
limited by the extent to which investors have goals other than, or in
addition to, share value maximization.
---------------------------------------------------------------------------
\189\ See generally Andrey Malenko & Nadya Malenko, Proxy
Advisory Firms: The Economics of Selling Information to Voters, 74
J. FIN. 2441 (2019). In their theoretical model, the authors assume
shareholders have perfectly aligned incentives with all shareholders
agreeing on share value maximization as the singular goal of the
firm; proxy advice is provided by a single monopolistic proxy
advisory firm; and, shareholders follow proxy advisory firm advice
without exception. Additionally, the authors assume that when
deciding whether to invest in their own independent research,
shareholders believe that their votes will be pivotal to the vote
outcome. The ownership structure of the company is key to the
reported findings: The paper actually shows that proxy advisory
services are valuable when ownership is sufficiently dispersed. The
negative affect of the use of proxy advisors is likely to arise in
companies with more concentrated ownership, but not very
concentrated because in such cases shareholders again find proxy
advisory services to be valuable.
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B. Economic Baseline
The baseline against which the costs, benefits, and the impact on
efficiency, competition, and capital formation of the proposed
amendments are measured consists of the current regulatory requirements
applicable to registrants, proxy voting advice businesses, and
investment advisers and other clients of these businesses, as well as
current industry practices used by these entities in connection with
the preparation, distribution, and use of proxy voting advice.
1. Affected Parties and Current Regulatory Framework
a. Clients of Proxy Voting Advice Businesses as Well as Underlying
Investors
Clients that use proxy voting advice businesses for voting advice
would be affected by the proposed rule amendments. In turn, investors
and other groups on whose behalf these clients make voting
determinations would be affected. As discussed in greater detail below,
to our knowledge, the proxy voting advice industry in the United States
consists of five major firms.\190\ Three of the five firms are
registered with the Commission as investment advisers and as such,
provide annually updated disclosure with respect to their types of
clients on Form ADV. Table 1 below reports client types as disclosed by
these three proxy voting advice businesses.
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\190\ These firms are (1) Institutional Shareholder Services
(``ISS''), (2) Glass Lewis & Co. (``Glass Lewis''), (3) Egan-Jones
Proxy Services (``Egan-Jones''), (4) Segal Marco Advisors, and (5)
ProxyVote Plus.
Table 1--Number of Clients by Client Type
----------------------------------------------------------------------------------------------------------------
Number of clients \a\
-----------------------------------------------
Type of client \b\ ProxyVote Plus Segal Marco
ISS \c\ \d\ Advisors \e\
----------------------------------------------------------------------------------------------------------------
Banking or thrift institutions.................................. 130 0 0
Investment companies............................................ 183 0 0
Pooled investment vehicles...................................... 356 0 24
Pension and profit sharing plans................................ 189 131 63
Charitable organizations........................................ 113 0 0
State or municipal government entities.......................... 12 0 0
Other investment advisers....................................... 863 0 0
Insurance companies............................................. 49 0 0
Sovereign wealth funds and foreign official institutions........ 9 0 0
Corporations or other businesses not listed above............... 127 0 0
Other........................................................... \f\ 208 0 \g\ 31
-----------------------------------------------
Total....................................................... 2,239 131 118
----------------------------------------------------------------------------------------------------------------
\a\ Form ADV filers indicate the approximate number of clients attributable to each type of client. If the filer
has fewer than five clients in a particular category (other than investment companies, business development
companies, and pooled investment vehicles), they may indicate that they have fewer than five clients rather
than reporting the number of clients.
\b\ The table excludes client types for which all three filers indicated either zero clients or less than five
clients.
\c\ The current Form ADV filing for ISS is available at https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=111940.
\d\ The current Form ADV filing for ProxyVote Plus is available at https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=122222.
\e\ The current Form ADV filing for Segal Marco Advisors is available at https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=114687. We note that Segal Marco Advisors lists two bases for
registration: (i) That they are a large advisory firm, and (ii) that they are a pension consultant with
respect to assets of plans having an aggregate value of at least $200,000,000 that qualifies for the exemption
in Rule 203A-2(a) under the Advisers Act. As a result, some of their clients may not use Segal Marco Advisors
for proxy voting advice.
\f\ ISS describes clients classified as ``Other'' as ``Academic, vendor, other companies not able to identify as
above.'' See supra note c.
\g\ See supra note e.
Table 1 illustrates the types of clients that utilize the services
of proxy voting advice businesses. For example, while investment
advisers constitute a 39 percent plurality of clients for ISS, other
types of clients include pooled investment vehicles (16 percent),
pension and profit sharing plans (8 percent), and investment companies
(8 percent). Other users of the services offered by proxy voting advice
businesses include corporations, charitable organizations, insurance
companies, and academic endowments. Together, these various users of
proxy voting advice business services make voting determinations that
affect the interests of a wide array of retail investors, beneficiaries
and other constituents.
b. Proxy Voting Advice Businesses
Proxy voting advice businesses also would be affected by the
proposed amendments. As the Commission has previously stated, voting
advice provided by a business such as a proxy voting advice firm that
markets its expertise in researching and analyzing proxy issues for
purposes of helping its clients make proxy voting determinations (i.e.,
not merely performing administrative or ministerial services) generally
constitutes a solicitation subject to federal proxy rules because it is
``a communication to security holders under circumstances reasonably
calculated to result in the procurement, withholding or revocation of a
proxy.'' \191\ Proxy voting advice businesses engaged in activities
constituting solicitations typically rely
[[Page 66543]]
on two exemptions from the information and filing requirements of the
federal proxy rules: Rules 14a-2(b)(1) and (b)(3).\192\ Where a proxy
voting advice business relies on 14a-2(b)(3), it must disclose to its
clients any significant relationship with the registrant or any of its
affiliates, or a security holder proponent of the matter on which
advice is given, as well as any material interests of the proxy voting
advice business in such matter. Even if exempt from the information and
filing requirements of the federal proxy rules, the furnishing of proxy
voting advice remains subject to the prohibition on false and
misleading statements in Rule 14a-9.\193\
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\191\ See Commission Interpretation on Proxy Voting Advice,
supra note 19, at 47417.
\192\ 17 CFR 240.14a-2(b)(1), (b)(3).
\193\ 17 CFR 240.14a-9.
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As of August 19, 2019, to our knowledge, the proxy advisory
industry in the United States consists of five major firms: ISS, Glass
Lewis, Egan-Jones, Marco Consulting Group (``Marco Consulting''), and
ProxyVote Plus.
ISS, founded in 1985, is a privately-held company that
provides research and analysis of proxy issues, custom policy
implementation, vote recommendations, vote execution, governance data,
and related products and services.\194\ ISS also provides advisory/
consulting services, analytical tools, and other products and services
to corporate registrants through ISS Corporate Solutions, Inc. (a
wholly owned subsidiary).\195\ As of June 2019, ISS had more than 1,800
employees in 30 offices in 13 countries, and covered approximately
44,000 shareholder meetings in 115 countries, annually.\196\ ISS states
that it executes about 10.2 million ballots annually on behalf of those
clients.\197\ ISS is registered with the Commission as an investment
adviser and identifies its work as pension consultant as the basis for
registering as an adviser.\198\
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\194\ See 2016 GAO Report, supra note 9, at 6.
\195\ Id.
\196\ See supra note 18.
\197\ Id.
\198\ See 2016 GAO Report, supra note 9, at 9.
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Glass Lewis, established in 2003, is a privately-held
company that provides research and analysis of proxy issues, custom
policy implementation, vote recommendations, vote execution, and
reporting and regulatory disclosure services to institutional
investors.\199\ As of June 2019, Glass Lewis had more than 360
employees in the U.S., the United Kingdom, Ireland, Germany, and
Australia that provide services to more than 1,300 clients that
collectively manage more than $35 trillion in assets.\200\ Glass Lewis
states that it covers more than 20,000 shareholder meetings across
approximately 100 global markets annually.\201\ Glass Lewis is not
registered with the Commission in any capacity.
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\199\ See 2016 GAO Report, supra note 9, at 7.
\200\ See Glass Lewis, supra note 1869.
\201\ Id.
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Egan-Jones was established in 2002 as a division of Egan-
Jones Ratings Company.\202\ Egan-Jones is a privately-held company that
provides proxy services, such as notification of meetings, research and
recommendations on selected matters to be voted on, voting guidelines,
execution of votes, and regulatory disclosure.\203\ As of September
2016, Egan-Jones' proxy research or voting clients mostly consisted of
mid- to large-sized mutual funds \204\ and the firm covered
approximately 40,000 companies.\205\ Egan-Jones Ratings Company (Egan-
Jones' parent company) is registered with the Commission as a
Nationally Recognized Statistical Ratings Organization.\206\
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\202\ See 2016 GAO Report, supra note 9, at 7.
\203\ Id.
\204\ Id.
\205\ Id. While ISS and Glass Lewis have published updated
coverage statistics on their websites, the most recent data
available for Egan-Jones was compiled in the 2016 GAO Report.
\206\ See Order Granting Registration of Egan-Jones Rating
Company as a Nationally Recognized Statistical Rating Organization,
Exchange Act Release No. 34-57031 (Dec. 21, 2007), available at
https://www.sec.gov/ocr/ocr-current-nrsros.html#egan-jones.
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The proxy advisory segment of Segal Marco Advisors was
originally established in 1988 as Marco Consulting and is a privately-
held company that provides investment analysis and advice and proxy
voting services to a large number of Taft-Hartley pension and public
benefit plans.\207\ Marco Consulting was acquired by Segal Advisors in
2017.\208\ As of July 2019, Segal Marco Advisors votes proxies for
roughly 8,000 companies annually.\209\ Segal Marco Advisors is
registered with the Commission as an investment adviser and identifies
its work as a pension consultant as one basis for registering as an
adviser.\210\
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\207\ See 2016 GAO Report, supra note 9, at 7.
\208\ See History, Segal Marco Advisors, https://www.segalmarco.com/about-us/history/ (last visited Oct. 3, 2019).
\209\ See Corporate Governance and Proxy Voting, Segal Marco
Advisors, https://www.segalmarco.com/services/corporate-governance-and-proxy-voting/ (last visited July 9, 2019).
\210\ See 2016 GAO Report, supra note 9, at 9. Segal Marco
Advisors also indicates assets under management as another basis for
registering as an adviser. See Segal Advisors, Inc., Form ADV (July
1, 2019), available at https://adviserinfo.sec.gov/IAPD/content/ViewForm/crd_iapd_stream_pdf.aspx?ORG_PK=114687.
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ProxyVote Plus is an employee-owned firm established in
2002 to provide proxy voting services to Taft-Hartley pension fund
clients.\211\ ProxyVote Plus conducts internal research and analysis of
voting issues and executes votes based on its guidelines.\212\
ProxyVote Plus reviews and analyzes proxy statements and other
corporate filings and reports annually to its clients on proxy votes
cast on their behalf.\213\ ProxyVote Plus is registered with the
Commission as an investment adviser and identifies its work as a
pension consultant as the basis for registering as an adviser.\214\
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\211\ See 2016 GAO Report, supra note 9, at 7.
\212\ Id. at 7-8.
\213\ Id. at 8.
\214\ See 2016 GAO Report, supra note 9, at 9.
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Of the five proxy voting advice businesses identified, ISS and
Glass Lewis are the largest and most often used for proxy voting
advice.\215\
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\215\ See 2016 GAO Report, supra note 9, at 8, 41 (``In some
instances, we focused our review on Institutional Shareholder
Services (ISS) and Glass Lewis and Co. (Glass Lewis) because they
have the largest number of clients in the proxy advisory firm market
in the United States.''); see also Center on Exec. Comp. Letter,
supra note 24, at 1 (noting that there are ``two firms controlling
roughly 97% of the market share for such services''); Soc. for Corp.
Gov. Letter, supra note 24, at 1 (``While there are five primary
proxy advisory firms in the U.S., today the market is essentially a
duopoly consisting of Institutional Shareholder Services . . . and
Glass Lewis & Co. . . .'').
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c. Registrants and Other Soliciting Persons
Registrants and other soliciting persons also would be affected by
the proposed amendments. Registrants that have a class of equity
securities registered under Section 12 of the Exchange Act as well as
non-registrant parties that conduct proxy solicitations in respect to
those registrants are subject to the federal proxy rules.\216\ In
addition, there are certain issuers that voluntarily file proxy
materials with the Commission. Finally, Rule 20a-1 under the Investment
Company Act subjects all registered management investment companies to
the federal proxy rules.\217\
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\216\ Foreign private issuers are exempt from the federal proxy
rules under Rule 3a12-3(b) of the Exchange Act. See 17 CFR 240.3a12-
3.
We are not aware of any asset-backed issuers that have a class
of equity securities registered under Section 12 of the Exchange
Act. Most asset-backed issuers are registered under Section 15(d) of
the Exchange Act and thus are not subject to the federal proxy
rules. Nine asset-backed issuers had a class of debt securities
registered under Section 12 of the Exchange Act as of December 2018.
As a result, these asset-backed issuers are not subject to the
federal proxy rules.
\217\ Rule 20a-1 under the Investment Company Act requires
registered management investment companies to comply with
regulations adopted pursuant to Section 14(a) of the Exchange Act
that would be applicable to a proxy solicitation if it were made in
respect of a security registered pursuant to Section 12 of the
Exchange Act. See 17 CFR 270.20a-1.
``Registered management investment company'' means any
investment company other than a face-amount certificate company or a
unit investment trust. See 15 U.S.C. 80a-4.
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[[Page 66544]]
As of December 31, 2018, there were 5,746 registrants that had a
class of securities registered under Section 12 of the Exchange Act
(including 98 Business Development Companies (``BDCs'')).\218\ As of
the same date, there were 120 companies that did not have a class of
securities registered under Section 12 of the Exchange Act that
voluntarily filed proxy materials.\219\ As of August 31, 2019 there
were 12,718 registered management investment companies that were
subject to the proxy rules: (i) 12,040 open-end funds, out of which
1,910 were Exchange Traded Funds (``ETFs'') registered as open-end
funds or open-end funds that had an ETF share class; (ii) 664 closed-
end funds; and (iii) 14 variable annuity separate accounts registered
as management investment companies.\220\ The summation of these
estimates yields 18,584 registrants that may be affected to a greater
or lesser extent by the proposed amendments.\221\
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\218\ We estimate the number of registrants with a class of
securities registered under Section 12 of the Exchange Act by
reviewing all Forms 10-K filed during calendar year 2018 with the
Commission and counting the number of unique registrants that
identify themselves as having a class of securities registered under
Section 12(b) or Section 12(g) of the Exchange Act. Foreign private
issuers that filed Forms 20-F and 40-F and asset-backed issuers that
filed Forms 10-D and 10-D/A during calendar year 2018 with the
Commission are excluded from this estimate.
BDCs are all entities that have been issued an 814-reporting
number. Our estimate includes BDCs that may be delinquent or have
filed extensions for their filings, and it excludes 6 wholly-owned
subsidiaries of other BDCs.
\219\ We identify issuers that voluntarily file proxy materials
as those (1) subject to the reporting obligations of Exchange Act
Section 15(d) but that do not have a class of equity securities
registered under Exchange Act Section 12(b) or 12(g) and (2) that
filed any proxy materials during calendar year 2018 with the
Commission. The proxy materials we consider in our analysis are
DEF14A, DEF14C, DEFA14A, DEFC14A, DEFM14A, DEFM14C, DEFR14A,
DEFR14C, DFAN14A, N-14, PRE 14A, PRE 14C, PREC14A, PREM14A, PREM14C,
PRER14A and PRER14C. Form N-14 can be a registration statement and/
or proxy statement. We manually review all Forms N-14 filed during
calendar year 2018 with the Commission and we exclude from our
estimates Forms N-14 that are exclusively registration statements.
To identify issuers reporting pursuant to Section 15(d) but not
registered under Section 12(b) or Section 12(g), we review all Forms
10-K filed in calendar year 2018 with the Commission and count the
number of unique issuers that identify themselves as subject to
Section 15(d) reporting obligations but with no class of equity
securities registered under Section 12(b) or Section 12(g).
\220\ We estimate the number of unique registered management
investment companies based on Forms N-CEN filed between June 2018
and August 2019 with the Commission. Open-end funds are registered
on Form N-1A. Closed-end funds are registered on Form N-2. Variable
annuity separate accounts registered as management investment
companies are trusts registered on Form N-3.
The number of potentially affected Section 12 and Section 15(d)
registrants is estimated over a different time period (i.e., January
2018 to December 2018) than the number of potentially affected
registered management investment companies (i.e., June 2018 to
August 2019) because there is no complete N-CEN data for the most
recent full calendar year (i.e., 2018). Registered management
investment companies started submitting Form N-CEN in September 2018
for the period ended on June 30, 2018 with the Commission.
\221\ The 18,584 potentially affected registrants is the sum of:
5,746 registrants with a class of securities registered
under Section 12 of the Exchange Act;
120 registrants without a class of securities
registered under Section 12 of the Exchange Act that voluntarily
filed proxy materials; and
12,718 registered management investment companies.
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The abovementioned estimates are an upper bound of the number of
potentially affected registrants because not all of these registrants
may file proxy materials related to a meeting for which a proxy voting
advice business issues proxy voting advice in a given year. Out of the
18,584 potentially affected registrants mentioned above, 5,690 filed
proxy materials with the Commission during calendar year 2018.\222\ Out
of the 5,690 registrants, 4,758 (84 percent) were Section 12 or Section
15(d) registrants and the remaining 932 (16 percent) were registered
management investment companies.\223\
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\222\ For details on the estimation of companies that filed
proxy materials with the Commission during calendar year 2018, see
supra note 218.
\223\ According to data from Forms N-CEN filed with the
Commission between June 2018 and August 2019, there were 965
registered management investment companies that submitted matters
for its security holders' vote during the reporting period: (i) 729
open-end funds, out of which 86 were ETFs registered as open-end
funds or open-end funds that had an ETF share class; (ii) 235
closed-end funds; and (iii) 1 variable annuity separate account. See
Form N-CEN Item B.10). The discrepancy in the estimated number of
registered management investment companies submitting proxy filings
(i.e., 932) and Form N-CEN data (i.e., 965) likely is attributable
to the different time periods over which the two statistics are
estimated.
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Further, there were 95 other soliciting persons that submitted
proxy materials with the Commission during calendar year 2018.\224\
---------------------------------------------------------------------------
\224\ We estimate other soliciting persons as the number of
unique CIKs of entities that submitted Forms DEFC14A, DEFN14A, and
DFAN14A during calendar year 2018 with the Commission.
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2. Certain Industry Practices
The proposed amendments would codify existing and create certain
additional obligations for proxy voting advice businesses that rely on
exemptions from the information and filing requirements of the proxy
rules. The current practice of proxy voting advice businesses vary and
to the extent industry participants may already provide similar
information or offer similar review and comment opportunities under
their own practices, such practices could affect our analysis of the
benefits and costs of the proposed amendments.
For example, we are proposing to augment existing obligations by
specifying that detailed disclosure of material conflicts of interest
must be provided, as a condition to relying on the exemptions in Rules
14a-2(b)(1) and (3), in the proxy voting advice and in any electronic
medium used to deliver the advice, including a discussion of the
policies and procedures used to identify, and steps taken to address,
potential and actual conflicts of interest. We are aware that some
proxy voting advice businesses have disclosure practices and procedures
regarding conflicts of interest that may be similar to these proposed
disclosure requirements.\225\ For example, Glass Lewis has noted that
it adds a statement to the front cover of its proxy voting advice when
it determines that there is a potential conflict of interest.\226\
Further, ISS has noted that its proxy voting advice contains a legend
indicating that the subject of the advice may be a client of ISS'
subsidiary, ISS Corporate Solutions, Inc. (ICS).\227\
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\225\ See supra note 76.
\226\ See Glass Lewis Letter, supra note 16, at 9 (``Glass Lewis
makes full disclosure to its clients to enable them the opportunity
to understand the nature and scope of the potential conflict and
make an assessment about the reliability or objectivity of the
recommendation. This is done by adding a disclosure note to the
front cover of the relevant proxy research report when Glass Lewis
determines that there is a potential conflict of interest (e.g.,
related to Glass Lewis' ownership structure, business partnerships,
client-submitted shareholder proposals, employee and outside
advisors' relationships and when an investment manager client is a
public company or a division of a public company).'').
\227\ See Letter from Gary Retelny, President and Chief
Executive Officer, Institutional Shareholder Services to the
Committee on Banking, Housing and Urban Affairs, U.S. Senate (July
6, 2018), at 4, available at https://www.issgovernance.com/file/duediligence/20180706-iss-senate-hearing-statement.pdf (describing
measures ISS has historically taken to ensure transparency of any
potential conflicts associated with ISS Corporate Solutions, Inc.
(``ICS''), which is a subsidiary of ISS that provides governance
tools and services to client) (``ISS' institutional clients can
readily identify any potential conflict of interest through ISS'
primary client delivery platform, ProxyExchange (PX), which provides
information about the identity of ICS clients, as well as the types
of services provided to those registrants and the revenue received
from them. Similarly, each proxy analysis and research report issued
by ISS contains a legend indicating that the subject of the analysis
or report may be a client of ICS. This legend also advises
institutional clients about the way in which they can receive
additional, specific details about any registrant's use of products
and services from ICS, which can be as simple as emailing our Legal/
Compliance department . . . .'').
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[[Page 66545]]
We are also proposing conditions that would require that
registrants and any other soliciting person covered by the proxy voting
advice be provided the opportunity to review and provide feedback on
the proxy voting advice that the proxy voting advice business intends
to deliver to its clients before such advice is disseminated. The
availability and length of the period for review and feedback would
depend on how early the registrant filed its definitive proxy
statement.\228\ These amendments are intended to give registrants and
other soliciting persons an opportunity to engage with the proxy voting
advice business and identify factual errors or methodological
weaknesses in the proxy voting advice before it is disseminated to
clients.
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\228\ See proposed Rule 14a-2(b)(9)(ii)(A)(1) and (A)(2). If the
registrant files its definitive proxy statement at least 45 calendar
days before the security holder meeting date, it will be given five
business days to complete an initial review the proxy voting advice;
if the registrant files less than 45 calendar days but at least 25
calendar days before the meeting, it will be given no less than
three business days to review. If the registrant files 25 calendar
days or fewer before the meeting, there would not be a requirement
to provide a review opportunity.
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We understand that Glass Lewis and ISS both currently provide some
opportunities for registrants to review and respond to some aspects of
their proxy voting advice. Glass Lewis offers a program that allows
participating registrants to request, and be provided with, a data-only
version of its proxy voting advice prior to Glass Lewis completing the
analysis based on that data.\229\ This process enables registrants to
notify Glass Lewis of any factual mistakes in the data prior to Glass
Lewis completing and publishing the analysis for its clients.\230\
Under this program, registrants are provided 48 hours to review the
draft analysis and provide corrections.\231\ ISS offers Standard &
Poor's 500 companies and companies in comparable large capitalization
indices in certain countries outside the United States an opportunity
to review a draft analysis for factual errors prior to delivery of
proxy voting advice to clients.\232\ ISS provides registrants one to
two business days to review draft proxy voting advice and provide
feedback before ISS disseminates the voting advice to clients.\233\
---------------------------------------------------------------------------
\229\ Glass Lewis Letter, supra note 16, at 6; see supra note
102.
\230\ Glass Lewis Letter, supra note 16, at 6.
\231\ See Issuer Data Report, Glass Lewis, https://www.glasslewis.com/issuer-data-report/ (last visited July 30, 2019).
\232\ See 2018 Roundtable Transcript, supra note 40, at 231-32
(comments of Mr. Gary Retelny) (``[W]e distribute prior to
publishing our final report, our draft report [to] the S&P 500
generally and other large global companies. We do not do it for
everyone.''); see also ISS Letter, supra note 9, at 10.
\233\ See 2016 GAO Report, supra note 9, at 28.
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The proposed amendments also would provide registrants and other
soliciting persons with a final notice of voting advice. This notice,
which must contain a copy of the proxy voting advice that the proxy
voting advice business will deliver to its clients, including any
revisions to such advice made as a result of the review and feedback
period, must be provided by the proxy voting advice business no later
than two business days prior to delivery of the proxy voting advice to
its clients. We are not aware of any proxy voting advice business that
provides registrants with such copies of proxy voting advice before it
is provided to clients. Most registrants do not become aware of the
data used in the proxy voting advice business's analysis or the
recommendations derived therefrom until after the voting advice has
been issued to the proxy voting advice business's clients, to the
extent the registrant has access to the proxy voting advice at
all.\234\
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\234\ See, e.g., supra note 232.
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Finally, the proposed amendments would require that proxy voting
advice businesses include in their proxy voting advice and in any
electronic medium used to deliver the proxy voting advice, if requested
by the registrant or other soliciting person, a hyperlink (or other
analogous electronic medium) to the registrant's or other soliciting
person's statement regarding the proxy voting advice. The statement
would constitute a ``solicitation'' as defined in Rule 14a-1(1) and be
subject to the anti-fraud prohibitions of Rule 14a-9, as well as the
filing requirements of Exchange Act Rule 14a-2. Currently, if
registrants have concerns with the recommendations of proxy voting
advice businesses, registrants can file additional definitive proxy
materials with the Commission to address their concerns with the
recommendations or analysis, but such an effort may not be effective.
Some registrants have asserted that a large percentage of proxies are
voted within 24 to 48 hours of proxy voting advice being issued \235\
and that it can be difficult to access and analyze the proxy voting
advice, formulate a response, and file the necessary materials with the
Commission within that time period.\236\
---------------------------------------------------------------------------
\235\ See, e.g., 2018 Roundtable Transcript, supra note 40, at
242 (comment of Mr. Adam Kokas) (``[W]ithin a day or so of the
report coming out, depending on the firm, 30 to 45 percent of our
shares are voted within 24 to 48 hours.''); Soc. for Corp. Gov.
Letter, supra note 24, at 3 (``Anecdotal evidence from some of our
members consistently shows that as much as 30% of the total
shareholder votes are cast within 24 hours of the ISS and Glass
Lewis recommendations being released to their subscribers . . .
.''); see also Placenti, supra note 40, at 8.
\236\ See 2018 Roundtable Transcript, supra note 40, at 228
(comment of Mr. Adam Kokas) (``[F]or all of these things related to
proxy advisory firm reports and voting, there's a before and there's
an after. So once the report is issued, it is an uphill battle, to
say the least, from a public company perspective, certainly from a
small to mid-market cap company, filing SEC solicitation materials
or doing other things to try to correct the record are very
difficult.'').
---------------------------------------------------------------------------
We do not have data that would allow us to examine with a
meaningful degree of precision the timing of when proxies are voted. In
2016, 2017, and 2018, the number of unique registrants that filed proxy
materials with the Commission was 5,690, 5,744, and 5,862,
respectively.\237\ Table 2 below reports the total number of times
registrants filed additional definitive proxy materials in response to
proxy voting advice in calendar years 2016, 2017, and 2018.\238\ Table
2 also reports the number of instances registrants indicated particular
concerns with respect to the proxy voting advice.\239\
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\237\ See supra note 218 for details on the estimation of
registrants that filed proxy materials with the Commission during a
calendar year.
\238\ Id.
\239\ We divide registrant concerns into five categories: (1)
Factual errors, (2) analytical errors, (3) general or policy
disputes, (4) amended or modified proposal, and (5) other. We
classify a concern as ``factual errors'' when the registrant
identifies what it considers to be incorrect data or inaccurate
facts that the proxy voting advice business uses in some part as a
basis for its negative recommendation. We classify a concern as
``analytical errors'' when the registrant identifies what it
considers to be methodological errors in the proxy voting advice
business's analysis that it used as a basis for its negative
recommendation. We classify a concern as ``general or policy
disputes'' when the registrant does not dispute the facts or the
analytical methodology employed but instead generally espouses the
view that specific evaluation policies or the evaluation framework
established by the proxy voting advice business are overly
simplistic or restrictive and do not adequately or holistically
capture the merits of the proposal. We classify a concern as
``amended or modified proposal'' when the registrant responds to a
current or prior year negative recommendation from a proxy voting
advice business by indicating that it has amended or modified
proposals or existing governance practices prior to the annual
meeting and requests investor consideration of these facts in making
their vote. Finally, we classify as ``other'' those concerns where
the registrant objects to the proxy voting advice business's
negative recommendation but does not specifically cite nor respond
to the rationale for the negative recommendation and instead makes a
generalized argument in favor of the proposal. Registrants may have
more than one concern with a proxy voting advice business's voting
advice, so the number of firms filing amended proxy materials may
not equal the sum of concern types within a given year.
[[Page 66546]]
Table 2--Registrant Concerns Identified in Additional Definitive Proxy Materials
--------------------------------------------------------------------------------------------------------------------------------------------------------
Type of registrant concern
---------------------------------------------------------------------------------------------------------------------------------------------------------
Amended or
Year Filings Factual errors Analytical General or modified Other
errors policy dispute proposal
--------------------------------------------------------------------------------------------------------------------------------------------------------
2016.................................................... 99 24 40 54 18 11
2017.................................................... 77 13 28 42 10 8
2018.................................................... 84 17 28 58 6 2
--------------------------------------------------------------------------------------------------------------------------------------------------------
Although not required, registrants sometimes indicate in their
additional definitive proxy materials the date on which they first
became aware of the proxy voting advice business's voting advice. The
date may represent the date the proxy voting advice was issued or may
represent the date an advance copy was provided to the registrant. For
example, in 2018, in 14 of the 84 filings, the registrant indicated the
date on which it first became aware of voting advice issued by a proxy
voting advice business.\240\ Among those 14 filings, the median
(average) number of business days between the proxy voting advice
business issuing its advice and the registrant filing amended proxy
materials was 3 (3.8) business days.\241\ The median (average) number
of business days remaining until the shareholder meeting was to take
place with regard to those 14 filings was 9.5 (10.3) business
days.\242\
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\240\ For 2017 and 2016, the number of filings indicating the
date on which the registrant became aware of a proxy voting advice
business's voting advice was 14 of 77 and 21 of 99, respectively.
\241\ The median (average) number of business days between the
proxy voting advice business issuing its advice and the registrant
filing additional definitive proxy materials for 2017 and 2016 was
4.5 (6.4) and 3 (5), respectively.
\242\ The median (average) number of business days remaining
until the shareholder meeting was to take place in 2017 and 2016 was
5.5 (8.4) and 8 (12.8), respectively.
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It may be the case that, as discussed above, some registrants
expect a large percentage of proxies to be voted within a short period
of time following the issuance of proxy voting advice.\243\ As a
result, some registrants may not file additional definitive proxy
materials if they do not have the resources to do so quickly or if they
do not think the effort would have a meaningful impact on votes.\244\
This decision may deprive market participants of information that would
reasonably be expected to affect a voting or investment decision.
---------------------------------------------------------------------------
\243\ See supra note 235.
\244\ See supra note 236.
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C. Benefits and Costs
We discuss the economic effects of the proposed amendments below.
For both the benefits and the costs, we consider each piece of the
proposed amendments in turn. The proposed amendments include: (1)
Amendments to the definition of solicitation in Rule 14a-1(1); (2)
conditioning availability of the exemptions in Rules 14a-2(b)(1) and
(b)(3) on proxy voting advice businesses providing disclosure regarding
conflicts of interest; (3) conditioning availability of those
exemptions on proxy voting advice businesses providing registrants and
certain soliciting persons the opportunity to review and respond to
draft proxy voting advice, subject to the registrant or other
soliciting persons filing definitive proxy statements at least 25
calendar days (45 calendar days, if the longer review and response
period is desired) before the relevant meeting; and (4) an amendment to
the examples in Rule 14a-9 of disclosure that, if omitted from a proxy
solicitation, may be misleading.
1. Benefits
First, we are proposing to codify the Commission's interpretation
that, as a general matter, proxy voting advice constitutes a
solicitation within the meaning of the Exchange Act Rule 14a-1(l).
Overall, we do not expect this proposed amendment to have a significant
economic impact because it codifies an already-existing Commission
interpretation. Nonetheless, at the margins, this proposed amendment
may benefit proxy voting advice businesses and their clients to the
extent that codifying this interpretation in the Commission's proxy
rules provides more clear notice that Section 14(a) and the proxy rules
apply to proxy voting advice. We also are proposing to amend Rule 14a-
1(l)(2) to clarify that the furnishing of proxy voting advice by
certain persons would not be deemed a solicitation. Specifically,
voting advice from a person who furnishes such advice only in response
to an unprompted request for the advice would not be deemed a
solicitation. Again, we do not expect this proposed amendment to have a
significant economic impact because it codifies the Commission's
longstanding view that such a communication should not be regarded as a
solicitation subject to the proxy rules.
Second, we are proposing to amend rule 14a-2(b) to make the
availability of the exemptions in Rules 14a-2(b)(1) and (b)(3) for
proxy voting advice businesses contingent on providing enhanced
disclosure of conflicts of interest specifically tailored to proxy
voting advice businesses and the nature of their services.\245\ The
proposed conflicts of interest disclosures are intended to augment
existing requirements by specifying detailed disclosures about
conflicts of interest that must be provided in proxy voting advice. The
disclosures provided under the proposed amendments would need to be
sufficiently detailed so that clients of proxy voting advice businesses
can understand the nature and scope of the interest, transaction, or
relationship and assess the objectivity and reliability of the proxy
voting advice they receive. In addition, proxy voting advice businesses
would be required to disclose any policies and procedures used to
identify, as well as the steps taken to address, any material conflicts
of interest, whether actual or potential, arising from such
relationships and transactions. The proposed amendments also would
specify that the enhanced conflicts disclosures must be provided in the
proxy voting advice and in any electronic medium used to deliver the
advice.
---------------------------------------------------------------------------
\245\ See supra note 84.
---------------------------------------------------------------------------
The proposed amendments could benefit the clients of proxy voting
advice businesses by enabling them to better assess the objectivity of
the proxy voting advice businesses' advice against potentially
competing interests. The proposed amendment could also benefit clients
of proxy voting advice businesses because they would receive the same
information about potential conflicts of interest, regardless of which
exemption the proxy voting advice business relies upon for its proxy
voting advice (currently, only proxy voting advice businesses relying
on the 14a-2(b)(3) exemption are required to provide disclosure about
conflicts of interest). Furthermore, the requirement
[[Page 66547]]
that conflicts of interest disclosures be included in the proxy
advisor's voting advice could benefit clients of proxy voting advice
businesses by making more standard the manner in which such information
is disclosed and ensuring that the required disclosures receive due
prominence and can be considered together with proxy voting advice at
the time clients are making voting determinations. This may, in turn,
make it easier or more efficient for such clients to review and analyze
the conflicts disclosure. Disclosure of material conflicts of interest
can lead to more informed decision making, and we anticipate that
institutional investors would use information from disclosures of
material conflicts of interest to make more informed voting decisions.
Thus, to the extent they cause the clients of proxy voting advice
businesses to make more informed voting decisions on investors' behalf,
these disclosure requirements could also benefit investors. Further,
these disclosures could make it easier and more efficient for clients
that are investment advisers to evaluate and determine whether to
retain proxy voting advice businesses, in order to ensure that the
investment adviser discharges its fiduciary duty to cast votes in the
best interest of its clients.
As we discuss in Section II.B.1 above, we are aware that some proxy
voting advice businesses have asserted that that they have practices
and procedures that address conflict of interest concerns.\246\ Even
where certain proxy voting advice businesses may provide detailed
disclosure about conflicts of interest under existing practices,
requiring this disclosure as a condition to the proxy rule exemptions
would help to ensure that the disclosure is more consistent across the
proxy voting advice provided by proxy voting advice businesses, and
would provide users of that advice with ready and timely access to such
disclosure in the proxy voting advice and in any electronic medium used
to deliver the advice. We believe this would allow clients of proxy
voting advice businesses to more efficiently access and assess the
conflicts disclosure. We note, however, to the extent that proxy voting
advice businesses currently provide information that meets or exceeds
the proposed disclosure requirements, the benefits we describe above
would be more limited.\247\
---------------------------------------------------------------------------
\246\ See supra note 76.
\247\ See supra note 76.
---------------------------------------------------------------------------
Third, the proposed amendments to Rule 14a-2(b)(9) would, subject
to the registrant or other soliciting persons filing definitive proxy
statements at least 25 calendar days (45 calendar days, if the longer
review and response period is desired) before the relevant meeting,
require that proxy voting advice be provided to registrants and other
soliciting persons before it is disseminated to clients of proxy advice
businesses, in order to allow such registrants and other soliciting
persons an opportunity for their review and feedback. The proposed
amendments also would require that a proxy voting advice business, upon
request, include in its proxy voting advice a hyperlink or other
analogous electronic medium that leads to the registrant's or other
soliciting person's response to the advice. We believe the proposed
amendments would benefit clients of proxy voting advice businesses--and
thereby ultimately benefit the investors they serve--by enhancing the
overall mix of information available to those clients as they assess
voting recommendations and make determinations about how to cast votes.
Providing a standardized opportunity for registrants and other
soliciting persons to review and provide feedback could also help
identify factual errors or methodological weaknesses in the proxy
voting advice businesses' analysis that could undermine the reliability
of their proxy voting recommendations. To the extent that proxy voting
advice businesses refine their advice based on feedback from
registrants and other soliciting persons, users of the advice and the
investors they serve (if applicable) could benefit from more accurate
and complete voting advice. Even where the proxy voting advice is not
revised based on feedback received, clients of these businesses may
still benefit from having ready and timely access to the registrant's
and other soliciting person's perspective when considering the advice,
such as where there are differing views about the proxy advisor's
methodological approach or other differences of opinion that the
registrant or other soliciting person believes are relevant to the
voting advice. This is particularly true where, as may often be the
case, clients of proxy voting advice businesses must make voting
decisions in a compressed time period.
The proposed amendments also could benefit registrants and other
soliciting persons by providing them the opportunity to identify any
factual errors or methodological weaknesses that may underlie relevant
proxy voting advice before it is disseminated and potentially relied
upon by clients to make voting determinations. Similarly, by providing
registrants and other soliciting persons the opportunity to include
within the advice a link to their response, these parties would be able
to communicate their views at the same time as the views of the proxy
voting advice business are presented and in a manner they deem most
appropriate or effective. Taken together, these factors may give
assurance to registrants and other soliciting persons that clients of
proxy voting advice businesses have access to accurate and reliable
information and to all views related to matters upon which they are
asked to vote.
As we discuss in Section III.B.2, some proxy voting advice
businesses have internal policies and procedures aimed at enabling
feedback from registrants before their voting advice is issued. To the
extent that proxy voting advice businesses currently enable feedback
from registrants, the benefits we describe above would be more limited.
While some proxy voting advice businesses provide opportunities for
review and feedback, these existing practices may be inadequate to
address registrants' or other soliciting persons' concerns and ensure
that those who make proxy voting decisions receive information that is
complete and accurate in all material respects. In addition, it does
not appear that proxy voting advice businesses currently provide all
registrants and other soliciting persons with an opportunity to review
proxy voting advice.\248\ The proposed requirements could benefit
clients of proxy voting advice businesses by standardizing the review
and feedback process so that all clients would benefit from changes
that result from a registrant's feedback and also from the ability to
access a registrant's response if the registrant chooses to provide
one.
---------------------------------------------------------------------------
\248\ See supra note 100.
---------------------------------------------------------------------------
We note that the benefits described above also would be limited to
the extent registrants already respond to proxy voting advice by filing
additional definitive proxy materials and those additional definitive
proxy materials are effective in informing voting determinations. As
discussed above, however, due to timing considerations, it may be
difficult for registrants or other soliciting persons to respond
effectively to proxy voting advice by filing amended proxy
materials.\249\ We also note that to the extent the 45 and 25 calendar
day filing thresholds encourage registrants and other soliciting
persons to file their definitive proxy statements earlier than they
[[Page 66548]]
otherwise would, this could benefit investors generally as they would
have more time to review the materials and, as discussed below to help
mitigate potential costs for proxy voting advice businesses.
---------------------------------------------------------------------------
\249\ See supra Section III.B.2.
---------------------------------------------------------------------------
Finally, we are proposing to amend Rule 14a-9 to add as an example
of what could be misleading, if omitted, certain disclosures that are
relevant to proxy voting advice, specifically disclosures related to
the proxy voting advice business's methodology, sources of information,
conflicts of interest or the use of standards that materially differ
from relevant standards or requirements that the Commission sets or
approves. There is a risk that, where such disclosures are omitted,
clients of proxy voting advice businesses may make their voting
determinations based on incomplete information regarding the basis of
the proxy voting advice, or upon a misapprehension that a registrant is
not in compliance with applicable laws or regulations.
We do not expect the proposed amendment to the list of examples in
Rule 14a-9 to significantly alter existing disclosure practices, as it
would largely codify existing Commission guidance on the applicability
of Rule 14a-9 to proxy voting advice.\250\ To the extent the proposed
amendment prompts some proxy voting advice businesses to provide
additional disclosure about the bases for their voting advice, the
clients of these businesses--and the investors they serve--may benefit
from receiving additional information that could aid in making voting
determinations. For example, clients may benefit from more clarity
about how proxy voting advice business standards or criteria differ
from existing regulatory requirements. We note, however, that this
benefit to clients of proxy voting advice businesses would be more
limited to the extent the clients already are aware of, and incorporate
in their consideration of proxy voting advice, existing regulatory
requirements and understand how such requirements differ from the
standards and criteria applied by proxy voting advice businesses.
---------------------------------------------------------------------------
\250\ See Commission Interpretation on Proxy Voting Advice,
supra note 19, at 11-13.
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2. Costs
We expect that proxy voting advice businesses as well as
registrants and other soliciting persons would incur direct costs as a
result of the proposed amendments. We expect clients of proxy voting
advice businesses and investors may incur indirect costs as well. In
this section, we analyze these costs in terms of how the proposed
amendments would change disclosure and engagement practices for proxy
voting advice businesses relative to the baseline. We note that, to the
extent that proxy voting advice businesses incur costs associated with
the risk of a failure to comply with the proposed conditions, these
costs may be mitigated by the proposed provision specifying that an
immaterial or unintentional failure to comply with the new conditions
would not result in a loss of the proxy rule exemptions. Further, to
the extent that any of the proposed amendments impose direct costs on
proxy voting advice businesses and to the extent those costs are passed
along, the proposed amendments could create indirect costs for clients
of proxy voting advice businesses, including investment advisers and
other institutional investors, and the underlying investors they serve,
if applicable.
First, with respect to the proposed amendments to Rule 14a-1(l), we
do not expect these amendments to have a significant economic impact
because they codify already existing Commission interpretations and
views about the applicability of the federal proxy rules to proxy
voting advice.
Second, the proposed conflicts of interest disclosure requirements
would impose a direct cost on proxy voting advice businesses. For
example, proxy voting advice businesses would bear any direct costs
associated with: (i) Reviewing and preparing disclosures describing
their conflicts; (ii) developing and maintaining methods for tracking
their conflicts; (iii) seeking legal or other advice; and, (iv)
updating their voting platforms. Proxy voting advisory businesses that
are investment advisers are already required to identify conflicts and
to eliminate or make full and fair disclosure of those conflicts.\251\
Further, proxy voting advisory businesses that are retained by
investment advisers to assist them in discharging their proxy voting
duties may already provide such conflicts disclosure in connection with
the investment advisers' evaluation of the capacity and competency of
the proxy voting advice business. We are unable to provide quantitative
estimates of these direct costs on proxy voting advice businesses for
three reasons. The facts and circumstances unique to each proxy voting
advice business and the nature of its material interests, transactions,
and relationships will dictate the disclosure it provides. In addition,
as discussed in Section II.B.1 above, boilerplate language would not be
sufficient to satisfy proposed Rule 14a-2(b)(9)(i). Under the rule, a
proxy voting advice business would have to provide conflicts disclosure
with enough specificity to enable its proxy advisory clients to
adequately assess the objectivity and reliability of the proxy voting
advice. As a result, the disclosure provided by the proxy voting advice
business could differ depending on the circumstances (e.g., depending
on the scope of services they provide their clients and the subject
registrant) and be subject to change in the future as both the
business's and its clients' interests change. Finally, proxy voting
advice businesses' direct costs will depend on the extent to which
their current practices and procedures would meet or exceed the
proposed disclosure requirements.\252\
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\251\ See Commission Interpretation Regarding Standard of
Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019),
84 FR 33669, at 33671 (July 12, 2019).
\252\ See supra note 89. We solicit comment and data on the
extent to which current proxy voting advice business practices and
procedures would meet or exceed proposed disclosure requirements.
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Third, with respect to the proposed requirement that registrants
and other soliciting persons be given an opportunity to review and
provide feedback on the proxy voting advice and receive a final notice
of voting advice, the business would bear direct costs. Specifically,
such businesses would bear any direct costs associated with: (i)
Modifying current systems, or developing and maintaining systems to
track the timing associated with these new requirements; (ii) modifying
current systems and methods, or developing and maintaining new systems
and methods to share the proxy voting advice with registrants and other
soliciting persons; and (iii) delivering draft voting advice to
registrants and other soliciting persons for their review and feedback.
While some proxy voting advice businesses may already have systems in
place to address some or all of these mechanics,\253\ we are not able
to estimate the costs associated with modifying or developing these
systems and methods. To the extent proxy voting advice businesses
already have similar systems in place, any additional direct
[[Page 66549]]
cost may be limited. Because we lack data on the extent to which proxy
voting advice businesses already have similar systems in place, we are
unable to quantify this potential cost.
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\253\ See, e.g., Glass Lewis Letter, supra note 16, at 5-6
(``Glass Lewis has a resource center on its website designed
specifically for the issuer community via which public companies,
their directors and advisors can, among other things: (i) Submit
company filings or supplementary publicly available information;
(ii) participate in Glass Lewis' Issuer Data Report (`IDR') program,
prior to Glass Lewis completing and publishing its analysis to its
investor clients; and (iii) report a purported factual error or
omission in a research report, the receipt of which is acknowledged
immediately by Glass Lewis, then reviewed, tracked and dealt with
internally prior to responding to the company in a timely
manner.'').
---------------------------------------------------------------------------
The requirement to provide proxy voting advice to registrants and
other soliciting persons for their review and feedback would increase
the risk that commercially sensitive information about proxy voting
advice may be disseminated more broadly. To mitigate this risk, the
proposed amendments to Rule 14a-2(b)(9) would allow proxy voting advice
businesses to require that registrants and other soliciting persons
agree to keep the information confidential as a condition of receiving
the proxy voting advice. We believe this provision would mitigate
potential costs to proxy voting advice businesses by allowing them to
maintain control over the dissemination of their proxy voting advice
and minimize the risk of unintentional or unauthorized release.
The proxy voting advice business may also incur costs associated
with processing and considering the registrant's or other soliciting
person's feedback and making determinations as to whether changes to
the proxy voting advice are necessary or appropriate based on such
feedback. Further, allowing registrants and other soliciting persons
time to review and provide feedback on voting advice could delay when
the businesses deliver their advice to clients. This may require proxy
voting advice businesses to renegotiate their agreements with clients
to the extent that proxy voting advice businesses may be contractually
obligated to deliver their advice by specified dates. Alternatively,
the proxy voting advice businesses may need to expend greater resources
to ensure delivery by the date on which they would have delivered the
advice in the absence of the requirement to allow registrants and other
soliciting persons the opportunity to review and provide feedback on
the proxy voting advice. These additional costs could be mitigated by
the proxy voting advice business receiving more time than it otherwise
would to review the definitive proxy statements as a result of the
incentives created by the 45 calendar days and 25 calendar days filing
thresholds in proposed Rule 14a-2(b)(9)(ii). We lack the data necessary
to quantify this cost. Additionally, allowing a registrant or other
soliciting person to review and provide feedback on the voting advice
before the proxy voting advice business provides it to its clients
could impact perceptions about the independence and objectivity of the
advice.\254\ This, in turn, could affect the willingness of investment
advisers and other clients to engage the services of proxy voting
advice businesses. Although the feedback process may give users of the
advice more confidence that it is accurate and informed by the issuer's
review, this consultation process has been noted by some as possibly
affecting the independence and objectivity of the advice. This possible
concern may be limited by the fact that the proposed rules would not
require proxy voting advice businesses to make changes to the voting
advice based on a registrant's feedback. Proxy voting advisory
businesses also may develop other practices and policies to assure
clients of their independence from the registrant.
---------------------------------------------------------------------------
\254\ See ISS Letter, supra note 9, at 11 (``Although we
understand that some issuers believe they should have the right to
review and object to every vote recommendation ISS makes--and in
some cases, even interject their views into ISS proxy research
reports--granting issuers such extreme influence over independent
proxy advice would interfere with a proxy adviser's fiduciary
responsibility to its clients, and hurt both investors and the
integrity of the voting process.''); see also 2018 Roundtable
Transcript, supra note 40, at 232 (comment of Gary Retelny)
(``[M]any of our clients do not like us sharing our report with
registrants prior to them seeing it. They want to be the first ones
to see it. So there is a tension there between sharing the report
itself with the registrant prior to sending it to the ones that
actually pay for it. Right?''); Glass Lewis Letter, supra note 16,
at 8 (``We believe that allowing an issuer to engage with us during
the solicitation period may lead to discussions about the
registrant's proxy, thereby providing registrants with an
opportunity to lobby Glass Lewis for a change in policy or a
specific recommendation against management. To ensure our research
is always objective, Glass Lewis takes this added precaution and
postpones any engagements until after the solicitation period has
ended . . . .'').
---------------------------------------------------------------------------
Registrants and other soliciting persons also would incur direct
costs associated with coordinating with proxy voting advice businesses
to receive the proxy voting advice, reviewing the proxy voting advice
within a relatively compressed timeframe, and determining whether to
offer feedback to the proxy voting advice business regarding factual or
methodological issues or other matters pertaining to the proxy voting
advice. Because the extent of the registrant or other soliciting
person's engagement with the proxy voting advice business would depend
upon the particular facts and circumstances of the proxy voting advice
and any issues identified therein, as well as the resources of the
registrant or other soliciting person, it is difficult to provide a
quantifiable estimate of these costs.
To the extent proxy voting advice businesses do not deliver their
voting advice by the date on which they would have delivered the voting
advice in the absence of the requirement to allow registrants and other
soliciting persons the opportunity to review and provide feedback on
the voting advice, clients of proxy voting advice businesses would
incur an indirect cost in that they would have less time to consider
the business's voting advice prior to the proxy vote. This cost may be
mitigated, however, to the extent that the advice they do eventually
receive would be based on more accurate, transparent, and complete
information.
If registrants and other soliciting persons choose to provide a
statement regarding the proxy voting advice, registrants and other
soliciting persons would incur costs of drafting a statement, providing
a hyperlink (or other analogous electronic medium) to the proxy voting
advice business, maintaining their statement online, and coordinating
timing with proxy voting advice businesses for the filing of
supplementary proxy materials.\255\ We do not have data with respect to
these costs. The proxy voting advice business would also incur a direct
cost of including that hyperlink or other analogous electronic
mechanism. We believe this cost would be small.
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\255\ Registrants are not required to respond to proxy voting
advice nor are required to request that a hyperlink or other
analogous electronic means be included in the proxy. Presumably,
registrants would respond to proxy voting advice only when they
believe doing so would have a net beneficial effect for them.
---------------------------------------------------------------------------
Finally, the proposed amendments to Rule 14a-9 may impose direct
costs on proxy voting advice businesses to the extent the proposed
amendment prompts some proxy voting advice businesses to provide
additional disclosure about the bases for their voting advice. We
expect any such costs to be minimal, especially given that most of the
examples were already included in existing Commission guidance.\256\
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\256\ See supra notes 45, 51 and accompanying text.
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D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
As discussed in Section II.B above, proxy voting advice businesses
perform a variety of functions for their clients, including analyzing
and making voting recommendations on matters presented for shareholder
vote and included in registrants' proxy statements. As an alternative
to utilizing these services, clients of proxy voting advice businesses
could instead conduct their
[[Page 66550]]
own analysis and execute votes internally.\257\
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\257\ Clients of proxy voting advice businesses may also rely on
some combination of internal and external analysis.
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We believe that, for purposes of general analysis, it is
appropriate to assume that the cost of analyzing matters presented for
shareholder vote would not vary significantly with the size of the
position being voted. Given the costs of analyzing and voting proxies,
the services offered by proxy voting advice businesses may offer
economies of scale relative to their clients performing those functions
themselves. For example, a GAO study found that among 31 institutional
investors, large institutions rely less than small institutions on the
research and recommendations offered by proxy voting advice
businesses.\258\ Small institutional investors surveyed in the study
indicated they had limited resources to conduct their own
research.\259\
---------------------------------------------------------------------------
\258\ See 2007 GAO Report, supra note 9, at 2.
\259\ Id.
---------------------------------------------------------------------------
By establishing requirements that promote accuracy and transparency
in proxy voting advice, the proposed amendments could lead to an
increased demand for voting advice from proxy voting advice businesses.
To the extent proxy voting advice businesses offer economies of scale
relative to their clients performing certain functions themselves,
increased demand for, and reliance upon, proxy voting advice business
services could lead to greater efficiencies in the proxy voting
process. At the same time, as discussed above and below, the proposed
amendments would impose certain additional costs on proxy voting advice
businesses. As discussed above, these costs to proxy voting advice
businesses could reduce compliance costs for their clients. To the
extent these costs are greater than the related benefits (or vice
versa) it could lead to decreased (or increased) demand for proxy
voting advice business services, and there would be fewer (or more)
efficiencies in the proxy voting process.
2. Competition
As noted above, the proposed amendment could lead to increased
demand for proxy voting advice business services. Increased demand for
their services could, in turn, lead to increased competition among
proxy voting advice businesses to meet that increased demand.
Alternatively, the increased demand for advisory services could lead to
an increase in the number of proxy voting advice businesses in the
marketplace, also leading to an increase in competition among proxy
voting advice businesses.
In addition to potentially increasing demand for voting advice from
proxy voting advice businesses by establishing requirements that
promote accuracy and transparency in proxy voting advice, the
requirements that promote accuracy and transparency in proxy voting
advice could stimulate competition among proxy voting advice businesses
with respect to the quality of advice. In particular, clients of proxy
voting advice businesses may be better able to assess conflicts and the
accuracy of advice, which could, in turn, cause proxy voting advice
businesses to compete more on those dimensions.\260\
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\260\ Because disclosure under the proposed amendment occurs
within the context of private business relationships rather than
being public disclosure, this effect on competition is limited to
the extent proxy voting advice business clients would use more than
one proxy voting advice business.
---------------------------------------------------------------------------
It is also possible, however, that the proposed amendments could
have the opposite effect on competition. The proposed amendments would
cause proxy voting advice businesses to incur certain additional
compliance costs as discussed in Section II.C.2 above that may or may
not be offset by a reduction in compliance costs for their clients. It
is difficult to predict how those costs and benefits would be shared
among, or between, proxy voting advice businesses and their clients. If
costs borne by proxy voting advice businesses are large enough to cause
some businesses to exit the market or potential entrants to stay out of
the market, the proposed rules could decrease competition.
Alternatively, if proxy voting advice businesses do try to pass along
the costs, or some component thereof, to their clients, it is possible
that those costs would be large enough to cause some clients to develop
internal functions to assist with proxy voting responsibilities,
thereby reducing demand for, and potentially competition among, proxy
voting advice businesses.
Additionally, it is possible that given certain industry practices,
the increase in costs could affect proxy voting advice businesses
differently. For example, we understand that the two largest proxy
voting advice businesses, ISS and Glass Lewis, have processes in place
for disclosing certain aspects of their analysis to certain registrants
prior to making a recommendation to clients. It is possible that the
costs associated with the proposed amendments could affect certain
other proxy voting advice businesses more significantly than ISS and
Glass Lewis.\261\ A differential effect on costs across proxy voting
advice businesses could, in turn, affect competition within the proxy
advisory industry. Further, to the extent the costs associated with the
proposed amendments would disproportionately affect proxy voting advice
businesses other than ISS and Glass Lewis, the proposed amendments
could lead to a reduction in competition among proxy voting advice
businesses.\262\
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\261\ We note that one proxy voting advice business commenter
recommended rulemaking that would provide registrants with a process
by which they could appeal a proxy voting advice business's voting
advice. See Letter from Saul Grossel, COO, Egan-Jones (Nov. 14,
2018), at 2. In particular, the commenter recommended that,
``issuers should be given the opportunity to review a draft copy of
reports prior to their release. Id. If issuers disagree with the
analysis and/or recommendations of the proxy advisor, they should be
provided the opportunity to state their dissent.'' Id. The fact that
a proxy voting advice business other than Glass Lewis or ISS
recommended that registrants should be offered the opportunity to
review and provide feedback on proxy voting advice may suggest that
the costs associated with the review and feedback process would not
disproportionately affect certain proxy voting advice businesses.
\262\ The 2007 GAO Report addresses several issues related to
the proxy voting advice industry, including a lack of competition
within the industry. See 2007 GAO Report, supra note 9, at 13-14
(``[P]roxy advisory firms must offer comprehensive coverage of
corporate proxies and implement sophisticated technology to attract
clients and compete. For instance, institutional investors often
hold shares in thousands of different corporations and may not be
interested in subscribing to proxy advisory firms that provide
research and voting recommendations on a limited portion of these
holdings. As a result, proxy advisory firms need to provide thorough
coverage of institutional holdings, and unless they offer
comprehensive services from the beginning of their operations, they
may have difficulty attracting clients. . . . The initial investment
required to develop and implement such technology can be a
significant expense for firms.'').
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3. Capital Formation
In facilitating the ability of clients of proxy voting advice
businesses to make informed voting determinations, the proposed
amendments could ultimately lead to improved investment outcomes for
investors. This in turn could lead to a greater allocation of resources
to investment. To the extent that the proposed amendments lead to more
investment, we could expect greater demand for securities, which could,
in turn, promote capital formation. Additionally, more accurate
information may improve the efficient allocation of capital. However,
given the many factors that can influence the rate of capital
formation, any effect of the proposed amendments on capital formation
is expected to be small.
[[Page 66551]]
E. Reasonable Alternatives
1. Require Proxy Voting Advice Businesses To Include Full Registrant
Response in the Businesses' Voting Advice
Rather than including a hyperlink or any other analogous electronic
medium directing the recipient of the advice to a written statement
prepared by the registrant or other soliciting person, we could require
proxy voting advice businesses to include a full response in the voting
advice these businesses provide to their clients. Including a
registrant's full response in the voting advice would benefit clients
of proxy voting advice businesses by allowing them to avoid the
additional step of ``clicking through'' to the response. Including a
full response in the voting advice provided by proxy voting advice
businesses also could benefit registrants and other soliciting persons
by having their responses more prominently displayed, depending on
where in the advice the response is included.
However, requiring inclusion of the registrant's full response in
the voting advice provided by proxy voting advice businesses could
disrupt the ability of such businesses to effectively design and
prepare their reports in the manner that they and their clients prefer.
Also, registrants would lose the flexibility to present their views in
the manner they deem most appropriate or effective.
2. Different Timing for, or Number of, Reviews
The proposed amendments require a five or three business day review
and feedback period depending on how many days before the shareholder
meeting the registrant files its definitive proxy statement.
Alternatively, we could propose a shorter or longer period. A shorter
period could hamper the ability of registrants and other soliciting
persons to engage meaningfully with proxy voting advice businesses
regarding their advice, whereas a longer period could disrupt the
ability of proxy voting advice businesses to deliver their voting
advice to clients in a timely fashion. The proposed period reflects a
balancing of the ability of registrants and other soliciting persons
covered by proxy voting advice to review and provide feedback on the
advice before it is disseminated to the business's clients and the
challenges typically faced by proxy voting advice businesses to prepare
and deliver their voting advice to clients within very narrow
timeframes. We believe the proposed timeframes for registrants and
other soliciting persons to review and provide feedback on proxy voting
advice strike an appropriate balance between those two competing
considerations.
Also, the proposed amendments would require that a final notice of
proxy voting advice be provided to allow registrants and other
soliciting persons two business days to determine whether to provide a
statement in response to the proxy advice and request that a hyperlink
to the statement be included in the proxy voting advice. Alternatively,
we could require that only the review and feedback period be provided,
with no subsequent final notice of voting advice. Providing only the
review and feedback period would reduce the potential disruptions for
proxy voting advice businesses associated with the proposed engagement
procedures. However, limiting registrants and other soliciting persons
to the review and feedback period, with no subsequent final notice of
voting advice also would make it difficult for them to know whether
proxy voting advice businesses had incorporated their feedback prior to
disseminating their proxy voting advice to clients. The ability for
registrants and other soliciting persons to prepare a timely and
accurate response and to include in a hyperlink (or other analogous
electronic medium) also would be limited.
3. Public Disclosure of Conflicts of Interest
The proposed amendments require that proxy voting advice businesses
include in their advice (and in any electronic medium used to deliver
the advice) certain conflicts of interest disclosures. We could require
that those conflicts of interest disclosures be made publicly rather
than just to clients. Public disclosure of proxy voting advice
businesses' conflicts of interest could allow beneficial owners to
assess the conflicts for themselves. While there may be some benefit to
beneficial owners from having access to this information, this benefit
may be limited given that many beneficial owners have delegated
investment management functions to others in the first place and thus
would not be receiving the advice.
4. Require Additional Mandatory Disclosures in Proxy Voting Advice
In addition to requiring the proposed conflicts of interest
disclosures, we could require that proxy voting advice businesses
include in their proxy voting advice additional disclosures, such as
disclosure regarding the proxy voting advice business's methodology,
sources of information, or disclosures regarding the use of standards
that materially differ from relevant standards or requirements that the
Commission sets or approves. Proxy voting advice businesses' clients
may benefit from having consistent disclosure on such matters as they
assess the voting advice and make decisions regarding their utilization
of the voting advice. However, such disclosures may not be material or
necessary to assess proxy voting advice in all instances, and would
result in increased costs to proxy voting advice businesses. Certain
information may also comprise proprietary information, disclosure of
which, depending on the degree required, may result in competitive
consequences to proxy advisory firm businesses. In light of these
considerations, the proposed rules would not require such disclosures
in all instances. However, we have requested comment on whether these
or other disclosures should be required as a condition to reliance on
Rue 14a-2(b)(1) or (3) by proxy voting advice businesses.
5. Require Disabling of Pre-Populated and Automatic Voting Mechanisms
The proposed amendments do not condition the availability of the
Rules 14a-2(b)(1) and 14a-2(b)(3) exemptions on a proxy voting advice
business structuring its voting platform to disable the automatic
submission of votes in instances where a registrant has submitted a
response to the voting advice. Alternatively, we could require such a
condition. Or, we could require proxy voting advice businesses to
disable the automatic submission of votes unless a client of a proxy
voting advice business clicks on the hyperlink and/or accesses the
registrant's (or certain other soliciting persons') response, if one
has been provided. Another alternative would be to require that the
proxy voting advice business refrain from pre-populating voting choices
for clients once a registrant or other soliciting person has submitted
a response.
Disabling pre-populated or automatic submission of votes where
registrants or other soliciting persons have submitted responses to
voting advice could benefit these parties to the extent that it
increases the likelihood that clients of proxy voting advice businesses
would review their responses. At the same time, disabling these
functions could increase costs for proxy voting advice businesses and
increase the burdens on their clients by requiring those clients to
devote greater resources to managing the voting process, which may in
turn also reduce the value of the services of the proxy voting advice
businesses.
[[Page 66552]]
Alternatively, clients of proxy voting advice businesses may choose not
to vote, which could make it difficult for registrants to meet quorum
requirements for their shareholder meetings and cause delays for
companies and shareholders.
6. Exempt Smaller Proxy Voting Advice Businesses From the Additional
Conditions to the Exemptions
As discussed in Section III.C.2, it is possible that given certain
industry practices, increases in costs resulting from the proposed
amendments may be different for certain proxy voting advice businesses.
For example, ISS and Glass Lewis have processes in place for disclosing
certain aspects of their analysis to certain registrants prior to
making a recommendation to clients. However, the remaining three proxy
voting advice businesses, all of which are smaller than ISS and Glass
Lewis, to our knowledge do not have such processes in place. It is
possible, then, that the costs associated with the proposed amendments
could affect those smaller proxy voting advice businesses more than ISS
and Glass Lewis. To the extent the costs associated with the proposed
amendments would disproportionately affect proxy voting advice
businesses other than ISS and Glass Lewis, the proposed amendments
could lead to a reduction in competition among proxy voting advice
businesses.
As a means of addressing the potential adverse effect on
competition among proxy voting advice businesses, we could exempt
smaller proxy voting advice businesses from the additional conditions
to the exemptions in Rules 14a-2(b)(1) and 14a-2(b)(3). Although
exempting smaller proxy voting advice businesses from the additional
conditions would reduce the cost of the proposed amendments for such
businesses, it also would mean that their clients would not realize the
same benefits in terms of potential improvements in the reliability and
transparency of the voting advice they receive. This, in turn, could
put smaller proxy voting advice businesses at a competitive
disadvantage.
Request for Comment
Throughout this release, we have discussed the anticipated economic
effects of the proposed amendments, including their benefits and costs
and potential effects on efficiency, competition, and capital
formation. We have used the data currently available in considering the
effects of the proposed amendments. We request comment on all aspects
of this initial economic analysis, including on whether the analysis
has: (1) Identified all benefits and costs, including all effects on
efficiency, competition, and capital formation; (2) given due
consideration to each benefit and cost, including each effect on
efficiency, competition, and capital formation; and (3) identified and
considered reasonable alternatives to the proposed amendments.
We request and encourage any interested person to submit comments
regarding the proposed amendments, our analysis of the potential
effects of the proposed amendments and other matters that may have an
effect on the proposed amendments. We request that commenters identify
sources of data and information with respect to proxy voting in
general, and the use of proxy voting advice businesses in particular,
as well as provide data and information to assist us in analyzing the
economic consequences of the proposed amendments. We are also
interested in comments on the qualitative benefits and costs we have
identified and any benefits and costs we may have overlooked. We urge
commenters to be as specific as possible.
Comments on the following questions are of particular interest.
Have we correctly characterized the demand for the
services of proxy voting advice businesses? What alternatives are
available, if any, to the advice of proxy voting advice businesses?
To what extent would the benefits of more reliable and
complete voting advice being provided to investment advisers and other
clients of proxy voting advice businesses benefit investors? Please
provide supportive data to the extent available.
The benefits of the proposed amendments for institutional
investors and their clients are linked to the extent to which current
practices of proxy voting advice businesses would meet the requirements
of the proposed conditions. Have we correctly characterized the extent
to which the current practices of proxy voting advice businesses would
meet such requirements?
We discuss the possibility that proxy voting advice
businesses could attempt to mitigate the delay in delivering advice to
clients caused by registrant and other soliciting persons' review by
committing additional resources to producing proxy voting advice
earlier than they do currently. Would proxy voting advice businesses
take these steps? How costly would it be for proxy voting advice
businesses to produce proxy voting advice faster than they do
currently? Please provide supportive data to the extent available.
We expect that the costs of the proposed review and
feedback period and final notice of voting advice would be lower for
proxy voting advice businesses that currently provide registrants with
a mechanism for reviewing draft documents prior to proxy voting advice
businesses issuing final drafts to their clients. Are we correct in
that characterization? If other proxy voting advice businesses would be
disproportionately affected, to what extent, and how would such effects
manifest? What, if any, additional measures could help mitigate any
such disproportionate effects? Please provide supportive data to the
extent available.
To what extent might the increased burdens to proxy voting
advice businesses to comply with the proposed conditions be borne by
proxy voting advice businesses clients?
In response to the Commission's recent releases on proxy
voting responsibilities and proxy voting advice, one commenter argued
that the Commission's interpretation and guidance \263\ would likely
create substantially increased costs and unnecessary burdens on the
process by which proxy voting advice businesses render their
advice.\264\ According to that commenter, proxy voting advice
businesses would face increased litigation, staffing and insurance
costs that could be passed on to their institutional investor clients
and their underlying retail clients. Would these concerns similarly
apply to aspects of the proposed amendments, or is this concern
overstated in that the aspects of the interpretation and guidance that
are encompassed in the proposed amendments reflect current legal
obligations regarding solicitation activities?
---------------------------------------------------------------------------
\263\ See Commission Guidance on Proxy Voting Responsibilities,
supra note 9; Commission Interpretation on Proxy Voting Advice,
supra note 19.
\264\ See Letter from Kenneth A. Bertsch, Executive Director,
Council of Institutional Investors (Oct. 24, 2019), at 3.
---------------------------------------------------------------------------
If registrants and other soliciting persons choose to
provide a statement regarding the proxy voting advice, registrants and
other soliciting persons would incur costs of drafting a statement,
providing a hyperlink (or other analogous electronic medium) to the
proxy voting advice business, maintaining their statement online, and
coordinating timing with proxy voting advice businesses for the filing
of supplementary proxy materials. Please provide data with respect to
these costs.
To what extent do investors change their votes? To what
extent do investors change their votes in response to a registrant
filing additional definitive
[[Page 66553]]
proxy materials? Please provide supportive data to the extent
available.
IV. Paperwork Reduction Act
A. Summary of the Collections of Information
Certain provisions of our rules, schedules, and forms that would be
affected by the proposed amendments contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\265\ We are submitting the proposed
amendments to the Office of Management and Budget (``OMB'') for review
in accordance with the PRA.\266\ The hours and costs associated with
maintaining, disclosing, or providing the information required by the
proposed amendments constitute paperwork burdens imposed by such
collection of information. An agency may not conduct or sponsor, and a
person is not required to comply with, a collection of information
unless it displays a currently valid OMB control number. The title for
the affected collection of information is: ``Regulation 14A (Commission
Rules 14a-1 through 14a-21 and Schedule 14A)'' (OMB Control No. 3235-
0059).
---------------------------------------------------------------------------
\265\ 44 U.S.C. 3501 et seq.
\266\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------
We adopted existing Regulation 14A \267\ pursuant to the Exchange
Act. Regulation 14A and its related schedules set forth the disclosure
and other requirements for proxy statements, as well as the exemptions
therefrom, filed by registrants and other soliciting persons to help
investors make informed voting decisions.\268\ A detailed description
of the proposed amendments, including the need for the information and
its proposed use, as well as a description of the likely respondents,
can be found in Section II above, and a discussion of the expected
economic effects of the proposed amendments can be found in Section III
above.
---------------------------------------------------------------------------
\267\ 17 CFR 240.14a-1 et seq.
\268\ To the extent that a person or entity incurs a burden
imposed by Regulation 14A, it is encompassed within the collection
of information estimates for Regulation 14A. This includes
registrants and other soliciting persons preparing, filing,
processing and circulating their definitive proxy and information
statements and additional soliciting materials, as well as the
efforts of third parties such as proxy voting advice businesses
whose voting advice falls within the ambit of the federal rules and
regulations that govern proxy solicitations.
---------------------------------------------------------------------------
B. Incremental and Aggregate Burden and Cost Estimates for the Proposed
Amendments
Below we estimate the incremental and aggregate effect on paperwork
burden as a result of the proposed amendments. These estimates
represent the average burden for all respondents, both large and small.
In deriving our estimates, we recognize that the burdens would likely
vary among individual respondents based on a number of factors,
including the nature and conduct of their business. Compliance with the
proposed amendments would be mandatory for proxy voting advice
businesses relying on the exemptions in Rules 14a-2(b)(1) or (b)(3).
Utilization of the procedures specified in proposed Rule 14a-
2(b)(9)(iii) would be voluntary for registrants and other soliciting
persons. Information maintained, disclosed, or provided in connection
with the proposed amendments may be subject to confidentiality
agreements between the proxy voting advice businesses and any
soliciting persons that choose to take advantage of the proposed
procedures. There is no specified retention period for any information
maintained, disclosed, or provided pursuant to the proposed amendments.
We believe that the proposed amendments would increase the number
of responses to the existing collection of information for Regulation
14A. Although we do not expect registrants and other eligible
soliciting persons to file any different number of proxy statements as
a result of our amendments, we do anticipate that the number of
additional soliciting materials filed under Rule 14a-12 may increase in
proportion to the number of times that registrants and other soliciting
persons choose to provide a statement in response to a proxy voting
advice business's proxy voting advice under proposed Rule 14a-
2(b)(9)(iii). For purposes of this PRA, we estimate that there would be
an additional 174 annual responses to the collection of information as
a result of the proposed amendments.\269\
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\269\ See supra notes 141, 142 and the accompanying discussion
in the release. Because a registrant's or other soliciting person's
decision to utilize proposed Rule 14a-2(b)(9)(iii) will be entirely
voluntary, it is difficult to predict how frequently such parties
will choose to avail themselves of this provision and prepare a
response to proxy voting advice. For purposes of this PRA estimate,
we use as our baseline the number of times firms filed additional
definitive proxy materials in response to proxy voting advice in
calendar years 2016 (99), 2017 (77) and 2018 (84), discussed in
Section III.B.2 infra and reflected in Table 2 in that section. We
then assume, given the relative convenience of the hyperlink
mechanism in proposed Rule 14a-2(b)(9)(iii) and the opportunity to
reach shareholders before their votes are cast, that a greater
number of registrants and soliciting persons would utilize proposed
Rule 14a-2(b)(9)(iii) than have historically filed additional
soliciting materials. For purposes of this PRA analysis, we estimate
that at least three times as many registrants and other soliciting
persons will choose to prepare responses to proxy voting advice and
request that their hyperlink be provided to the recipients of the
advice pursuant to proposed Rule 14a-2(b)(9)(iii) than otherwise
would choose to file additional soliciting materials. As a result,
we would expect that three times as many required filings under Rule
14a-12 would be made. Taking the average of the Rule 14a-12 filings
made in years 2016, 2017, 2018 (87), we multiply by a factor of
three (300%) for an estimate of 261 Rule 14a-12 filings, or an
increase of 174 annual responses to the Regulation 14A collection of
information.
---------------------------------------------------------------------------
In addition to an increase in the number of annual responses, we
expect that the proposed amendments would change the estimated burden
per response. The burden estimates were calculated by estimating the
number of parties we anticipate would expend time, effort, and/or
financial resources to generate, maintain, retain, disclose or provide
information in connection with the proposed amendments and then
multiplying by the estimated amount of time, on average, such parties
would devote in response to the proposed amendments. The following
table summarizes the calculations and assumptions used to derive our
estimates of the aggregate increase in burden corresponding to the
proposed amendments.
PRA Table 1--Calculation of Increase in Burden Hours Resulting From the Proposed Amendments
----------------------------------------------------------------------------------------------------------------
Affected parties
-----------------------------------------------
Proxy voting Other
advice Registrants soliciting
businesses persons
(A) (B) (C)
----------------------------------------------------------------------------------------------------------------
Number of Respondents........................................... \a\ 5 \b\ 1,897 \c\ 32
Burden Increase: Hours Per Respondent........................... \d\ 500 \e\ 10 \e\ 10
[[Page 66554]]
Column Total \f\................................................ 2,500 18,970 320
-----------------------------------------------
Aggregate Increase in Burden Hours.............................. [Column A] + [Column B] + [Column C] = 21,790.
----------------------------------------------------------------------------------------------------------------
\a\ Represents the estimated number of proxy voting advice businesses that would be subject to the proposed
amendments to Rule 14a-2(b). We are aware only of five such businesses at this time.
\b\ Using 5,690 registrants that filed proxy materials with the Commission during calendar year 2018 as the
upper bound (see Section III.B.1.c. and note 222 supra), we estimate that an average of one-third, or
approximately 1,897, would be the subject of proxy voting advice each year, and therefore impacted by the
proposed amendments to Rule 14a-2(b).
\c\ See supra Section III.B.1.c. & note 224. According to our estimates, 95 other soliciting persons filed proxy
materials with the Commission during calendar year 2018. Because it is unlikely that all 95 solicitations were
the subject of proxy voting advice, we have assumed for purposes of this analysis that only one-third, or
approximately 32, should be considered in our calculation of aggregate burden.
\d\ This estimate, which is an average of the burden expected to be incurred by each proxy voting advice
business, is intended to be inclusive of all burdens reasonably anticipated to be associated with the
business's compliance with the conditions of proposed Rule 14a-2(b)(9), including, for example, identification
and preparation of disclosure concerning conflicts of interest required by proposed Rule 14a-2(b)(9)(i) and
communication with registrants and other eligible soliciting persons. Our assumption is that the burden would
be greatest in the first year after adoption, as the businesses incorporate the new requirements into their
existing practices and procedures. We estimate that the burden would be 1,000 hours in the first year and 250
hours in each of the following years for a three-year average of 500 burden hours.
\e\ In addition to proxy voting advice businesses, we anticipate that registrants and other soliciting persons
would incur some additional paperwork burden as a result of the proposed amendments. For example, if they
choose to respond to the proxy voting advice,\270\ these parties would likely incur some burden in preparing
and communicating their responses. Nevertheless, we do not anticipate the corresponding burden would be
significant in most cases, particularly when averaged among all affected parties. Therefore, we have estimated
that registrants and other soliciting persons would each incur, on average, an increase of ten additional
burden hours each year.
\f\ Derived by multiplying the number of respondents in each column by either the burden per response or the
estimated aggregate burden increase, whichever was applicable.
The table below illustrates the incremental change to the total
annual compliance burden in hours and in costs\271\ as a result of the
proposed amendments. The table sets forth the percentage estimates we
typically use for the burden allocation for each response.
---------------------------------------------------------------------------
\270\ See supra note 255.
\271\ Our estimates assume that 75% of the burden is borne by
the company and 25% is borne by outside counsel at $400 per hour. We
recognize that the costs of retaining outside professionals may vary
depending on the nature of the professional services, but for
purposes of this PRA analysis, we estimate that such costs would be
an average of $400 per hour. This estimate is based on consultations
with several registrants, law firms, and other persons who regularly
assist registrants in preparing and filing reports with the
Commission.
PRA Table 2--Calculation of Increase in Burden Hours Resulting From the Proposed Amendments
----------------------------------------------------------------------------------------------------------------
Number of Total increase Increase in
estimated in burden burden hours per Increase in Increase in Increase in
responses hours response internal hours professional hours professional costs
(A) [dagger] (B) (C) =(D) = (B) x 0.75 (E) = (B) x 0.25 (F) = (E) x $400
[dagger][dagger
]
----------------------------------------------------------------------------------------------------------------
5,760 21,790 4.0 16,478 5,493 $2,197,200
[dagger][dagger][d
agger]
----------------------------------------------------------------------------------------------------------------
[dagger] This number reflects an estimated increase of 174 annual responses to the existing Regulation 14A
collection of information. See supra note 269. The current OMB PRA inventory estimates that 5,586 responses
are filed annually.
[dagger][dagger] Calculated as the sum of annual burden increases estimated for proxy voting advice businesses
(2,500 hours), registrants (18,970 hours), and other soliciting persons (320 hours). See supra PRA Table 1.
[dagger][dagger][dagger] The estimated increases in Columns (C), (D), and (E) are rounded to the nearest whole
number.
Finally, the table that follows summarizes the requested paperwork
burden that will be submitted to OMB for review in accordance with the
PRA, including the estimated total reporting burdens and costs, under
the proposed amendments.
PRA Table 3--Requested Paperwork Burden Under the Proposed Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current burden Program change Revised burden
-----------------------------------------------------------------------------------------------------------------------------------------------
Current Current Number of Increase in Increase in
annual burden Current cost affected internal professional Annual responses Burden hours Cost burden
responses hours burden responses hours costs
(A) (B) (C) (D) minus> minus>
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Reg. 14A........................................ 5,586 551,101 $73,480,012 5,760 16,478 $2,197,200 5,760 567,579 $75,677,212
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
From Column (A) in PRA Table 2.
From Column (D) in PRA Table 2.
From Column (F) in PRA Table 2.
[[Page 66555]]
Given the number of variables that are highly specific to the
unique circumstances of each proxy voting advice business, the matter
for which they have been engaged to provide advice, and the course of
that engagement, our ability to predict the magnitude of corresponding
costs and burdens with any precision is limited. Therefore, we
encourage public commenters to consider our assessment and provide
additional information and, where available, data that would be helpful
in deriving our estimates for purposes of the Paperwork Reduction Act.
Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information would have practical
utility;
Evaluate the accuracy and assumptions and estimates of the
burden of the proposed collection of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to, Vanessa A. Countryman,
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-22-19.
Requests for materials submitted to OMB by the Commission with regard
to the collection of information should be in writing, refer to File
No. S7-22-19 and be submitted to the U.S. Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736. OMB is required to make a decision concerning the
collection of information between 30 and 60 days after publication of
this proposed rule. Consequently, a comment to OMB is best assured of
having its full effect if the OMB receives it within 30 days of
publication.
V. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\272\ the Commission must advise OMB as to
whether the proposed amendments constitute a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in:
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\272\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
An annual effect on the U.S. economy of $100 million or
more (either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether the proposed amendments would be a
``major rule'' for purposes of SBREFA. In particular, we request
comment on the potential effect of the proposed amendments on the U.S.
economy on an annual basis; any potential increase in costs or prices
for consumers or individual industries; and any potential effect on
competition, investment or innovation. Commenters are requested to
provide empirical data and other factual support for their views to the
extent possible.
VI. Initial Regulatory Flexibility Analysis
The Regulatory Flexibility Act (``RFA'') \273\ requires the
Commission, in promulgating rules under Section 553 of the
Administrative Procedure Act, to consider the impact of those rules on
small entities. The Commission has prepared this Initial Regulatory
Flexibility Analysis (``IRFA'') in accordance with Section 603 of the
RFA.\274\ It relates to the proposed amendments to: The proxy
solicitation exemptions in Rule 14a-2(b); the definition of
``solicitation'' in Rule 14a-1(l); and the prohibition on false or
misleading statements in solicitations in Rule 14a-9 of Regulation 14A
under the Exchange Act.
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\273\ 5 U.S.C. 601 et seq.
\274\ 5 U.S.C. 603.
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A. Reasons for, and Objectives of, the Proposed Action
The purpose of the proposed amendments to Rule 14a-2(b) is to help
ensure that investors who rely on the advice of proxy voting advice
businesses receive more accurate, transparent, and complete information
on which to make their voting decisions, in a manner that does not
impose undue costs or delays that could adversely affect the timely
provision of proxy voting advice. The proposed amendments are designed
to enhance the accuracy and reliability of the proxy voting advice
available to investors at the time they are casting votes, as well as
disclosures about any interests or relationships that may have
materially affected the voting advice. In addition, the proposed
amendment to Rule 14a-1(l) would codify the Commission's interpretation
that, as a general matter, proxy voting advice constitutes a
solicitation subject to the federal proxy rules, which would provide
more clear notice of the applicability of the protections afforded
under these rules to those who receive proxy voting advice from persons
marketing their expertise as a provider of such advice, separately from
other forms of investment advice, and sell such advice for a fee.
Finally, the proposed amendment to Rule 14a-9 would amend the list of
examples of what may be misleading within the meaning of the rule in
order to help ensure that the recipients of proxy voting advice are
provided the information they need to make fully informed decisions and
to clarify the potential implications of Rule 14a-9. The reasons for,
and objectives of, these proposed amendments are discussed in more
detail in Sections I and II above.
B. Legal Basis
We are proposing the rule and form amendments contained in this
document under the authority set forth in Sections 3(b), 14, 16, 23(a),
and 36 of the Securities Exchange Act of 1934, as amended.
C. Small Entities Subject to the Proposed Rules
The proposed amendments are likely to affect some small entities;
specifically, those small entities that are either: (i) Proxy voting
advice businesses (i.e., persons who provide proxy voting advice that
falls within the definition of a ``solicitation'' under Rule 14a-
1(l)(iii)(A), as proposed); and (ii) registrants or other eligible
persons under proposed Rule 14a-2(b)(9) conducting solicitations
covered by proxy voting advice.
The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small governmental
[[Page 66556]]
jurisdiction.'' \275\ For purposes of the RFA, under our rules, an
issuer of securities or a person, other than an investment company or
an investment adviser, is a ``small business'' or ``small
organization'' if it had total assets of $5 million or less on the last
day of its most recent fiscal year.\276\ An investment company,
including a business development company,\277\ is considered to be a
``small business'' if it, together with other investment companies in
the same group of related investment companies, has net assets of $50
million or less as of the end of its most recent fiscal year.\278\ An
investment adviser generally is a small entity if it: (1) Has assets
under management having a total value of less than $25 million; (2) did
not have total assets of $5 million or more on the last day of the most
recent fiscal year; and (3) does not control, is not controlled by, and
is not under common control with another investment adviser that has
assets under management of $25 million or more, or any person (other
than a natural person) that had total assets of $5 million or more on
the last day of its most recent fiscal year.\279\ We estimate that
there are 1,171 issuers that file with the Commission, other than
investment companies and investment advisers, that may be considered
small entities.\280\ In addition, we estimate that, as of December
2018, there were 114 registered investment companies that would be
subject to the proposed amendments that may be considered small
entities.\281\ Finally, we estimate that, as of September 30, 2019,
there were 575 investment advisers that may be considered small
entities.\282\ As discussed above, three of the five major firms that
comprise the proxy advisory industry are registered investment
advisors.\283\
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\275\ 5 U.S.C. 601(6).
\276\ See Exchange Act Rule 0-10(a) [17 CFR 240.0-10(a)].
\277\ Business development companies are a category of closed-
end investment company that are not registered under the Investment
Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64].
\278\ See Investment Company Act Rule 0-10(a) [17 CFR 270.0-
10(a)].
\279\ See Advisers Act Rule 0-7(a) [17 CFR 275.0-7(a)].
\280\ This estimate is based on staff analysis of issuers,
excluding co-registrants, with EDGAR filings of Form 10-K, 20-F and
40-F, or amendments, filed during the calendar year of January 1,
2018 to December 31, 2018. The data used for this analysis were
derived from XBRL filings, Compustat, and Ives Group Audit
Analytics.
\281\ This estimate is derived from an analysis of data obtained
from Morningstar Direct as well as data filed with the Commission
(Forms N-Q and N-CSR) for the second quarter of 2018.
\282\ Based on SEC-registered investment adviser responses to
Items 5.F. and 12 of Form ADV.
\283\ See supra Section III.B.1.b (Economic Analysis).
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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
If adopted, the proposed amendments would apply to small entities
to the same extent as other entities, irrespective of size. Therefore,
we expect that the nature of any benefits and costs associated with the
proposed amendments would be similar for large and small entities.
Accordingly, we refer to the discussion of the proposed amendments'
economic effects on all affected parties, including small entities, in
Section III above.\284\ Consistent with that discussion, we anticipate
that the economic benefits and costs likely would vary widely among
small entities based on a number of factors, including the nature and
conduct of their businesses, which makes it difficult to project the
economic impact on small entities with precision.\285\ Compliance with
the proposed amendments may require the use of professional skills,
including legal skills.
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\284\ In particular, we discuss the estimated benefits and costs
of the proposed amendments on affected parties in Section III.C.
(Economic Analysis) above. We also discuss the estimated compliance
burden associated with the proposed amendments for purposes of the
PRA in Section IV (Paperwork Reduction Act) above.
\285\ See supra Section III.C.2. (Economic Analysis).
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As a general matter, however, we recognize that any costs of the
proposed amendments borne by the affected entities, such as those
related to compliance with the proposed amendments, or the
implementation or restructuring of internal systems needed to adjust to
the proposed amendments, could have a proportionally greater effect on
small entities, as they may be less able to bear such costs relative to
larger entities. For example, as discussed in Section III.B.2, ISS and
Glass Lewis, currently the two largest proxy voting advice businesses,
have existing processes in place for identifying and disclosing
conflicts of interest to their clients, as well as providing some
registrants access to versions of the businesses' proxy voting advice
prior to making a recommendation to clients. If competing proxy voting
advice businesses do not have such processes in place, they could be
disproportionately affected by the proposed amendments. In particular,
any small entities that provide proxy voting advice services, to the
extent that their existing practices and procedures would not satisfy
the conditions of proposed Rule 14a-2(b)(9), would incur additional
compliance costs and, consequently, may be more likely than larger
proxy voting advice businesses to exit the market for such services or
less able to enter the market in the first place.
We anticipate that any costs resulting from the proposed amendments
would primarily relate to proposed Rule 14a-2(b)(9) and, as such,
predominantly affect the proxy advice voting businesses that would be
required to comply with Rule 14a-2(b)(9) in order to rely on the
exemptions in Rule 14a-2(b)(1) or (b)(3).\286\ These businesses would
likely incur costs to ensure that their internal practices, procedures,
and systems are sufficient to meet the conflicts of interest disclosure
and review and feedback requirements under proposed Rule 14a-2(b)(9).
The magnitude of such costs would depend on the extent to which the
businesses are already meeting or exceeding these proposed
requirements. However, we believe that, at most, there are currently
only a limited number of proxy voting advice businesses that meet the
definition of small entity for purposes of the RFA.\287\ Accordingly,
we do not expect the proposed amendments would have a significant
economic impact on a substantial number of such businesses. However, we
request comment on the number of proxy voting advice businesses that
would be small entities subject to the proposed amendments.
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\286\ We do not expect that the proposed amendments to Rule 14a-
1(l) and Rule 14a-9 will have a significant economic impact on
affected parties, including any small entities, because they codify
already-existing Commission positions on the applicability of these
rules to proxy voting advice.
\287\ As discussed supra, at note 190, we understand that the
proxy voting advice industry in the United States consists of five
major firms. At this time, we do not know of any proxy voting advice
businesses that would be considered small entities as defined by the
RFA, but acknowledge that there may be some such firms providing
proxy voting advice of which we are unaware.
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As discussed in Section III.C.2., we do not expect that registrants
or other soliciting persons that are small entities would incur
significant costs as a result of the proposed amendments, although it
is difficult to provide a quantifiable estimate of such costs. We
request comment on how to quantify the impact on small entities that,
while not directly subject to the proposed amendments, may be affected
by the proposal.
E. Duplicative, Overlapping, or Conflicting Federal Rules
We believe that the proposed amendments would not duplicate,
overlap, or conflict with other federal rules.
[[Page 66557]]
F. Significant Alternatives
The RFA directs us to consider alternatives that would accomplish
our stated objectives, while minimizing any significant adverse impact
on small entities. In connection with the proposed amendments, we
considered the following alternatives:
Establishing different compliance or reporting
requirements that take into account the resources available to small
entities;
Exempting small entities from all or part of the
requirements;
Using performance rather than design standards; and
Clarifying, consolidating, or simplifying compliance and
reporting requirements under the rules for small entities.
We do not believe that establishing different compliance or
reporting requirements for small entities in connection with our
proposed amendments would accomplish the objectives of this rulemaking
or minimize significant adverse impacts on small entities. The proposed
amendments are intended to help ensure that investors who rely on the
advice of proxy voting advice businesses receive accurate, transparent,
and materially complete information on which to make their voting
decisions. Our objective of improving the quality of proxy voting
advice would not be as effectively served if we were to establish
different conditions for smaller proxy voting advice businesses that
wish to rely on the exemptions in Rules 14a-2(b)(1) or (b)(3). For
similar reasons, we do not believe that exempting smaller proxy voting
advice businesses from all or part of the proposed amendments would
accomplish our objectives.\288\
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\288\ See also supra Section III.E.6. Exempting smaller proxy
voting advice businesses from the additional conditions of Rules
14a-2(b)(1) and (3) would reduce the cost of the proposed amendments
for such businesses, but it also would mean that their clients would
not realize the same benefits in terms of potential improvements in
the reliability and transparency of the voting advice they receive.
This, in turn, could put smaller proxy voting advice businesses at a
competitive disadvantage.
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The proposed amendments generally would use design standards to
assure clients of proxy voting advice businesses that all entities
providing such advice are following a consistent approach to their
disclosures of conflicts of interest and the review and feedback
requirements for proxy voting advice. If the goal is accurate and
reliable proxy voting advice, using design rather than performance
standards minimizes the degree of uncertainty that proxy voting advice
businesses and their clients would have regarding whether such
businesses are in full compliance with the rules and could help to
bolster their confidence in the quality of voting advice they receive.
However, while we generally have used design standards for the proposed
amendments, we have included features that are intended to minimize the
disruption to proxy voting advice businesses, such as requiring the
inclusion of a hyperlink to a response by the registrant or certain
other soliciting persons. Such features would also provide greater
flexibility to registrants and other soliciting persons, including
small entities, in providing their response.
In proposing these amendments, we have undertaken to provide rules
that are clear and simple for all affected parties. We do not believe
that further clarification, consolidation, or simplification for small
entities is necessary.
Request for Comment
We encourage the submission of comments with respect to any aspect
of this IRFA. In particular, we request comments regarding:
How the proposed amendments can achieve their objective
while lowering the burden on small entities;
The number of small entity companies that may be affected
by the proposed amendments;
The existence or nature of the potential effects of the
proposed amendments on small entities discussed in the analysis; and
How to quantify the effects of the proposed amendments.
Commenters are asked to describe the nature of any effect and
provide empirical data supporting the extent of that effect. Comments
will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed rules are adopted, and will be
placed in the same public file as comments on the proposed amendments
themselves.
VII. Statutory Authority
We are proposing the rule amendments contained in this release
under the authority set forth in Sections 3(b), 14, 16, 23(a), and 36
of the Securities Exchange Act of 1934, as amended.
List of Subjects in 17 CFR Part 240
Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.
Text of Proposed Rule Amendments
In accordance with the foregoing, the Securities and Exchange
Commission proposes to amend title 17, chapter II of the Code of
Federal Regulations as follows:
PART 240--GENERAL RULES AND REGULATIONS UNDER THE SECURITIES
EXCHANGE ACT OF 1934
0
1. The authority citation for part 240 continues to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5521(e)(3); 18 U.S.C.
1350, Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
Sections 240.14a-1, 240.14a-3, 240.14a-13, 240.14b-1, 240.14b-2,
240.14c-1, and 240.14c-7 also issued under secs. 12, 15 U.S.C. 781, and
14, Pub. L. 99-222, 99 Stat. 1737, 15 U.S.C. 78n;
* * * * *
0
2. Amend Sec. 240.14a-1 by revising paragraph (l)(1)(iii) and adding
paragraph (l)(2)(v) to read as follows:
Sec. 240.14a-1 Definitions.
* * * * *
(l) Solicitation. (1) * * *
(iii) The furnishing of a form of proxy or other communication to
security holders under circumstances reasonably calculated to result in
the procurement, withholding or revocation of a proxy, including:
(A) Any proxy voting advice that makes a recommendation to a
security holder as to its vote, consent, or authorization on a specific
matter for which security holder approval is solicited, and that is
furnished by a person that markets its expertise as a provider of such
proxy voting advice, separately from other forms of investment advice,
and sells such proxy voting advice for a fee.
(B) [Reserved]
(2) * * *
(v) The furnishing of any proxy voting advice by a person who
furnishes such advice only in response to an unprompted request.
0
3. Amend Sec. 240.14a-2 by:
0
a. Revising paragraph (b)(1) introductory text and (b)(3) introductory
text; and
0
b. Adding paragraph (b)(9).
The revisions and addition read as follows:
[[Page 66558]]
Sec. 240.14a-2 Solicitations to which Sec. 240.14a-3 to Sec.
240.14a-15 apply.
* * * * *
(b) * * *
(1) Except as provided in paragraph (b)(9) of this section, any
solicitation by or on behalf of any person who does not, at any time
during such solicitation, seek directly or indirectly, either on its
own or another's behalf, the power to act as proxy for a security
holder and does not furnish or otherwise request, or act on behalf of a
person who furnishes or requests, a form of revocation, abstention,
consent or authorization. Provided, however, That the exemption set
forth in this paragraph shall not apply to * * *
* * * * *
(3) Except as provided in paragraph (b)(9) of this section, the
furnishing of proxy voting advice by any person (the ``advisor'') to
any other person with whom the advisor has a business relationship, if:
* * *
* * * * *
(9) Paragraphs (b)(1) and (b)(3) of this section shall not be
available to a person furnishing proxy voting advice covered by Sec.
240.14a-1(l)(1)(iii)(A) (``proxy voting advice business'') unless all
of the conditions in the following paragraphs (i), (ii), and (iii) are
satisfied:
(i) 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:
(A) 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;
(B) Any material transaction or relationship between the proxy
voting advice business (or its affiliates) and the registrant, 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;
(C) 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
(D) 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.
(ii) The proxy voting advice business provides the registrant or
any other person conducting a solicitation (other than a solicitation
exempt under Sec. 240.14a-2) covered by its proxy voting advice, prior
to the distribution of that advice to its clients:
(A)(1) 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 registrant
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
(2) 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 registrant 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
(B) No earlier than the expiration of the period described in
paragraph (A)(1) or (A)(2) of this section, 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 paragraph (A)(1) or (A)(2) of this section, as
applicable.
Note 1 to paragraph (b)(9)(ii): Once the two business day period
specified in paragraph (B) of this section has expired, the proxy
voting advice business will be under no further obligation to provide
the registrant or any other soliciting person with additional
opportunities to review its proxy voting advice with respect to the
same meeting.
Note 2 to paragraph (b)(9)(ii): A proxy voting advice business may
require the registrant or other soliciting person, as applicable, to
enter into an agreement to maintain the confidentiality of any
materials it receives pursuant to paragraph (b)(9)(ii) of this section
and refrain from publicly commenting on those materials, provided that
the terms of such confidentiality agreement:
(A) Shall be no more restrictive than similar types of
confidentiality agreements the proxy voting advice business requires of
the recipients of the proxy voting advice; and
(B) Shall cease to apply once the proxy voting advice business
provides its advice to one or more recipients. The proxy voting advice
business is not required to comply with paragraph (b)(9)(ii) of this
section if the registrant or other soliciting person does not enter
into such an agreement.
(iii) If requested by the registrant or any other person conducting
a solicitation (other than a solicitation exempt under Sec. 240.14a-2)
prior to expiration of the period described in paragraph (b)(9)(ii) of
this section, the proxy voting advice business shall 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 registrant's or other soliciting
person's, as applicable, statement regarding the proxy voting advice.
Note to paragraphs (b)(9)(ii) and (b)(9)(iii): A proxy voting
advice business will be under no obligation to comply with the
provisions of paragraphs (b)(9)(ii) and (b)(9)(iii) of this section if
the registrant 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).
(iv) An immaterial or unintentional failure of a proxy voting
advice business to comply with one or more conditions of Sec. 240.14a-
2(b)(9) will not result in the loss of such proxy voting advice
business's ability to rely on the exemptions in paragraphs (b)(1) and
(b)(3) of this section, so long as:
(A) The proxy voting advice business made a good faith and
reasonable effort to comply; and
(B) 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.
* * * * *
0
4. Amend Sec. 240.14a-9 by adding paragraph e. to the Note to read as
follows:
Sec. 240.14a-9 False or misleading statements.
* * * * *
Note: * * *
e. Failure to disclose material information regarding proxy voting
advice covered by Sec. 240.14a-1(l)(1)(iii)(A), such as the proxy
voting
[[Page 66559]]
advice business's methodology, sources of information, conflicts of
interest or use of standards that materially differ from relevant
standards or requirements that the Commission sets or approves.
* * * * *
By the Commission.
Dated: November 5, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-24475 Filed 12-3-19; 8:45 am]
BILLING CODE 8011-01-P